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«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market: Financial Services and the Free ...»

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Review of the Balance of

Competences between the

United Kingdom and the

European Union

The Single Market:

Financial Services and the

Free Movement of Capital

Summer 2014

Review of the Balance of

Competences between the

United Kingdom and the

European Union

The Single Market:

Financial Services and the

Free Movement of Capital

© Crown copyright 2014

You may re-use this information

(excluding logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/ doc/open-government-licence/ or e-mail: psi@nationalarchives.gsi.gov.uk.

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. Any enquiries regarding this publication should be sent to us at BalanceofCompetences@cabinet-office.gsi.gov.uk.

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gcn.civilservice.gov.uk/ Contents Executive Summary 5 Introduction 9 Chapter 1: Development of EU Competence 13 Chapter 2: Current State of Competence 21 Chapter 3: Impact on the National Interest 33 A. The UK Financial Services Sector, 34 Access to the Single Market and the Free Movement of Capital B. The Global Nature of Financial Rules and 49 Markets C. Development of the Banking Union and 65 EU-Level Supervision D. Impact of the Crisis on the EU’s Approach 74 to Rule-Making Chapter 4: EU Policy-Making Process 85 Chapter 5: Future Options and Challenges 103 Appendix I: Overview of sectoral views submitted to 113 this report Annex A: Abbreviations 116 Annex B: List of Evidence Received 120 (including oral evidence) Annex C: Engagement Events 123 Annex D: Other Sources 132 Annex E: Treaty Bases Most Relevant to Financial 135 Services and the Free Movement of Capital Annex F: Key EU Financial Services Legislation 138 Executive Summary This report examines the balance of competences between the European Union and the United Kingdom in the area of financial services and the Free Movement of Capital, and whether this balance is appropriate to the national interest. It has been led by HM Treasury and reflects evidence submitted by experts, non-governmental organisations, businesses, Members of Parliament and other interested parties, either in writing or orally, as well as other relevant material. Where appropriate, the report sets out the current position agreed within the Coalition Government for handling this policy area in the EU. It does not predetermine or prejudge proposals that either Coalition party may make in the future for changes either to the EU or to the balance of competences.

Responses to the Call for Evidence, and evidence from relevant public sources, suggest that in the areas covered the balance of competences, as intended in the EU Treaties, is broadly appropriate, but is often undermined by poor policy-making. For the balance to be fully appropriate in the future, the EU should undertake significant reform of the existing EU policymaking framework and processes, take a more proportionate approach to legislation in all subsectors, and give greater consideration to the principle of subsidiarity in retail market sectors.

This is supported by evidence that:

• Access to the single market in financial services and the Free Movement of Capital provides significant benefits for the UK financial services industry and for consumers – a number of industry stakeholders stressed the UK’s access to the Single Market as a reason to locate in the UK and argued that further deepening of the Single Market would bring additional benefits;

• There are, however, significant weaknesses in the EU’s current approach to harmonisation and policy-making – stakeholders considered the existing policymaking framework to have been inadequate for the type, volume and pace of legislation experienced in the last five years, and the quality of consultations, impact assessments and drafting of detailed rules to have not been sufficiently high; and

• Focused reform is required to ensure the success of the Single Market and justify the current balance of competences – a majority of respondents believed that a programme of reform is achievable and could correct current deficiencies, although wide concerns related to the development of the euro area and the banking union implied that Treaty change should remain an option, while some respondents argued for a repatriation of powers.

6 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital Chapter One sets out the historical development of the single market in financial services and the Free Movement of Capital. EU Directives in the 1970s, which were focused on regulating banks and insurers, established a foundation for market opening. However, by the end of the 1990s, a genuine single market in financial services had not been created, and the high costs of capital compared to other markets hindered economic growth. This led to the Financial Services Action Plan and a vision to create a single rulebook for firms. Subsequent changes, particularly in response to the globalisation of financial services and the financial crisis, have led to a shift from market opening to a focus on financial stability, consumer protection and reducing the scope for regulatory and supervisory arbitrage.

Chapter Two sets out the current legal framework and key pieces of legislation that regulate financial services and facilitate the Free Movement of Capital in the Single Market. It notes the various treaties that underpin measures to promote the single wholesale market for financial services, summarises the EU legislative processes, and describes the rationale and focus of the major pieces of EU legislation across financial services sectors.

Chapter Three considers the role and impact of financial services and the Free Movement of Capital on the UK’s national interest. Based on the evidence submitted, it considers the balance and use of EU and UK competences and the benefits and costs to firms and individuals. In

particular, the chapter considers four overarching themes:

A. The importance of the financial services sector to the UK and the benefits of access to the Single Market and the Free Movement of Capital – The financial services sector in the UK is larger and more important compared to the sector in other major EU Member States. It not only makes a significant contribution to the economy, but also presents a number of risks, as highlighted in the recent crisis. There was broad consensus in evidence and analysis about the benefits of access to the single market in financial services, although this was not felt equally across all sectors.

