Michel Barnier, the European Union (EU) Commissioner responsible for internal markets and services including financial services (FS), has spoken out at a London conference against UK exceptionalism, writes Neil Ainger. Barnier is the man responsible for overseeing the implementation of a plethora of regulations such as the Bank Resolution and Recovery Directive (BRRD), European Market Infrastructure Regulation (EMIR) and the Capital Requirements Directive (CRD) IV, which will introduce the Basel III capital adequacy regime into Europe and is keen for the UK to stay in the EU but as a full member.
“There cannot be two single markets: one for the UK and financial services and one for the rest of Europe; that is out of question,” warned EU Commissioner Barnier during a speech in London on Friday 12 July at Europe House in Smith Square, London, UK. The venue was formerly the headquarters of the Conservative Party during Margaret Thatcher’s term as UK prime minister during the 1980s and famously hosted many a victory party.
The ex-PM would no doubt be turning in her grave to find out that the Smith Square building is now home to the European Parliament’s press office in London; a fact genuflected to Barnier when he listed the arguments the UK has had with the EU over the years to the audience of 200 bankers, politicians and civil servants gathered by the Policy Network and the City of London Corporation. He cited Schengen, the Working Time Directive and the famous “handbag” rebate row with Thatcher in 1984.
“At the same time there have been many positive UK contributions to the EU on enlargement, the single market and climate change,” continued Barnier in a conciliatory tone that sought to emphasise the benefits the UK gains from its EU membership, and the dangers of an exit if the present PM’s promised in/out referendum comes to fruition in 2017. “I don’t know what the British people will decide [if there is an EU exit referendum] but I do know you cannot pick and mix with the EU: you are either in or not,” said the man who voted for the UK to join the EU in 1973.
Barnier also went on to warn that the EU was needed as a counterweight to China, India and the US. If Europeans wanted to maintain a global voice they had to do it collectively, he said, citing the EU/US agreement on derivatives regulation that had been agreed just prior to the start of the London conference. "The US has Dodd-Frank while the EU has EMIR … just a few differences between the two can create problems," he told delegates before explaining, "that's why the Commission has been talking to the Americans, in an effort to close the gaps.”
The European Securities and Markets Authority subsequently released its ESMA discussion paper on implementing the clearing procedures for over-the-counter (OTC) derivatives after the agreement. Feedback for this huge industry change is being sought by 12 September.
EU and UK/City Relationship Deteriorating
The 40th anniversary of the 1973 UK ascension to the EU trading bloc was one of the prime reasons for the debate about the future relationship between the country and the EU to be convened in the heart of the British political enclave in Westminster, London. It provided a convenient excuse to discuss the proposition that the EU and the City’s priorities are now in direct conflict; if not necessarily the views of the respective populations of the relevant nations.
In recent times the Financial Transactions Tax (FTT) and the single supervisory regime, which is due to come fully into force in spring 2014 and be enforced by the European Central Bank (ECB) via the single banking union, have led many in the City to view the EU as seeking to rein in its powers and status as one of the top three global financial centres in the world.
With the UK outside of these two eurozone-led initiatives - and unlikely to join the euro single currency bloc anytime soon - it is increasingly believed that a parting of the ways may soon happen between the EU and UK as the latter tries to prevent the single banking union, FTT, bankers bonus cap and a raft of other planned pan-European regulations from applying to it. An example can be seen just recently in May when Andrew Bailey, one of three deputy governors at the Bank of England (BoE) at the time and the head of the BoE’s financial sector supervisor, the Prudential Regulation Authority (PRA), attacked the inappropriateness of the Solvency II insurance regulations emanating from Europe.
[In many ways the debate mirrored the earlier discussions about the future of London as a financial centre held at the SWIFT Business Forum in London at the end of April –Ed].
