The Simplification Paradox: Safety, Competitiveness, And Administrability In Post-Crisis EU Financial Services Reform

The EU’s financial services simplification agenda is conventionally presented as pragmatic recalibration. This article argues it is more accurately understood as a compound acknowledgement of structural limitations—by regulators whose rules exceeded reasonable operational expectations, regulated firms whose compliance prioritized formal outputs over substantive risk management, and a political economy that can no longer equate regulatory volume with effectiveness. Drawing on regulatory cycle literature and political economy of financial regulation, the article identifies three interlocking acknowledgements embedded in simplification. A tripartite framework—examining the EU, US, and UK—shows that enforcement credibility may better explain compliance outcomes than regulatory complexity. The US demonstrated that complex rules produce compliance when backed by credible sanctions. The EU developed different regulatory discipline through intensive, predominantly non-public prudential supervision within Banking Union, particularly via the Single Supervisory Mechanism (SSM) and Supervisory Review and Evaluation Process (SREP), while remaining weaker in punitive enforcement, individual accountability, and private enforcement. The UK combines judgementled preventive supervision with developed public-enforcement infrastructure and individual accountability. The article argues that credible regulatory discipline—whether through punitive enforcement, preventive supervision, or individual accountability—rather than complexity may be the binding constraint on compliance. That simplification requires corresponding investment in supervisory capacity and enforcement credibility.

The language of financial services regulation in the European Union has changed, driven by intensifying concerns about European competitiveness. Where once the dominant register was expansionary—more rules, more reporting, more supervisory data, more granularity—the current register is contractive. The European Commission’s Omnibus simplification package—comprising both its original proposalsShow Footnote and the legislative amendments subsequently adopted,Show Footnote the Competitiveness Compass,Show Footnote the (multiple times) revived Capital Markets Union (CMU) becoming rebranded and reorientated as a Savings and Investments Union (SIU) agenda,Show Footnote the Market Integration and Supervision Package (MISP),Show Footnote sustained political pressure from France and Germany for a broad regulatory review and the influential Draghi and Letta reportsShow Footnote—collectively signal that the post-2008 settlement is being renegotiated. The question, for scholars, practitioners, and policymakers alike, is: on what terms, at whose instigation, and with what consequences for systemic resilience?

It would be tempting to characterize this simplification movement as a straightforward political concession to industry lobbying—a regulatory pendulum swinging back, as it periodically (and equally welcomingly) does, under commercial pressure and changed political conditions.Show Footnote That characterization is not entirely wrong, but risks being substantially incomplete. Simplification is not merely a concession to firms that found compliance burdensome. It is, at a structural level, an admission that the regulatory architecture constructed in the decade and a half following the 2008 Global Financial Crisis (GFC) contained within it the seeds of its own dysfunction—a conclusion that requires engagement with deeper questions about regulatory design, institutional behaviour, and the political economy of financial supervision.

This article advances four interconnected arguments. First, that the simplification agenda contains three overlapping and largely unacknowledged admissions—about regulatory overproduction, about how firms responded to regulation, and about the relationship between regulatory intensity and economic competitiveness—each of which reflects structural failures in the post-crisis regulatory settlement rather than merely operational deficiencies in its implementation. Second, that there is a prior structural question that the simplification debate largely elides: whether the EU’s challenge was primarily one of regulatory design, enforcement credibility, or both, and what the comparative evidence from the United States and United Kingdom reveals about the relationship between rule complexity, enforcement modality, and compliance outcomes. Third, that simplification produces concrete and identifiable losses in supervisory visibility, institutional discipline, and systemic resilience that require honest acknowledgement rather than political minimization. Fourth, that the deeper problem is a structural policy trilemma—between safety, competitiveness, and administrability, which no reform programme can fully escape—that no simplification agenda can resolve without making explicit trade-offs that policymakers have thus far been reluctant to articulate openly, and that the human capital dimension of both firm-level governance and supervisory practice may represent a binding constraint on the effectiveness of any regulatory model, whether prescriptive or principles-based.

In advancing these arguments, the article aims to make a distinct contribution to the existing literature on financial regulation. The regulatory cycle scholarship, from Minsky through Goodhart, has identified the political economy dynamics that produce alternating phases of regulatory expansion and contraction—but has not systematically examined the structural failures on both sides of the regulatory relationship that the current simplification moment reveals. The rules-versus-principles literature, following Black and Cunningham, has illuminated the trade-offs between prescriptive and outcomes-based approaches—but has not confronted the possibility that neither model can succeed without credible deterrence, whether through punitive enforcement, preventive supervision, or individual accountability. The regulatory competition scholarship has analysed the dynamics of interjurisdictional competition—but has not addressed the unprecedented circumstance in which all major financial centres are simultaneously retreating from effective regulatory discipline. This article’s contribution isthreefold: it develops a ‘three admissions’ framework that identifies the structural failures—in regulatory production, firm-level compliance culture, and political economy—that the simplification agenda implicitly acknowledges; it articulates a policy trilemma between safety, competitiveness, and administrability that clarifies why simplification cannot be costless and why the trade-offs involved require explicit rather than implicit resolution; and it advances a three-dimensional comparative analysis of enforcement—distinguishing punitive public enforcement, preventive prudential supervision, and individual accountability—that reveals the EU has developed powerful but often non-public supervisory discipline through the Banking Union’s SREP framework, while remaining comparatively weaker in the other modalities. This refined enforcement analysis strengthens rather than undermines the article’s argument about supervisory judgement and human capital: if intensive preventive supervision can produce compliance outcomes comparable to punitive enforcement, the binding constraint becomes the institutional capacity, expertise, and independence of supervisors.

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