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City must beware tit-for-tat finance regulations

Stuart Fraser
It has often been said that the UK should aspire to be a &ldquo;bridge&rdquo;&nbsp; between the US and the European Union. Well, the reform of financial&nbsp; regulation and supervision is a case in point. <br /><br />During my recent visit to&nbsp; Washington I met senior administration officials in the White House and&nbsp; Treasury, regulators at the SEC and Federal Reserve&nbsp; and elected members of&nbsp; the Senate and the House. Our discussions focussed on the European Union&rsquo;s&nbsp; plans for new financial services regulation. All eyes in Washington &ndash; to the extent that they look overseas at all &ndash; are on Brussels on this issue. And rightly so. <br /><br />Co-ordination between the EU&nbsp; and US on regulatory reform needs to be ramped up urgently. Both sides admit&nbsp; that they will not benefit from &ldquo;going it alone.&rdquo; The UK &ndash; as an EU Member&nbsp; State and home to Europe&rsquo;s largest financial centre &ndash; can be a conduit for&nbsp; communication, consultation and coordination.&nbsp;&nbsp;&nbsp; <br /><br />European and American efforts at regulatory reform must&nbsp; not be allowed to diverge &ndash; competing blocs of regulation on either side of&nbsp; the Atlantic would be disastrous for all. I see three main problems with the&nbsp; Balkanisation of financial regulation and supervision.&nbsp; <br /><br />My first&nbsp; concern is regulatory arbitrage, in which market players exploit differences&nbsp; between regulatory systems. The simplest form of regulatory arbitrage is for a&nbsp; company to up sticks and move its offices to whichever jurisdiction offers the&nbsp; friendliest regulation. This is clearly an inefficient use of resources and could also be a serious blow for the City, if it lost large chunks of its industry to other centres. <br /><br />That is why I have made it a priority to convince the UK&nbsp; government and colleagues in Europe to take a strong stance on the proposed EU&nbsp; Alternative Investment Directive. <br /><br />My second concern&nbsp; is that competition to keep business could trigger a &ldquo;race-to-the-bottom&rdquo; on&nbsp; financial regulation, with financial centres vying to offer the laxest&nbsp; regime. This would be dangerous indeed &ndash; pushing the riskiest activity into centres with flimsy oversight.&nbsp; We need global agreement&nbsp; on regulatory reform.<br /><br />The final&nbsp; danger of the EU or US acting alone is financial protectionism.&nbsp; The last&nbsp; thing we need is &ldquo;tit-for-tat&rdquo; regulation, with each side trying to protect&nbsp; their own markets. Two competing sets of standards would be bad for trade, bad for the EU&nbsp; and US and bad for the City. London is uniquely placed to ensure that&nbsp; information and ideas are crossing the Atlantic. The &ldquo;bridge&rdquo; metaphor may be&nbsp; overused, but in this case, I believe it is apt. <br />Stuart Fraser, Chairman of Policy, City of London Corporation