Only a few months ago, Michel Barnier, the European Commissioner for the internal market, was being portrayed as a “bogeyman” in the City of London. The city’s hedge fund and private equity community were terrified the Frenchman wanted to regulate them out of existence as part of some French plot to usurp London as Europe’s leading financial centre.
It therefore seemed odd that, when he unveiled a ground-breaking deal to establish three pan-European regulators to oversee banks, insurers and markets across Europe on September 2, barely a whimper was heard, even from the Europhobic diehards in the Square Mile.
Under the proposals, three European Supervisory Authorities will be up-and-running by January 2011. Banking's ESA will be in London (a minor victory for UK chancellor George Osborne), the insurance one will be in Frankfurt, and the financial markets one will be in Paris.
There will also be a European Systemic Risk Board, chaired by the president of the Frankfurt-based European Central Bank, which will be tasked with issuing early warnings about wider risks building up across the EU.
Day-to-day supervision of institutions and markets is to remain with national regulators, with the ESAs' main task being to draw up harmonized rules and standards in a bid to strengthen the overall regulatory framework. The plans are due to be approved by EU finance ministers and the European parliament later this month. Barnier said:
"We have reached a crucial milestone. We will have the control tower and the radar screens needed to identify risks... This new framework is a crucial stage in our effort to learn all the lessons from the crisis to better protect our economy and our citizens in the future."
City AM did not like the regulatory shake-up at all, declaring it would “formalize a historic power grab by Brussels institutions over key swathes of the UK and London economies.” And the Daily Telegraph quoted Mats Persson, director of the eurosceptic thinktank Open Europe, as saying:
"The proposals clearly represent a shift in powers from the UK to the EU level, and go beyond what was originally envisioned and the UK had pushed for... The EU supervisors will be given the mandate to interpret, apply and even enforce EU laws at the expense of national regulators in several key areas."
But the Financial Times was much more positive, declaring the shake-up had been greeted with relief in London. Its initial report opened with the words:
“It could have been so much worse. That seems to be the markets’ general view towards draft rules on short selling from Brussels circulated this week…
The FT's biggest concern seemed to be that partial short-selling bans might be imposed at times of extreme market volatility.
Many in the City of London acknowledge that the system of financial regulation put in place by former UK prime minister Gordon Brown in 1997 is broken and are therefore comfortable with a more pan-European approach. Sir Win Bischoff, chairman of Lloyds Banking Group, said as much in May. Simon Gleeson, a partner at Clifford Chance in London, told the FT:
“From our perspective, it is right to have harmonized rules given the sheer amount of damage that can be done from having conflicting ones."
Gleeson was more sceptical about the shift to EU-wide regulation in a subsequent FT piece, in which he said: “One of the biggest concerns is the cultural separation between London and places like Paris and Frankfurt." The FT said Gleeson argued that continental regulators would struggle to understand the City’s more 'sophisticated' ways.
So has Barnier gone from 'zero' to 'hero' in the eyes of the City? Or is further backlash brewing from Europhobic London-based financiers, many of whom are eager to preserve as much as they can of the freewheeling Anglo-Saxon financial model? It remains to be seen. However if there is one, I suspect London financiers will be tilting at windmills.
Further reading on EU financial regulation and hedge funds:
- Hedge Fund Challenges Extend Beyond Regulation, by Kevin Burrows
- How Much Independence for Supervisors in Financial Market Regulation?, by Marc Quintyn
- EU derivatives regulation--Papering over the cracks, by Anthony Harrington [blog post]
- There is method in Merkel's madness, by Ian Fraser [blog post]
Tags: banking , EU , European Central Bank , hedge funds , insurance , regulation , UK