Even before Peer Steinbrück popped up yesterday to accuse Britain of seeking to defend London’s “competitive advantage”, the more hysterical element in the City was fretting over a potential EU landgrab. Mr Steinbrück’s ill-informed intervention ? not entirely unconnected, no doubt, to the small matter of the German election this weekend ? sent conspiracy theorists into overdrive. If the worst fears of some City folk are realised, the EU reforms spell curtains for London’s dominant position in finance.
It’s time for a bit of common sense. Is it really the case that London’s pre-eminence in financial services has come about purely because regulation here is less intrusive than on the Continent? Well, certainly not if the complaints of our financial services industry about the burdensome business of regulatory compliance have been anything to go by over the past 20 years.
There are a whole host of reasons that businesses such as hedge funds operate out of London ? spanning tax policy, culture, language, geography and many more ? but this country has not, in recent years, been a soft touch for those institutions which have dealings with City regulators.
No doubt there are loopholes in London that some have exploited (just as there are in other countries), but are the eurosceptics really suggesting that we should market the City as a venue for profitable regulatory arbitrage?
In any case, the debate about the relatively benign ? or not ? nature of London’s current regulatory environment misses the point. The question now is whether the reforms unveiled in Brussels will impinge upon the UK in unacceptable ways.
The first of these reforms certainly won’t. The launch of the European Systemic Risk Board should worry no one. This body, charged with assessing threats to financial stability, has no powers of its own. Reports that the Bank of England Governor, Mervyn King, has secured the deputy chairmanship of the ESRB look a little premature, but with or without UK representation at the highest level, we shouldn’t be worried by what is in effect an early warning system.
As for the European System of Financial Supervisors, the other half of the package, the Financial Services Authority, our sovereign regulator, may find itself in conflict with one of the three new authorities set up to oversee the banking, insurance and securities sectors. That said, the UK has pre-secured one crucial concession ? that these bodies will never be allowed to take decisions with fiscal consequences for member states. That will curtail their powers and avoid the most painful potential rows. Also, the new bodies won’t have any day-to-day supervisory powers; they’re charged with developing consistent rulebooks and setting technical standards.
Within those harmless-sounding objectives, there will be plenty of room for disagreement, and with qualified majority voting ruling the day in the event of disputes, Britain could be trampled upon by other countries with less interest in protecting the financial services industry. But we are heading in that direction in any case: one of the objectives of the G20 meeting is to establish a global regime of exactly the type that the Commission is set to impose in Europe.
Those who would paint the latest reforms as another incursion into Britain by the power-crazed bureaucrats of Brussels have their own agenda. But do they believe that regulation of the global financial system can be left to individual national authorities ad infinitum? The lesson of the crisis has been that the supervision of cross-border-based institutions whose activities have global implications requires an international approach.
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