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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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3.55 Evidence emphasised the increasingly important role played by global policy-makers and regulators, and the need for a sufficient degree of accountability and democratic control in relation to these international bodies, given the significant impact they have on jurisdictions around the world.69 Stakeholders also noted that a large proportion of EU-level legislation has been the necessary implementation of rules that originated at the international level.70 In this regard, criticism of European legislators for proposals or processes relating to certain pieces of legislation can sometimes be misdirected when the EU has been seeking to respond to the significant number of international standards agreed by the G20 and other global bodies.71

3.56 However, evidence also drew attention to measures in which the EU has not confined itself to following the specifics of international agreements and has departed from global standards. Notable examples include the proposal for a Financial Transaction Tax (see box), the Commission’s proposed Regulation covering benchmarks,72 and remuneration measures in CRD IV73 which are inconcsistent with international best practice as set out in the FSB Principles for Sound Compensation Practices.74 Other aspects of CRD IV have also attracted criticism from third parties for inconsistency with the international standards as set by the BCBS.75

3.57 Evidence also raised concerns that EU markets regulation was disproportionate in some areas compared to the global level, and argued that deviations from international standards can create scope for market fragmentation, regulatory arbitrage, weaken competitiveness with firms based in other countries, and contribute to challenges in agreeing terms of access between EU and non-EU countries. Stakeholders also highlighted the lack of policy coherence which can create barriers to firms conducting business internationally.76 NAPF, submission of evidence, p4.

See: City of London Law Society Regulatory Law Committee (CLLS), submission of evidence, p2; HSBC, submission of evidence, p7; IRSG, submission of evidence, p3; the Law Societies, submission of evidence, p3;

NAPF, submission of evidence, p6; and RBS, submission of evidence, p2.

See: Sharon Bowles MEP, submission of evidence, p12; and CLLS, submission of evidence, p2.

See: Business for Britain, submission of evidence, p2; BCCL, submission of evidence, p4; CLLS, submission of evidence, p13; HSBC, submission of evidence, pp2, 5; Nomura, submission of evidence, p3; and WMA, submission of evidence, p6.

For more information see: www.financialstabilityboard.org/publications/r_090925c.pdf, accessed on 12 June 2014.

See: BBA, submission of evidence, p10; Business for Britain, submission of evidence, p5; CBI, submission of evidence, p13; and CLLS, submission of evidence, p15.

Business for Britain, submission of evidence, p3. The ESRB opinion to the Commission and the co-legislators on CRD IV also highlighted the importance of amending the proposed legislation to permit national authorities ‘flexibility in the set of available policy tools to both prevent and mitigate specific risks’. The BCBS’s interim peer review of the draft text of CRD IV also found it was ‘materially non-compliant’ regarding the definition of capital and the Internal Ratings based approach to credit risk. In its Financial Stability Review, the Bank of England drew attention to the number of exemptions the EU had introduced regarding credit valuation adjustment (CVA) charges requirements: ‘EU legislators have increased the number of counterparties that banks can exempt from such requirements. Credit quality deterioration was a major source of loss during the crisis. Under Basel III, the only exemptions are for transactions with a central counterparty and securities financing. CRD IV contains broader exemptions... leaving a significant gap in the CRD IV framework. A preliminary estimate, based on data from a small sample of banks, suggests that the impact of these exemptions might reduce a

bank’s CVA charge by up to 50%’. See Bank of England, Financial Stability Review (2013), p42. Available at:

www.bankofengland.co.uk/publications/Documents/fsr/2013/fsrfull1306.pdf, accessed on 14 June 2014.

See: IRSG, submission of evidence, p12; and Barclays, submission of evidence, p6. The latter identifies

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Financial Transaction Tax and Extraterritoriality The proposal for a Financial Transaction Tax (FTT) aims to create a common system of taxation for financial transactions across participating Member States. It is being taken forward by 11 Member States under the enhanced co-operation procedure which is set out in the Treaties and allows nine or more Member States to take forward a proposal to apply to do so where agreement cannot be agreed amongst all 28 Member States, provided the requirements set out in the Treaties are met.1 The UK is not participating in the FTT under enhanced co-operation, and has serious legal concerns about the territorial reach of the tax as proposed.

The FTT was considered as part of the Taxation report in semester one of the Balance of Competences Review. However, it was raised as a key issue in many pieces of evidence to this report.2 They draw attention to concerns about the FTT relating to extraterritoriality, proportionality, the impact on growth, competitiveness and employment in both the UK and EU, the use of enhanced cooperation procedures in ways that may damage the Single Market and the rights of Member States, the poor use of impact assessments, and other damaging and unintended consequences.

Evidence from the Law Societies emphasised, among other above concerns, the extraterritorial effect posed by the tax which will have an adverse effect on Member States not imposing the FTT as well as countries outside the EU.3 The UK Government has also voiced concerns that the tax will also apply to entities in non-participating Member States where their trading counterparty is headquartered in the FTT area, regardless of the place of issuance of the instrument being traded. Evidence from Business for Britain, as well as reports from the House of Lords European Union Committee, referred to risks of the FTT driving business offshore. Business for Britain highlighted the experience of Sweden in the 1980s where a similar transaction tax resulted in around 80% of business going offshore and that the tax was repealed within a few years.4 The IRSG also cited evidence it commissioned which estimated that the cost of the FTT on the UK Government would be £3.95bn.5 Evidence from Fresh Start also provides a detailed case study on the FTT.

