British banking bashes Brussels

Jonathan Lindsell, 16 September 2013

The City will be breathing not one but three collective sighs of relief this week. EU initiatives which would have harmed London far more than any other member states. The Financial Transaction Tax, short selling restrictions, bond sales rules and Libor regulation all seem to be going Britain’s way.

Earlier this year, Civitas publication How much does the EU cost the UK? (pp.5-6) set out many of the more damaging EU financial initiatives, such as the so-called ‘Robin Hood’ tax and various attempts to regulate London from afar. By June a leak from the European Commission suggested that tax, formally the Financial Transaction Tax, had lost most of its bite. This is fortunate: the tax could be “a disaster for UK employment, GDP and tax revenue…The 1980/90s financial tax in Sweden…drove over 50% of all trades to London and reduced bond and futures trading volume by 85% and 98%.”

Now this victory is almost a fait accompli. On Tuesday the European Council’s Legal Service leaked a 14-page memo which concluded that it would be illegal under the EU’s treaty framework for 11 Eurozone states to tax sales of stocks, bonds, derivatives and repurchase agreements. The UK government, which had launched a legal challenge to the FTT on similar grounds, was delighted that the report noted the tax “exceeded member states’ jurisdiction for taxation under the norms of international customary law”, “infringes upon the taxing competences of non-participating member states” and would be “discriminatory and likely to lead to distortion of competition to the detriment of non-participating member states”. This advice is not legally binding, but damns the Commission’s proposals.

The EU’s Paris-based ‘banking watchdog’, the European Securities and Markets Authority (ESMA) was dealt two blows last week. It had claimed the right to ban short-selling of financial instruments in emergencies – a power Europe’s highest court advisor (the European Court of Justice’s avocat general Niilo Jääskinen) urged judges to rule ESMA did not possess: “The [proposal’s] outcome is not harmonisation but the replacement of national decision-making with EU level decision-making. This goes beyond the limits of [treaty single market rules].”

This followed the Commission’s decision last Wednesday to ditch plans giving ESMA control of the Libor exchange rate, which has been the subject of recent scandals. European authorities did not trust the City to regulate Libor, after UBS and Barclays banks were found guilty of rate-rigging and fined.  The reasoning behind this particular Commission u-turn is unclear.

These precedents bode well for a future challenge – bond clearance houses. Frankfurt had been pushing for rules which would force clearance houses handling Euro-denominated currency to be based only in the Eurozone.  Chancellor George Osborne’s challenge to the proposals was based on exactly the ‘free movement of capital’ and ‘equal competition’ treaty principles that London’s recent victories depended upon.