03 February 2016

Financial Times: Brexit deal - would City safeguards have stopped bonus cap?

The draft “safeguards” are billed by UK chancellor Osborne as the most important part of Britain’s “new settlement” with the EU. Yet for the City of London, Paris, Berlin and the European Central Bank, their practical impact remains a mystery.

The deal that has emerged is a complex, highly caveated list of legal principles, backed by a political brake mechanism for non-euro countries to escalate disputes to EU leaders. Crucially the brake would only allow for extra discussion; the EU could still take decisions by majority vote.

So is this a genuine boost for London’s autonomy after a post-crisis regulatory onslaught from Brussels? One way to answer that question is to see whether the new safeguards would have helped in past policy battles.

1. The ECB location policy for clearing houses — Possibly

[...] The draft text gives the UK more legal firepower to head off any future clash, stating it is “prohibited” to discriminate against EU companies because of the currency of where they are based.

But there is a hitch: it adds that “any difference in treatment must be based on objective reasons”, raising the prospect that some discrimination could be possible. 

Britain’s court victory never clarified whether financial stability concerns trump non-discrimination principles. Sharon Bowles, a former British MEP who steered work on much of the EU post-crisis regulation, said there was a danger the draft could “open up a loophole in Britain’s defence against discrimination” and must be “sorted out”. 

2. Banker bonuses — Possibly

The EU cap on banker bonuses was Britain’s most humiliating regulatory defeat in Brussels. [...]

Would the new safeguards have helped? Significantly the draft suggests “financial stability” is a matter for the Bank of England. This could have helped thwart a bonus ban in the UK, because its proponents argued it was a pan-EU financial stability measure. The emergency brake — forcing EU leaders to discuss such a sensitive issue — could have shifted the political calculus.

That said, Britain’s new safeguards are “without prejudice” to existing EU powers to “take action that is necessary to respond to threats to financial stability,”. In other words, Brussels still reserves the right to legislate. 

3. Freedom to set bank capital rules — Probably

[...] Britain’s new settlement suggests bank rules may have to be set in a “more uniform manner” for the euro area’s banking union than for other EU nations. This marks a clear break with Brussels’ mantra of a “single rule book” for EU financial service. Britain could also have pointed to the clarification that it is responsible for financial stability issues. 

4. EU powers to ban short selling — Probably 

Mr Osborne failed in court to overturn laws giving the EU’s markets supervisor powers to ban short selling. Significantly the new safeguards suggest Britain’s financial stability responsibilities cover not just banks but also “markets”. [...]

The safeguards would give the UK more weight in arguing against a centralised capital markets supervisor, an idea trailed last year in a report by EU leaders including Mario Draghi, the president of the ECB.

The same applies to any future push to centralise oversight of clearing houses, according to Nicolas Véron, a senior fellow at think-tank Bruegel. “It could mean that the UK won’t be outvoted in future legislation relating to financial supervision and stability issues,” he said. “It seems to me that it gives the UK pretty robust protection”.

Full article on Financial Times (subscription required)

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