
Having been back in the regulatory space again recently, it reminded me of a comment made by one European Commissioner when discussing MiFID back in the day. Over drinks, we were debating the wording and detail and he said: “the point is not to get all member states to comply … the point is to get them in the pen and then make the pen smaller”.
What he meant is that member states were like sheep and the first goal is to get the sheep rounded up and in the sheep pen. After that, you start tightening the restrictions until they fully comply.
This is the reason why Basel, UCITS, PSD, MiFID and more regulations move version one to versions two, three, four and more. You just keep tightening things.
So, I was amused in our discussions of CRD VI – yes that is number six! – and the fact that we were debating the fact that any bank wanting to offer deposits or lending in an EU member state now needed to have a branch in the member state and fully comply with the member state’s rules. The challenge here is that the member state’s rules can vary from state to state – there is no homogenous regulation here – and you could easily find your company in breach of the local rules, even though these are meant to be harmonised and consistent across the region.
The devil is in the detail, as they say.
Core to this point is that directives and regulations are similar to contracts and negotiations, and every party can have a different interpretation of the contract and negotiation. For example, some years ago I was given the responsibility to negotiate a contract with a third party company but we didn’t trust each other. The result was that every sentence and word was analysed in depth, and the contractual negotiations dragged on for months. It was tedious and, even at the end of day, could be open challenge and debate.
This is the problem with all directives, regulations, rules and contracts: they are open to debate. It is why European regulators talk about equivalence, proportionality and subsidiarity.
In EU financial services regulations, "equivalence" means the EU recognizes a third country's regulatory and supervisory regime as sufficiently similar to its own, allowing the EU to rely on that country's oversight in specific areas. This recognition allows the EU to create cross-border financial services and reduce regulatory overlaps, impacting how EU firms operate in those third countries and how third-country firms operate in the EU.
Then there is proportionality. The principle of proportionality in EU law requires that EU actions are not more burdensome than necessary to achieve a legitimate objective. It ensures that EU measures are suitable, necessary, and not excessive in relation to the goals they pursue. The core objective is that institutions and member states can operate through interpretation of directives, rules and regulations that are balanced and proportionate.
The principle of subsidiarity is that companies can operate in EU member states and determines how much latitude each state has between EU laws and local management.
These European principles of equivalence, proportionality and subsidiarity, aim to allow 27 countries to allow cross-border services and passporting without argument. The problem is that it also allows interpretation and debate over implementation.
But then, bearing in mind my earlier comment, the objective is not to get a harmonised European marketplace. It is to get all the sheep in the pen and then make the pen smaller.

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...