On September 1, Olivier Guersent became Director-General for DG Financial Stability, Financial Services and Capital Markets Union, following the departure of Jonathan Faull, who will now lead the Commission's newly created Task Force responsible for strategic issues related to the UK Referendum. From 2010 until 2014, Mr. Guersent was Head of Cabinet for Michel Barnier, former European commissioner for internal market and services, before taking on the role of Deputy Director-General responsible for financial services in July 2014. He has also worked extensively in the field of competition policy, initially in the French government and as of 1992 in the Commission. We spoke to him about his work and the Commission's efforts to make financial markets more resilient and better supervised, and what he sees as the main challenges and priorities for the years ahead.

Mr. Guersent, you have been closely involved in the Commission's efforts to regulate the financial sector following the financial crisis. Have we finished the job on making financial markets more resilient and better supervised? What do you see as the priorities for the next few years?

No, I absolutely don’t believe that our work on the implementation of the regulatory agenda is finished. First of all, part of the G20 agenda that we have been pursuing since 2008 is not yet completely finalised at the international level, and consequently not fully implemented – even if the European Union is ahead compared to most jurisdictions in the world. In the area of banking we have pretty much finished. The insurance part of the G20 agenda is being finalised for systemic insurers. We have taken the lead in Europe with "Solvency II".

The part that really remains to be finalised at the international level is in the area of "market financing of the economy" and shadow banking. This is very much in line with the Commission’s agenda and with our project for a Capital Markets Union. Ultimately, the Capital Markets Union is about unlocking non-bank funding – although banks will naturally continue to play a key role when it comes to financing European businesses.

In the area of non-bank funding there are certain things that we would like to encourage. And there are also some grey areas that we do not necessarily want to discourage but that are in need of regulation. For example, when funds finance loans using leverage, in other words a banking activity, they cannot be completely unsupervised. We need to continue properly regulating activities that could be seen as risky.

Furthermore, we have not finished because we have been pursuing this regulatory agenda in the context of the crisis. It was an ambitious and wide-ranging agenda. But the entire financial system is interconnected and consequently the forty-something laws that were proposed in the last Commission all have an effect on each other.  We tried as far as possible to make them all fit together like pieces of a puzzle, without any gaps or duplication. But given their number, given their complexity and given the fact that each of these texts was discussed and amended in the context of a political negotiation, within the European Parliament and the Council, it would have been a miracle if we had finished with a perfect puzzle where all the pieces fit together flawlessly. It is inevitable that there are some unintended consequences.

So we intend to carry out a "sanity check" of this regulation, not only in the way it is always done in Europe, with specific, individual reviews of all these pieces of legislation. But also by taking a more horizontal approach to how they work together and how that has a material effect on the way that the financial system works.     

In a few days, the Commission is going to launch its proposal for a Capital Markets Union. What is the objective of the CMU?

Actually, 15 years ago we would probably have called it the single capital market. We have a single market that, in this area, is extremely imperfect. These markets are both global, and at the same time highly segmented within the European Union. This segmentation means that, between countries with a current account surplus and countries that need financing, capital does not circulate smoothly.

At the same time our economy, which has until now been heavily dependent on bank financing, has seen this bank financing shrink. On the one hand, as a result of the crisis, and on the other hand as a result of the regulation that had to be adopted in order to stop the crisis – and that led in particular to limits on leverage, and consequently banks’ ability to lend. It was of course necessary. But it was probably the worst time to do it. The regulation had pro-cyclical effects that were unavoidable, even though we tried as far as we could to ensure that they were as small as possible.

In general, it is not in the interest of the European economy to depend on one engine only. In the same way that there are single-engine airplanes, but they tend to be less safe than twin-engine or four-engine aircraft. In a single engine, if the engine fails then you fall. In continental Europe, our economies are 70% dependent on bank financing. So when bank financing catches a cold, the economy coughs.

What we want to do is not to reduce bank financing, but to try and revive it, to make banks more stable, stronger and therefore able to lend more. But in addition to this, we want to make it easier to develop different ways of financing the economy. In the first place, to increase the amount of financing available to the economy. Secondly, to make this financing stronger and more resilient. And finally, because in terms of substance, these different types of financing do not necessarily meet the same varied financial needs of the economy.

