New research insights and questions for future research and practitioners on supervision and enforcement of banking, financial, digital markets and promotion of sustainability

Mira: The topic of supervision of markets and enforcement of norms and policies in the EU is an exciting, yet complex one to discuss, to design and to research (see my new chapter in Maggetti et al. 2022 aiming at capturing all relevant elements and dilemmas). The classic debates concern such pertinent issues as to which types of supervision – public and/or private, EU and/or national, compliance and/or deterrent oriented, to name but a few – should be most optimal to ensure specific policy goals and promotion of values. Next to these, new trends and challenges – globalisation and digitalisation of markets and hence enforcement, promoting sustainability and yet competitive businesses, etc.  – add to the ‘to do’ list for researchers and practitioners. Knowledge accumulation and exchange on these questions across jurisdictions, policy fields and disciplines are thus essential to advance academic and policy debates, and this blog post aims to contribute to this. It shows the pertinent research and policy questions and research conclusions of five 2022 LLM Law & Economics master graduates who have written their impressive master theses on the topics of their choice in the area of supervision of markets, enforcement and agencies under my supervision. Their results and suggestions for future research on integer (banking) supervision, sustainable, fair (digital) competition and finance are impressive and aim to promote achieving policy objectives and boost further research attention and discussion in enforcing the areas of banking, financial, digital markets and sustainability goals and beyond. 

This blog post is set up further as a discussion of all master graduates’ research topics, conclusions and suggestions for further research practice. We start randomly with Maarten whose research shows an important link between taking prudential and integrity risks and the need of public supervision for both in the banking sector, illustrated by the Dutch banking supervisor (DNB). Then, Jurriaan continues with the supervision of financial markets and how an upcoming EU directive on non-financial reporting should be better implemented by the Dutch financial markets’ (AFM) supervisor with the help of enhancing their expertise and resources. Further, Lauren advises the EU Commission to take the example from the Dutch Competition Authority (ACM) in promoting sustainability goals and competition. Finally, Elena and Ivana share their thoughts on the optimal design for the DMA legislative proposal.

Maarten: My thesis title was ‘When it rains it pours: examining the relationship between prudential and integrity issues in banking supervision’. Basically, what sparked my attention was that the supervisors of the Dutch central bank signalled that credit institutions often face increased prudential risk and/or complications and integrity risks and/or complications simultaneously. This assumption was fuelled by cases such as the SNS Bank and Amsterdam Trade Bank, which encountered both heightened prudential and integrity risks. What was unclear however was what exactly the relationship is between the prudential and integrity risks.

To clarify, prudential risks concern the financial soundness of a credit institution while integrity risks revolve around the bank’s ability to recognize and prevent financial crime. In other words, when it does not go that well with the financial reserves, this may push the top officials to do more risky business to earn more money but this may affect financial stability of the whole system. So, my aim was to find out to what extent this is true and to help a public supervisor to recognise such behaviour of banks and prevent financial instability by suspecting an elevated integrity or prudential risk if one of them has been detected.

I wrote my thesis while being an intern at the Dutch central bank. They asked me to set up a literature and case study to explain the potential link between the two complications and a data analysis to test whether this link exists in practice. Interestingly, my research showed that the literature (ESRB, 2015) (Köster & Pelster, 2017) (Armour et al., 2017) (Premti et al., 2021) and case studies provide sufficient support for a possible relationship between integrity and prudential risk. Particularly, the relationship between credit risk and integrity risk appears to play an important role in the case studies of the Amsterdam Trade Bank and the SNS Bank. However, the data analysis did not yield the required significant results to substantiate the literature and theory due to the limitations of the data set in question. Therefore, further research including a larger sample is necessary to arrive at a quantitative substantiation.

Jurriaan: My thesis was also on how to enhance public supervision in the world of finance but from a different perspective, namely on the upcoming corporate sustainability reporting directive (CSRD) and how the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) could enforce it. I have also written my thesis while doing internship at AFM and actually I am now working there!

My research question was to what extent the AFM will be able to effectively supervise the upcoming CSRD. The CSRD will force large corporations like Unliver to report detailed sustainability-related information in a structured manner; this is next to publishing their yearly financial information. My method consisted of applying the AFM’s abilities to supervise the CSRD according to laid out requirements for effective supervision. It has been a challenged issue to determine what effective supervision was but a number of studies (Broek, 2015; Brown & Tarca, 2005) have been helpful. I suggest that possible challenges for the effective supervision of the CSRD need to be made to prepare the AFM for its new role. These changes concern having (1) adequate resources, (2) adequate knowledge and expertise, and (3) adequate supervisory powers.

The relevance of this research project was to showcase that the AFM, in its current form, could not effectively supervise the CSRD as several requirements for effective supervision were missing. The European Union has, and will continue to, publish a large amount of legislation in the realm of sustainable finance. In order for this legislation to have the intended effects, it will need to be effectively supervised. As a result, EU financial market supervisors will need to undergo serious transformations. Instead of strictly having expert knowledge of financial topics, supervisors will need to acquire adequate knowledge of environmental, societal and governance-related (ESG) topics. This will prove to be challenging for many European financial market supervisors and further research into this topic will therefore be necessary. As these supervisors differ in many ways, I think specialized research for each member state will be required and the crucial role of European Securities and Markets Authority (ESMA) will need to be investigated, too.

Lauren: I agree with Jurriaan, sustainability is one of the main developments in the contemporary world and needs to be further investigated and promoted in policy-making. My thesis also concerned this trend, but from a competition law perspective. I am now working for the OECD to promote sustainable policies for our future.

