Blocking complexity – how complex regulation blocks public interest representation

Banking regulation in Europe and around the world is dominated by technical and expert rule-making and enforcement. In recent years this has been associated with complexity, of bank’s activities and of regulation, that impedes the public from participating and representing their interests in banking regulation.

Historically, banks managed their own affairs.[1] Over time, regulation became more formal with a clearer distinction between regulator and regulated, but it remained self-regulation, e.g. via cartels or guilds. Regulators were experts drawn from banks themselves. Regulation increasingly became the role of the state, but it retained a narrative ‘as a skill only available to those with tacit, practical knowledge of the markets – thus excluding actors from the new democratic politic’.[2] For example, the Bank of England and the Banque de France were both originally private banks, then the bank of banks, and were only finally nationalised in 1946, and they remain institutions of banking experts.

If anything banks moved private governance into the state.[3] This trend was still clearly visible during the management of the recent financial crisis. For example, the operations of failed banks taken under national ownership have not been brought under the command of politicians; rather a part of the state has bought shares hoping to sell for a profit.  As Froud et al, (2011:109) observe of UKFI (the UK government entity established in 2008 to manage nationalised banks) : ‘As UKFI elaborated its role and mandate, it increasingly represented, not the nationalisation of the banks, but the privatisation of the Treasury as a new kind of fund manager.’

The increased role of finance in society generally (financialisation) has also seen more expert regulation. During this period ‘regulatory functions have increasingly been delegated to public bodies or agencies with a status semi-autonomous from central government’.[4] A prime example was the shift to independent central banks, a critically important institution that moved away from the influence of democratically elected officials. The Bank of England for example was removed from parliamentary control in 1997. In addition, there is an increased role for wholly or partly private bodies perceived as technical specialists[5] e.g. ISDA, credit rating agencies, or IOSCO (the International Organization of Securities Commissions).

The importance of technical experts for bank regulation has had the effect of blocking public participation and interest representation in banking. One of the main ways has been through complexity. For over 30 years now global banking has been ever freer to engage in new activities, in a process widely known as de-regulation. But de-regulation has been accompanied by re-regulation. [6] Allowing banks to undertake ever more activities has required ever more rules . Rules can facilitate new activities in a number of ways setting a level playing field, reassuring clients and bank liability holders.

A self-perpetuating circle has developed (illustrated below). Banks are generally free to undertake new activities, leading to more rules, creating possibilities for them to develop yet more instruments. Banks have created new instruments that use regulation as an input, exploiting the form of regulation while abiding by the letter of the law.[7] These new activities necessitate yet more new rules which provide new opportunities… and so the cycle continues.

The result is enormous, complex rule books. Take, for example, the Basel Capital Accords. Basel 1 was 30 pages long, while Basel 2 was over 250 pages long. The EU’s implementation of Basel 3 (CRD4 plus CRR) totalled 675 pages and those interested in advocacy would have also benefited from reading supporting documentation such as the delegated acts (76 pages) and impact assessments (420 pages).

Banks mobilise large sums of money to study the complex rule book (both to innovate and to lobby) but the quantity and complexity of rules acts as an additional barrier to public participation. First, the public are largely excluded from participating directly or via Civil Society Organisations (CSOs), who report that they  usually cannot spare the resources required to master the quantity and complexity of banking regulation. Without a good knowledge of bank activity and regulation they feel a lack of legitimacy that prevents them from expressing opinions on banking. In addition, responses to public consultations which lack sufficient technical arguments are often given less weight by regulators.[8]

Second, even the more democratic arms of the state are largely excluded for the same reason. When a cross-party group of Members of the European Parliament in 2010 issued a ‘Call for a Finance Watch’, they warned that ‘the lack of counter-expertise poses a danger to democracy.’[9] MEPs are generally not banking experts and face a daunting task when scrutinising proposed banking regulation, in addition they struggle to match the attention that banks devote – MEPS, for example, face a raft of issues to address and yet have only limited time resources. Third, even regulators often struggle to match the spending of banks, competing for funding and operating with a ‘constant pressure’ on resources.[10]

In short, decreasing the complexity of banks’ activities and of the accompanying regulation, as part of a return to ‘Boring Banking’[11], would be an important step towards increasing the participation and interest representation of the public. For more discussion of these and related issues as well as some potential policy proposals that arose in our discussions with a range of civil society actors please see our new report – Public Interest Representation in Banking.

Duncan Lindo (Twitter: @lindod1972)