The difficult role of consumer groups in the shaping of financial regulation

PLATO project |

Although European financial regulation directly affects citizens as consumers, it is only to a limited extent exposed to public debate. There has also been widespread criticism that European regulators were too close to the financial sector, both before and after the financial crisis. The EU introduced permanent advisory councils, so-called Stakeholder Groups, to include more diversified societal interests in the shaping of new regulation. Despite these efforts, Bastiaan Redert finds that the instrument largely disadvantaged consumer interests over the financial industry rather than ensuring truly balanced information.

tourists taking photos of statue in NYC

The Charging Bull statue in New York City financial district symbolizes aggressive financial optimism and prosperity (photo: nuria mpascua | Flickr).

Financial regulation may not be the most exciting policy field. Its highly technical nature requires specific economic and legal expertise and makes it little exposed to public debate. Yet, such regulations very much affect European citizens. Examples include the capital requirements for European banks, which require them to set aside enough capital to cover unexpected losses, the proposed pan-European pension, which is to complement national pension systems, and Solvency II, which establishes a European supervisory framework for insurance companies.

Despite these rules having important implications for European consumers, their interests seem to be largely under-represented in the drafting of EU financial regulation. In some important dossiers, consumer groups are fully absent from voicing their concerns to EU policy makers. Even after the financial crisis, consumer interests seem unable to get sufficiently involved. My PhD research reveals that also in advisory councils founded to give consumers a voice, such interests are often pushed aside.

Limiting agencies’ dependence on the industry

In the EU, financial regulation is largely drafted and created by three agencies known collectively as the European Supervisory Authorities (ESAs). The agencies regulate the banking sector, financial markets, insurance and employment pensions. Although these agencies have a lot of technical know-how, drafting sound regulations requires detailed information about market developments and trends, as well as potential risks and vulnerabilities. Such information is mainly supplied by the financial industry.

The agencies’ dependence on information provided by the financial industry creates risks. A vast body of research shows that before and after the financial crisis European regulators were too close to the sector they were supposed to regulate. The industry could successfully lobby for lenient oversight, which allowed banks and investment companies to continue taking excessive risks.

To break up this power of the financial industry, the ESAs designed instruments to ensure an open dialogue with different societal interests: the industry, users of financial services, consumer groups, and independent experts. More concretely, in 2011 the ESAs installed four advisory councils, also known as Stakeholder Groups (the EBA’s Banking Stakeholder Group is one). These are permanent councils within the agencies, and in each council 30 interest groups hold a seat for 2.5 years. The Stakeholder Groups strive towards a diversified membership, with seats reserved specifically for consumer organizations and academics. The aim of this diversified membership is to get more balanced information when drafting regulations.

Three hurdles for consumer groups’ influence

Although the Stakeholder Groups indeed are balanced in terms of membership, it turns out they are less balanced in how they operate. Interviews with members I have done in my PhD project reveal that consumer groups experience three disadvantages compared to industry representatives. These are related to the lack of expertise and resources, and lobbying behaviour.

Expertise: Financial regulation is a highly complex policy field, and the discussions in the Stakeholder Group meetings are highly technical. For example, members discuss what percentages should be used to value the liabilities of insurers. Participants cannot express their opinion on such topics without prior knowledge. Industry representatives have this knowledge as it concerns their daily operations, and if not, they have a back office to assist them. Consumer representatives, on the contrary, lack such technical expertise. They report that it takes them a fair amount of time to get acquainted with the topics at hand and to identify issues that are relevant for European consumers. As a result, consumer representatives are sometimes completely absent from important discussions. Members reported that some of their peers don’t even speak once during their 2.5-year mandate.

Resources: Financial resources allow organizations to hire experienced staff who can help prepare for the meetings. It also allows for own research and data collection to help members get their points across during discussions. Consumer organizations simply do not have the same financial resources as the industry, and representatives prepare the meetings by themselves without extra payment. One member described this asymmetry as follows: ‘During the meetings I am sitting next to a guy that represents an association that manages combined assets of just under 10 trillion [euros]. To put that into perspective, our organization’s annual budget is 240,000 euros. And we are lucky because it’s been a good year.’

Lobbying behaviour: While the rationale of the Stakeholder Groups is that they ensure a balanced opinion, this might be too naïve. As the members are representatives of banks, insurance companies, consumers, and pensioners, the meetings are not only highly technical, but also bound to be highly political. Their joint advice is the result of a battle between interests, which in turn creates winners and losers. This means that the Stakeholder Groups are lobby venues where members battle for influence. Given the asymmetry in their access to expertise and resources, this is problematic. As one member stated: ‘I see the industry’s expertise as being part of the strategy to defend their interests. Because when the industry has better knowledge than those forces acting against the industry’s interests, then they are winning on a technical side.’

Playing against professionals

These three hurdles hinder consumer representatives’ contributions during meetings. They are sceptical about their own ability to act as a counter-voice to the industry. One interviewee compared the uneven playing field to a basketball game: ‘The industry is playing professional basketball […] I would say we are not even playing amateur basketball, it’s even lower than street basketball’. Consequently, the functioning of the Stakeholder Groups is still largely imbalanced in favour of business groups. In turn, this allows for the close relations between the industry and regulators to continue.

These issues raise serious questions about the effectiveness of the Stakeholder Groups in ensuring more balanced opinions. Is it therefore a worthless instrument? No, it is not all doom and gloom. Both industry and consumer representatives are aware that the Groups are not supposed to be ‘lobbying machines’ and they try to keep lobbying to a minimum. Furthermore, members note that despite the mentioned flaws, the Stakeholder Groups are valuable venues for exchanging ideas between different parts of society. However, the agencies should design the Stakeholder Groups in such a way that limits structural disadvantages of consumer representatives. A more systematic analysis of this project’s interview data will provide a better understanding of the problems at hand, and we do expect to make specific recommendations for reform in the near future.

This blog post presents preliminary findings of ongoing research of Bastiaan Redert (University of Antwerp) and Peter Bursens (University of Antwerp) undertaken as part of the PLATO project.

The author recently published an article in the Journal of Common Market Studies, in which he investigates the participation of stakeholders in public consultations.