For example, a young entrepreneur who creates a microbiology start-up will obviously need a bank and a credit line. But what he really needs is venture capital and an investor who is willing to take a risk to enable his business to develop. This is the real challenge for capital financing. At every stage of their development, our businesses need a combination of bank and non-bank financing.

The idea behind the Capital Markets Union is exactly that: to offer the European economy a greater variety of financing options, which are better suited to their needs and – importantly – stronger and more diverse. 

You started your career in the field of competition policy, first in the French government and then in the Commission. What do you think is the right balance between the free market and regulation in the area of banking and finance?

Certain sectors, specifically the network industries, either because of their nature – they are natural monopolies, present high barriers to entry, deliver increasing returns – and/or because of their vital importance to the economy, cannot be subject only to competition. Because if the competition takes place outside of any regulatory framework, then there is no competition, the monopoly will dominate and it will be impossible for any potential new competitors to challenge it. So what we need is future-proof regulation to ensure that there is competition and that it produces the desired results.

Moreover, these industries are essential for countries’ competitiveness. If you are in a Member State in which the postal services, telephone services, transport services and banking services do not work, or are too expensive, then the economy will not be competitive. They are all infrastructures that provide an ecosystem in which a competitive economy can thrive.

The financial system needs a very specific regulation, both because, in its role of circulating money it represents the economy’s bloodstream, and also because when it is hit by a crisis, the cost of such a crisis – for the economy in general and for public finances in particular – is very different from that of a crisis in the industrial sector.  And if the 2008/2009 crisis has taught us anything, it is that the financial repercussions of insufficient regulation in the financial sector are huge. In other words, it is up to regulators to put frameworks in place in advance that will enable heal thy and fair competition to develop.  At a national, European, but especially at an international level, because financial services are by their very nature global. It is very difficult to imagine a financial system in which there are not international standards.

Not all financial services require ex-ante regulation. On the contrary, some do not need it, or it could hamper, not foster, their growth - for instance emerging markets. For example, a typical question might be ‘should we regulate crowdfunding or not?’

There is certainly a phase in the evolution of this market when it is preferable to not regulate, because the risks are small and it could stifle its development. There is probably a point at which we need to start thinking about minimal regulation. And, if the sector were to grow and become more systemically important, then we would probably need to start to consider tighter regulation.

As a director-general, you are managing a department of 385 staff. What do you see as the main challenges?

These 385 people have produced an enormous quantity of regulation over the past five years. We are proud of that work. My colleagues and I have carried out this work with a small team – a small and extremely dynamic group that faced a huge workload with even greater motivation. A very high level of solidarity between colleagues was needed to allow us to carry out what Europe expected of us. 

Now we need to turn our attention to the ‘after-sales service’ phase that follows these five years of regulation. In other words the implementation, or so-called Level 2 rules, that need to be fine-tuned.

At the same time the G20 agenda is following its course and we are launching this great project for a Capital Markets Union. So not only do we not have less work than when we proposed all this legislation, we actually have just as much and probably even a bit more.  Despite this, we are working in an environment in which these resources are becoming increasingly rare.

So, along with my predecessor Jonathan Faull and all my colleagues, I began a period of reflection regarding our working methods. What we have found is that working on financial regulation is extremely complex and multi-faceted, while also calling for highly specific sectoral expertise. So our collective challenge is: How do we successfully combine this horizontality and this verticality? How do we devote fewer resources to coordination and quality-control bodies and focus more of our energy on substance?

Following a collective period of reflection, involving everyone in DG FISMA, we came to the conclusion that we need to combine our traditional vertical structures with more flexible, horizontal networks.

The goal is to have a flatter organisation, based on a smooth exchange of information and opinions, in which colleagues in charge of specific projects can feel more empowered and the need for coordination is limited. In doing so, we hope to improve both the quantity and the quality of what we produce, make our organisation more responsive and adaptable and increase the motivation of the people who work there.