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  • Print publication year: 2012
  • Online publication date: December 2012

2 - The legacy effects of the financial crisis on regulatory design in the EU


Examining regulatory change


This chapter examines the European Union (EU)'s crisis-era reform program from a regulatory design perspective. In particular, it considers the legacy effects of the financial crisis on financial system regulation.

Financial system regulation is traditionally regarded as concerned with three objectives: financial stability; market efficiency, transparency and integrity; and consumer protection. In order to consider the legacy effects of the crisis on regulatory design, this chapter addresses the impact of the financial crisis on the latter two regulatory spheres: market (or securities) regulation – which addresses market efficiency, transparency and integrity, and the conduct of business regulation of market intermediaries – and consumer protection regulation. The chapter questions whether the initial crisis-era, financial stability-driven reform movement has led to regulatory innovation in these two cognate fields, the extent of the innovations and whether innovations have been productive.

Market regulation and consumer protection regulation were not part of the EU’s initial regulatory response to the crisis. Concerned with financial stability, the “first generation” response focused on prudential regulation and so on institutional and systemic stability. Bank capital, bank supervision and bank rescue and resolution proposals were the centerpieces of the initial EU reform agenda, reflecting the international agenda. But market regulation and consumer protection regulation have recently been caught up in the backwash of the financial stability-led reform agenda as a “second-generation” effect, as the EU has moved from shoring up financial stability to becoming the self-styled “architect[s] of a new financial system.” In particular, legacy effects related to the dominant financial stability agenda are reshaping the policy goals and the nature of market and consumer protection regulation more generally.

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Smith, Herbert, A Changing Landscape. Regulatory Developments in the Distribution of Retail Investment Products (London: Herbert Smith, 2010), p. 1
CESR, The Lehman Brothers Default: An Assessment of the Market Impact (2009) (CESR/09–255), p. 3.
Synovate, Consumer Market Study on Advice (2011)
FSA, Guidance Consultation. Assessing Suitability (London, FSA: 2011)
FSA, Policy Statement 10/6, Distribution of Retail Investments – Delivering the RDR (London: FSA, 2010)
Skypala, P., “Unhealthy Truth behind Robust AUM,” Financial Times Fund Management Supplement, June 27, 2011, 6.
European Commission, Eurobarometer 74, Autumn 2010, Europeans, the EU and the Crisis (2010)
AMF, The AMF's New Strategy Proposals (Paris: AMF, 2010).
FSB, Progress in the Implementation of the G20 Recommendations for Strengthening Financial Stability (Basel: FSB, 2011)
OECD, G20 High Level Principles on Financial Consumer Protection (Paris: OECD, 2011)
FSB, Consumer Finance Protection, With a Particular Focus on Credit (Basel: FSB, 2011)
FSA, Policy Statement 7/11, The Responsibilities of Providers and Distributors for the Fair Treatment of Customers (London: FSA, 2007)
Karmel, R.S., “Mutual Funds, Pension Funds and Stock Market Volatility – What Regulation by the Securities and Exchange Commission is Appropriate?,”Notre Dame Law Review, 80 (2005), 909–49
Warren, E., “Product Safety Regulation as a Model for Financial Services Regulation,”Journal of Consumer Affairs, 42 (2008), 452–60
Epstein, R., “The Neoclassical Economics of Consumer Contracts,”Minnesota Law Review, 92 (2008), 803–58
Jory, R., “New Regulations leave Retail Structured Products on Shaky Ground in France,” Financial Risk Management News and Analysis, April 21, 2011.
Joint Associations Committee, Combined Principles for Retail Structured Products (2011)
FSA, Discussion Paper 11/1, Product Intervention (2011) (London: FSA
Masters, B., Ross, A. and Powley, T., “Scandals Prompted Shift to New Rules,” Financial Times, June 25, 2011, 3.
FSA, Annual Report 2010/2011 (London: FSA, 2011), p. 67
The FSA has reported interest in its approach from other EU regulators: Feedback Statement 11/3, Product Intervention. Feedback (2011) (London: FSA, 2011), p. 20.
Ferran, E., “Understanding the New Institutional Architecture of EU Financial Market Supervision,” in Wymeersch, E., Hopt, K. J. and Ferrarini, G., Financial Regulation and Supervision: A Post-Crisis Analysis (Oxford University Press, 2012)
Moloney, N., “The European Securities and Markets Authority and Institutional Design for the EU Financial Market – A Tale of Two Competences: Part (2) Rules in Action,”European Business Organization Law Review, 12 (2011), 177–225
Kelleher, E., “Listed Funds of Hedge Funds lose out to UCITS III,” Financial Times Fund Management Supplement, April 18, 2011, 8.
Johnson, S., “Swaps Tactic threatens UCITS Brand,” Financial Times Fund Supplement, November 14, 2011, 1.
Skypala, P., “What will the Banks think of Next?” Financial Times Fund Management Supplement, November 14, 2011, 6.
CESR, Advice on the MiFID Review (2010) (CESR/10–859)
Lodge, O., “EU Financial Regulator tries to mend UCITS III,” Financial Times Fund Management Supplement, August 8, 2011, 11.
IMF, Global Financial Stability Report, April 2011 (Washington DC: IMF, 2011), p. 68
FSB, Potential Financial Stability Issues arising from Recent Trends in ETFs (Basel: FSB, 2011), p. 2
Amenc, N., Ducoulombier, F., Goltz, F. and Tang, L., What are the Risks of European ETFs? (Nice: EDHEC-Risk Institute, 2012)
AMF, 2011 Risk and Trend Mapping for Financial Markets and Savings (Paris: AMF, 2011), p. 6
Campbell, J., “Household Finance,”Journal of Finance, 61 (2006), 1553–604
Bainbridge, S.M., “Whither Securities Regulation? Some Behavioural Observations Regarding Proposals for its Future,”Duke Law Journal, 51 (2002), 1397–511
FSA, Retail Conduct Risk Outlook 2011 (London: FSA, 2011), pp. 75–6
Burkart, O. and Bouveret, A., Systemic Risk due to Retailization (Frankfort: ESRB, 2012).
Treasury Select Committee, 15th Report, The Retail Distribution Review (2011)
House of Commons, Treasury Committee, Report. Retail Distribution Review (2011).
Sullivan, R., “European States at Odds over Commission,” Financial Times Fund Management Supplement, July 18, 2011, 3.
FSA, Retail Product Development and Governance. Structured Product Review (London: FSA, 2011)
Woolfe, J., “Widespread Belief MiFID II set to Fail Retail Investors,” Financial Times Fund Management Supplement, January 30, 2012, 8.
Gray, J. and Hamilton, J., Implementing Financial Regulation (Chichester: Wiley, 2006), pp. 188–225
Devlin, J., A Report for HM Treasury, Literature Review on Lessons Learned from Previous “Simple Products” Initiatives (2010).
Recently, renewed effort has been made to address the “simple products” conundrum: Sergeant Review of Simple Products, Interim Report (London: 2012).
Jacoby, M., “Dodd-Frank, Regulatory Innovation, and the Safety of Consumer Financial Products,”North Carolina Banking Institute Journal, 15 (2011), 99–110