SAYING “I wouldn’t start from here” is not a very helpful response to a traveller asking directions, but sometimes it is the best one. It is good news for London that the chancellor managed to force concessions on EU derivatives legislation. He entered the negotiations in Luxembourg outnumbered 26 to 1, but achieved most of what was needed to ensure that we aren’t disadvantaged compared to Paris or Frankfurt. But in truth we shouldn’t be in this position to start with.
We are the overwhelming derivatives capital of Europe, with a market share of over 70 per cent, and yet we find ourselves reacting to legislation voted on by countries that have no derivatives market of their own. It is the same across the field of financial services legislation – we are the undisputed financial services capital of Europe, and yet we have to respond to a tidal wave of financial services legislation that has originated elsewhere in Europe. We don’t set the agenda, and are left valiantly trying to limit the damage to our key strategic industry.
We are in this position because the previous government took its eye off the ball – former chancellors Alistair Darling and Gordon Brown were notorious for not engaging in Brussels. We should continue to lobby strongly to ensure the legislation already in the pipeline doesn’t harm our national interests, but we should also aim to get to a different starting point – to where we set the legislative agenda for the industry which we lead in Europe. That means having a clear idea of what legislation we want – generally that which creates an open, single market in financial services – and putting it on the table.
We have an immediate opportunity with the proposals from the Vickers commission to ring-fence investment banking from retail banking. The government is committed to introducing that here – but we should consider pushing for it to be adopted across the EU. There is a strong political case – the Vickers commission, made up of some of Europe’s top banking experts, believes it will create a more stable financial system, which other European governments keep insisting they want. With Dexia and other European banks seriously vulnerable in the euro crisis, the European banking system certainly needs some strengthening. Europe’s largest banks are generally universal ones, combining investment and retail banks, which the Vickers proposals are squarely aimed at.
European banks might complain, but it would be difficult for French and German governments to make the case against following our prudent lead. By pushing this, we would start being on the front foot, setting the agenda, and forcing the Brussels bureaucracy to spend more time on things we want, and by default (there are only so many hours in the day) less time on things we don’t want. Introducing it EU-wide would make a more level playing field across the continent. But there is another advantage, in the realpolitik, horsetrading world of Brussels negotiations. It would massively strengthen our hand with other countries on other pieces of legislation; if they wanted us to make concessions on some aspects of the Vickers reform, they would have to make concessions on something else. It is worth thinking about – it just might be a good place to start, helping ensure the EU goes in the direction we want.
Anthony Browne is a former director of the think tank Policy Exchange.