Simplification versus deregulation: An ocean apart

Since Mario Draghi and Enrico Letta published their well-known reports, highlighting how regulation can act as a brake on economic growth, regulatory simplification has become a mantra in Europe.

In an article published in the March 2024 issue of this Newsletter, we already pointed out that a regulatory pause could be a highly effective remedy for the loss of competitiveness caused by regulatory fatigue. Unfortunately, little progress has been made over the past two years.

Across the Atlantic, the US administration has rolled out a highly ambitious agenda aimed not merely at simplification, but above all at deregulation.

European initiatives

The Draghi Report inspired the so-called “Competitiveness Compass”, a plan to revive the economy through policies and reforms designed to stimulate economic growth, innovation, and productivity in Europe, thereby strengthening the European Union’s competitiveness vis-à-vis global powers such as the United States and China.

Within this context, the European Commission has launched a strategy to reduce bureaucracy and simplify EU legislation, with the objective of cutting administrative burdens for companies by at least 25% and for SMEs by 35% by 2029.

To this end, multiple regulatory relief “omnibus” packages have been introduced. These propose comprehensive amendments to existing legislation and include six specific initiatives spanning areas from sustainability to digital regulation, among others, with an estimated reduction in recurring administrative costs of €8.6 billion.

This December, the European Parliament and the Council reached an agreement to exempt 90% of companies from the application of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), resulting in potential savings of up to €4.5 billion.

Regarding the so-called 28th Regime referenced in the Newsletter article, the European Union has put forward a legislative proposal to create an optional and uniform legal framework. This voluntary legal alternative to the 27 national legal systems of EU Member States is intended to facilitate the incorporation, operation, and expansion of businesses—particularly start-ups and scale-ups—within the single market. It could largely address the fragmentation of Member States’ legal frameworks in areas such as tax law, company law, and labor regulation.

National initiatives

Spain’s National Securities Market Commission (in Spanish, CNMV) has also aligned itself with European efforts through its plan to simplify supervisory activities by 2026. This roadmap seeks to enhance efficiency and promote proportionality without undermining investor protection. Simplifying the regulatory and supervisory framework in securities markets, avoiding duplicative reporting, and reducing required documentation by up to 50% are among the plan’s objectives, alongside greater use of technology.

Rethinking regulation in the financial sector

US regulators, together with the Federal Administration, are eliminating or relaxing standards introduced after the 2008 crisis, viewing them as excessively restrictive for banks. These measures include reductions in certain capital buffers, aimed at freeing resources for lending and investment. One report concludes that the deregulation agenda could allow US banks to release up to 14% of their Common Equity Tier 1 (CET1) ratio, unlocking approximately $2.6 trillion in additional asset capacity for lending and capital markets activities. Critics, however, warn that this reform and the partial dismantling of the prudential shield could lay out the groundwork for a future financial crisis.

In Europe, the European Central Bank (ECB) has published recommendations to simplify the regulatory architecture and the supervisory and reporting framework. In contrast to the US approach, the European regulator is moving toward supervisory simplification while maintaining policy continuity. Among its proposals—alongside giving a decisive boost to the banking union and the savings and investment union to enhance the integration and efficiency of capital markets—is the introduction of a simpler regime for smaller institutions.

This would involve creating a European governance mechanism with a holistic view of capital, aiming to merge capital buffers into two categories: releasable and non-releasable. It would also simplify the leverage ratio and strengthen the loss-absorbing capacity of Additional Tier 1 capital (AT1), while preserving the resilience of the system.

In the conclusions of the Ecofin meeting held in December, EU finance ministers called on the European Commission to develop a comprehensive and ambitious plan to review, simplify, and, where appropriate, repeal financial sector regulation without compromising stability, while accelerating reforms and their implementation timelines. The goal is to eliminate unnecessary requirements, align definitions to remove duplication, and do away with obsolete provisions and unnecessary or overlapping reporting obligations. Looking ahead, ministers urged that rules should be less complex and burdensome, and that, in addition to applying proportionality criteria, the impact of any regulatory change on both the sector and the broader economy should be assessed.

Looking ahead

Europe’s very survival is at stake. A sense of urgency is required, along with a simple, harmonized regulation that reduces bureaucracy, if the old continent is to regain and consolidate its position in the global economy.