“The European Commission should reform the way it takes advice on financial matters and it cannot do that without bringing about a deep change in its financial expert groups,” Yiorgos Vassalos, a researcher at the Corporate Europe Observatory (CEO), told EURACTIV Germany in an interview.
Yiorgos Vassalos is co-author of a study entitled ‘A captive Commission: The role of the financial industry in shaping EU regulation’, carried out by the Alliance for Lobbying Transparency and Ethics Regulation (ALTER-EU).
ALTER-EU is a coalition of over 160 public interest groups, trade unions, academics and public affairs firms concerned with the increasing influence exerted by corporate lobbyists on the political agenda in Europe.
Vassalos was speaking to EURACTIV Germany’s Alexander Wragge.
Your analysis ‘
A captive Commission: The role of the financial industry in shaping EU regulation
‘ shows a dominance of representatives from the financial industry in the European Commission’s expert groups. These people gave or are still giving advice to the Commission on financial issues. Would you say that the financial industry regulates itself in the EU?
Since 1999, the EU has created a single European Financial Market but left a great deal of it to be self-regulated. This approach has manifestly failed, as the big crisis showed. Nevertheless, the EU continues today to stick with the self-regulatory approach.
Do you have examples of the financial industry having directly influenced policy, or watering down strict regulations? I’m talking about rating agencies, hedge funds or tax havens, for example.
Accounting standards have been set according to the advice of bodies like the International Accounting Standards Board (IASB) and the European Financial Reporting Advisers Group (EFRAG), dominated by companies like KPMG, Deloitte and Ernst & Young. That has resulted in loopholes as big as a barn that have rendered financial institutions unreliable.
In 2008, mainstream political groups and heads of state asked for action to regulate hedge funds. The proposals presented by the European Commission in April 2009 were very limited in scope in comparison with what the politicians were calling for, because the Commission stuck to many of the directions proposed by the conclusions of expert groups dominated by the hedge fund industry, published in 2006.
SMEs, community banks, consumers, civil society, trade unions and academia are once more excluded.
How important is the advice of the expert groups for the financial policy of the Commission?
The Financial Services Action Plan, which created the single European financial market, was conceived in an expert group [the High-Level Strategy Review Group; see p. 7 of ALTER-EU report]. The backbone of the Plan was formed by this expert group.
After the break-out of the recent crisis, the main guidelines for the reform of financial supervision were determined within an expert group full of bankers, the De Larosière group.
Today, there are more experts from private companies in the expert groups advising the Commission’s units dealing with financial policies (Directorates F,G and H of DG Internal Market) than Commission’s policy-making civil servants (‘A’ grade officials): 229 corporate advisers to 150 policymaking staff .
Expert groups are not the only way the Commission is taking advice. They also organise public consultations through the Internet, conferences, etc. But there also, it is the financial business mostly participating and – for what its worth – whose views are mostly taken up by the Commission.
The importance of expert groups in financial policy-making is definitely strategic. Outgoing Commissioner Charlie McCreevy had said the Commission was been listening too much to the ‘selling’ side and to the lobbyists with the biggest budgets, and that this should stop. The Commission should reform the way it takes advice on financial matters and it cannot do that without bringing about a deep change in its financial expert groups.
How transparent is the creation of expert groups? Who decides about their members? What are the criteria?
The creation of expert groups is completely opaque. Almost all the financial expert groups were created via a unilateral decision by the Commission, which chose the members without a public call for interest.
The criteria according to which the Commission selects expert group members are very arbitrary. There are codes of conduct in place that say different types of interests should be equally represented, but the Commission doesn’t implement them in many cases. Certainly not in nine out of 20 financial expert groups, which are almost exclusively composed of big financial business representatives.
80% of the expert group members who do not come from government come from big companies and only 20% from consumers, trade unions, academics and all the rest. [The other 11 financial expert groups are composed exclusively of government representatives.]
How would you make the EU’s expert group system more transparent and balanced?
On the transparency front, the Commission improved a lot throughout 2009. Up to 2008, the membership of most expert groups was not disclosed publicly. Certainly due to ALTER-EU’s pressure, the membership of most expert groups is now public. The Commission should make it all clear, so that there are no unjustified exceptions at all.
There is a lot of progress to be made on the selection criteria. We ask for clear and coherent criteria for all the Commission’s DGs. We want these criteria to be publicly announced, so that a citizen can cross-check them with the membership of an expert group and assess if they have been followed.
The most serious handicap right now is that the Commission doesn’t accept that corporate capture of a large number of expert groups is a problem. We think that big business representatives should never be more than half of the non-governmental members.
The reason is simple: they represent individual commercial interests, whereas expert groups are about public policies, policies that are supposed to serve the general interest. They should always be counterbalanced by public interest groups, academia or other types of interest like worker, consumer and other ones.
During the financial crisis, many experts said they were not able to explain the complex background and reasons for the turmoil, even within the financial industry. Did the Commission have the opportunity to get independent, competent experts?
In the press conference when we launched our report, [Green] MEP Sven Giegold rightly said that it is not easy today to find really independent economists without financial links to the industry, due to the way economic universities have been reformed in the last few decades.
Nevertheless, such experts exist. And many of them had warned about the crisis and were ignored. John Christensen and Paul Jorion are two examples that randomly come to my mind. But the Commission is not even trying to find independent economists to get advice. It just surrenders itself to the appetite of big financial business. It is hostage of the doctrine ‘what is good for big business is good for the market, so it’s good for society at large’. This doctrine is not confirmed in real life.
