U.K. Seen Fighting EU Benchmark Plan in Next Financial Clash

U.K. officials, emboldened by a series of victories on financial regulation, are set to challenge European Union plans to toughen rules for benchmarks underpinning markets from interest rates to oil prices over concerns the measures will unfairly burden banks.

The U.K. will seek improvements to the proposals made yesterday by Michel Barnier, the EU’s financial services chief, to ensure they are sensible, proportionate and internationally coherent, according to a British official who isn’t allowed to be cited by name, in line with government policy. Barnier today defended the draft law, describing it as “balanced, practical and fair.”

The EU plans, designed to restore trust amid rate-rigging scandals, include requiring banks and other companies that submit benchmark data to sign up to legally binding codes of conduct. The Brussels-based European Commission would also win powers to decide if benchmarks set outside the EU can be used.

The commission plans are “impulsive and premature,” Syed Kamall, a U.K. Conservative lawmaker representing London in the European Parliament said in an e-mail. EU Commissioners “should wait for evidence before jumping into action and should allow markets to operate freely unless and until there is a very compelling reason to step in.”

Three Victories

The U.K. concerns over the benchmark proposals follow three victories for the nation last week in tussles with the EU over financial regulation. Plans for an 11-nation financial transaction tax and enhanced powers to ban short-selling, both opposed by the U.K., were criticized by EU lawyers and a senior official at the European Court of Justice. The EU executive arm also scrapped a proposal in the draft benchmark rules to hand oversight of London’s interbank offered rate to a Paris-based regulator.

Britain is concerned that Barnier’s plans cover too wide a range of benchmarks and that rules on using rates set outside the EU could restrict the activities of firms operating in Britain, according to another person who asked not to be named because negotiations are private.

Under Barnier’s proposals banks and other companies within the EU would only be allowed to base a financial instrument on a benchmark that is administered in the EU or in another country that has rules judged as equivalent to those in the 28-nation bloc.

‘Without Ideology’

The commission would be in charge of the equivalence decisions and would “in particular” assess whether nations comply with principles drawn up by the International Organization of Securities Commissions.

“It’s true that in Germany some said it wasn’t European enough and in London they tell me it’s too European, so I think I’m in exactly the right place,” Barnier said at an event in Madrid today. “I’ve worked without ideology and I’d like the British government to recognize that.”

Authorities have fined UBS AG, Barclays Plc and Royal Bank of Scotland Group Plc about $2.5 billion for distorting the London interbank offered rate, or Libor, and other interbank rates. Other firms are under investigation around the world.

Martin Wheatley, the head of the U.K.’s Financial Conduct Authority, said Barnier’s proposal was a “useful document.”

‘Market Confidence’

“The key issue here is that restoring confidence and trust is not simply about Libor,” Wheatley said in a speech in London today. “It may well be the biggest benchmark -– referenced in contracts worth some $600 trillion --– but it’s by no means the only one capable of knocking market confidence.”

Yesterday’s EU proposals would apply to “all published benchmarks that are used to reference a financial instrument traded or admitted to trading on a regulated venue,” as well as those that underpin financial contracts such as mortgages and those that measure the performance of an investment fund, according to the commission. An exemption would apply for rates set by EU central banks.

“To suggest that all benchmarks and indices are faulty and in need of regulating on the basis of the Libor experience is absurd,” Kamall said. “It shows no logic and no concept of limited intervention.”

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