UK finance sector perspective on EU financial regulation

John Cooke, Chairman, Liberalisation of Trade in Services (LOTIS) Committee, TheCityUK

On 15 March 2011 I was invited to speak at an UKSIF Analyst Seminar on EU Policy. The Seminar addressed relevant EU policy for responsible financial services – current and forthcoming consultations, key legislation as well as drivers for change. It aimed at giving insights on reconciling UK perspectives vs. continental European perspectives. 

Penny Shepherd (Chief Executive, UKSIF) covered the UK perspective on EU policy and identified the areas where the UK and continental Europe tend to differ, and the reasons why, with much financial services regulation moving to the European level, UKSIF is trying to explore and reconcile these differences. Matt Christensen (EUROSIF) covered some of the recent EU policy consultations to which EUROSIF has responded, such as: the Single Market Act, the Securities Law Directive, Corporate Governance in Financial Institutions and Remuneration Policies, and others.

I offered the ‘UK finance sector perspective’ on EU financial regulation – summarised in the blog post below. Rather than offering deep-dive detail into specific fields: it aims to cover some UK perceptions of relevant EU policy for responsible financial services – particularly what I see as some key drivers for change.

Perspectives on Europe

I found it fascinating to read EUROSIF’s “European Socially Responsible Investment (SRI) Study 2010”. For, in terms of global SRI data, it depicts something that seems relatively rare – Europe in the lead. Taking total world SRI in 2008-10 (the national dates vary) as €7,594bn, Europe (2009) accounted for €4,986bn, or nearly two-thirds (66%). The US accounted for well over a quarter (28%), and Canada, Australia and Japan were the most significant within the remaining 6%. I found it very interesting to note also that ‘while methodologies of SRI market studies from the various regional Social Investment Fora are converging, SRI practices can be quite specific from one region to another. As an example, shareholders advocacy, i.e. proposing to sponsor or co-sponsor shareholder resolution(s) based on ESG issues, is specific to the US market, for both cultural and regulatory reasons.’

I will not go into all the considerations that could affect Europe’s performance in the future.  Clearly, these cover global trends, internal EU trends, cultural factors – as already noticed by the EUROSIF Study in relation into US advocacy practices – and (although others will have wiser things to say on this than I have) the global search for yield. But, from my trade in financial services vantage-point, I should like to focus on some of the issues that could bear on how Europe has taken the lead in SRI over the past decade and how European thinking develops in the future.

Many commentators point to the steady growth in SRI, in Europe and elsewhere, despite the impact of the global financial crisis in 2008 and later. It is contended that, even taking account of the sharp deceleration in economic growth during the past year or two, SRI in Europe will probably continue to follow a resilient path overall, whatever variations there may be in different EU member-states. It is even said that the major structural adaptations that are taking place in the financial sector, overhauling a whole range of previously accepted strategies and processes, may actually lead to lead to an even greater variety of more responsible forms of investments. Europe, it is said, “thrives on a crisis” and the true merits of sustainable investing should and will become even clearer when social or environmental crises strike and call for a socially responsible financial response.

Naturally, all of us interested in socially responsible investment hope that this will prove true. I have no firm evidence-base for challenging this point of view. But I just wonder whether it may risk showing a degree of complacency. It could be said, for instance, that SRI grew and flourished – like so many other financial activities – during the long period of financial services expansion up to 2008, on the back of booming economies in so many EU member-states.  If that it so, we are now set for a period of change. 

I do not propose to go into all the specific regulatory changes that have followed, or will follow, the crisis. We all know of the big changes in European and UK regulatory architecture and legislation that spring from the De Larosière Report, the Turner Review, and our own Treasury’s proposals for a New Approach to Financial Regulation. And, in different representative groups, trade associations, and European bodies, we spend a great deal of time discussing them. But I would like to point to some other developments affecting the EU’s future, and that of the UK in it, which in turn could affect the prospects for SRI.

The first is polarisation within Europe and, consequently, differing views of what Europe is for. We all got used, in the long boom that preceded the recent crisis, to thinking of the European project as a tide which lifted all boats. We can now see that the crisis has affected European economies differentially, some of the heaviest effects being felt by the weakest. In terms of European ‘solidarity’ – the code-word for transfers between richer and poorer member-states via the ‘Community method’ – there is less of a cake to share round, and more reluctance to share it. We have, I think, to expect that this will lead to a different style of European politics and policies – a move away from what political scientists call ‘value-creating’ politics (i.e. a readiness to share) towards “value-claiming” politics (i.e. a wish to safeguard and to secure advantage).

