London, the financial capital of Europe, is coming to grips with a foreign concept: None of its three most important regulators speaks with a British accent.
For the island nation that opted out of the euro, the start of three European Union oversight agencies on New Year’s Day has stirred anxiety about London’s future as a money center and how to influence the EU, which is overhauling rules from bonuses and bank capital levels to naked short-selling, high-frequency trading and over-the-counter derivatives.
“The U.K. has to accept European regulation willingly in exchange for developing its position as Europe’s financial center,” said Simon Gleeson, a financial regulatory lawyer at Clifford Chance LLP in London. “The U.K. needs to be on the inside if it is to remain Europe’s financial center.”
The EU regulators will set rules and guidelines for all of Europe, supervise their implementation and may intervene in nations during a crisis. National regulators won’t have freedom to interpret the agencies’ regulations. London bankers, who can appear “arrogant and patronizing” to EU officials, according to a report by ex-Barclays Plc adviser Malcolm Levitt, must learn to negotiate with European partners as equals if their finance industry is to prosper, lawmakers and bankers said.
The shift has stirred concern among some Londoners long-wary of European integration that Brussels may be trying to weaken the city’s role as the region’s financial center.
“We have a national interest and a right to expect that our view is heard more than others when it comes to financial services,” said Andrew Hilton, director of the Centre for the Study of Financial Innovation, a forum for bankers and regulators funded by institutions including the Bank of England. “If the U.K. doesn’t have the most influence in European regulation, it would be like saying the auto industry should be overseen by Latvians or the wine industry should be run by Estonians.”
No British bank employees are registered as lobbyists holding passes to enter the European Parliament, according to an official listing. By contrast, Italy’s Banca Monte dei Paschi di Siena SpA, the world’s oldest bank, has 13. Citigroup Inc. and Deutsche Bank AG have four each, BNP Paribas SA and Morgan Stanley have two each, and Goldman Sachs Group Inc. and JPMorgan Chase & Co. have one each.
“Our rivals from other EU member states recognize the advantage of maintaining a continued presence in Brussels,” said Syed Kamall, a lawmaker in David Cameron’s Conservative Party who represents London in the European Parliament.
Brian Mairs, a spokesman for the British Bankers’ Association, which lobbies for U.K. banks, said the absence of passes doesn’t indicate a lack of British influence. “Passes might be convenient to lobbyists living in Brussels,” he said.
‘Shift in Power’
The new overseers of U.K. regulation include Italian Andrea Enria, chairman of the London-based European Banking Authority, which is implementing rules that limit upfront cash bonuses. Portugal’s Gabriel Bernardino heads the European Insurance and Occupational Pensions Authority in Frankfurt. Dutchman Steven Maijoor chairs the European Securities and Markets Authority in Paris, which has the power to ban products deemed risky to financial stability.
“It’s clearly a shift in power,” Kamall said. “The most effective way for me to stand up for the City when I’m in Brussels is not to wave a Union Jack and say, ‘We want this.’”
The U.K.’s Financial Services Authority, Europe’s biggest financial regulator, is being broken up by Britain’s government. The limits of the FSA’s ability to shape rules and supervise firms were exposed during the crisis, former U.K. Chancellor of the Exchequer Alistair Darling said in an interview.
“We did push back against EU financial regulation until 2007,” said Darling, whose government approved the creation of the new EU regulators in 2009. “What changed was that during the banking crisis it became obvious that there were a lot of issues in relation to regulation that needed to be resolved at a cross-border level.” Darling is now an opposition lawmaker.
Critics say the EU regulators will push business away from U.K. financial districts such as the City of London and Canary Wharf, which paid 53.4 billion pounds ($85 billion) in tax in the year through March 2010, or 11 percent of the total, according to accounting firm PricewaterhouseCoopers LLP. London is home to about 240 overseas banks, including the European bases for JPMorgan and Goldman Sachs.
Britain is also home to about 80 percent of Europe’s hedge funds and about 60 percent of its private equity firms. The U.K. accounts for about 37 percent of all global foreign exchange trading and 46 percent of all trading of over-the-counter interest rate derivatives, according to lobby group TheCityUK. More than 1 million people work in the financial industry in the U.K., according to the City of London Corporation.
“It’s very foolish to have given these powers away to the EU,” said Stuart Wheeler, founder of London-based spread-betting company IG Group Holdings Plc and treasurer of the U.K. Independence Party, which wants Britain to leave the EU and got the second-most votes in the U.K. in the European Parliament election in 2009. “The burden of regulation that the EU is imposing on financial companies is far too great.”
British financial representatives can make “chauvinistic and counterproductive” arguments, said Malcolm Levitt, a former U.K. Treasury official. He wrote a December report entitled “Getting Brussels Right” based on 68 interviews in London and Brussels. U.K. firms can be too slow to get involved with EU policymaking, he said. They should avoid “self-serving pleading” and show how they benefit the EU, he said.
‘Learning to Engage’
The U.K. won’t be without influence on the new EU watchdogs: FSA Chief Executive Officer Hector Sants, 55, is on the board of the new insurance agency. FSA banking director Thomas Huertas is alternate chairman of the new EU banking authority, filling in for Enria when he’s unavailable; Alexander Justham, the FSA’s director of markets, is on the board of the securities and markets regulator. London’s lobbyists say lenders will also adapt the way they make their arguments to the new regulators.
“The City is learning to engage more proactively” with the EU, said Angela Knight, CEO of the British Bankers’ Association, which represents 200 lenders including HSBC Holdings Plc and Lloyds Banking Group Plc. “We need a more peer-to-peer approach.”
The BBA’s priorities in Brussels include monitoring laws to incorporate the Basel Committee on Banking Supervision’s new rules and to manage bank failures, Knight said. The BBA is resisting regulators’ plans to force a leverage ratio on banks as well as any attempts by other EU states to dilute the Basel Committee’s definition of core Tier 1 capital, a measure of lenders’ financial strength, by widening the definition to include instruments beyond common equity and retained earnings.
The elected European Parliament is reviewing laws restricting naked short-selling and trading in over-the-counter derivatives. The European Commission, the EU’s executive body, is readying an overhaul of market rules to cover dark pools and high-frequency trading.
Both moves are being challenged in London. More disclosure of short positions on securities such as sovereign debt could have “serious unintended consequences” and may force trading of securities to leave the EU, according to Andrew Baker, chief executive of the London-based Alternative Investment Manager Association, which lobbies for hedge funds. Naked short sellers bet against a security, such as a government bond, without first borrowing it.
The case for more oversight of dark pools, trading platforms that allow investors to buy and sell securities away from regulated exchanges so they don’t have to disclose positions, is “often exaggerated,” according to U.K. Treasury minister Mark Hoban.
‘Manage Its Grief’
Bank officials such as Sacha Polverini, Barclays’s director of European public policy, said they see the benefits of the new European regulators. They will create “increased consistency in the way prudential rules are implemented,” he said.
“As Germany has to manage its grief about the demise of German monetary authority and accept the European Central Bank, I think exactly the same is true of the U.K. with financial regulation,” said Nicolas Veron, a senior fellow who works on regulation at Bruegel, a Brussels-based research group. “The City has nothing to gain from fighting yesterday’s fight.”