Scrapping financial safeguards will inflate bills for ordinary people

Finance plays a crucial economic role…

The financial industry is at the center of the economy: it provides financial services and allocates capital to all other economic actors, for instance:

• It manages the financial infrastructure of our modern lives – like day-to-day payments, savings accounts, insurance, or pension products
• It creates money on behalf of central banks and allocates credit
• It intermediates between the actors in need of financing, and the ones seeking to invest their money or savings, and proposes investment products
• It runs market places, where the offer and demand for wholesale financial products – the ones needed by large corporations, public entities and financial institutions – meet

Like a lot of markets, the market for financial services is regulated: participants are free to pursue profit, but not in any way they like. Because of its social and economic importance, the financial sector is supervised. Lawmakers dictate what is allowed or not on financial markets and how it is done: regulation “shapes finance”.

…with strong public interest implications

Market regulations are also meant to protect consumers and the wider economy from economic disfunctions.

Like all markets, the market for financial services is subject to what economists call “market failures”, like:

• Market concentration: An excess of concentration in a market (when a small number of businesses hold very large market shares) can lead to monopolistic practices resulting in unreasonable undue price increases and drop in quality for consumers
• Asymmetry of information: An asymmetry of information between sellers and consumers puts consumers at a disadvantage and prevent buyers from properly assessing the social, environmental or health consequences of buying or using a product
• Negative externalities: Running economic activities sometimes has a negative impact on third parties. When beneficiaries of a transaction do not face the full consequences of their actions, it is called an “externality”.

When they happen in a market with a crucial economic role – like that of financial services -, market failures can have tremendousExternalities of the financial industry include the economic damage of financial crises but also the social and environmental impacts of economic activities financed such as value extraction, social standards dumping or pollution. Information assymetry can bring people from vulnerability to overindebtedness and tragedies. Market concentration can fuel misselling practices, regulatory capture and slow down innovation. economic, political, social and environmental consequences, and regulation is society’s only protection.

All this explains why financial regulation has such economical and social implications. The role of the financial industry has major public interest dimensions, and the way regulation shapes it has important political and economical consequences.

For this reason, Finance Watch believes that the role of finance and its regulation should be debated democratically, and calls for more accountability and a better representativity of civil society in the lawmaking processes.

Too much regulation or not enough?

Finance Watch believes that profitability constitutes both a legitimate objective and a necessary condition for the sustainability of financial institutions. Still, the pursuit of profitability should not be conducted to the detriment of public interest.

Given the importance of finance in the economy, financial regulation should enable the financial industry to unleash transparent and sustainable investments into the real economy while protecting the public interest. All of Finance Watch policy proposals to create or improve financial regulations are carefully designed to reach this equilibrium.

An unprecedented wave of financial deregulation

After the 2008 financial crisis and its catastrophic consequences on European economies and public finances, there was a short momentum for ambitious financial regulation. But today, 16 years after the crisis, memories have faded.

Amidst geopolitical and trade fears, corporate lobbies are successfully framing financial regulation as a problem for the competitiveness of the financial industry. Nothing is further from the truth: financial regulation is a competitive advantage and a cornerstone of European strategic autonomy.

But EU decision-makers are taking the bait. The European Commission is undertaking an unprecedented deregulation wave and decades of progress are at stake.

Who will pay for deregulation?

The current deregulation agenda is threatening consumer protection, social safeguards and environmental protections. On top of triggering economic instability, endangering jobs and decreasing people’s wellbeing, indiscriminate deregulation will directly or indirectly increase people’s costs of living:

• Costs to access basic financial services will increase, particularly for already vulnerable people, and consumers will have much less protectionExemples of protections threatened by the deregulatory wave in Europe include protections against: conflict of interest in financial advice, protections against unfair commercial practices, protections against algorithmic discrimination, prevention of personal financial data misuse, prevention of irresponsible lending practices, protection against overindebtedness against predatory practices
• Value for money for green financial products will decrease as greenwashing by financial institutions will be made easier, accountability for human rights and environmental violations will reduce, and legal uncertainty for companies will skyrocket
• Bills for financial services like house insurance will increase due to the unpreparedness of financial institutions to climate change. The cascading costs of natural catastrophes due to unaddressed climate change will increasingly be borne by governments, in other words, taxpayers
• Economic prosperity in developed countries could keep dropping further, as happens when “too much finance” preventsRead more on Nicholas Shaxson's finance curse: https://www.theguardian.com/books/2018/oct/23/the-finance-curse-nicholas-shaxson-review companies from channeling money into productive investments. When the financialisation of an economy is excessive, it generalises extractive practicesExamples of extractive practices inclue shares buybacks and excessive dividend distributions. Read Finanzwende report: https://transformative-responses.org/wp-content/uploads/2021/12/2021214_Shrink-Finance_komplett.pdf that impact the real economy
• And most importantly: as taxpayers, the value for money for the taxes paid to the State will decrease. States will have to redirect public money when the next catastrophic financial crisis hits, and governments will again have to spend incredible amounts to bailout failing financial institutions. Incidentally, this will also negatively impact the real estate and job markets, and the value of retail investors’ assets on financial markets

There are many more examples to list, as more than 100 financial rules are set to be scrapped, and even more deregulation is expected.

The recent political agreement in the European Parliament to remove the companies’ obligation to explain how they would transition to net-zero by 2050 – so Europe can deliver on its Paris Agreement commitments –  is a dire warning sign.

Today more than ever, citizens need policymakers to understand the public interest dimensions of financial regulation, and stop cutting blindly into hard-won safeguards, which will backfire on citizens.

Finance Watch will continue to represent people’s voice relentlessly at EU level to this end. Times are hard: civil society will need all the support it can get from all sides. Finance Watch will keep ambition high so Europe resists corporate short-termism and becomes the sustainable and prosperous continent it should be.

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Pablo Grandjean, Finance Watch