Shadow Rulemaking: Governing Regulatory Innovation in the EU Financial Markets

The number and diversity of the European Supervisory Authorities' (ESAs) soft law acts continue to grow. The recent reform of the ESAs' founding regulations added two new instruments to their toolbox, "questions & answers" (Q&A) and "no action letters," both invented and already used by the ESAs in their supervisory practices. The reformed regulations continue to encourage the ESAs to pursue their tasks by developing new instruments and convergence tools. The article assesses the ESAs' rulemaking and regulatory innovation from a broad governance perspective, asking what type of procedural controls and review mechanisms would best facilitate beneficial forms of regulatory innovation while also controlling its excesses. It is argued that the main shortcoming of the present regime is not the lack of adequate procedural controls so much as the incomplete system of legal remedies. Flexibility should be preserved, but more credible judicial controls are needed to check the ability of soft law to bypass legislative processes.