Impact of the Global Financial Crisis on National Regulators in European Countries
Sergey V. Kovalchuk
The financial crisis, whose signs emerged just a few years ago, and became clearly defined at the end of 2008, gave rise, in different countries and for different reasons, to a debate on the measures taken by regulatory agencies.
The European organization of Supreme Audit Institutions (EUROSAI) pays special attention to all aspects of the global financial crisis and, in particular, to the changes it caused in the regulatory environment of European countries. During the VIII EUROSAI Congress that took place in Lisbon in June 2011 public auditors from 49 Supreme Audit Institutions (SAIs) discussed, among other themes, the direct and indirect impacts that the crisis has had on regulators in European countries. Below an overview of such impacts and changes implemented within regulatory agencies is offered for your consideration.
Changes in the financial regulators’ responsibilities
The survey conveyed among EUROSAI member SAIs shows that a common response to the crisis has been to introduce changes to the responsibilities of regulators. However, the extent and nature of such changes varied widely from country to country. In some European countries such as Belgium, Czech Republic, Malta and Poland regulators faced no significant impact from the crisis or no impact at all and so didn’t change their responsibilities.
In Denmark economic and financial crises have strengthened the focus of Parliament, government and the public on economic regulators, as questions have been asked whether they could have done more to avoid some of the consequences of the crises and especially bankruptcy in the banking sector. In the Netherlands there are discussions about the budget of the Dutch National Bank in the light of new or extended tasks at a time when government expenditure is being reduced, including budgets for regulators.
But in a number of states regulators faced more serious challenges which resulted in functional or funding changes. In Germany the financial crisis has had an “enormous” impact on the structure and processes of the Federal Financial Supervisory Authority and resulted in additional tasks in the area of supervision of banks. The Portuguese National Bank (Banco de Portugal) had to adopt a series of new regulatory and supervisory initiatives in 2008-2009. Although the financial markets crisis had less of an impact in Spain than in other countries, the situation of some operators put pressure on the Bank of Spain.
In Hungary several legal provisions changed, which served the more effective intervention of the Financial Supervisory Authority (HFSA) and the strengthening of the role of consumer protection. On one hand, the HFSA was authorized to take measures for consumer protection, impose fines and, on the other hand, the HFSA handles the individual complaints received by public proceedings. In 2011 the Regulatory Office for Network Industries of Slovak Republic reduced the number of employees and the budget of the Office by 10%; the same procedure was applied to Telecommunications Regulatory Authority and Postal Regulatory Office. In United Kingdom all public bodies, including regulators, have been expected to make efficiency savings. Until now the regulators have not generally faced the official savings targets imposed on government departments, but the expectation is that their budgets will come under significant pressure (25-40%). Several regulators face uncertainty about their future role or existence.
The Croatian Competition Agency in the Annual Plan for 2010–2011, stated that limited resources and administrative capacities are the key challenges because of which it could not be expected that the Agency would be always capable of addressing absolutely all issues and potential competition cases in the Croatian market. Therefore, the leadership of the Agency has decided to rationalize the use of resources and prioritize the work. The intention is to raise awareness among aid providers about scarcity of resources and the necessity of reasonable and responsible allocation and use of taxpayers money because, as a rule, these are considerable budget resources. In Iceland there have been discussions on how to strengthen regulation of the financial sector. The financial supervisor (FME) has been given increased funding. Also the feasibility of merging FME and the Central Banks is under consideration. In other sectors, smaller regulatory bodies might be merged in order to create larger, more efficient regulators. In Israel one of the impacts of the economic and financial crisis was a renewed public debate around a more efficient regulatory system required by the country. Economic regulators have to improve the service and information that they provide to the public, and improve cooperation and coordination between the relevant regulators.
The regulators have to recognize that the free market and competition may fail, so that they must be more alert.
Structural and legislative changes of financial services regulation
However, institutional, legislative and structural changes faced by regulators in EU member states were even more obvious and profound. In Denmark the Financial Stability Company was established in October 2008 as part of an agreement between the Danish State and the Danish financial sector (the Private Contingency Association). The Company is state-owned through the Danish Ministry of Economic and Business Affairs.