Mandelson Warns Against UK Marginalisation
The ‘exceptionalist’ approach is not winning friends in Europe, and is something that Peter Mandelson, president of the organising Policy Network and ex-minister of state, EU Commissioner and right-hand man to Tony Blair when he was UK PM, warned against during the subsequent debate. Other participants included Gerry Grimstone, chair of Standard Life and of TheCityUK pressure group and Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), alongside Philippe Legrain, principal advisor at the Bureau of European Policy Advisers at the European Commission (EC).
“Common EU standards and supervision is needed to check regulatory arbitrage and help investor confidence,” said Mandelson. “Of course it is in everyone’s interest that these rules impose the lowest possible cost upon businesses as well … but it should be obvious that a banking union is needed to underpin the monetary union,” added the well-known advocate of UK entry to the single currency. He urged the UK “to keep fighting hard to retain its influence under this new structure and to remain at the top table … and not distance ourselves from the EU.”
“I suspect the FTT will eventually be reshaped in a less harmful way too,” continued Mandelson, as he explained how it was the European Parliament which “blindsided” everyone and unilaterally pushed this potentially City-damaging measure through.
He concluded that: “The strength of the eurozone is in itself likely to pull business away from London in time so banks, central counterparty (CCP) clearing houses and others will gravitate there. No amount of diplomatic skill can prevent this while the UK stays out of the euro [long-term].”
For Gerry Grimstone, chair of Standard Life, it was “poppycock” to suggest that the City’s financial services hub could exist in its present form without the regional and global reach that the UK’s membership of the EU gives it. But equally, he warned, it was in the EU’s interests that the FS hub was in its borders and that “the cluster effect of the City was impossible to replicate”.
Grimstone listed the three main immediate priorities for the politicians, as he saw it speaking from an FS perspective:
• Define the relationship between the EU and UK to provide certainty.
• Stabilise the eurozone to provide economic certainty.
• Widen and deepen the single market to deliver a foundation for growth and jobs.
ESMA Head Maijoor Speaks Out on Pending ECJ CCP Ruling
According to Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), and another panellist, “the only way to get a single [international] rulebook is to give up some sovereignty”. Nonetheless, he was careful to stress that the UK’s new Financial Conduct Authority (FCA) regulatory body was a key partner who he talks to often and has found to be very cooperative.
In regard to the pending European Court of Justice (ECJ) ruling on whether the ECB is justified in maintaining that the CCPs will in future have to be located within the eurozone if they want to clear euro funds, Maijoor was understandably diplomatic as this potentially explosive issue threatens to cause a further rift in the relationship between the EU and UK. He warned to “be careful” as any such ECJ ruling “would make the single market more difficult”. Indeed, if the ECJ backs the ECB’s position then it can be argued it is in contravention of the single market rules which should protect the UK advantage in this area and allow it to compete for clearing business on a fair and level playing field with other members of the EU.
If the London clearing house LCH.Clearnet, which the London Stock Exchange (LSE) group consolidated its ownership of earlier this year - and others such as Euroclear - are forced to leave London and set up expanded operational centres in the eurozone then this will distance them geographically and culturally from the centre of euro trading in the EU, which is in London. The costs of any such relocation will be huge and represent a clear and present danger to London’s present position as the global hub for euro trading. Any move to force CCPs to relocate to the eurozone, when the ECJ ruling comes through this quarter, would be fiercely resisted and was an issue often raised during the Q&A session at the end of the debate.
Conclusion: Diverging paths
The ECJ/CCP debate is just one strand in the on-going complex relationship between the large island off the coast of the European mainland and the continent itself. Convergence is needed for businesses and regulators to deliver a single market, efficiency and better global clout, but politically a divergence between the UK and EU seems to be underway and the battle to decide whether Britain stays in or exits is truly underway.
The consequences for banks and companies across Europe are profound, but equally the operational and technological impact of having to relocate CCPs abroad or to integrate the FTT into trading operations in London’s supra-national dealings will not be easy. The fear has to be that European politicians and business people are having this debate without recourse to the practical connectivity and integration difficulties of their decisions. As ever, it will be the technologists who have to pick up the pieces and make whatever is finally decided, actually work.