What the EU, and each individual, can do to make the financial system serve us all
A large number of EU actions aim to prevent, mitigate and remedy undesirable outcomes which may be caused by unethical behaviour in the financial system.
Binding EU rules put in place since the financial crisis
After the financial crisis the EU regulator recognised that poorly designed remuneration policies can lead to excessive risk-taking by staff and a focus on short-term gains. Among other key initiatives, the Capital Requirements Directive and the Capital Requirements Regulation aim to protect financial stability by regulating remuneration policies and practices for key staff, who are capable of influencing the risk profile of their financial institutions. According to EU rules, asset managers are required to establish and maintain sound remuneration policies for their key staff. The rules aim to limit excessive risk-taking and align staff’s incentives with the long-term objectives of firms.
Investor protection and financial advice are regulated at European level by a directive called Markets in Financial Instruments. It aims to protect retail investors, who have less information about the financial products than those, who are selling them the products or advising them.
In the Capital Markets Union Action Plan, the Commission proposed legislative measures to promote a safe and liquid market for securitisation, which includes due diligence, risk retention and transparency rules.
In the wake of the LIBOR scandal the Commission acknowledged that manipulating benchmarks is tantamount to stealing from investors and consumers. Therefore it proposed a Regulation on benchmarks to help rebuild confidence in financial markets in the European Union.
On-going international cooperation to combat tax avoidance
The policies at EU level do not stop at the level of binding rules, but extend into areas of international cooperation, where the EU can play an important role in initiating change. A good example is tackling tax avoidance. The EU takes its international tax good governance commitments seriously, and therefore expects the same from its international partners. An EU level initiative on fair taxation envisages fair and open discussions with international partners on tax issues that concern the global community. Besides this dialogue, an EU list of non-cooperative tax jurisdictions will be a tool for the EU to deal with third countries that refuse to play fair.
EU policies enabling informed individual choices
It is also our individual responsibility to ensure that the choices we make support the well-being of all. There are important policy areas, such as sustainable finance, where the Commission aims to support informed and responsible individual choices.
In its Action Plan on Sustainable Finance the Commission proposes policies to facilitate financing environmental and social goals, to help the economy transition to a sustainable pathway. The proposal on suitability would require a financial sales person to ask clients about their investment preferences on environmental, social and governance issues and offer a suitable product. The proposal on fiduciary duties will require asset managers and institutional investors to disclose to their clients how they take environmental, social and governance considerations into account in their investment decisions.
The proposal on taxonomy will help investors understand to what extent a green product contains environmentally sustainable assets. These and future measures are meant to help individual investors make better choices that can help the sustainable transition of our economy.
Our individual role in making the financial system benefit all
Regulatory interventions alone are not sufficient. Be it binding rules or non-binding recommendations, what we observe is that the outcome of any policy action is always better when people truly subscribe to the objectives of the rules, as opposed to rules being simply imposed on them.
Barbara Gabor & Martin Spolc
The views expressed in europeinfos are those of the authors and do not necessarily represent the position of COMECE and the Jesuit European Social Centre.