FD Column by Laura van Geest: 'Beware of Fashionable Pendulum Legislation'

Article

13/03/26

Reduction in the number of rules. Politicians in Brussels and The Hague are working hard to achieve this. This could have a positive outcome, writes AFM CEO Laura van Geest in her periodic column for the Financieele Dagblad, but beware of swinging policy. The column appears online on Friday (behind login) and in the physical newspaper on Saturday.

Regulation is back high on the agenda – and above all, less regulation. Better regulation, simplification, and burden reduction are the European buzzwords. The Jetten cabinet aims to scrap or simplify five hundred rules every year. The framing is competitiveness; it is about easing rules for businesses. The citizen apparently does not sigh under an excess of rules. The concept of broad prosperity seems to have been pushed to the background, as economist Hans Stegeman recently noted in the FD.

Although you might not think so when listening to entrepreneurs, rules also offer benefits. They ensure efficiency, predictability, protection against the law of the strongest, and limitation of liability. Can it be better? Certainly. Less swinging policy, please.

Strong Intervention

Because we are in a pendulum and the swing is moving back again. Policymakers are partly to blame for this movement themselves. We all recognize the reflex after a disaster or crisis: first, a public condemnation of what happened, followed by the dismissal of the responsible notable (for example, the minister or supervisor), after which regulation follows to prevent recurrence. And above all, with a strong intervention, at a fast pace, because this must not happen again. Here are the ingredients for qualitatively poor regulation.

Then time passes, disasters do not occur, the burden of the measures increases, and the call for deregulation is heard again. Then the great rollback begins – until the next round. The developments surrounding European sustainability legislation are a fine illustration of this. Climate change is a real danger. But the original CSRD directive looked quite intense even to a supervisor like the AFM. In the consultation responses, the AFM therefore consistently advocated for streamlining. And indeed, before the ink on the legislation was even dry in the Netherlands, the European Commission came out with a significant expansion of the package in the form of a consolidation act, the omnibus. The result: unstable regulation.

Closer to home – in the world of financial supervision – you also see this pendulum. Many financial crises are linked to procyclical policy: regulation and supervision are weakened by laissez-faire governments during the boom and, usually after a change of government, tightened during the bust. Often, reduced governance is accompanied by growing close relationships between politicians and financiers, and an increase in corruption. An IMF working paper on regulatory cycles dates from 2018, but unfortunately has lost none of its relevance.

The hopeful exception that proves the rule is the Swedish banking crisis of the 1990s, where strong institutions and little corruption provided good protection against swinging policy.

Shift of Risks

Regulation after a crisis can produce unintended side effects. The 2008 financial crisis offered opportunities for stronger and more harmonized banking supervision in Europe. However, the risks have not disappeared but have shifted to the less heavily regulated part of the financial sector, such as private markets. On the one hand, this is intended, as financing for innovative but risky projects remains possible. On the other hand: a shambles is a shambles and causes financial pain. And there are plenty of examples of these clubs partly raising their financing from the traditional banking sector, which then remains exposed to these risks.

Recently, the first reports of incorrect valuations in private markets are appearing in the newspapers again, followed by restrictions for investors when they want to withdraw their money from funds. These waterbed effects are better addressed through stricter regulation of non-bank financial institutions than by following the deregulation wave currently underway in the United States.

Tip for the Netherlands

The literature shows that the political timing of regulation in the financial sector can be described as mediocre. In terms of financial regulation and supervision, Sweden offers a more promising perspective than the US. Let us not lose sight of this in the negotiations on the Savings and Investment Union (SIU).

Can the rules in the Netherlands itself be better, more broadly speaking? Certainly. We too would benefit from less hype, less policy for the stage, and a bit more action. Because the Netherlands has a long tradition of evaluating and then ignoring. My free tip for the Finance part of the five hundred rules: take a look at the evaluations of fiscal regulations, there is no shortage of critical final assessments.

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