Would a stand alone financial services commissioner be a curse or a blessing?

There’s a bit of a debate going on at the moment over whether splitting up the internal market portfolio in the next European Commission is a good or bad thing for UK interests. The idea is to separate financial services from the wider internal market portfolio, to create a more manageable brief and avoid a scenario whereby an activist Commissioner turns this portfolio into a financial services one anyway, neglecting the many other crucial single market issues such as professional services, energy and digital services.

The idea has been subject to a bit of push-back with some worrying that a new “financial services tsar” will turn against the City, while making it more likely that the Commission develops a Eurozone-bias in its financial services legislation. The British Bankers’ Association has come out against the idea, for example. 

There is undoubtedly a risk here: if a free-standing financial services brief goes to a candidate who is anti-free markets, doesn't get financial services and who wants to pursue Eurozone-tailored solutions at the expense of the single market, then of course, it would be a bit of a disaster. However:

• Remember, we’ve lived with a 'financial tsar' over the last fine years. His name is Michel Barnier. Though there are now those within the UK Government who say Barnier “wasn't that bad after all”, it was clear that he saw his primary mission as restricting and controlling financial activity. He focused almost all his energy on this to the detriment of wider internal market issues. 
• Under Barnier’s watch the integrity of the single market has been mostly protected – for example there are now non-discrimination provisions in laws such as MiFID and EMIR – however it has been and remains a daily struggle and most of these protections were inserted by member states during the negotiation process. Let’s not forget, this is the man who has played a leading role in the drive for a Financial Transaction Tax and the banker’s bonus cap. Furthermore, the original proposal for a eurozone banking union transferred huge amounts of power to the Commission and put a eurozone focused brief right at its core (to the chagrin of more than just the UK). 
• More importantly, however, while financial services is hugely important for the UK national interest, it’s not the only interest. The problem with merging financial services and the wider internal market is that the latter tends to get neglected given all the focus on the likes of banking union and regulating sprawling multinational financial institutions. An active Commissioner dedicated to liberalising the single market in services, digital and energy could be hugely beneficial at the moment, particularly since the appetite for a new push in some of these areas may be growing across Europe. Also, this will form a key plank in Cameron’s renegotiation strategy. 
• Splitting off financial services is the only chance the UK has of getting internal market – which even without financial services (for the reasons described above) would be a big prize. 
• While it is often said that keeping financial services inside internal market ties it to the single market, the point also runs both ways. For example, outside the internal market brief, more attention may be paid to the legal justification for financial services regulation rather than it simply being pushed through under a single market justification as is usually the case. 
• In terms of Eurozone-bias – we’re as concerned about it as anyone, as we flagged up as early as 2011 (though we don’t believe that the Eurozone will organise itself as a perfectly coherent entity any time soon) – the key for this is to keep financial services as far away from the Economic and Monetary affairs brief as possible, which for the most part looks to be taking place. 

So it could go go either way. However, you have to compare it against what has gone before and what the likely alternative is. Cameron would have to screw it up badly to make the de facto division of labour worse in this area than what was the case in the previous Commission.

The long lost Liikanen report returns – but it looks pretty different

Has the Liikanen report become the Barnier plan?

Update 30/01/14 11:45:

Some eagle eyed HM Treasury officials have flagged up that the recitals of the proposal (the preamble points before the articles of the regulation) do allow for the derogation to apply to secondary legislation as long as the key primary legislation has been passed. As we note below, this is the case with Vickers and the UK therefore certainly counts for the derogation. It is a bit strange that this isn't also spelt out in the article of the proposal but its inclusion is likely to be more that sufficient for the UK.

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Okay, maybe long lost is an exaggeration, but it’s certainly been off the front line agenda for some time.

The time away from the spotlight has been used to significantly overhaul the European Commission’s flagship proposal on reforming the banking sector in the aftermath of the crisis.

Here’s the full proposal, out this morning, while here are the press release and Q&A.

While the proposal was always expected to be the offspring of the Liikanen report, in this case the apple has fallen quite far from the tree. The proposal is quite a change from the original report and as expected focuses more on a Volcker-style rule on proprietary trading rather than a significant separation of large banks. That said, the focus remains on separating off risky trading activities, meaning the main impact is a lessening of scope. We outline our thoughts below.

