Laughing all the way to the banks: top finance regulator moves to top lobbyist role
The Director of the European Banking Authority is set to become the new Chief Executive of one of the most powerful finance lobby groups in Europe. The move has been approved by the Authority with a decision that flies in the face of common sense and triggers all sorts of alarm bells over conflicts of interest.
The European Banking Authority (EBA) has done it again, setting a new low with its latest revolving doors case. Back in May 2019 the EU agency – which plays a key role in banking regulation and supervision – made Spanish megabank Santander’s then-top lobbyist, José Manuel Campa, its new chair. Now the EBA has announced that it has allowed its number two in command, Executive Director Adam Farkas, to become Chief Executive for the Association for Financial Markets in Europe (AFME), a coalition of megabanks set up to lobby the EU institutions. While the EBA has set conditions on this role, if complied with they would make Farkas’ job impossible to carry out; in other words, the conditions are there to give the appearance of ethics and transparency, when in reality they are papering over what is in reality quite a major conflicts of interest problem.
This is because the main goal of AFME is to adapt the rules in favour of the interests of the big banks. With the move directly from EBA to AFME, its Chief Executive Farkas will be able to pass on information, experience, procedural knowledge, and networks to his associates in the lobby group as they embark on new attempts to influence EU institutions, not least the EBA. Despite the fact that there are revolving door regulations in place that are supposed to prevent these kinds of moves – including a ban on ex-staff lobbying for one year – the EBA claims it has complied with the rules.
Yet there are some major flaws in their argument: the EBA’s approval can only be in line with the rules if, absurdly, all of a sudden AFME lost its entire raison d’etre, or its new Chief Executive refrained from actually working for a long time after taking up his new position.
Risk of rigging decision-making
As one outgoing US financial supervisor famously stated: “I would like to see financial regulation be viewed as a lifelong career choice – similar to the Foreign Service – rather than a revolving door to a better-paying job in the private sector. There should be a lifetime ban on regulators working for financial institutions they have regulated.” That financial regulators sometimes leave office to join the industry they once oversaw is an oft-repeated story, and addressing the problem has been at the core of rule-making on ethics for decades. Still, rules have not lived up to expectations and have been sadly ineffective.
Looking at the various roles the EBA is playing there are plenty of good reasons for it to be cautious and rigorous when it comes to regulating the revolving door. The Authority develops technical standards and guidelines in order to ensure implementation of EU rules; it advises the European Parliament and the Commission on rule-making; and it passes judgment on the conduct of national financial services authorities and of companies.
To be effective and trustworthy, such tasks require an arm’s length distance between the EBA and the banks it is supposed to help regulate. In the aftermath of the 2008 financial crisis this should be more abundantly clear than ever. If the regulators and the regulated become one big family with only a blurred line between them, we are all in trouble. This EBA-AFME affair is a good litmus test for where we are on this.
AFME: lobbying power player
AFME is best understood as an alliance between the biggest US banks and their European counterparts. The composition of its board says it all: this is a lobbying vehicle for the biggest global banks. In AFME, companies such as Goldman Sachs, JPMorgan, Deutsche Bank, and BNP Paribas pool their resources to form a collective powerful voice for the financial industry. AFME was set up to be, in its own words, in “close dialogue with regulators to ensure that the industry's perspective is understood and carries weight”, and to use what they call their “market expertise” to “assist formulation of EU and national legislation”. Lobbying the EU institutions is what AFME is about. And its budget spend of slightly under €5 million annually to lobby the EU institutions is the highest among finance lobby groups. The size enables AFME to be almost omnipresent in lobbying the EU institutions when it comes to financial markets.
While AFME does lobby in some member states, not least the UK, the EU is the main target for obvious reasons: the EU defines the rules in the area, not national parliaments, or individual governments. Here, Adam Farkas will be the top decision-maker in the association. Part of his role will surely be to help coordinate the lobbying positions of the banks and he will have a fairly big staff to help him. It certainly seems that this is what the outgoing chief executive Simon Lewis has been doing.
That situation ought to make the decision on Farkas’ application for approval to join AFME a straightforward one. Article 16 in the EU Staff Regulations is supposed to prevent conflicts of interest between old and new roles, and it includes the power to reject startling revolving door moves. As the conflict of interest in this case is rather glaring, you would think that the board of the EBA (the Board of Supervisors) would have taken the obvious decision to reject the application.
EBA’s own strict limits
This is particularly true, when we examine how the EBA itself defines ‘lobbying’. Under pressure from the EU Ombudsman, the EBA has adopted a broad definition of the term for use in cases like this. From the perspective of a broad definition, lobbying is not just about what a person is doing directly, ie direct exchanges with the target of lobbying, in this case the EBA or the EU. Lobbying is also about activities “on which he/she is involved, eg managing a team of people who will conduct those activities, or designing such activities, or providing advice to the organisation for which he/she works or provides professional services,” according to the EBA’s own definition. We welcome this broad definition and one that should surely close the revolving door for Adam Farkas.
