The financial services industry is of central importance to the UK economy. It represents some 7% of GDP. It also generates major exports for the UK - in the region of one-third of UK financial services are exported to the EU. News reports in the immediate aftermath of the referendum result included the sharp drop in banking stocks; the overtures being made to attract UK financial business away from the City to other EU centres; and plans by leading financial institutions to move some operations away from the City. Vivid illustrations all of the importance of the Brexit vote for the City and the UK financial services industry.

Some five years on from the Autumn 2008 collapse of Lehmans, the regulatory dust from the Global Financial Crisis has settled. Significant regulatory policy debates are still underway internationally, notably with respect to the treatment of shadow banking.1 But the main contours of the crisis-era regulatory landscape are now clear. Internationally, most major economies, including the EU, have implemented the G20 reform agenda, set out initially in the 2008 Washington Declaration,2 and covering, inter alia: bank capital, liquidity and leverage; hedge funds; rating agencies; and the over-the-counter (OTC) derivatives markets. That major regulatory change would have followed the financial crisis is not, of course, a surprise.3 Observation of responses to major financial crises over the years from the 1929 Crash to the ‘dotcom bubble’ era and beyond4 makes clear that what Professor Coffee has vividly described as the ‘regulatory sine curve’5 leads to a regulatory boom after financial market bust.

The controversial and long-awaited Commission Proposals to revise the cornerstone Markets in Financial Instruments Directive 2004 (MiFID I) were presented in October 2011. The Proposals are currently going through the Council and Parliament negotiation process, and final agreement is expected sometime in 2013. This article places these important reforms (together, MiFID II) in context by examining the impact of MiFID I since its application to EU financial markets in November 2007, and by considering what MiFID I's impact suggests for the design of MiFID II. It considers how MiFID I reshaped the EU share trading marketplace and how the dominant interests which shaped MiFID I's regulatory design fared. It also examines how those interest groups are seeking to shape MiFID II, and the implications. It suggests that the influence of interest groups may have led to overly ambitious MiFID II Proposals which are excessively concerned with investment firm and trading platform interests, and not sufficiently focused on the overall efficiency and effectiveness of EU share trading markets. It calls for a more modest approach to reform, based on fine-tuning MiFID I.

This article considers the impact of the financial crisis reform agenda on EU investor protection regulation. It argues that retail market regulation is becoming associated with a consumer protection agenda and that a more interventionist approach to the retail markets is following. The influences which are shaping this ‘consumerisation’ of EU investor protection regulation, and the benefits and risks of the new approach, which are particularly apparent in the product intervention sphere, are considered.

The purpose of this article, and of its earlier companion article (Part (1) Rule-making, 12 European Business Organization Law Review (2011) p. 41), is to examine the implications of the new European Securities and Markets Authority which was established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any institutional design would have struggled given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body's powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision, even if there is considerable symbiosis between these activities.

This article considers ESMA's supervisory powers. It argues that, by contrast with its rule-making powers, the current and potential extent of ESMA's supervisory powers has pushed ESMA too high up the spectrum towards EU intervention. Local supervision of the EU rule-book represents an important safety valve for the EU financial market but this safety valve may be obstructed by ESMA's undue standardisation of supervisory practices. ESMA's extensive direct supervisory powers are also troubling given concerns as to their effectiveness. It was always going to be a challenge to draw the dividing line between ESMA's supervisory powers and those of national competent authorities. But the line may have been drawn too far on the side of operational centralisation.

Since the outset of the financial crisis, the EU financial markets regime1 has been undergoing a period of turbulence which contrasts sharply with the period of relative stability which it briefly enjoyed over 2005–2007 and post-FSAP (Financial Services Action Plan2). The FSAP reforms had been adopted. The Committee of European Securities Regulators (CESR) had emerged as an influential actor, driving some degree of supervisory coordination and co-operation and constructing a significant soft law ‘rule-book.’ And the 2007 Lamfalussy Review suggested broad political, institutional and stakeholder satisfaction with the Lamfalussy process. There was little enthusiasm for grand adventures in institutional design, albeit that supervision, an institutionally-driven concern, was presciently if belatedly emerging as a concern of the EU institutions. The Review's main concern, however, was with strengthening the pragmatic, if somewhat haphazard, network-based, ‘supervisory convergence’ model as the means for supervising the integrating EU financial market. With respect to regulation, reflecting the wider international zeitgeist pre-crisis,3 ‘Better Regulation’ and the need for a ‘regulatory pause’ were the watchwords of a Commission which, once the massive FSAP regime was safely in place, espoused the benefits of self-regulation and highlighted the risks of intervention without impact assessment, extensive consultation and evidence of market failure.4 This was most apparent with respect to credit rating agencies,5 debt market transparency,6 hedge funds,7 and clearing and settlement.8 Institutionally, a relatively sophisticated law-making apparatus, in the form of the Lamfalussy structures, a plethora of advisory bodies and stakeholder bodies (notably FIN-NET which represents the consumer and SME interest), had been established.

The purpose of this article, and its companion article, is to examine the implications of the new European Securities and Markets Authority, established in January 2011.

In the wake of the financial crisis, the case for institutional reform and for conferring regulatory and supervisory powers on a central EU authority became compelling. But any design for institutional reform of EU financial market regulation and supervision would have struggled to deliver an optimum model, given the necessity for compromise. The central difficulty is one of nuance. Where on the spectrum from national powers to EU powers, and with respect to regulation and supervision, should any new body's powers be placed if optimum outcomes are to be achieved? The question is further complicated by the different dynamics and risks of centralising rule-making and of centralising supervision/enforcement, even if there is considerable symbiosis between these different activities.

This article considers ESMA's rule-making powers; it is accompanied by a companion piece on ESMA's supervisory powers. It examines the considerable powers which ESMA has been granted in the rule-making sphere and argues that ESMA is likely to lead to significant intensification of the EU rule-book for financial markets. While a uniform rule-book carries risks, there are countervailing benefits. There are also promising signs that ESMA may become an effective rule-maker and may prove an effective mechanism for managing the risks of the intensifying rulebook. But the institutional design model is flawed. Treaty restrictions have led to a troublesome compromise in terms of ESMA's design, particularly with respect to Commission control and ESMA independence. Overall, ESMA's design is under-ambitious with respect to rule-making.

By contrast, as the companion piece argues, the extent of ESMA's supervisory powers, real and potential, may have pushed ESMA too high up the spectrum towards EU powers. Local supervision of the EU rule-book represents an important safety valve for the EU financial market, and should not be obstructed by over-centralisation. Once supervision was placed on the reform agenda, however, it was always going to be a challenge to draw the dividing line between ESMA's powers and those of national competent authorities. The line may, however, have been drawn too far on the side of operational centralisation.