The Future of the European Financial Services Market

Mark Boleat, Chairman of the City of London Policy and Resources Committee, stresses the need for cooperation in Europe.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The European financial services market is of crucial importance to the City of London, and to the UK more generally. London is the world’s leading international financial centre. It has attained this position for a variety of reasons, including actions taken in other countries, notably the US in respect of the Eurodollar market and more recently Sarbanes Oxley. It is a centre for the UK, for Europe and indeed for the whole world.

London was a global financial centre before the development of the Single European Market, but there is no doubt that the UK’s membership of the EU, and therefore participation in the Single Market, has played a role in strengthening London’s position as a financial centre. That makes it an asset for the whole of Europe.

Today, many global financial businesses have their European, EMEA or global headquarters in London. These include businesses based in other Member States. In many cases, the alternative to London is not Paris or Frankfurt or Madrid, but rather New York, Singapore or Hong Kong.

The Single Market

The single market generally has brought huge benefits to the people of the EU, estimated at £3,500 for each household a year, but these benefits are not immediately visible, because they are diffused throughout the economy, whereas some of the less desirable features of the EU are all too apparent.

The finance industry in the UK, and indeed business in the UK generally, want to see a deepening and strengthening of the Single Market, and for the UK to be a part of that market and fully engaged in work to develop the market.

But there is a question of what sort of single market do we want. Britain wants a liberal and outward looking Single Market, not a “Fortress Europe”, with rules designed to discriminate against those not in the European club.

The MiFID Review exemplifies this. We support the Council Presidency texts which have dropped the third country cross border passport from the draft MIFIR. We believe that it is vital that the EU financial services market remains open to investors from outside the EU. EU firms need access to services provided by third country firms. Requiring all third country firms providing those services to have an EU licence, or to be found subject to an equivalent regime, could risk severely restricting cross border financial services business between the EU and the rest of the world.

Until recently there were few complaints in the British financial services industry about the single market, but two recent developments have raised real concerns about the direction in which Europe is heading.

The first is the cap on bankers’ bonuses. This is simply bad policy making. There is no impact assessment and has been no meaningful consultation. The policy will not achieve its desired objectives, inasmuch as they can be determined. It will not lead to a reduction in bankers’ pay – the market is doing a pretty good job of doing this – and it will not reduce risk in the banking industry, because there will be a restructuring away from variable pay and towards fixed pay.

At the margin it will make the EU a less attractive place to do banking business. And the extra-territorial aspects of the tax are thoroughly undesirable. From the UK point of view this was a measure that if not aimed at the UK, will have a disproportionate effect on the UK

The proposed Financial Transaction Tax (FTT) is even worse. Since the most recent proposals were published, the evidence of the negative impacts of such a tax has been growing. The intended broad scope of the tax means that it would be impossible to shield the real economy from its effects.

That is a point that has been made here in Germany - both Bayer and Siemens have publicly criticized the FTT, as it will impose millions of Euros of additional costs and increase burdens on pension schemes.

Christine Bortenlanger of the DAI said in the Financial Times

this is a direct strike against the export-oriented German economy.

Taxes are not borne by markets or businesses, they are borne by people. The cost of the FTT would be borne by taxpayers, because of the increased cost of funding public borrowing, by investors and by the public generally.

The Commission’s aim to tax “all actors, all instruments, all markets” would have profound consequences for the functioning of financial markets. This would mean that certain transactions would become uneconomical and would cease entirely. Repos with a maturity of under a year would no longer be economical. The disappearance of this market would not only impair the financing of the wider economy but repo is also an important mechanism in the transmission of monetary policy by the ECB.

Britain is not one of the countries that has signed up to the FTT, but again the extra-territorial aspects would adversely affect London as a financial centre, and government and corporates in Britain who would have to offer higher yields on their securities.

Last week there were signs of a major rethink on the structure of FTT, and it is clear that the proposals currently on the table will be significantly modified so as to avoid the consequences outlined above.

This is very welcome, but surely such a badly thought through proposal should never have seen the light of day.

The position on financial services is mirrored in other industries. Just why does the Commission waste time on pointless proposals such as European Contract Law, which seeks to address a problem that does not exist? Or regulating how olive oil must be served in restaurants – a blatantly protectionist measure that has rightly been withdrawn, but this begs the question of why it was proposed in the first place.

Rather than concentrate on more harmonisation for the sake of it, we would like to see a further deepening and strengthening of the Single Market. According to OpenEurope, removing EU-wide barriers to trade in services could increase GDP by nearly €300bn – or nearly €150bn if the enhanced cooperation mechanism is used by the twelve member states already supportive of such measures.

Banking Union

The creation of a banking union is an essential element to underpin the stability to the euro zone. There has been reasonable progress on the first part of the banking union - the Single Supervisory Mechanism.

We support the agreement achieved by the Irish Presidency with the European Parliament on the Single Supervisory Mechanism and the related EBA Regulation. We welcome the significant safeguards for those Member States outside the Eurozone that will not be part of the SSM. This is essential to ensure the Single Market is open to all Member States, Eurozone and non-Eurozone, on a non-discriminatory basis.

Progress seems reasonably on course for the ECB to take on its new responsibilities, as scheduled, over the coming year. However to achieve the stated aim “to break the link between banking systems and sovereign risk” all three parts of the Banking Union must be in place.

Simply having a single supervisor for the Eurozone is not enough. We need to see more progress on the accompanying deposit insurance scheme to act as a deterrent to bank runs. And finally, there will have to be a resolution authority and a common fiscal back stop for the SSM, otherwise, as Sir Mervyn King, the Governor of the Bank of England, said “banks will remain national in death”.

Last week the French and German governments issued a joint statement covering a wide range of EU issues. The section on banking union has been widely interpreted as a scaling back of ambitions in respect of resolution and recovery, with a clear message that national authorities will be playing a significant role for some time to come.

British Membership of the EU

This all serves as background to the current UK debate, if not obsession, on EU membership. As soon as Europe is mentioned, the debate tends to become emotional, and rational argument can be difficult. Britain now faces a period of up to four years of heated debate and uncertainty about its future relationship with the EU.

During this time key decisions will be taken on the future of Europe. Britain must not lose sight of the “day job”. It needs to be fully engaged in the development of policy at the European level, to help ensure that decisions taken are in the best interests of the whole of Europe, Britain included. This may not be as exciting or headline-grabbing as the debate on referenda, renegotiation, repatriation etc. but in the short term it is more important. Those decisions are capable of having a significant effect on the British economy, regardless of whether Britain is in or out of the EU.

And also during this time, businesses round the world will be taking location decisions – where to expand, where to contract, where to set up. At the margin, London’s position is weakened by the current debate on Britain’s membership, and it is the duty of all politicians in Britain to ensure that this never gets beyond “at the margin”.

So the clear message from the UK financial services industry is that Britain wants to be within the Single Market, and therefore within the EU, that Britain must be more engaged in seeking to shape the single market so that it is outward looking not protectionist, and that Europe must play its part by recognising that there is a global market and Europe itself must change to meet the challenge.

I know that here in Germany, many of you support such a reform agenda too. And I hope that the UK and Germany have work together to meet this challenge.

Perhaps the answer lies in the words of Mario Draghi, who said in a recent speech in London,

Europe needs a more European UK as much as the UK needs a more British Europe.

Published 5 June 2013