As hard as he might try, it looks as if Gordon Brown has already lost control of the debate on the future regulation of the world's financial services industries. His pleas to President Obama and the US Congress for a co-ordinated global response sounded very fine but lacked substance and, crucially, lacked credibility. His hopes of pulling off a deal at the G20 Summit next month now look very slim.
Most of the rest of the world is not looking to the UK or the United States for a lead in reforming the way financial markets and the firms that play in them are regulated for the simple reason that they think the Anglo-US approach of the last 25 years has a lot to do with the mess the world's economies are currently in as many leading commentators are starting to point out. Europe, in particular, does not want a UK or US solution and is already busily working at its own. Last week's Larosiere report spells out a new approach that has quickly won approval in the European Commission and among key national governments in mainland Europe. The Larosiere Report? You haven't heard of it? You can be forgiven because the coverage in the UK of this key report for the European Commission by former International Monetary Fund managing director Jacques de Larosiere has been poorly covered here. Yet, it has set the EU on a course to create three new pan-national regulatory bodies - the European Banking Authority, the European Securities Authority and the European Insurance Authority.
These new regulators will be given wide powers to impose supervisory standards on national regulators, make binding decisions on technical issues (very likely to include powers over product design) and enforce adequate prudential supervision in conjunction with another new body, the European Systemic Risk Council. Certain pan-European organisations will find themselves closely regulated for the first time with credit ratings agencies at the top of the list - they are in for a very nasty shock if these recommendations go through. For the time-being, the EU envisages micro-level regulation of individual firms being left with national regulators but it sets out a course towards far greater control in the future, threatening to bring a range of other market and conduct of business issues under the remit of its new structure.
The report and the Commission make a nod in the direction of the world outside Europe's borders by urging a "deepening of the EU's bilateral financial relations with all its major partners" but here, in the very next line, is the key statement of intent "There is an opportunity for the EU to seize global leadership". This is where the battle lines will be drawn and it is hard to see Gordon Brown's voice being heard above the noise of that battle.
There are some scores to be settled with the UK among many regulators in Europe dating back to the creation of the Single Market in financial services in 1992 when the UK won a protracted argument over the balance between prudential regulation and product regulation, with the EU rules coming down firmly in favour of the former. At the time, many financial products in Germany, France, Italy and Spain were tightly regulated in terms of design and rates. All of that was replaced by a more UK orientated system of prudential supervision and it is that system that many in Europe believe has now failed, no more so that in the UK. Larosiere comes back time and again in his report to the need to regulate at much more detailed level, especially when it comes to hedge funds, over-the -counter derivatives and credit default swaps. It also has things to say on the need for greater risk retention by the issuers of securitised products and calls for common rules for what it rather vaguely refers to as "investment funds".
The UK has given a lukewarm welcome to the Larosiere report but merely praising it as a "good basis for further discussions" as Alistair Darling did this week is hardly going to win friends at the European Commission, especially as he goes on to dismiss the idea of given any new pan-European bodies powers over national regulators. Europe sees it as the agenda for those discussions and we can expect to see France and Germany pressing this at the G20 summit. They are not interested in the sort of wishy-washy talk of global co-operation that the Prime Minister peddled to the US Congress this week: they want firm action with tough new rules and see how to deliver that as the starting point for debate, not merely as an option for discussion.
If the UK financial services sector wants to engage in the real debate over the future of regulation it will be much better advised to look to Brussels rather than to Westminster.
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