My thesis title was ‘‘Fair’ share? Comparing the approach of the European Commission and the Dutch Competition Authority (ACM) towards sustainability agreements’.  The global nature of climate change leaves no sector or industry untouched. The realm of competition policy is no exception. The ACM has long championed the ‘green competition’ movement, and in January 2021 the ACM released its draft guidelines on sustainability agreements. Later in March 2022, the European Commission followed suit and released a 19-page chapter on sustainability agreements in its updated draft guidelines.

My thesis undertook on a comparison of the sustainability agreement guidelines of the European Commission and the ACM. The thesis begins by giving a background on the academic debate on this topic (e.g. Kingston, Dolmans, Peeperkorn) including the role of private companies in the green transition. It also analysed the parties’ positions on what constitutes a ‘fair share’ for consumers under Article 101(3) TFEU against the jurisprudence of the CJEU.

After the comparison and the analysis of the case law, the thesis concludes with a number of recommendations for the Commission. The Commission could enhance its policy on sustainability agreements by simplifying the categorisation of potential benefits accruing under Article 101(3) TFEU. The Commission should also adopt the ACM’s consultation process with companies wishing to enter into sustainability agreements, as this could save resources in reducing ex post Article 101(1) TFEU enforcement and increase certainty for undertakings. Finally, the Commission should adopt the ACM’s wider interpretation of a ‘fair share’ under Article 101(3) TFEU, in the context of sustainability agreements. This would produce more effective and equitable results for the environment. This argument is justified on the basis of the case law of the CJEU (such as MasterCard, Compagnie Générale Maritime, Shaw), and on the basis of the polluter pays principle of Article 191(2) TFEU.

Elena: It is interesting to see how many challenges competition law is facing. My research was also in the area of competition law and supervision but from a different perspective. The DNB, AFM, ACM and the EU Commission are public supervisors. I became curious about the role of private enforcement and the rapidly developing trend of digitalisation.

I wrote my thesis on ‘What role for private enforcement in the Digital Markets Act (DMA)?’ The DMA is an ambitious EU regulatory response to rise of digital platforms. It is set to complement competition law rules. Both business and end users will benefit from its provisions. Long before the DMA’s official application date, public and scholarly debates have discussed the role of centralized public enforcement by the Commission and of private enforcement for the success of the Schweitzer, Komninos, Podszun, Monti).

My master thesis investigated whether individual business users can contribute to the DMA’s effectiveness, by means of private enforcement (private enforcement involves the initiation of a lawsuit by private parties, before a court, to remedy a breach of the law). This inquiry entails looking into the potential of the DMA rules and regulatory design to facilitate private enforcement initiated by individual business users, while also analysing the comparative advantages of public and private enforcement. My conclusion was that the EU Commission rightly gains the enforcement spotlight, at least in the first years of DMA application, considering the novelty of the Regulation and the complexity of digital markets. However, private enforcement could enhance enforcement by easing the burden on the resources of the Commission and empowering individual business users. For example, from the perspective of information asymmetries, individual business users might be better placed to monitor some of the infringements of DMA provisions (Shavell). This could be the case of the transparency obligation of gatekeepers towards advertisers in Article 5(9). The advertiser has an initial information advantage compared to the Commission regarding gatekeeper’s compliance. In addition, such an obligation does not seem to require sophisticated interpretation of the DMA or complex analysis of algorithms. Thus, national courts, even without much digital competition experience, might handle such litigation well. Private enforcement is not without risks, one of them being fragmentation. The cooperation mechanism between the Commission and national courts, as well as the exclusive powers of the Commission to designate the gatekeepers and further specify (some of) the DMA obligations can mitigate this risk, but not fully. The adoption of guidelines by the Commission (Article 47 of the DMA) regarding (some of) the gatekeepers’ obligations could aid national courts to interpret the DMA. It also remains to be seen whether and how the field of private damages will develop around the DMA and whether competition law private enforcement will serve as a model in this regard.

Ivana: During this year, I also grew excited about the DMA that was proposed back in 2020. Due to that, I submitted a thesis discussing the design of optimal enforcement under this Act, looking at both public and private enforcement possibilities. As Elena mentioned, the DMA introduced multiple obligations on so-called digital gatekeepers leaving the enforcement primarily in the hands of the European Commission. Gatekeepers, or in other words, large online platforms, have accumulated such dominance in the digital world that it has noticeably limited competition in the markets. We can observe this in the case of the widely used search engine Google or the popular social networking service Facebook. An important question following from the newly introduced obligations is: who should be responsible for their enforcement in the future – is it the public, private parties or even a combination of these two? During the analysis of the optimal enforcement, I have suggested that there are certain aspects that should be taken into consideration, such as deterrence discussed by Alan Mitchell Polinsky or the experience of the potential enforcers studied by Dominik Wolski. Based on these findings, I have concluded that it is crucial for regulators to modify competition law enforcement in digital markets. Rapid technological advancement significantly impacts market definitions, types of anti-competitive practices, and finally – enforcement methods, predominantly due to the occurrence of zero pricing strategies or network effects. As a result, it is critical to choose an enforcement strategy that effectively harnesses the capacity of both public and private enforcers and establishes clear boundaries between them. This should be done in order to ensure that competition legislation does not fall behind the developments in the market and precludes unnecessary over-regulation.  

This blog post has been written by the graduates of the 2022 LLM Law & Economics master programme at Utrecht University (alphabetically) – Elena Aldescu, Ivana Brojová, Jurriaan Dijkgraaf, Maarten de Lange, Lauren Murray – and their thesis supervisor and this master programme’s director Miroslava Scholten. This blog post supports the idea of ‘Do not waste good students’ research!’ motto and the ‘Student’s Research for Society’ project.


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