We are already seeing a particular subset of these questions in the development of the politics of the Eurozone. The long crisis of the Euro, the pressures on Germany to bear the bulk of the burden of resourcing a Euro-stability package, reluctance within the German electorate to do so, the Franco-German Competitiveness Pact (and its internal stresses) together raise two questions with, I would suppose, profound implications for the future of investment within Europe. The first is whether specific policies for Eurozone integration will develop. The second is how much influence the UK, outside the Eurozone, can have on such policies. All this will, I think, lead to uncertainty for the investment sector.

Mapped across these factors are Treaty developments that will affect the EU’s future. The Treaty of Lisbon has profoundly altered the relative roles of the different EU institutions. The European Parliament is its principal beneficiary: MEPs are now able to bargain the powers that they have in so many areas to achieve results in fields where, arguably, they still have no formal influence. For those of us dealing with SRI this could have very beneficial effects: many MEPs are naturally attracted towards SRI. But the effects will only be truly beneficial if MEPs can be brought to see that the socially valuable changes they seek in so many fields can only be achieved if the Union as a whole remains wealth-creating and competitive. That argument has still to be played out and won.

The wider economic background – Europe’s competitive place in the world – is also critical. The EU must follow economic and commercial policies attuned to its advantages in terms of economic scale, growth, employment and competitiveness. This means focusing on services, given that the services sector is now the primary contributor to growth. European private-sector services businesses already contribute more than 55% of EU GDP and account for more than 50% of all EU employment (this rises to 77% for GDP and employment across all public and private sector services). The EU is also the largest exporter and importer of services, with more than 26% of total world trade in services (extra EU). Moreover, 65% of all outward foreign direct investment (FDI) by European businesses (extra-EU) and more than 80% of all FDI coming into the EU is invested into services sectors. With services trade comprising only 28% of EU external trade, there is huge potential scope for expansion, with the promise of enhanced EU competitiveness and prosperity. Yet over recent years international trade in services has remained at only 15-16% of world exports. Only if the EU can expand its business in the fields in which it is most competitive will it be able sustain the huge social costs (and the yields necessary to finance them) that go with an ageing society in a mature economy.

Implications for the UK

For us in UK financial services, all this could have some very particular and specific effects and bring some particular challenges. I will look at two.

The first concerns how EU policies bear on the UK. It is estimated that, if London’s financial services cluster did not exist, EU GDP would suffer an immediate reduction of €33 billion. The true significance of the sector is greater still when related professional and support services are taken into account. In EU discussions of financial services, the UK has always been something of an outlier: we have the largest market in the EU for financial services (no other EU Member State has a financial services sector (wholesale or retail) which is close to being as prominent as that of the UK), and, out of the major EU member-state economies, we are the most dependent on our international financial services market. Unsurprisingly, most other member-states do not share our interests. They – particularly the newer member-states – are much readier than the UK to be ‘policy-takers’, not ‘policy-makers’, in financial services and financial services regulation. Before the crisis this did not matter too much. It now matters a great deal more.

The second concerns the wider task of actually getting our views across to our colleagues in the EU. We need to make a lobbying effort as never before. And lobbying is not something that we in the UK are used to. Our own legislature – which tends to legislate in general terms, granting powers for the executive to exercise – has historically not been lobbied as much as, say, the US Congress. Nor have we needed to lobby in Europe, as long as MEPs were relatively weak and the tendency of EU legislation was towards Directives rather than Regulations. All that is now changing. The changes create a climate in which the UK is not necessarily operating from a position of strength. We are under-represented in the EU institutions in terms of UK nationals in significant roles. We have a government which – as Conservative policy towards the UK Conservative MEPs shows – is lukewarm towards the levers of power in Europe, often thinking adversarially in terms of ‘sovereignty’ and ‘red lines’ rather than in terms of the Realpolitik of how to maximise influence.

In TheCityUK we are taking an approach which we hope may at least go some way to tackling both these effects and challenges. We are actively seeking to form alliances between UK financial centres and those in other European member-states. One shared vehicle for this is the European Financial Centres Round Table. This brings together representatives from financial capitals and other financial centres across the EU, with the aim of ensuring that we understand each other in terms of our common interests and how we can promote them together. Common action will, we hope, help to identify common interests, reduce the distance between ‘policy-makers’ and ‘policy-takers’, and ease the task of getting our views across. Perhaps this initiative offers openings for UKSIF and EUROSIF as a way of taking common interests forward. I certainly hope so.

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