Financial services regulation in Europe

From ‘regulation by information’ to Supervisory Authorities

Term Paper, 2012
24 Pages


Table of contents

1. Introduction

2. In theory: regulatory patterns in the European Union
2.1 Regulation by networks in the European Community– the origins
2.2 Regulation by information – a functionalist logic

3. Financial services regulation in Europe – an institutional analysis
3.1 Four-level approach of financial services regulation
3.2 Regulation with ‘teeth’ – the creation of supervisory authorities
3.3 The consequences of enhanced powers

4. Process tracing: the power of belief systems
4.1 Advocacy Coalition Framework – the basic principles
4.2 Advocacy coalitions in financial services regulation
4.3 A qualitative leap?

5. Conclusion

6. References

1. Introduction

Since the foundation of the European Union in 1992, the claim of a ‘rising regulatory state’ in Western Europe has become an important feature of public policy research. The creation of a single market by the Treaty of Maastricht forced European governments to change their traditional modes of governance in response to developments like increasing international competition and deepening economic and monetary integration within the European Union.[1] Strategic adaptation to these new realities has been linked to two key trends: one is the reduced role for the positive, interventionist state and a corresponding increase in the role of the regulatory state, using legal authority over the tools of taxing and spending. The second trend is the European Commission’s ambitious attempts to maximise its influence over policy content, and the increased interest of member states in transnational policy responses to the issues arising from the Single European Market.[2] One of the main institutional features of this ‘rising regulatory state’ has been the creation of European regulatory agencies with the primary aim to provide policy-makers with objective and independent information. An interesting but also controversial feature of this development is the fact that governments were apparently willing to abandon some of their regulatory competencies in favour of institutions that are not democratically accountable, and that are to a large extent insulated from political influence.[3]

The relevance of this topic becomes accessible when looking at the developments in financial services regulation between 1999 and 2011. The eruption of the financial crisis in 2007 significantly changed the institutional architecture of regulation at the European level and led to the creation of a new European financial supervisory framework, centred around three supervisory authorities with defined legal powers. The aim of this paper is to outline these developments and to put them into an explanatory theoretical context. How can the development from regulatory agencies with only an auxiliary role in the process of European policy-making to supervisory authorities with defined legal powers be explained? Even more important, is there really a qualitative leap from one regulatory body to the other?

In order to answer these questions, the following part of the paper constitutes a theoretical section aiming to explain the politics behind the scenes that led to the creation of regulatory agencies and prepared the ground for the new supervisory framework. The institutional analysis in the third part briefly outlines the institutional setup of financial services regulation prior to the crisis before contrasting it with the European Securities and Markets Authority (ESMA) established in 2011. In the fourth part, I will use the explanatory lens of the Advocacy Coalition Framework to put the actions and motivations of actors involved in these developments into perspective. In the final conclusion, I will sum up the previous findings in order to assess the actual power of supervisory authorities in the context of financial services regulation.

2. In theory: regulatory patterns in the European Union

This section will examine the theoretical background of regulatory patterns in Europe. ‘Grand’ integration theories are not able to give a convincing explanation for the creation of European regulatory agencies. The following chapter will show that their creation rather followed a functionalist logic which gave rise to the concept of ‘regulation by information’, shaping the institutional architecture of regulation in the European Union for almost two decades.

2.1 Regulation by networks in the European Community– the origins

The creation of European agencies followed a structural logic in the post-1992 period: the creation of the single market triggered an ongoing process of deepening regulatory interventions by European institutions, thereby getting closer to the model of Majone’s regulatory state described above. The primary goal of establishing an integrated area ‘without internal frontiers in which the free movement of goods, persons, services and capital is ensured […]’[4] has to be understood as the main rationale behind the development of European regulatory politics. In this context, harmonization initially became the primary vector of Community intervention. The coexistence of distinct regulatory authorities in each member state, each with their own objectives and priorities created obstacles capable of hampering free trade. Thus, harmonization and mutual recognition of national rules appeared as a natural solution in dealing with the resulting diversity problems.[5] The Community approach to harmonization was based on a decentralized administration model, basically due to the limited competences of European institutions. Set up as a two-tier legislative exercise, it was based on directives supposed to set objectives, but leave to national authorities ‘the choice of form and methods’ whereby they are to be implemented.[6] This system of decentralized administration facilitated a basic distribution of labour between the Community and the member states but leaving the institutional focus undoubtedly at the national level. Dehousse identified this ‘power rationale’ as being crucial in understanding the development of Community regulatory competences: although the creation of a single market without internal borders tended to reinforce the autonomy of policy-makers operating at the Community level, national administrations found it easy to accept an expansion of Community activities due the power they enjoyed throughout the harmonization process.[7]