But, again: are there enough experts from trade unions, consumer groups, independent academics or charities who can give advice on the regulation of financial products like ‘credit default swaps,’ which are not understood by traders themselves?
Maybe there are not enough experts from trade unions, consumer groups, etc. Certainly not enough to seriously cross-check all policies from a civil society perspective. But they should be given an opportunity to be in the advisory bodies, so that they can counterbalance big banks.
It doesn’t take huge expertise to see when somebody is promoting something serving his individual interest, but it is risky or even clearly harmful for society at large. Civil society groups would add value in this process, even like watchdogs.
It is true that there is a problem of limited capacity in civil society. This is a problem for democracy and politicians should address it. The European Parliament in 2007 called upon the Commission to create “a European budget line to fund financial market expertise in consumer and SME organisations,” but the Commission never implemented this proposal.
Now, if even traders do not understand some financial products, then this indicates that there is something fundamentally wrong about these products. If nobody understands them, then they are uncontrollable. Then we don’t know how good or bad they can be for the economy and consequently we should curb the resistance of the traders and regulate and reform them.
In any case, it is not any more legitimate for the traders to say “we are the only ones to understand, just trust us”. We trusted them in the past and they betrayed us. Others should understand too and control them.
Do any experts from private institutions, like banks and insurance firms, act as ‘business representatives’ or can they be independent and unbiased as well?
No, a corporate executive cannot be ‘independent’ or ‘unbiased’. Business representatives in expert groups act as lobbyists and this cannot be different. The Commission doesn’t pay them to work for expert groups. They are paid by their companies to work in the expert groups because these companies expect to be rewarded by the policies that will be put in place.
The Commission accepts people working for corporations or business associations participating in expert groups ‘in a personal capacity’. It makes them also sign a declaration of “commitment to act in the public interest”. That’s ridiculous. People being paid by corporations to be there will promote corporate views and not the public interest, no matter what they sign.
Basically we want the Commission to understand that when it asks people from the financial sector for advice: they are asking people with a vested interest. Their advice should always be seen in that light.
The Commission should stop hiding lobbyists under the carpet with this ‘personal capacity’ concept.
The key expert group for Europe’s reaction to the financial crisis was the De Larosière group, which drafted its report about the causes and the lessons of the financial meltdown in February 2009. You mention that four of the De Larosière group’s eight members had close links to giant financial corporations deeply implicated in the crisis. As one example, you say that Jacques de Larosière, former managing director of the IMF, is linked to French bank BNP Paribas. Do you think that De Larosière and his group were not independent and unbiased enough to do a good job?
The De Larosière group was definitely not independent and unbiased. As well as his deep links with BNP Paribas, Mr de Larosière is also co-president of the financial lobby Eurofi. The majority of the De Larosière group was closely linked with specific big private banks. We documented that in a special report. This group put forward the collective will of big banks and the Commission just put it in paper and forwarded it to the member states.
Some people would say that nobody without practical experience can be an expert on a sector…
Consumers and workers also have practical experience from the other side. Public policymaking should take into account all sides. Then a scientific assessment of the views should also be made. This is to be offered by academics. Other considerations like the environmental or the social ones should also be brought in by public interest groups.
This is the pluralism the Commission is declaring in words, but not implementing in practice.
What do think about the argument that an economic sector which is affected by regulations should be involved in policymaking?
It is absolutely clear that the big companies of a sector should be involved in the policymaking. We never challenged or doubted that. We just say that their point of view should be one among others. Not the only one taken into account. It is the latter that happens today in the financial sector. 80% of the non-governmental members come from big business. As Poul Nyrup Rasmussen – president of the Party of European Socialists – said, “this is a disaster for democracy”.
What was the reaction of the Commission to your analysis?
The Commission made only two rather awkward comments to our report, according to journalists.
“If you want financial advice you don’t ask a baker” was the first. This was a quite cynical one. There are not only bankers and bakers in this world. There are actors other than bankers who can give advice on financial issues.
Then they faltered out something about being “unfair to concentrate solely on the financial sector, [because] a look at a broad cross-section of the EU’s many expert groups reveals a balanced showing of representatives from NGOs, consumer groups and civil society in general, as well as industry officials” (EURACTIV 09/11/09).
Even if expert groups were balanced in all other sectors, that wouldn’t justify not being in the financial one.
What is more, this is far from being the case. There are many other sectors where business dominates. 40% of the expert groups under DG Enterprise and Industry are unbalanced in favour of business. Research is another policy area captured by vested interests.
Can the EU take the necessary steps to produce better regulation to avoid a new financial crisis, if there is no change in its expert group policy?
The Commission has no hope of substantially reforming the financial sector if it keeps relying on these advisers whose objective is to maintain the status quo.
Do you expect the new Commission to develop more equal involvement of stakeholders?
Michel Barnier, the nominee for internal market commissioner, gave a very encouraging signal […] during his approval hearing in the European Parliament.
[German] MEP Sven Giegold asked him whether he will “make sure that [these] expert groups have in the future a balanced composition and that the minutes of these expert groups meetings are fully published”.
Barnier replied: “There are expert groups where it is probably useful or necessary to open up the game. So, I will respond positively to your question, provided that I see which are these expert groups and where they are.”
If Mr. Barnier gets approval from the Parliament, he should look up the eight corporate-dominated groups we mention in our report plus the one on derivatives that was created after we had finished writing it. These nine groups have to be reformed under his administration or abolished if reform proves impossible.