21 December 2004

Report: The City and the EU - There must be a better way

This paper argues that it is in the UK’s interests to press for early reforms to the FSAP. But since these are unlikely to be conceded, the UK should also explore the implications of opting out of the FSAP altogether and repatriating control of financial regulation. Although there would be a political cost, this would liberate the City from the FSAP straitjacket and greatly strengthen it long term prospects. The paper also argues that the FSAP provides a warning about the dangers of overcentralisation within the EU and demonstrates how a “point of excellence” like the City which is of value to the EU as a whole can be damaged by political rivalry and the desire to harmonise.

The EU’s single market is supposed to open up trade among members by knocking down barriers and streamlining regulation. In practice, it often has the opposite effect. A good example is the financial services sector where the EU has spent five years creating the regulatory framework for a single market, only to end up a gigantic programme of over 40 detailed regulations and directives which threaten to stifle innovation and drive financial business out of the EU. From the UK’s point of view, the outcome is specially worrying because it may remove many of the City’s competitive advantages.

The regulations are contained in the so-called Financial Services Action Plan which has attracted criticism on many counts: its size and detail, its emphasis on “harmonisation” (i.e. centralised rule-making), and the flaws in several of its key measures. Because it was the result of horse-trading and compromise, it actually imposes a worse regulatory regime on many members of the EU than they had before, the UK in particular. These shortcomings would be acceptable if they were the price for opening up a genuine single market in financial services. But the FSAP has run into a mire of protectionism and will take many years to implement, something even the Brussels commission admits.

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