How EU Financial Regulators Think in Time of Brexit

In a recent article, we have advanced a socio-psychological perspective to approach financial regulation in the European Union. The key question animating our research is ‘how do financial regulators “think”?’

While behavioural approaches to finance have expanded the understanding of markets’ dynamics, the analytical tools of behavioural sciences have been seldom applied to the regulatory authorities entrusted with the power to regulate and supervise financial markets, ie financial regulators. The decision-making process of financial regulators is largely influenced by public choice theory and neo-institutional economics. Hence regulators are commonly considered as unitary entities, operating at arm’s length from political power and routinely engaged in a process of (rational) maximisation of identified, institutional or individual interests. Regulatory studies have enriched this perspective by focusing on processes, dynamics and values embedded in regulators’ cognitive frameworks. Yet social psychology and anthropological inquiries teach us that any collective organisation responds to more complex behavioural dynamics. According to the ‘unified theory of social relations’, any collective enterprise is governed through a combination of four fundamental relational modes, or forms of sociality: (i) Communal Sharing, governed by sharing mechanisms whereby resources are pooled and decisions are taken in the interest of the group as a whole; (ii) Authority Ranking, which epitomises authoritarian structures, according to which a hierarchy among members characterises how decisions are made within a group; (iii) Equality Matching, whereby members aim at preserving equality and fairness within their group; and (iv) Market Pricing, which are represented by market-based mechanisms that, by virtue of pricing and/or other agreed criteria, allow each member of a group to maximise individual utility and preferences.

In order to apply the analytical tools of social psychology to EU financial regulatory bodies, two fundamental steps are required. First, EU institutions are considered as groups of individuals whose tasks and objectives are set forth by primary and secondary European law. In particular, we focus on the decision-making organs of selected EU institutions involved in the regulatory governance of financial markets, ie the College of Commissioners of the European Commission, the Governing Council of the European Central Bank and the Board of Supervisors of each of the three European Supervisory Authorities (‘ESA’s). Second – given that the authorities considered perform different roles in the EU institutional framework and are established upon different legal premises – a typology is constructed by reference to two dimensions. These are: (i) the function of each institution vis-à-vis the ‘common interest’ of the Union; and (ii) the constitutional status of those institutions. This typology allows to explore the fluid notion of ‘common interest’ that bonds together the EU as an international legal community and is reflected in the overarching goal of creating and preserving the single market. Moreover, it is noted that EU financial regulators, depending on their constitutional statuses, are mandated to discharge different functions to advance, define, and practically operationalise the pursuit of such a common interest.

Against this backdrop, the unified theory of social relations is applied and dominant relational modes are isolated for each of the organs considered, revealing that the College of Commissioners and the Governing Council present different mixes of Communal Sharing and Equality Matching forms of sociality; whereas the Board of Supervisors of each ESA is defined by a Market Pricing relational mode. Two general observations may be drawn in the hope that further research will be conducted in this area. First, constitutional and legal frameworks appear to have an impact on the fashions in which social interactions within regulatory bodies occur. Dominant behavioural patterns result correlated to the functions performed by institutions vis-à-vis the Union’s common interest and to their constitutional statuses. Second, some of the common issues affecting the EU governance apparatus and cogently noted in the literature, such as the politicisation of the Commission and the role of the ESAs, could be explained as stemming from behavioural patterns within given forms of sociality.

Furthermore, these findings are applied to examine the impact of the UK’s decision to leave the EU on the intra-institutional decision-making process of financial regulators. Brexit will take several years before it will be completed. Meanwhile, the UK is still part of the EU, thus its representatives participate in the decision-making organs of EU financial regulators. Each mode of sociality indicates how conflicts are likely to be managed among individuals partaking in a collective enterprise. For instance, marginalisation, or even the genesis of different subgroups, are expected within the College of Commissioners, when the interest of the group as a whole no longer corresponds to the interest pursued by one (or some) of its members. Similarly, the fashion in which the ESAs discharge their tasks may significantly change due to a reorganisation of the Supervisory Boards’ preferences. These dynamics – impacting on institutional agendas and activities – extend beyond tactical choices, as they represent deeper behavioural dynamics.

Giuliano G. Castellano is Assistant Professor at the University of Warwick, School of Law and Research Associate at i3-CRG, École polytechnique, CNRS, Paris-Saclay, and Geneviève Helleringer is Associate Professor at the ESSEC Business School Paris-Singapore and a Fellow of the Institute of European and Comparative Law at the University of Oxford.