Financial regulation – which protects people from very real risks – is being dismantled by a massive wave of deregulation. Europeans will pay the price in multiple ways: as consumers, workers, investors and taxpayers. The financial industry is at the heart of the economy: it provides financial services and allocates capital to all other economic actors, for instance:
It manages the financial infrastructure of modern life – including day-to-day payments, savings accounts, insurance and pension products
It creates money on behalf of central banks and allocates credit
It acts as an intermediary between those who need financing and those looking to invest their money or savings, while offering a range of investment products
It operates marketplaces where supply and demand for wholesale financial products – those required by large corporations, public entities and financial institutions – come together
Like many other markets, the financial services market is regulated: participants are free to pursue profits, but not without limits. Because of its major social and economic importance, the financial sector is subject to supervision. Lawmakers determine what is permitted on financial markets and how activities must be carried out: regulation “shapes finance”.
Market regulations are also designed to protect consumers and the wider economy from economic dysfunctions.
Like all markets, the financial services market is vulnerable to what economists call “market failures”, such as:
Market concentration: Excessive concentration in a market, where a small number of businesses control very large market shares, can encourage monopolistic practices, leading to unreasonable price increases and lower-quality services for consumers
Asymmetry of information: When sellers have significantly more information than consumers, buyers are placed at a disadvantage and may be unable to properly assess the social, environmental or health consequences of purchasing or using a product
Negative externalities: Economic activities can sometimes have negative effects on third parties. When those benefiting from a transaction do not bear the full consequences of their actions, these consequences are known as “externalities”.
When market failures occur in a sector with such a crucial economic role – like financial services – they can have enormous economic, political, social and environmental consequences, and regulation is society’s primary protection. All of this explains why financial regulation has such significant economic and social implications. The financial industry has major public interest implications, and the way regulation shapes it can have important political and economic consequences.
For this reason, Finance Watch believes that the role of finance and its regulation should be debated democratically, and calls for greater accountability and stronger representation of civil society in the lawmaking process.
Finance Watch believes that profitability is both a legitimate objective and a necessary condition for the sustainability of financial institutions. However, the pursuit of profitability should not come at the expense of the public interest.
Given the importance of finance to the economy, financial regulation should enable the financial industry to channel transparent and sustainable investment into the real economy while protecting the public interest. All of Finance Watch’s policy proposals to create or improve financial regulations are carefully designed to achieve this balance.
After the 2008 financial crisis and its catastrophic consequences for European economies and public finances, there was a brief period of momentum for ambitious financial regulation. But today, 16 years after the crisis, memories have faded.
Amid geopolitical and trade concerns, corporate lobbies are successfully portraying financial regulation as a problem for the competitiveness of the financial industry. Nothing could be further from the truth: financial regulation is a competitive advantage and a cornerstone of European strategic autonomy.
Yet EU decision-makers are taking the bait. The European Commission is pursuing an unprecedented wave of deregulation, putting decades of progress at risk.
The current deregulation agenda threatens consumer protection, social safeguards and environmental protections. In addition to potentially triggering economic instability, putting jobs at risk and reducing people’s wellbeing, indiscriminate deregulation could directly or indirectly increase people’s cost of living:
Costs for accessing basic financial services will increase, particularly for already vulnerable people, while consumers will have significantly less protection against predatory practicesValue for money from green financial products will decrease as greenwashing by financial institutions becomes easier, accountability for human rights and environmental violations is reduced, and legal uncertainty for companies increasesBills for financial services such as home insurance will increase as financial institutions remain unprepared for climate change. The cascading costs of natural disasters resulting from unaddressed climate change will increasingly be borne by governments – and therefore by taxpayersEconomic prosperity in developed countries could continue to decline, as excessive finance can prevent companies from directing capital toward productive investments. When an economy becomes excessively financialised, extractive practices can become widespread and negatively affect the real economyAnd most importantly: as taxpayers, people will receive less value for the taxes they pay to the State. Governments will have to redirect public funds when the next catastrophic financial crisis occurs, and may once again be required to spend enormous amounts on bailouts for failing financial institutions. This could also negatively affect real estate and employment markets, as well as the value of retail investors’ assets in financial markets
There are many more examples to consider, as more than 100 financial rules are set to be scrapped, with even more deregulation expected.
The recent political agreement in the European Parliament to remove companies’ obligation to explain how they would transition to net-zero by 2050 – so that Europe can meet its Paris Agreement commitments – is a serious warning sign.
Today, more than ever, citizens need policymakers to understand the public interest implications of financial regulation and stop dismantling hard-won safeguards without sufficient consideration of the consequences. Such measures could ultimately backfire on citizens.
Finance Watch will continue to represent people’s voices at EU level in pursuit of this goal. These are challenging times, and civil society will need support from all sides. Finance Watch will continue to push for ambitious policies so that Europe can resist short-term corporate interests and become the sustainable and prosperous continent it aims to be.
