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U.K. Fights EU Short-Sale Powers After Bank Bonus Defeat

Updated on
Prime Minister David Cameron
Prime Minister David Cameron has promised to seek a new settlement with the EU, amid a rising tide of opposition that saw the U.K. Independence Party, which advocates a divorce from the bloc, gains seats in local elections last month. Photographer: Chris Ratcliffe/Bloomberg

The U.K., defeated in a campaign to derail European Union curbs on banker bonuses, goes to the bloc’s top court tomorrow in a bid to overturn the powers of an EU agency to ban short selling.

Britain will argue at the Luxembourg-based EU Court of Justice that the European Securities and Markets Authority’s decision-making ability comes at the expense of national supervisors, in the latest skirmish against the EU’s growing powers over financial services.

“The Brits have a tradition of objecting to more power being given to the European Commission or EU agencies,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels. If ESMA has been handed the powers to “avoid a bad functioning of the single market, then there’s nothing against this” in the bloc’s rules, he said.

Prime Minister David Cameron has promised to seek a new settlement with the EU, amid a rising tide of opposition that saw the U.K. Independence Party, which advocates a divorce from the bloc, gains seats in local elections last month. While Cameron has said he plans a referendum on EU membership by the end of 2017, this has failed to quell calls from members of his Conservative Party for Britain’s European destiny to be put to the people sooner.

Bonus Curbs

The U.K. has often found itself on the defensive in EU discussions on financial regulation. The nation, which lacks a veto on financial laws, was the sole dissenting voice in March opposing a deal to ban bonuses more than twice fixed pay.

Britain’s Chancellor of the Exchequer George Osborne last week said that plans being discussed by 11 other EU nations for a common financial transactions tax were “unlawfully extraterritorial” and “poorly designed.” The country started a legal challenge over the draft measures in April.

The U.K. is also suing the European Central Bank over policies that it says push clearing of some derivatives away from London and into the euro area, and has grappled with other states on topics ranging from oversight of hedge funds to how much power the Brussels-based commission should have to police bank capital.

Upgraded Mandate

ESMA, which brings together markets regulators from the 27-nation EU, was handed an upgraded mandate to police short selling last year as part of a bid by EU lawmakers to make markets less volatile and tame speculation by traders blamed for driving up governments’ borrowing costs.

Short sellers seek to profit on declining markets by selling borrowed shares or bonds, on the belief their price will fall, then replacing them with securities bought at a lower price.

Britain contests provisions of the law allowing Paris-based ESMA to introduce short-selling bans to protect “the orderly functioning and integrity of financial markets.” It can only act if the crisis has “cross-border implications” and if national regulators are unwilling or unable to deal with it.

ESMA is one of three EU-level agencies set up to better coordinate oversight of securities markets, banks and insurers in the wake of the collapse of Lehman Brothers Holdings Inc.

The U.K.’s case “could have wider ramifications,” said Alexandria Carr, a lawyer in the London office of Mayer Brown, which isn’t involved in the case. It could affect the powers of the EU’s three supervisory authorities “to take what are arguably wide discretionary decisions.”

ESMA Powers

ESMA has “a large measure of discretion” in the law about when it takes action, is “given a wide range of choices as to what measure or measures to impose” and “is empowered to renew its measures without any limit on their overall duration,” the U.K. said, according to a court filing.

The U.K. Treasury declined to comment on the court case.

ESMA has seen its powers boosted several times since it started work in 2011. EU lawmakers put it in charge of overseeing credit-ratings companies and trade repositories, while the commission is set to propose that it should take over supervision of Libor and other critical benchmark rates.

“This is probably just the next step in what promises to be, in the years ahead, a series of regulatory challenges between national regulatory authorities and EU institutions,” Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said in an e-mail.

“I think the evidence that short selling is a root cause of instability is slim. But this does not prevent it from being one of several emotive issues,” he said.

Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, the architect of the proposal to give ESMA the short-selling powers, declined to immediately comment on the hearing.

The case is: C-270/12, United Kingdom of Great Britain and Northern Ireland v. Council of the European Union, European Parliament.

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