A reform overtaken by events?
While this was originally flagged as a key proposal, it has been a long time coming. In the meantime, a new single supervisor has been created, new plans on capital requirements, a new macro prudential framework, new plans on bank bail-ins and a new bank resolution scheme have all been substantially developed. The new framework for the financial sector has largely grown up without this proposal, and how exactly it will fit in – both in terms of timeline and structure – remains unclear.

An EU Volcker rule – the Barnier rule?
The key part of the new proposal is a ban on “proprietary trading in financial instruments and commodities, i.e. trading on own account for the sole purpose of making profit for the bank.” While this is well intentioned, it does come with some complications:

• It has proved very difficult to identify what exactly classifies as proprietary trading, compared to necessary trading to manage risk and to act as a market-maker.
• The current definition in the proposal is fairly narrow, and refers to activities specifically dedicated to making a profit for the bank itself. In other words, it looks as if it could be fairly easily side-stepped. It also exempts trading of government bonds and money market instruments for cash management.

Separation power – moving away from national control?
As we have noted before, the prospect of a supranational body ordering the break-up of a flagship national bank has the potential to be incredibly explosive. The banking union has brought this closer, but final decision on how to resolve a bank remains mostly national. This proposal would allow such a decision to be taken not just to resolve a bank, but also if its non-retail activity was impacting financial stability. However, it seems that the final say will now rest with the ‘competent authority’ (a definition which is never spelled out), which in the case of large eurozone banks would likely be the ECB as the SSM (Single Supervisory Mechanism).

Has the UK secured a derogation?
As expected, a clause has been included on a general derogation (not specific and only applying to the separation rule not the prop trading ban) which allows for the rules on separation to be superseded by any national rules which aim to achieve the same goals. While Vickers would certainly qualify on this front, the text specifies that the derogation can only apply to legislation adopted before 29/01/2014. Currently, all legislation relating to Vickers is not expected to be adopted in the UK until mid-2015. However, the key banking reform act (which includes the ring-fencing plans) was made into law in December.

For the most part then, it seems the UK has secured a derogation, which can be put down as a small but important win for the government. Plenty of other states have also secured scope for their national plans.There is clear encouragement in the wording for states who are yet to put a comprehensive system in place, to adopt the EU framework. That said, with lots of different national plans in place, one has to question how effective this system will really be.

A long way to go
As the points above suggest, this remains a controversial proposal and negotiations will be tricky. Little should happen this year, due to the European Parliament elections and the new Commission entering office. Assuming the next Commission picks up the same proposal (which is not guaranteed) the aim is to have the necessary legislative acts approved by January 2016, with the prop trading ban coming into force at the start of 2017 and the separation powers in mid-2018. As with some of the other regulations, it seems the EU response to the financial crisis will only be in place a decade after the crisis hit.

These are just some of the key points of contention upon first reading. There is much more to go in this process with the input of member states and the European Parliament likely to be very different, and sometimes even adversarial. There is also a lot of scope for the rules to be altered using delegated acts and technical standards – these will ultimately determine how the prop trading ban and separation rule work in practice.

So far, a large part of the banking sector (mostly smaller banks) will probably be happy. Larger banks will see it as an improvement, but will likely push for a further watering down. Questions can still be raised over whether costs will be passed onto consumers and whether it will really help limit risky activity, which can often be related to mundane retail bank activity. But then the idea is that other parts of the framework will also help limit this effects.  

In any case, the proposal is likely to once again fall away from the frontline and it could yet come back with a different face once again.

The Commissioner for Everything

Michel Barnier - the man who was handed the crucial Internal Market portfolio in the Commission following a complete miscalculation by Gordon Brown - is definitely on the move. The job as the entire Single Market's (and the City's) Chief Regulator doesn't seem quite big enough for him. Barnier wants more.

Before Christmas he said that he would make sure to "give his opinion" on EU farm policy to the new Commissioner for Agriculture, Dacian Cioloş, insisting on the need to "preserve farm regulations because feeding people is not a service like any other".

And in thinly veiled criticism of Catherine Ashton's decision not to go to Haiti following the earthquake, he now seems to be setting his eyes on the Commission's foreign policy portfolio as well. On his blog Jean Quatramer reports from a press briefing with Barnier on Wednesday.

After having refused to criticise her directly: [Barnier] let slip a poisonous remark during a press lunch earlier: 'when the tsunami hit in December 2004, I immediately made myself available'. At that time, he was Chirac’s Foreign Minister. Barnier added that at the meetings of the 27 European Commissioners, he would put constant pressure on the leader of European diplomacy (who is also the Vice President of the Commission) on 'issues of foreign policy and defence', implying that there is work to be done.