The Company’s objective is to secure financial stability in Denmark. Hungarian regulations of financial services that cover client protection were modified, tightened, and — partly due to the regulatory process of the European Union, the adoption of EU directives into national legislation — several new legal provisions were made. For example the directives on payment services in the internal market or on credit agreements for consumers contain significant stipulations on client protection and prove that consumer protection is brought into focus also at EU level. In Malta the Authorisation Unit was set up to process all applications from firms seeking an authorisation to provide financial services.
A Regulatory Development Unit has been set up to coordinate legislative and regulatory development and lightens the burden of the Supervisory Units in this regard. In July 2009 the new Cyprus Security and Exchange Commission (CySEC) Act was passed which further enhanced the supervisory and regulatory powers of the CySEC. The Act governing the Investment Sector and the Banking Sector also changed and additional guidelines and regulations are issued to further regulate the sectors. In 2010 the UK Government elaborated program according to which it is planned to make the following changes: the Financial Services Authority will be abolished; a new Financial Policy Committee will be created within the Bank of England, with primary statutory responsibility for maintaining financial stability; the new Prudential Regulation Authority will be responsible for prudential regulation of all deposit-taking institutions, insurers and investment banks.
It will be a subsidiary of the Bank of England; the dedicated consumer protection and markets authority (CPMA) will be created, with a primary statutory responsibility to promote confidence in financial services and markets;
a new single agency to tackle economic crime will also be created. Portugal also approved a new legal framework that assigns to the National Bank’s powers to establish rules of conduct for credit institutions and financial companies and to ensure the transparency of information and equity in transactions of financial products and services between the entities subject to its supervisions and their customers.
Meanwhile, some countries had implemented changes in their regulatory environment, or at least initiated them, prior to the crisis. For example, in the Slovak Republic supervision over the financial markets in the area of banking, capital markets, insurance and rental insurance was integrated under the umbrella of the National Bank as far back as in 2006 which also meant the abolition of Office for the Financial Market. Conversely, in Poland the Central Bank’s responsibility to supervise the banking sector was shifted to the Polish Financial Supervision Authority (as of 1 January 2008). However different in technical respects those changes in both countries had a similar goal — consolidation of supervision of financial markets within the single regulator.
The same trend is indicated in Spain, where the unification of financial supervisors (bank products, stock markets and assurance products) is being widely discussed at government, academic and professional level even though there is no Act approved by Parliament.
Consumer protection
Just as in other areas, European countries apply different approaches to responsibility of financial regulatory agencies for improving the financial capability of consumers. Regulators in Belgium, Denmark, Czech Republic, Germany, Slovak Republic and Spain (at least not directly) provide no such services to their respective consumers.
In some other countries, a key response to the economic and financial crisis has been to place greater emphasis on consumer protection, especially in financial markets. Regulators in the UK and Portugal have a specific mandate to take forward consumer financial education; in particular, a national money guidance service providing people with access to free personalized information and guidance on a range of money matters such as budgeting, saving and borrowing, mortgages, insurance, pensions and planning for retirement, and tax and benefits has been set up in UK. The Central Bank of Cyprus is represented in the Consumer Education Committee headed by the Cyprus Securities and Exchange Commission.
In the Romanian Government there have been attempts to maintain the tariffs of energy products at “an acceptable level” to diminish the pressure on consumers.
In Hungary existing legislative Acts relating to financial services have, since January 2010, been amended to considerably strengthen their consumer protection provisions. At the same time, a Code of Ethics was established, on the fairness of financial organizations towards consumers. The Hungarian Financial Supervisory Authority also has a growing role in consumer protection.
Taking into consideration the above-stated examples the general conclusion can be made that the economic environment has a significant impact on the work of regulators and the recent financial crisis has prompted many changes. The financial crisis has also led to enhanced roles for financial regulators across European countries.
In some cases existing regulators have received enhanced powers to protect consumers and ensure financial stability; while elsewhere, new independent regulators are being established to address perceived shortcomings in the existing regulatory regime. In some countries, structural reforms have reflected the expansion of the role of the central bank in overseeing financial stability, though some other countries have reduced the power of their central banks.
