Three Losses to U.K. in a Week Limit EU Financial Reform

European Union lawyers gave the U.K. victories in fights over financial regulation that will boost the country’s standing in a power struggle over the future of banks and securities trading in the 28-nation bloc.

Plans for an 11-nation financial transaction tax and enhanced powers to ban short-selling, both opposed by the U.K., were criticized by the European Council’s legal service and a senior official at the European Court of Justice. The EU executive arm also scrapped a proposal to hand oversight of London’s interbank offered rate to a Paris-based regulator.

The U.K., home to the European Union’s biggest financial center, has been at odds with aspects of the commission’s overhaul of financial rules in response to the 2008 crisis and collapse of Lehman Brothers Holdings Inc., which has prompted warnings from EU officials that it can’t pick and choose the terms of its relationship with the bloc.

“The commission and member states have been pushing the limits of the treaty,” said Simon Gleeson, a financial regulation lawyer at Clifford Chance LLP in London. “The real issue is that, increasingly, what goes on in Europe is not Europe-wide, it’s various groups of states. You can’t use the single EU mechanism to cut local deals.”

The spate of victories are a boost for U.K. Prime Minister David Cameron, who is under constant pressure from members of the Conservative Party to seek more concessions from the EU. Cameron has promised a referendum on EU membership by the end of 2017 if a Conservative government is elected in 2015.

Borne Fruit

“I’m delighted that the U.K.’s targeted forensic negotiations have borne fruit this week,” said Mark Field, a Tory lawmaker for the cities of London and Westminster. “No doubt the City will remain vigilant in the months ahead.”

Michel Barnier, the EU’s financial services commissioner, played down any split with the U.K.

“I do not see my role as waging a war or a battle against this or that country,” Barnier said in an interview in Vilnius, Lithuania.

“What I have been doing for the last four years is to try and avoid polemics and to try and do things intelligently,” Barnier said. “In taking account, in particular, of the role and the importance of the United Kingdom in the financial industry, which is a good thing for the whole of Europe, and the whole single market.”

Cameron said that the country would keep working to protect its interests, including the financial-services industry.

“The government is going to keep making the case for an important sector of the U.K. economy, consistent with a strong, safer, more sustainable financial sector,” said Jean-Christophe Gray, a spokesman for Cameron. “We’re going to keep doing that very much so in the European Union.”

Short Selling

In the last of the three decisions last week, the U.K. won the backing of a top European Union court official for its bid to overturn rules allowing EU regulators to ban short selling.

Emergency powers granted to the European Securities and Markets Authority were based on a flawed interpretation of EU treaties, Niilo Jaeaeskinen, an advocate general at the EU Court of Justice, said in a non-binding opinion. The decision to give the powers to Paris-based ESMA should have required a unanimous vote among nations to ensure “enhanced democratic input.”

ESMA, which brings together markets regulators from the 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.

Final Ruling

Barnier said he would wait for the court’s final ruling, which follows the non-binding opinion in a majority of cases.

“I didn’t see in this opinion of the advocate general a contradiction with the fact that a European agency can take decisions in the way we have proposed,” Barnier said.

The U.K. has also sued the European Central Bank at the same court over policies it says push clearing of some derivatives away from the City of London’s financial district.

Barnier was forced last week to retreat on other expanded powers for ESMA. He scrapped plans to put ESMA in charge of regulating tarnished interest-rate benchmarks, including Libor, in the face of steep opposition from the U.K.

Alternative Plan

Under the alternative plan, the rates would be overseen by a group of national regulators, including the U.K. Financial Conduct Authority. ESMA would have a role as a mediator between national regulators, the official said.

EU lawyers also played a key role in giving the U.K. a chance to block the financial transaction tax in euro-area countries, which the U.K. said would harm its financial services industry even though it wasn’t given a chance to vote on the final measure.

On Sept. 6, lawyers for the Council of the European Union, which represents the executives of EU member states, say the tax plan goes too far and would discriminate against countries that don’t participate, according to an EU document. The legal service of the European Commission, which proposed the levy, stands by the plan and will offer a rebuttal, said Emer Traynor, a spokeswoman for EU Tax Commissioner Algirdas Semeta.

The EU has proposed a broad-based tax on stocks, bonds, derivatives and other trades that could be collected worldwide by France, Germany and nine other EU nations that have so far signed up. The plan would charge a 0.1 percent rate for stock and bond trades and 0.01 percent for derivatives transactions, with some exemptions for primary-market sales and trades with the ECB.

The council’s Sept. 6 legal opinion said the EU can’t justify such an aggressive approach just to keep traders from moving outside the zone of participating nations.

“We’re right back to the idea that if you want to do something you have to do it as a unit, or not at all,” Gleeson said. “These are the big questions that go to the heart of the European Union.”

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