The City of London is resisting EU regulatory moves but can the UK – in or out of Europe – stop them?

19th May 2013


The City of London faces two huge challenges from the European Union. One is what is famously referred to as a Tobin tax which would see a levy on many Eurozone financial transactions not directly in the UK but with huge implications for UK financial services. Another is a regulatory move to limit bankers’ bonuses by the increasingly tough EU regulators.

The Tobin tax, or more accurately financial transactions tax, is meant to do two things, first raise revenue – though this was originally intended to help the developing world – and second to calm down markets by making the rather frenzied rate at which transactions occur slow down. The tax will be 0.1 per cent on the value of a share trade or bond transaction and 0.01 per cent on derivative transactions. The imposition on share and bond trading has the greater implication for mainstream investors. It will cost more to deal in those affected shares and bonds, and such trades are many fund managers’ bread and butter.

The UK does not exactly stand alone. For example, German multinationals such as Siemans and Bayer have also expressed their opposition saying it would not just hurt their day to day business operations but also their pension funding as the Financial Times reported earlier in May.

French commerce isn’t much more impressed as the Telegraph reports. French finance believes they are losing billions of euros already from having gone ahead already. Italy is the other country to embrace the tax so far, though eleven eurozone countries are set to impose the tax from 2014.

The City cannot realistically offer much shelter because the tax applies where it involves assets from one of the participating countries or even where a counter-party – providing some of insurance perhaps through a derivative contract – is from an affected eurozone country. The UK believes that it will hand other big financial centres such as New York and Singapore a huge advantage. The UK Government position is that the tax can only ever realistically be applied if done so globally, but given the measure is not subject to a veto, it is very difficult to see how the UK can stop it. Britain is trying to minimise the impact on the UK and in April challenged the aspects of FTT that could hit the UK as the Huffington Post reports.

For some though, the hit to the City will be unprecedented. This is the Telegraph’s Ambrose Evans-Pritchard – “The fact is that for the first time in EU history, a major country has been overridden in a field where it is the dominant player and has a vital interest. The rules of the game are that Germany is never threatened on the car industry, nor France on agriculture. This principle has been breached. It is a declaration of economic war”. Very tough words.

The problem is that unless the tax collapses under its own weight, it will serve to poison relations whether the UK remains in the EU, retains membership in a renegotiated structure or leaves. But it is adding grist to the mill of the in or out debate.

In fact, Wolfgang Munchau writing in the Financial Times agrees with Lord Lawson that the UK does not benefit from the EU partly because it doesn’t have the industrial capacity to take full advantage and that the financial interests of the City are not really looked after in European structures. Indeed they are threatened. However he also says that the coming banking union and increased integration means that the City cannot keep its status as the main financial centre for Europe, because the UK simply will not join the euro.

That might suggest that the growth in the City since the inception of the euro was actually a last hurrah at least for some types of transaction. But as we say, in or out, there may not be much the UK can do about it. Indeed to continue to influence things, one might say we have to sign up for more Europe not less, and that is pretty much politically impossible.

The second issue of massive concern to the City is that of the bankers’ bonus cap. This comes from the European Banking Authority, one of a set of new EU regulators set up after the banking crisis. For the moment, at least, the EBA can impose policy on the UK. This is also through qualified majority voting and we can’t veto things.

This of course is a very interesting argument to put in front of the British public. A recent change of definition from the EBA means that its bonus cap – bonuses can’t go above 100 per cent of salary or with specific shareholder approval double that – will hit as many as 10 times the number of bankers. The EBA has upped the ante by saying the rules apply to anyone earning euro 500,000 rather than trying to define things by role. Indeed, this is a tricky argument to have with and about the EU.

One has to wonder how many of the UK voting public who don’t work in the City or City dependent businesses would think that sounds unfair. It is likely that in response banks would reorganise their remuneration by bumping up salaries, but it does restrict their freedom of action as businesses. Salaries are a fixed cost and more of a strain on capital. Bonuses are not. Even the Guardian’s Nils Pratley , no champion of City interests, has questioned whether this is the best solution. Others though are backing the plan such as the High Pay Commission’s Deborah Hargreaves quoted in the Observer while warning that bankers will duck the measure somehow.

The EBA is talking about those on salaries of £420,000. That means a salary of £420,000 plus bonus of £420,000 or even double that with special shareholder permission. So while the employment and balance of payments arguments may strike a chord with the public, the bonus cap may not sound unreasonable to the man or women on the Clapham omnibus or indeed any omnibus anywhere else in the UK.

It is arguable that for the public at large, the biggest example of where the EU has interfered in their life and how it relates to finance is actually over the enforcement of the gender directive. As if to fully illustrate just what can happen in a huge confederation, a Belgium consumer organisation went to court claiming that the gender directive meant it is wrong for insurers to price automatically for sex. The European Court of Justice agreed. From the end of last year, insurance had to be equalised. Arguably women now pay more for motor insurance and men pay less. Insurers can no longer assume women are less risky drivers. And more important for investors, men may get a smaller annuity and women a bigger one, because the insurer can no longer price for women to live longer (thus costing the insurer more in payments).

This wasn’t even due to a move towards more regulation, but from enforcement of an existing regulation, an initiative taken by an outside organisation. The Conservative civil war continues with Lord Howe entering on the pro-Europe side and saying the the Conservatives are losing their heads over Europe. But the substance of the argument as it relates to the City is over a transaction tax which the UK can’t stop no matter whether it is in or out and over a limit to bankers’ bonuses which, all things being equal, many voters of all sorts of hues might well agree with.

Quit the EU – save bankers’ bonuses does not sound like an effective election poster. But the UK government is quite right to worry about the effect on jobs.


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