04 September 2016

Financial Times: Policymakers should not dilute City of London regulation

[...]The City seized on snippets of information from last week’s cabinet gathering at Chequers, the prime minister’s country house retreat, and concluded the government would prioritise a tough line on immigration over EU single market access. Even if Theresa May, the prime minister, is turning her back on a points system, any form of substantial restrictions on EU immigration can only limit Britain’s future access to the single market, given the principle of free movement on which Brussels insists.

It is a stance that has won favour from Nigel Lawson, a former chancellor of the exchequer. “We must accept that we will be outside the so-called single market,” he wrote in the Financial Times last week, while rejecting that this poses a major threat to the financial sector. Losing access to the single market would, he argued, be no sacrifice at all, since it had brought Britain “no discernible benefit”.

The City’s position could not be more different. On Friday the FT reported early estimates from the investment banking industry that a fifth of revenue — or £9bn of business — could be lost in the event that it was left with restricted access to the single market. [...]

The twin turbocharger for growth, which Lord Lawson denies but which financiers insist upon, has been London’s position as a springboard into the EU single market. Lobby group The CityUK found that Britain accounts for £45bn of capital markets and investment banking revenue out of a European total of £58bn. Of that, £25bn is “passported” business from elsewhere in the EU, much of it now at risk unless the passport regime can be maintained, or it can be mimicked through an “equivalent” regulatory set-up.

Lord Lawson’s suggestion that more deregulation is needed “to make the UK the most dynamic and freest country in the whole of Europe” is concerning. It threatens to revive the pre-crisis era when government and the then City regulator, the Financial Services Authority, acted as cheerleaders for finance rather than as policymakers with a duty to safeguard stability.

Others have made similar proposals. Carolyn Fairbairn, director-general of the CBI employers’ federation, argued last week that it was time to give the banking industry a break. That, she said, should mean an end to the 8 per cent bank supertax — a reasonable pitch. But she also argued that the promotion of competitiveness should become a guiding principle of the FSA’s successor institutions, the Prudential Regulation Authority and the Financial Conduct Authority.

That position is wrong-headed. Promoting competitiveness can only lead to a dilution of the stronger rules established post-crisis. Finance still accounts for a near-record 12 per cent of UK output. Light-touch regulation of such a key sector would put Britain and the world at risk again.

Full opinion piece on Financial Times (subscription required)

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