In the immediate post-1992 era, the model of legislative harmonization appeared to be the best solution to level the playing field for the creation of a single market. However, during the following years it became obvious that mutual trust and loyal cooperation among the member states were not sufficiently developed to achieve economic integration without an adequate administrative infrastructure at the European level.[8] Instead, a clearer separation between political and technical-administrative responsibilities was urgently needed for achieving policy objectives. Additionally, the two-tier character of the harmonization process gave rise to severe administrative problems not only at the European but also at the national level. The capacities of national authorities to cope with the requirements introduced by European legislation varied significantly, inducing wrongful or incomplete transposition of the internal market directives.[9] The shortcomings in the approximation of substantive law eventually gave raise to the question how the degree of uniform implementation needed in a single market could be achieved. The power rationale described above excluded a supranational option which could have reinforced the implementation and control powers of European institutions. The only way to improve decentralized implementation without substantially alter the existing balance of power in favour of the Community was seen in the delegation of strictly limited powers to independent regulatory agencies operating on the basis of ‘mutual information’: decision-making procedures based on comparable data and a shared definition of a given problem.[10] They were intended to assist the already existing comitology committees consisting of national experts and officials, initially created to monitor the decisions taken by the Commission when it is given regulatory powers to implement Community legislation.[11] As specialised administrative bodies, agencies are set up independently of supranational institutions and outside the legal framework of the European treaties, by way of a Council regulation. Bringing together all relevant actors in a given policy sector, they exercise their exclusively technical and scientific powers or administrative tasks under the leadership of a supervisory body (either a comitology committee or the Commission).[12] Council Regulation No 2309/93 of 22 July 1993, for example, specifies the tasks of the European Agency for the Evaluation of Medicinal Products (EMEA) as follows: ‘to provide scientific advice of the highest possible quality to the Community institutions and the member states for the exercise of the powers conferred upon them by Community legislation […], to ensure close cooperation between the Agency and scientists working within the member states […], whereas the exclusive responsibility for preparing the opinions of the Agency on all matters relating to medical products for human use should be entrusted to the Committee for Proprietary Medicinal Products […].’[13] This statutory limitation to a coordinative and informative function left the agencies to play only an ancillary role in the process of European policy-making.[14]

2.2 Regulation by information – a functionalist logic

European agencies owe their existence to a dilemma that characterizes not only the EU regulatory policy but the European integration process as a whole: despite the rising need for uniform European rules, greater centralization seems to be politically inconceivable for the national governments. Thus, European institutions often lack the formal powers and the institutional capacities needed to establish the appropriate rules and to enforce and monitor their compliance in the member states.[15] European agencies, set up as institutionalized regulatory networks of national experts in a certain policy field, constituted the Community’s response to the resulting regulatory gaps and initiated a shift in the European-level regulatory mode towards the concept of ‘regulation by information’.[16]

Can this development be explained by using one of the ‘grand theories’ of integration? In this context, Scharpf’s argument is proved true that ‘the complexity of the multi-level European polity is not adequately represented by the single-level theoretical concepts of competing intergovernmentalist and supranationalist approaches.’[17] Quaglia offers a solution by suggesting that sequencing theoretical approaches (interdependence, supranational governance and liberal intergovernmentalism) can be used to explain the various stages of the policy-making process , namely background-setting, agenda-setting and decision-making.[18] This threefold approach offers a suitable lens to explain integration at all levels of the policy-making system: the creation of the single market increased the interdependence between national governments and inspired the creation of European agencies to level the playing field for intra-EU trade. Supranational actors, particularly the Commission, played in important role in the agenda-setting stage. The Commission always resisted the delegation of some of its powers to independent institutions – thus, the final outcome of a purely coordinative and informative function of European agencies well reflected the preferences of this supranational actor. Even though member states were only marginal actors at the agenda-setting stage, whose preferences were shaped by the functional needs for greater uniformity in the implementation of Community rules, they remain the main actors in the decision-making stage, playing a central role in the operation of regulatory agencies.