But the Board of the EBA did not think so, and approved Adam Farkas’ move to AFME. The EBA board-members acknowledged there was a risk involved, but in their view, this can be managed by imposing two conditions:
1. Farkas cannot “engage in lobbying or advocacy of the EBA”, or have “professional contacts with EBA staff” for 24 months after leaving the EBA.
2. Farkas has been told not to “advise his new organisation's members or otherwise contribute to the activities of his new organisation on topics directly linked to the work he carried out during his last three years of service for 18 months after leaving the EBA”.
Much of this, described superficially in an EBA press release, is recognisable from EU Staff Regulations and gives the appearance that the rules have been followed. Indeed the 24 month lobbying ban exceeds of one year what is required by EU Staff Rules. But there is a fundamental conflict of interest between Farkas’ new position and his old role and claiming that imposing these two conditions do away with the problem is pure fantasy.
No lobbying of the EBA
With regards to the first condition, it will hardly be a big problem that Adam Farkas “cannot engage in lobbying the EBA” in person, in a direct exchange with the institution, since that can be monitored and enforced by the EBA itself. But the rules are about more than that: he is not supposed to be involved “indirectly” either.
The problem is that AFME is one of the groups that engages the most with the EBA. In the period from January 2018 till August 2019, for instance, AFME has come second only to the French Banking Association in number of contributions to EBA consultations (23 contributions versus 21 of a total of 28 consultations). And it is hard to imagine Farkas can stay clear of “indirect lobbying” as required by the rules: according to the public calendars on the Authority’s website, EBA Staff meet AFME representatives on a monthly basis. Sometimes AFME is represented by staff, sometimes by members, and the latter presents a further complication: in that AFME is a coordinating body for big banks, it is quite feasible that representatives for, say, Deutsche Bank or JP Morgan engage with the EBA after having consulted with the Chief Executive of AFME. An example of this overlap is the presence of Veronique Ormezzano of French bank BNP Paribas in the EBA ‘Banking Stakeholder Group’. While not there formally as an AFME representative, she does hold a position as chair of AFME’s Prudential Regulation Board. Such a high level of involvement of a key member of AFME cannot be reconciled with the restrictions the EBA claims to impose on AFME’s new CEO.
All this means that the requirement that Farkas must avoid lobbying the EBA in his new role is impossible to comply with. Too many activities would have to be stopped. And it makes the condition appear to be just a fig leaf for a flawed approval.
No lobbying for two years?
The second condition, by which Farkas must refrain from any contribution to his new organisation on issues relating to his work at the EBA for the past three years appears at least as unrealistic. To do so would mean preventing him from even speaking at events, or to the press, on the core business of AFME, not just avoiding lobbying. That begs the question what it is that AFME is working on that overlaps with the EBA’s mandate and activities, particularly when it comes to AFME’s interests when working with the EU institutions. In the association’s entry to the EU Transparency Register for lobbyists, AFME lists 25 areas of particular interest, including Banking Union, securitisation, insolvency law, and credit rating agencies. Of these, only two are not dealt with by the EBA. In 23 of 25 areas, the EBA either develops technical standards or guidelines, advises the Commission and the European Parliament, or deals directly with enforcement. In other words, if the conditions are to be met, Farkas will have to stay out of 92 percent of AFME’s activities.
That begs the question what the Chief Executive of AFME will be doing. Is AFME’s CEO a person that somehow stays clear of involvement with the EU institutions and with the many areas of interest AFME has listed? We get a good indication from the words of praise now uttered about Simon Lewis, who Farkas is to replace. When his departure was announced an AFME press release credited him for making AFME “a powerful voice for banks operating in Europe’s wholesale financial markets” and for ensuring that “AFME plays a pivotal role as a bridge between its members and policy makers in the UK and the EU27”. Lewis has also “led AFME in its engagement with the European Commission on critical issues,” according to the press release. So when Adam Farkas says he is looking forward to “continuing AFME's work towards a well-functioning and truly integrated European financial market,” on paper, he will not be able to do that at all, if the conditions he has been given to avoid conflicts of interests are to be taken at face value.
Clearly they shouldn’t. Lacking courage to reject the move outright, the Board of the EBA has created a fantasy. The conditions for Farkas’ new role are impossible to monitor and impossible to fulfil.
By setting these pie-in-the-sky conditions on Farkas’ move to AFME, it looks as if EBA’s board is either expecting that AFME would stop doing what it was set up to do, or it is expecting that Farkas will not do the kind of work his predecessor did. Setting such conditions may reassure the board that they have fulfilled the rules. But to outsiders who care about ethics rules it is more like a slap in the face.
Corporate Europe Observatory has asked the EBA for further clarification about how the conditions are supposed to be enforced. We also asked who conducted the assessment that laid the basis for the decision in the first place. So far the EBA Press Office has said that they “don’t disclose internal communication” and that “of course” it will not disclose the assessment.
At the moment, the legal services of the EBA is considering CEOs request to see the key documents in the case. New documents may shed more light on the matter – but explaining why it is legitimate and lawful to let a top EU regulator become a top finance lobbyist will be a challenge to say the least.