Last month Business for Britain published research on the potential damage to the City from EU financial regulation. This is an excellent report, full of content, and deserving of careful Whitehall consideration. It did, however, call fundamentally for the City to be regulated by the UK. 54 top City figures wrote to the Sunday Times (22nd June) supporting this recommendation. Business for Britain is right about the danger but their solution does not take enough account of the realities of the EU, whether the UK remains in or out. After explaining why their proposal is, frankly, unachievable, an alternative solution is advanced.
EU control of financial regulation was President Sarkozy’s price for attending the London G10 Summit in April 2009. To save the Summit, or perhaps his own prestige, Gordon Brown agreed that Brussels would set future regulations, with member states (such as the UK) merely enforcing them. We highlighted the dangers of this in a letter The Times published in June 2009 and a report called Saving the City, but City bosses then seemed unconcerned.
The EU’s position is logical: a single market requires a single set of regulations, and as the main proponent of the single market in financial services, the UK should accept that. Against that, the EU’s lawmaking system is undemocratic and corrupt, and the City, the world’s second-largest financial market, will be at the mercy of 27 other states – most with no interest in its future success, and some that are openly hostile to it. The UK with far the largest financial services market will have just one vote in 28.
The extent to which George Osborne has enabled the UK to claw back from that, and whether the claw back applies only to banks, is unclear. As the Business for Britain report (p.19) says “Facing new regulations which it believes are prejudicial to the interests of the UK, the government is so far failing to shape regulation before it is proposed to the point where it supports that regulation; failing to stop the progress of the resulting regulations which it does not support; and then failing to win the resulting legal cases when it attempts to challenge them in the courts.”
A solution which would give comfort to Business for Britain and those of similar persuasion would be to allocate votes on the EU financial regulation committee pro rata to the skin they have in the financial game. The UK would have about 75% of the votes but as other member states increased their financial services, they would also increased their share of votes. In effect it would still be a single EU market but the regulators would have a genuine interest in the health of the EU financial services market for the long term and its global competitiveness.
The naysayers, citing the 2008 crash, would say that the financial services people cannot be trusted with their own regulation but that is not what is proposed. The UK financial services market has regulators independent of the traders and that would still be true for the EU. To have regulation decided by member states that know nothing about it, as envisaged by the current arrangements, makes no sense. One might as well have the dentistry regulator setting the rules for horse racing.
Leaving the EU is no solution as UK financial services would still be governed by EU regulation when trading in the EU (our largest customer) just as they are by the US when trading in the US.
Achieving this EU reform would not be easy but then none of the reforms we seek will be easy to negotiate. Given the importance of the City, it should be a priority.