Both the UK financial services sector and the broader UK economy benefit from the Free Movement of Capital, which is protected by EU Treaty, and it is important that exceptions to the freedom exist only where necessary;

B. The global nature of financial services and its impact on the EU’s approach to rules and markets – The increasingly global nature of financial services has resulted in an international framework of regulatory standards. These standards have been significantly rewritten in the years since the crisis, providing the context for the EU’s recent approach to regulation. Evidence emphasised that the UK needs to ensure it has adequate influence in financial services at both the global and EU level. There were also strong calls for the EU to ensure it facilitates access for financial services firms between EU and non-EU markets and does not adopt a protectionist approach;

C. The impact of euro area developments, notably the banking union, and EUlevel supervision on the Single Market – Respondents broadly considered the establishment of the banking union following the euro area crisis to be necessary.

However, stakeholders raised a number of concerns about the possible implications of these developments for the integrity of the Single Market and the UK’s national interest. There were a number of calls for the EU to ensure that the development of the banking union does not come at the expense of Member States that choose not to participate. Similarly, the introduction of the new European System of Financial Supervision was generally considered a positive development, although there was some concern regarding its future role with regard to national authorities; and Executive Summary 7 D. The EU’s approach to rule-making following the financial crisis – The shift in focus from market-opening to financial stability in the last five years has raised questions regarding the quality of the policy-making process and the resulting rules.

Although there is broad consensus about the need for EU-level regulation to underpin the single market in financial services, evidence from stakeholders raised significant concerns regarding the recent pace, volume and focus of EU legislation, the failure to differentiate between financial services sub-sectors, the lack of proportionality, and insufficient recognition of the subsidiarity principle, especially in the retail sector.

Chapter Four considers in more detail, and in light of the volume of concerns and issues raised in evidence, the weaknesses in the existing EU policy-making framework and processes. It sets out the widespread view from submissions and other sources that the current legislative framework has not been adequate for the type, volume or pace of legislation experienced in the wake of the financial crisis. Evidence suggests that the quality of consultations, impact assessments and drafting of detailed rules has not always been sufficiently high, and that technical competence on financial services issues within EU institutions should be developed and strengthened.

Chapter Five considers future options and challenges relating to the EU’s competences and, in light of concerns raised in evidence, suggests areas for further consideration and exploration.

It considers issues related to the global, EU, euro area and national dimensions in turn, and in particular considers the implications of the international regulatory framework and global markets, the impact of the euro area and the banking union on the UK’s future national interest, and how to improve the quality of EU-level rules.

Introduction This report is one of 32 produced as part of the Balance of Competences Review. The Foreign Secretary launched the Review in Parliament on 12 July 2012, taking forward the Coalition commitment to examine the balance of competences between the UK and the European Union.

It will provide an analysis of what the UK’s membership of the EU means for the UK national interest. It aims to deepen public and Parliamentary understanding of the nature of the UK’s membership of the EU and provide a constructive and serious contribution to the national and wider European debate about modernising, reforming and improving the EU in the face of collective challenges. It has not been tasked with producing specific recommendations, looking at alternative models for Britain’s overall relationship with the EU, or considering whether UK membership of the EU is in the UK’s national interest.

The review is broken down into a series of reports on specific areas of EU competence, spread over four semesters between 2012 and 2014. More information on the review, including the timing of publication of reports, can be found at www.gov.uk/review-of-the-balance-ofcompetences.

The Nature of this Report The analysis in this report is based on evidence gathered following a Call for Evidence from October 2013 to January 2014.1 It draws on written evidence, notes of discussions, and existing material brought to our attention by interested parties, such as reports by parliamentary select committees or the European Commission.

Around 70 individuals and organisations, including trade associations on behalf of their members, submitted evidence – a full list can be found in Annex B, and all submissions are published alongside this report. A review of relevant public material, as well as opinions received in the course of regular Government business from a range of organisations, people and countries, has also been drawn on. Annex D sets out references and sources that informed this report.

An externally commissioned literature review on the Free Movement of Capital has also informed, and is published alongside, this report.

HMG, Balance of Competences Review: Single Market – Financial Services and the Free Movement of Capital, Call for Evidence (2013). Evidence and material submitted after the end of the call for evidence has, wherever possible, been taken into account.

10 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital The Objectives of this Report A broad definition of competence is used for the purposes of the review. Put simply, competence in this context is about everything deriving from EU law that affects what happens in the UK. That means examining all the areas where the EU Treaties give the EU competence to act, including the provisions in the EU Treaties giving the EU institutions the power to legislate, adopt non-legislative acts or take any other sort of action. It also means examining areas where the Treaties set out specific rules binding directly on the Member States without needing any further action by the EU institutions.

Definition of EU Competence The EU’s competences are set out in the EU Treaties, which provide the basis for any actions the EU institutions take. The EU may act only where the EU Treaties so provide and within the limits of the competences conferred on it by the EU Treaties. Where the Treaties do not confer competences on the EU, they remain with the Member States.

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