It seems that for Mr Barnier the world is not enough..

Scant compensation

Further to Friday's piece on the new EU Commission posts (described by Nicolas Sarkozy as a "victory" for France, who said the British were the 'big losers') it emerges that Jonathan Faull has been appointed as Michel Barnier's right-hand man as Director General of the Internal Market portfolio.

According to PA, Faull will ensure that "the interests of the City of London are understood at the highest levels of the Brussels bureaucracy."

We're not so sure. The man is a career eurocrat – he’s been working in the Commission bureaucracy since 1978, including a stint running the EU’s propaganda department, “DG Press and Communication”, between 1999 and 2003. Judging by his CV Faull has never worked in the City or similar in his life. How can he possibly have the interests of the City of London at heart, when his whole career has been about European integration?

This is scant compensation for the loss of the influential trade portfolio and the appointment of the protectionist French Europhile Michel Barnier to regulate Europe's financial markets.

A fox looking after the chickens

Number 10 is facing growing accusations that Gordon Brown had 'sold Britain down the river' once again by giving up the influential EU trade portfolio currently held by the UK's Cathy Ashton in return for the arguably less important external relations role.

Not only that, but according to French diplomats and a Commission source speaking to Le Monde newspaper, the whole sorry stitch-up was a deal brokered with Nicolas Sarkozy who in return for backing Ashton for Foreign Minister, secured GB's support for French MEP Michel Barnier to bag one of the most important Commission posts of all - Internal Market.

As Open Europe's Mats Persson told the Telegraph:

“This appointment is part of a very deliberate French strategy to challenge the anglo-saxon model in general and the prominence of the City of London in particular."

Because let's be clear: with Barnier in charge of the heaviest economic portfolio in the Commission we’re guaranteed to get two things: more 'Europe' and more regulations.

Looks like GB has been outmanoeuvred in Europe yet again. Don't get us wrong - the Foreign Minister role is a definitely a biggy. In charge of up to 7,000 staff and a £45 billion 3-year budget for the "biggest diplomatic service in the world", in the words of current foreign policy bod Javier Solana, Cathy Ashton is being described as the face of Europe on the world stage.

But as high-profile as that may be, the key thing to remember in all this is that the UK has now been completely ruled out of every single one of the important economic portfolios in the Commission - Internal Market, Competition, Trade, Economic & Social Affairs, even the rumoured new Financial Services post. In fact, France has made crystal clear that it doesn't want Jose Barroso to separate the financial services side of things from the Internal Market portfolio - meaning Barnier will be in charge of the lot.

Former Minister Michael Fallon sensibly asked David Miliband in Parliament today:

"Why did the Prime Minister allow himself to be outwitted by the French into conceding the key internal market and financial services job with a result that we will have a French commissioner regulating the City of London whilst Baroness Ashton is handing out the Ferrero Rocher?"

All of this is hugely important for the UK because the Commission is now so active in the area of financial and economic regulation - and it is vital the UK has a strong influence. Unless you've just arrived home from Mars, you will know the EU's current proposed rules for alternative investment funds, for instance, could be hugely damaging to the City unless they are substantially amended along the lines being pushed by the UK government and others.

Parachuting Michel Barnier into this role could be far more disastrous for the UK than any prestigious appointment to the world stage can hope to compensate for.

Why? Because Barnier is a backward-looking protectionist.

In the run-up to the EP elections he kept saying he wanted “to build a Europe that acts and protects.”

He appears to have also described himself as: “The only government minister whose politics is totally European”, and said, “Do we want Europe to be a simple regional actor and a free trade area or do we want to make Europe a global actor and a political power? My decision was made long ago.”

Most worrying of all, he said: “All problems are local and yet all the solutions are found in Brussels!”.

Even left-leaning newspaper Le Monde warned earlier this year that the "europhile" Barnier would be a poor choice for Internal Market Commissioner.

It said: “without a doubt the post is currently the most important at the heart of the European executive, after the presidency”. It pointed out that the City of London would view the appointment of a French politician to the Internal Market post as comparable “to entrusting the surveillance of a chicken coop to a fox”.

It wisely noted that “the issue of new financial regulation is too serious to become a simple stake in negotiations on the composition of the future commission”.

And don't forget, Sarkozy has said that Paris' La Défense district, which according to the FT recently is undergoing a radical makeoever, "intends to take over" the City.

Score: Brown 1, Sarkozy 2.