Financial regulation: Small victories on revolving doors

The independence of supervisory authorities is crucial for public interest. We are glad to see the EU take determined action to close revolving doors in financial regulation.

In an unprecedented move to avoid conflicts of interest, the European Parliament rejected the nomination of an ex-lobbyist, Gerry Cross, to become the next executive director of the European Banking Authority (EBA).

Being responsible for regulating the EU’s banking sector and for setting the technical standards necessary to implement EU banking and financial rules, the EBA is a key player in Europe’s financial sector. Since its decisions have a direct impact on bank profits, this institution is a constant target for bank lobbyists.

But a slew of poor management decisions have put the integrity of the EBA in doubt:

Finance Watch Financial regulation: Small victories on revolving doors

Triggered by Adam Farkas’ move from EBA to AFME, the European Parliament adopted a resolution on conflict of interest on 16 January, 2020

  • The current chairperson, José Manuel Campa was hired in May 2019 directly from a position as a leading lobbyist for a bank, where he still holds shares.
    • This hire made little sense. A lobbyist from a too-big-to-fail bank is not well-suited to become the head of the very authority that is meant to regulate powerful banks. Such a move undermines the credibility of our institutions and makes them vulnerable to regulatory capture.
  • The executive director, Adam Farkas, was authorised by the EBA to move from being top regulator to top lobbyist from one day to the next- with inadequate restrictions. He is now the CEO of the financial sector’s chief lobbying group in the EU: the Association for Financial Markets in Europe (AFME), which represents the interests of over 180 major banks and financial institutions.
    • This move endangers the confidentiality of the EBA’s plans and methods, and it transfers the latest insider influence, access and know-how directly into the hands of the financial lobby. It also sends the wrong message to EU policymakers in Brussels and beyond that if, as a regulator, you maintain a friendly relationship with the industry you regulate, you will be rewarded with a well-paying job. The EU Staff regulations provided the EBA with the legal foundation to reject such a move, but it chose not to use it.
  • The EBA then nominated Gerry Cross to assume the role of new Executive Director.
    • This nomination raised concerns about the gender imbalance in top jobs at the EBA. It was controversial as he had worked for many years as a lobbyist within major finance lobby organisations, such as the Institute for International Finance (IIF) and AFME. In this function, he had been involved in numerous attempts to influence key dossiers on financial regulation to promote the interests of some of the biggest financial institutions. They include rules on capital requirements (Basel rules), bank structure, financial transaction tax and speculation in commodities, to name a few.

Cross’ case was not one of revolving doors: He had a cooling-off period, assuming responsibilities at the Central Bank of Ireland after leaving AFME’s Brussels office. But the four years he spent with the Central Bank of Ireland was not enough to dispel concerns about his lobbying activities during the post-crisis years, some of the most crucial times in the history of banking regulation. It was clear: If the nomination of Cross were approved, it could strengthen a kind of “groupthink” between the EBA and the financial institutions it is set up to regulate.

And so, for the very first time, the European Parliament took action to block a candidate for a financial regulatory post. The strong reaction shows that they want to stand up to the already massive influence of the financial lobby on decision making.

This problem of conflict of interests is not only an EBA problem: it is a structural issue at both European and national level. There are very similar recent cases in the European Commission’s Directorate DG FISMA, in the French treasury, the German finance ministry, among others.

These kinds of conflicts of interest promote cynicism about government.

We need to stop yawning when private interests prevail over the public good. 

It is refreshing to see strong action to restore public confidence in the independence of our institutions. On 16 January, the European Parliament adopted a resolution against conflicts of interest at the EBA, and the EU Ombudsman launched an investigation. This is a direct result of the work of citizens and civil society members of the Change Finance coalition, which Finance Watch convenes. Together, we have been campaigning to bring this issue to the attention of decision makers.

These decision makers have taken matters into their own hands, and the pressure is mounting on the EBA. We hope the institution will now ensure a high level of consideration when it thinks about who is best placed to lead it.

When the lines between the private and public sectors blur, it is corrosive to good government. 

In the European Union, some of the old flaws that became evident with the financial crisis of 2007/08 are still prevalent. Europe still houses banks that are too-big-to-fail, the risk of another financial crash is still with us. Most importantly, a significant part of financial activity is not geared towards financing the real economy.

As we journey towards better regulation, it is important to defend public decision-making from the powerful influence of financial corporations, including applying strict rules on ‘revolving doors.’

The new resolution passed in the EP calls on the Commission to put in place stronger measures to avoid conflicts of interest and review the legal framework across all EU institutions.

This is a spark of hope, and we need to remain vigilant.

Shonan Kothari, Campaigns & Communications Officer at Finance Watch