19 March 2008

EPF: Are the Lamfalussy regulatory networks working successfully?

The European Policy Forum released a paper which analyses the successfulness of the Lamfalussy regulatory networks and offers an interim assessment from an academic perspective.

“The existence of closer links between sectoral supervisors could eventually have ramifications for the debate in relation to institutional design as it could make the possibility of a Euro-FSA seem more plausible”, the authors state. “The fact that cross border colleges of supervisors are beginning to coordinate their approaches under a European umbrella may point to some shift of emphasis towards supervision as distinct from regulation.”

The report, authored by Professor Eilis Ferran, University of Cambridge, and David Green, FSA, argues that for market participants, the perceived advantages of a more integrated supervisory infrastructure are likely to grow as their business models become more pan-European in orientation. For supervisors, the establishment of a single agency could be seen as the logical conclusion of a process of supervisory convergence. And, for consumers, a single agency may one day become the most appropriate model for the delivery of equivalent levels of investor protection and access to redress mechanisms in relation to cross-border financial activities

However, the possibility of a Euro-agency posed numerous pivotal questions about its design and role. These include whether there should there be a single agency for the financial markets generally or several sectorally-based agencies; whether it should replace entirely national agencies or operate alongside them with power over certain entities, such as cross border financial firms; and as to the scope of its supervisory competencies as well as its (Level 3) rule-making and standard-setting role. Sensitive issues, such as lender of last resort responsibilities, would need to be addressed.

One of the obvious dangers with a decentralised approach is the risk of lack of clarity about the roles and tasks assigned to different participants, the paper states and concentrates on the relationship between the Commission, the European Parliament and the 3L3 Committees.

Also of crucial importance are transparency issues as they are vital to ensure good institutional management between the relevant political and institutional parities.

A relatively new issue that is consequently beginning to surface is with regard to the compatibility of the detailed style of Lamfalussy laws (especially those at Level 2) with the “principles-based” style of regulation, on which the UK FSA has instituted a wide-ranging debate that is attracting considerable international interest, the authors state.

“Principles-based regulation is an experiment for the UK that may or may not work”, the authors state. “Even if it is successful in the UK, which is not yet clear, it may not be an appropriate regulatory style for much pan-European legislation because of cultural or legal differences between Member States.

"The point here is not to examine in detail the merits or demerits of principles-based regulation. Rather it is to flag the issue of EC law hampering innovation in regulatory style at Member State level and to raise the question whether this is a problem and, if so (or to the extent that it is), whether it has been exacerbated by the Lamfalussy process.

"This leads to the fundamental issue as to how much standardization of rules and of supervisory practice is needed. Notwithstanding heated debate in particular contexts, such as in relation to Article 4 of the MiFID implementing directive, this pivotal underlying issue has not so far been resolved.

Professor Eilis Ferran is Professor of Company and Securities Law at the University of Cambridge.

David Green is Advisor on International Affairs at the Financial Reporting Council and former Head of International Policy at the Financial Services Authority.

The paper is part of a EPF report named ‘Joining-up Europe’s Regulators’.

(For the full paper on Lamfalussy see pages 17-31 of the attached document)

© Graham Bishop