A Critical Evaluation of the New EC Financial-Market Regulation: Peaks, Troughs, and the Road Ahead

ABSTRACT

The implementation of the European Union’s Action Plan for Financial
Services (“FSAP”) is largely complete, though the transposition of
relevant legislation into the Member states’ legal orders is still pending.
The new legislation has significantly revamped the EU’s legal and
regulatory framework governing financial markets. The Lamfalussy
process has been successfully utilized in debating and enacting the most
important pieces of the new EC securities legislation. This article
provides a critical analysis of the securities Directives passed under
FSAP and critically evaluates their impact on EU capital markets and the
EU financial services industry. Furthermore, this article sheds light on
the evolution of EC financial market regulation and on the most
important and intricate points of the new legislation. It explains the
reasons that make the new legislation an agent of profound change for
EU financial markets in terms of structure, business planning and trading
processes. Finally, the article debates the cost of compliance with and
enforcement of the new framework and the supervisory and enforcement
loopholes created due to the absence of a single regulator for EU
financial markets.

I. INTRODUCTION

EC securities regulation has been, along with the introduction of the euro,
the cornerstone of all efforts aiming at the integration of EU financial markets. Yet developing this body of EC law has been a very lengthy process frequently
marred by controversy. In addition, a marked lack of direction has been its most
distinctive characteristic for almost two decades. This was caused by three
factors. The first factor was the existence of conflicting national agendas
motivated by a desire to protect and preserve domestic investment firms, national
securities markets and local business customs. The second factor was the
unwillingness of the global financial services industry to engage in a constructive
dialogue and find a common language with EC legislators. This unwillingness was
attributable to the inability of the industry to recognize the varied and important ways
through which EC securities law was able to influence the evolution of its business
processes, development of new products, and ultimately the competitiveness and
profitability of its members. The third factor was the inability of EC officials and
legislators to fully understand the intricacies of modern financial markets; in
particular their globalized nature and the fast pace of innovation within them. This
resulted in the production of legislation that often reflected the reserve, awe, and
prejudice with which EC bodies used to view the workings of global finance.