Despite the explanatory power of the ‘grand’ integration theories, the dynamics that have facilitated the creation of European regulatory agencies can be associated with a very functionalist logic of integration. Within the complex multi-level policy-making system of the EU, the supranational level seemed particularly suited to become the preferred level of public regulation, given the urgent need for uniform European rules and the active role of European institutions in the area of regulatory policy.[19] The main reason why the member states chose to delegate powers to non-majoritarian institutions is the need to preserve policy continuity against the changing preferences of variable parliamentary majorities.[20] In turn, policy continuity is seen as a necessary condition for policy credibility, providing the strongest argument in favour of an increased recourse to independent regulatory agencies at European level. Moreover, the internationalization of national economies, triggered by the creation of the European single market and the increasing openness of national borders, led to a gradual erosion of the effectiveness of direct regulation relying on orders, prohibitions and legally binding standards. Instead, reliable and understandable information was needed in order to cope with the growing complexity of regulatory issues. In this environment, European agencies could established themselves as serious actors for the provision of objective information, used by governments in the form of flexible guidelines that could be easily modified in the light of new scientific developments.


[1] Majone, Giandomenico (1997): From the Positive to the Regulatory State. Causes and Consequences from the Changes in the Mode of Governance. Working Paper 1997/93. (last accessed February 28, 2012).

[2] Lodge, Martin (2008): Regulation, the Regulatory State and European Politics. West European Politics, 31:1, 280-301. From now on cited as Lodge: Regulation.

[3] Ibidem. p. 282

[4] Article 14 (2) TEC, now Article 26 (2) TFEU.

[5] Dehousse, Renaud (1997): Regulation by networks in the European Community: the role of European agencies. Journal of European Public Policy, 4:2, 246-261. From now on cited as Dehousse: Regulation by networks in the European Community.

[6] Article 289 TEC, now Article 288 TFEU.

[7] Dehousse: Regulation by networks in the European Community. p. 249

[8] Everson, Michelle; Majone, Giandomenico; Metcalfe, Les; Schout, Adriaan (1999): The Role of Specialised Agencies in Decentralising EU Governance. Report presented to the Commission. (last accessed March 20, 2012). From now on cited as Majone Role of Specialised Agencies.

[9] Dehousse: Regulation by networks in the European Community. p. 251

[10] Ibidem. p. 254

[11] Article 202 EC (now Article 291 TFEU) confers on the Commission powers for the implementation of rules which the Council lays down and permits the Council to impose certain requirements in respect of the exercise of these powers. In July 1987, the Council adopted the ‘Comitology Decision’, defining specific committee variants and procedures for the exercise of the implementing powers conferred on the Commission. The 1987 procedures were replaced by a June 1999 Comitology Decision. (last accessed March 6, 2012).

[12] Eberlein, Burkhard and Grande, Edgar (2005): Beyond delegation: transnational regulatory regimes and the EU regulatory state. Journal of European Public Policy, 12:1, 89-112. From now on cited as Eberlein and Grande: Beyond delegation.

[13] Council Regulation (EEC) No 2309/93 of 22 July 1993 laying down Community procedures for the authorization and supervision of medicinal products for human and veterinary use and establishing a European Agency for the Evaluation of Medicinal Products. (last accessed March 13, 2012).

[14] Majone, Giandomenico (1997): The new European agencies: regulation by information. Journal of European Public Policy, 4:2, 262-275. From now on cited as Majone: Regulation by information.

[15] Eberlein and Grande: Beyond delegation. p. 95

[16] Majone: Regulation by information. p. 262

[17] Scharpf, F.W. (2001): Notes towards a theory of multilevel governing in Europe. Scandinavian Political Studies 24(1): 1-26, as quoted by Randall (2006), p. 404.

[18] Quaglia, Lucia (2007): The politics of financial services regulation and supervision reform the European Union. European Journal of Political Research 46, 269-290. From now on cited as Quaglia: The politics of financial services regulation.

[19] Eberlein and Grande: Beyond delegation. p. 104

[20] Majone Role of Specialised Agencies. p. 9

Excerpt out of 24 pages


Financial services regulation in Europe
From ‘regulation by information’ to Supervisory Authorities
University of Twente
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ISBN (eBook)
ISBN (Book)
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financial services regulation, European Union, Larosière, Advocacy Coalition Framework
Quote paper
Katja Philipps (Author), 2012, Financial services regulation in Europe, Munich, GRIN Verlag,


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