These requirements are notably set out in Articles 20 TEU and 326-327 and 332 TFEU, and include respecting the competences, rights and obligations of those Member States which do not participate in it.

See: AIG, David Campbell Bannerman MEP, BATS Chi-X, British Chamber of Commerce for Luxembourg, BBA, CLLS, FCA Practitioners Panel, FBCC, Fresh Start, Lord Flight, IMA, IRSG, the Law Societies, NAPF, RBS, Standard Life and WMA, submissions of evidence.

The Law Societies, submission of evidence, p7.

Business for Britain, submission of evidence, p2.

See: IRSG, The Impact of a Financial Transaction Tax on Corporate and Sovereign Debt (2013).

3.58 In light of the new international commitments following the crisis, there has been an increasing focus in jurisdictions on the more detailed and technical implementation of standards and the translation of these into national laws. It is perhaps inevitable, given the different regional and national characteristics of markets and financial institutions, that commitments and standards will be implemented in different ways.

3.59 The challenge is to ensure that, even if implemented differently, there is at least a high degree of consistency between rules in various jurisdictions and that conflict is avoided.

A failure to do so can create fragmented markets, inhibiting firms from transacting across borders and creating scope for arbitrage. Concerns over the inappropriate application or absence of common standards can also encourage countries to impose their own standards on firms based in other jurisdictions (‘extraterritoriality’).

54 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

3.60 A notable example of potential fragmentation and extraterritoriality raised in evidence relates to the discussions on the treatment of OTC derivatives between the EU and the US.

Evidence from a roundtable hosted by the Franco-British Chamber of Commerce noted that, ‘Despite strong standard-setting bodies, markets were still fragmented [...]. There isn’t a sufficiently strong international framework. IOSCO and the FSB come out with good guidelines, but implementation in the EU and US lead in different directions’.

3.61 Structural banking reforms were also highlighted in evidence as an area that may give rise to fragmentation, given the scope for different approaches across jurisdictions. Industry stakeholders emphasised the potential costs and challenges in trying to ensure they are compliant with all relevant regulation. They also questioned the appropriateness of the EU bringing forward legislative proposals on structural banking reforms at the start of 2014 given uncertainty that the new Commissioners and new MEPs, due to be in post from the middle of 2014, will support the same approach.77

3.62 Most stakeholders regarded the G20 and SSBs as the appropriate fora for resolving issues of fragmentation and extraterritoriality, although there were doubts that the existing framework and structures are sufficient to facilitate action in a timely manner to address these problems.78 Differences Between Global, EU and National Rules

3.63 Given the global nature of financial markets and the international framework which establishes overarching standards for financial services regulation, some stakeholders considered how different rules would be in the UK if they were not subject to EU legislation.

3.64 Stakeholders generally regarded the UK as having strong influence and representation at the global-level bodies. For instance, the BBA commented that, ‘The UK... maintains a leading voice in [international fora] discussions and it can therefore be argued that the UK has materially shaped the parameters of debate before the EU implementation process begins and remains well placed to continue to shape EU policy-making’. Evidence from Sharon Bowles MEP noted that, ‘International level agreements often suit the UK well due to UK engagement at the international level and the fact that international standards setters are focussed on larger and systemic financial entities that correlates to the structure of much of the UK financial sector’.

3.65 On the basis that the global level is responsible for the high-level standards which set the direction for and shape of EU legislation and that the UK was considered influential at the global level, some stakeholders held the view that UK financial services regulation would not necessarily be particularly different from current rules if it was not subject to EU legislation. The extent to which UK rules would be expected to diverge from EU rules should, however, be considered in light of the extent to which the EU is considered to have departed from international standards (see previous section).

3.66 Evidence from Lloyd’s of London noted that, ‘UK prudential insurance regulation would not be very different if the UK was solely responsible for the rules’. In the banking sector, the BBA and RBS similarly considered that UK regulation would not necessarily be particularly different, given the UK’s commitment to global standards. They did, however, highlight that if the UK had sole responsibility then implementation of rules may be swifter, as would be expected if only one Member State needed to agree the rules compared to 28. This See: Barclays, submission of evidence, p4; HSBC, submission of evidence, p6; and IRSG, submission of

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could make it easier to undertake equivalence assessments and agree access with other non-EU countries as well as reduce the scope for fragmentation and arbitrage.79

3.67 Others argued that the UK’s ability to take advantage of greater flexibility in considering specific national characteristics when applying the rules would create some further benefits, especially in more domestic and local markets such as the retail financial services sector.80 The British Private Equity & Venture Capital Association (BVCA) suggested that, given sole responsibility, the UK would take forward processes that are more ‘evidencebased and principles focused [...] in contrast to the EU’s “rules-based” approach’.

3.68 A number of stakeholders noted that in some cases, and based on past experience, UK rules may be tougher than EU regulation.81 The IRSG referred to the UK’s influence in the G20 and suggested that, ‘Undoubtedly, there are some areas of EU rules where the UK would have taken a different approach. However, there are many examples where the UK would have taken a tougher stance’, noting as an example, the structural banking reforms in the Financial Services (Banking Reform ) Act 2013 compared to current European proposals.82

3.69 On the more critical end of the spectrum, HSBC noted that, ‘UK-only regulation would not necessarily be better for the UK than EU regulation, with all its imperfections’, while APFA anticipated that ‘if the UK were solely responsible for the rules, they would not be very different to how they are now, and more heavy handed and onerous than the rest of Europe’.

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