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