Government and Institutions

EU harmonisation of financial services regulation unnecessary & undesirable


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The EU has been trying to unify all aspects of non-bank financial regulation for many years, with very little benefit felt by businesses or member states. New research from the Institute of Economic Affairs argues that EU involvement in regulating insurance and investment markets is damaging and unnecessary. If countries wish to unify their approaches to regulation, they can do so outside the framework of the EU.

Within insurance markets, EU regulation and interference has eroded the relatively liberal approaches that had been adopted in the UK. Regulatory bodies have accrued more and more powers harming the sector, reducing productivity and stymieing competition.

Even worse, regulation is now being centralised at the EU level so that national regulators have now become subsidiaries of EU regulatory bodies – a dangerous switch of power given there is no effective check on centralisation and increasing levels of regulation within the EU. And with higher levels of regulation come complex rules and higher levels of systemic risk for financial systems.

While unified regulation may reduce some costs of trade, it has imposed other costs on businesses:

Costs of over-regulation:

  • EU instigated insurance regulation, known as Solvency II, requires incredibly complicated rulebooks to deal with different types of business in 27 countries;

  • Excessive regulation imposes costs on companies and, ultimately, consumers;

  • Insurance and investment market regulation can be determined by qualified majority voting meaning the EU bureaucracy can determine regulation to the detriment of those countries that have a relative advantage in this field;

  • Uniform systems of regulation make financial systems more prone to systemic risk;

  • The status quo prevents the benefits of a ‘trial and error’ process in which regulators in different countries can learn from the successes and mistakes of others;

  • The current design of insurance regulation is likely to encourage insurance companies to invest in risky sovereign bonds.


The main reason the EU got involved in insurance and investment market regulation was to encourage the development of the Single Market. However, the only reason for the EU interfering in such regulation should be to prevent governments imposing requirements on companies domiciled in one member country that are effectively protectionist. If there are any benefits from unifying regulatory systems countries can agree to do that outside the EU.

Commenting on the report, actuary Professor Philip Booth, Academic and Research Director at the IEA said:

“The EU should not be harmonising insurance and investment market regulation and certainly should not be increasing regulation in the way that it is. Such regulation raises risks and imposes costs on consumers.”

“The role of the EU, through the European Court of Justice, should simply be to ensure that national regulations do not impede or significantly distort trade”.

Notes to editors:

For media enquiries please contact Nerissa Chesterfield, Communications Officer: [email protected] or 020 7799 8920 or 07791 390 268.

To download the full report, click here.

This report is part of a wider body of research examining how the EU might look if it were remodelled from a classical liberal perspective. In the book – Breaking Up is Hard to Do – several authors look at various areas of economic policy in which the EU has an interest, as well as the governing structures of the EU, and ask what, if anything, the EU should be doing.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He was formerly Professor of Insurance and Risk Management at the Cass Business School, where he also served as Associate Dean. He has an undergraduate degree in economics from the University of Durham and a PhD in Finance. He is a Fellow of the Institute of Actuaries and of the Royal Statistical Society. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues. He has written widely, including a number of books, on investment, finance, social insurance and pensions, as well as on the relationship between Catholic social teaching and economics.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.



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