Bank to press on despite EU legal threat

EUROPEAN law continues to pose an existential threat to Britain’s overhaul of its regulatory system but UK authorities are determined to press on regardless, a paper by the Bank of England and FSA said yesterday.

The paper said that new powers to be wielded by the Financial Policy Committee (FPC) will “be confined to areas where the United Kingdom has sufficient national discretion; the key hurdle here being that UK regulatory powers in some areas may be constrained by current and forthcoming EU legislation”.

But it said it would explore what tools the FPC should have despite the threat.

The Bank also reiterates the view expressed previously that European initiatives led by Commissioner Michel Barnier “risked fundamentally impeding its ability to meet its proposed statutory objective”, suggesting a worrying lack of progress in British negotiations to adjust the EU rules.

British authorities began expressing their concerns publicly after October, when City A.M. revealed that the Treasury views its policies as potentially illegal under current EU draft rules.

Chancellor George Osborne said this week that Barnier wants to allow the Vickers Commission proposals to be put into place but gave no details of specific progress and made no mention of the FPC’s new macro-prudential regime.

The Bank paper also said that “contracts that reward short-term performance excessively” is one of the top three causes of market distortions that amplify risk.

And it laid out proposals for the powers the FPC should use to mould bank’s balance sheets, such as limits on leverage, bans on pay-outs to shareholders and executives and cyclical capital requirements.

The other main tools include imposing variable haircut or margin requirements on transactions and forcing disclosure through clearing houses.