Hastings International and Comparative Law Review


In the aftermath of the 2007-2009 Global Financial Crisis, financial regulation in the European Union, following an international trend, underwent a process of intensive legal reforms that led to the revision of the legal premises underpinning the EU architectural framework for financial regulation and supervision. The EU has attempted to design a better equipped supranational apparatus for the governance of financial markets and crises. This effort accompanies a more general questioning of the role of law in the financial sector. The interaction between financial entities and legal rules has been reexamined and novel theories have focused on the idea that legal norms are constitutive elements of finance, rather than exogenous phenomena that intervene upon markets’ spontaneous order as a deus ex machina. In addition, the behavioral dynamics influencing the choices financial consumers, professional investors and other actors of the financial markets has been scrutinized. The interaction between financial markets and regulators has been also considered through an enriched, socio-legal vision. These novel approaches helps to understand that the interaction among regulators, financial entities and consumers occurs through legal and social constructions. Furthermore, the postulate of rationality developed in financial economics and influencing the regulators’ understanding of finance has been questioned. It is now largely understood that individual cognitive processing has limited capacity and that the brain economizes upon such processing by relying on heuristics and other shortcuts, which will save time but also generate biases and predictable errors. Behavioral finance moved from the fringes of financial economics to the mainstream stage: regulatory actions are refined in order to take into account these insights that depart from the traditional rationality paradigm.