An examination of policy trends in EU financial regulation applicable to investment funds

Abstract

The financial crisis demonstrated that the ancien regulatory and supervisory regime had failed to properly safeguard investors and the stability of the financial system. The EU policy response to the crisis focused on attaining a higher degree of harmonised regulation, particularly in fields that had hardly been touched by the EU legislative machine in the past. These include the OTC derivative market, short selling, the alternative investment funds industry and the depositary business. The regulation that emerged from the ashes of the crisis demands: [a] detailed transparency from financial institutions; [b] more robust regulation of financial product distribution; and [c] financial product intervention by financial supervisors. The paper examines some of the new trends in EU regulation that directly impact the fund industry in Europe. The paper argues that enhanced transparency is likely to benefit both financial supervisors and investors, as it improves the ability of supervisors to identify and investigate abusive behaviour and ensures that investors are provided with more information which is relevant to their investment decisions. The paper contends that the new regulatory framework will increase the cost of doing business, which is likely to trigger a process of consolidation and a change in the structure of the European investment funds industry. This may in certain instances have unintended consequences, such as a possible decrease in depositary capacity in Member States which have a small depositary complement. It is argued that such outcomes may be mitigated through the application of internal market principles and tools that are already applicable in practice in European financial regulation.