04 December 2006

FT: Optimism eroded by costly regulatory burden

When the European Commission launched the financial services action plan in 1999, it had the support of many in the City who saw it as an opportunity to create a single market in financial services where they could prosper.

Seven years later, nearly all the 42 measures involved have been adopted and the plan is on course to meet its 2010 deadline. But while the goals were laudable, the practice has been much less impressive - and the City’s optimism has all but evaporated.

Today’s report from Open Europe comes from the successor to the bodies that campaigned against the euro and the European constitution, and is naturally euro-sceptic. But the concerns it raises over the failures, compromises and costs of FSAP legislation will find support in much of Britain's financial services industry.

“The intention behind the FSAP was good, but tortuous negotiations between governments have turned the legislation into an expensive regulatory burden,” says Sir Martin Jacomb, former chairman of Prudential. “It will do little good for consumers at very high cost, and could stifle new competition. Unless it is modified, the net effect for London will be negative.”

British concerns over the detail of each measure are set out in the Open Europe report, along with costings of the impact on the UK. The market abuse directive, for example, is estimated to cost Britain not much more than £50m in the form of added record-keeping and reporting that the Treasury judged would bring “no incremental change in benefits”.

The insurance mediation directive and distance marketing directive, however, are estimated jointly to add costs of £400m a year, but have been implemented in such different ways throughout the EU that it can be harder to sell insurance across borders. “The thought behind the IMD is praiseworthy, in so far as it aims to make it easier for brokers and others to sell cross-border in a single market,” says Stephen Sklaroff, deputy director-general of the Association of British Insurers. “But it has actually made the single market less single than it was before.”

But behind these specific analyses, the results of the FSAP have led City leaders to question more deeply the rationale of the measures. A common theme brought out in the report is that Brussels adopted a European perspective, rather than a global one. The fear is that in trying to create a “level playing field” in the EU, the unintended consequence has been to weaken Europe’s only financial centre with global status.

Just at the moment when New York is losing ground to London because legislation introduced after the Enron scandal has made it a less attractive place to do international business, the City is being saddled with new regulatory burdens. This has been made worse by the tendency of EU member states to water down any legislation that might conceivably leave them at a disadvantage. Opportunities to tear down barriers to cross-border trade have been missed.

As Alan Brown, head of investment at Schroder Investment Management, says: “Several other member states seemed to be more concerned about protecting themselves from competition within Europe, rather than focusing on the increasing competition we are experiencing from the rest of the world.” More fundamentally, however, the approach at the heart of the FSAP is being questioned. The report says that a better approach - used in the single market in goods - would be to set minimum standards based on principles rather than to devise complex legislation to harmonise regulation.

Report

© Financial Times