EU politics: a waste of our time and everybody else's

23/06/2014

Matthew Elliott's Meal Ticket (MEMT), aka Business for Britain, has convinced the Sunday Times to carry its usual scam, publishing a scary letter in support of its EU "renegotiation" agenda. The excuse for this proposition is that his fellow travellers in the financial services industry are "extremely concerned" about Britain's current difficulties in preventing the introduction of certain measures by the European Union.

They list the financial transaction tax, the alternative investment fund managers' directive, the prospectus directive, bonus caps, bans on short selling and the restriction of euroclearing to eurozone clearing houses. Each of these things, they say, "will continue to erode Britain's competitiveness in markets in which it has unique global standing".

That empowers Mr Elliott to tell Conservative Home that: "The time has come to take powers back from the EU". Adds our Matthew, "We need new protections against bad and dangerous laws that the EU is proposing. A future renegotiation team needs to go to Brussels and demand new safeguards to protect the City. Business is clear: the City should ultimately be controlled by those in the UK, not EU officials".

One could hardly disagree with the idea that we need protection against big, bad Brussels, but harnessing this to a renegotiation agenda is getting more than a little tiresome. If we are to see any material change, then it will be by invoking Article 50 and then agreeing an exit package.

At his last fundraising bash, though – where Matthew passed round the begging bowl for £50,000 to keep the show on the road – witnesses were appalled by the shallowness of the MEMT approach, with not the least recognition of the global agenda, and the way it is gradually squeezing the EU out of the regulatory game.

As we point out in our Flexcit plan, the role of international agreement origin is no more evident than in the financial sector. Interestingly, there is still a two-way flow. For instance, in a few cases, the EU "uploads" its financial rules, so that they become the basis of international agreements. But, in many cases - and increasingly so - it "downloads" its regulation from international bodies.

A good example of this is the EU's Capital Requirements Directive, the so-called CR IV Package on the adequacy of banking capital. The original source is the Basel III agreement, crafted by the Basel Committee on Banking Supervision (BCBS).

The EU regulation also applies to the EEA so we would keep it on the statute book  it if we adopted the "Norway option". But, even outside the EU/EEA, the essence of the CR IV package would still apply to Britain. It is a party to the Basel III agreement. It would "download" it directly, rather than via the EU.

The process is rarely visible to the popular media, almost entirely unknown to the general public and – apparently – completely beyond the likes of Matthew Elliott. This is perhaps unsurprising. Only very occasionally does a hint of the real power emerge, as in January 2014 when the Basel Committee ruled on leverage ratios for banking loans, the issue at the heart of the 2008 banking crisis.

The picture, however, is extremely mixed. Regulation does not follow a single template. For instance, "over the counter” derivative trading is regulated by the EU's European Markets Infrastructure Regulation. But even this does not work in isolation.

The regulatory package stems from a commitment made in April 2009 by the G20 nations to "promote the standardisation and resilience of credit derivatives markets, in particular through the establishment of central clearing counterparties subject to effective regulation and supervision".

Thus, in an industry of global reach, the EU regulation combines with elements "downloaded" from the US Dodd-Frank Act and from Basel III. There is no single author and, outside the EU, Britain would "download" from similar sources. Its regulatory package would look very little different from what it is now.

On the other hand, the Alternative Investment Fund Managers Directive (AIFMD), of which Mr Elliott and his cronies complain, is indeed largely of EU origin. Quite rightly, it is seen as a building block of "Fortress Europe" – a more protective European market sheltered from competition.

Tellingly, a recent survey had 68 percent of respondents believing that AIFMD will lead to fewer non-EU managers operating in the EU. Some 72 percent viewed the Directive as a business threat. As an EEA member, if we chose to go down that route, Britain would have to retain its provisions. But that is one of the many reasons why EEA membership can only be regarded as a temporary solution.

Nevertheless, simply to attribute cost to additional regulation, and then to "renegotiate" a better deal from the EU, is not a realistic approach to the problem.

In September 2013, Deloitte recorded that new regulations had cost the European insurance industry as much as €9bn since 2010, with each of the top 40 insurers having spent more than €200m on compliance. Of regulation deemed to have a major impact, 36 percent was of national origin. The rest came from the EU or international sources.

Instruments such as the "Solvency II" package, on capital requirements, have international dimensions. Specifically, Directive 2009/138/EC implements recommendations from the International Association of Insurance Supervisors, the International Accounting Standards Board, the International Actuarial Association and nine other agencies alongside the World Bank and the IMF.

At a European level, all of these work with the EU's Frankfurt-based European Insurance and Occupational Pension Authority, and with Member State regulatory bodies.

This has interesting implication for Brexit. Global dimensions mean that leaving the EU, per se, would not afford any significant relief from these provisions. Costs would still be incurred. But it also means that renegotiation with the EU would be a waste of time. We would be talking to the wrong people.

Because of this, an alternative stratagem has been suggested by the consultancy KPMG. It argues that significant costs arise from duplication and the lack of a consistent measure of insurers' financial solvency. Thus, rather than targeting to remove regulation, it suggests the global industry could save up to $25 billion per year from harmonised, consistent regulation.

In this context, rather than a negative, Solvency II is seen as a start of a long process of improving and rationalising the law. But it is also part of a global initiative alongside the Solvency Modernisation Initiative in the US and recent ERM enhancements in China.

Indicative of future expectations was a commentary in Reuters. It complained that one of the great disappointments in the raft of regulatory changes emerging from the financial crisis of 2008 had been the failure of regulators to agree a common framework.

In an attempt to achieve this, a greater role was proposed for the International Organisation of Securities Commissions (IOSCO), the acknowledged global standard-setter for the securities sector.

The way forward was seen as this organisation promoting and facilitating regulatory convergence, something which was regarded as inevitable for global markets. Whatever European issues currently apply, the eventual ambition is to have harmonised global legislation for what is, after all, a global industry.

And for all the wittering from the likes of Elliott, UK regulators are not ill-disposed to this idea. The chief executive of the Financial Conduct Authority, Martin Wheatley, states that his authority intends to "reflect on and embrace" the international nature of markets.

He talks of a "new regulatory landscape" and of driving changes in regulation, infrastructure and culture, as a body at the "heart of international regulation". His view is that the regulator exists "to drive forward a changing global agenda". "You will witness first-hand how we share priorities with our EU and US counterparts, and how we are at the forefront of discussions to address cross-border risks", he says.

Such discussions require access at the highest level, well above the narrow sub-regional entity that is the EU. Despite it being positioned as such by David Cameron, the "top table" is quite simply not the EU.

Occupying that position globally is the G20. Thus, when the EU sought to adopt its Financial Transaction Tax (FTT) – about which Elliott also complains - against British wishes, invoking the enhanced co-operation procedure, it was to the G20 that the financial markets representative bodies turned.

Now, on financial matters, the key body is becoming the G20. But it works through the Financial Stability Board (FSB), founded in April 2009, with a mandate "to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies". It brings together national authorities, international financial institutions, sector-specific international groupings of regulators and supervisors and committees of central bank experts.

It counts as its members the Basel Committee on Banking Supervision (BCBS); the Committee on the Global Financial System (CGFS); the Committee on Payment and Settlement Systems (CPSS); the International Association of Insurance Supervisors (IAIS); the International Accounting Standards Board (IASB) and the International Organization of Securities Commissions (IOSCO). This is, in effect, the standards setters' standards setter.

Significantly, the FSB is chaired by Mark Carney, Governor of the Bank of England. You want the "top table"?  Well, this is it, and our man chairs the meetings.