Ill-judged EU financial services regulation could damage growth - CBI chief
Heavy-handed regulation coming from Europe could do serious damage to the UK’s professional and financial services sector, which is crucial for jobs and growth, the CBI’s Director-General John Cridland has said
Speaking at last night's CBI London annual dinner, attended by the Mayor Boris Johnson, Mr Cridland, warned that the likely effect of many current EU proposals "will be to damage the UK's prospects for growth."
Highlighting the economic importance of the capital, and
particularly the professional and financial services sector, which
accounts for 10 per cent of economic output and employs a million
people, Mr Cridland said:
"London is a jewel in our crown. Its entrepreneurs and
innovators are as good as any. And London's leading business
sectors offer us the best hope for high-end jobs, value add and
export growth.
"Its creative industries are a real success story, and one
with plenty more chapters to come. And we have world-beating
business, professional and financial services companies. We mustn't
countenance any policies that hold them back."
But he warned that a number of proposed regulations from
Brussels risk doing just that, including:
the Financial Transaction Tax, Solvency II, the Capital
Requirements Directive, audit market reforms and EU proposals on
corporate governance.
And he called on European Commission President Barroso to
ensure he is "working with business, not against it. And that means
boosting professional and financial services firms, not battering
them with costly reforms."
He said: "The likely effect of many of Brussels' current
proposals will be to damage the UK's prospects for growth. Nowhere
is this more acutely the case than for professional and financial
services, which are being bombarded with unwarranted
regulation."
In particular, he highlighted the damaging consequences for
London of the proposed financial transaction
tax, which he dismissed as "a Brussels revenue-raising
exercise, and one that will hit London disproportionately
hard."
Read John Cridland's speech (pdf)
Video: Watch Boris Johnson's speech to the London Annual Dinner
Looking at the consequences of the tax, Mr Cridland pointed to the European Commission's own official impact analysis, which shows it could dent EU gross domestic product by the equivalent of more than €100bn a year:
"The tax would be an incredibly blunt instrument, one that
would increase the cost of capital for businesses, hold back their
growth potential and raise minimal revenue in return.
"And it's a policy that will penalise the UK as Europe's
leading financial centre, diverting activity to financial hubs like
New York, Singapore or Hong Kong. Believe me, there's nothing its
financiers would like to see more than London totalled by the Tobin
tax."
Mr Cridland also highlighted Sweden's ill-fated introduction
of a financial transaction tax in the 1980s:
"Share prices plummeted, half of all Swedish equity trading
upped sticks and came to London, the volume of bond trades fell by
85 per cent and future trades by 98 per cent. No wonder the Swedish
government got rid of the tax, and that the Swedes are now the
tax's most vociferous opponents."
A number of proposals from Michel Barnier, the European
Commissioner for Internal Market and Services also drew Mr
Cridland's fire.
On Solvency II, which sets capital requirements
for insurance firms, Mr Cridland said they would "deliver a
two-in one hit from Laboratoire Barnier":
"First, they would have a major impact on insurance
companies and pension funds as potential providers of the long-term
investment capital critical for our infrastructure
renewal.
"The second hit is to try and impose Solvency II-style
capital requirements on defined benefit pension schemes. This
affects all business with defined benefit liabilities, whether or
not they've closed the scheme.
"The proposal is to make pensions funds follow the same
standards as insurance firms. It means they have to plan for
1-in-200 year incidents. I know mortality changes do happen, but
they don't do it suddenly in the same way that disasters can befall
insurers.
"So the new regime is highly inappropriate. It's also
devastating. Imposing a Solvency II regime on pensions will double
technical provision levels. That could mean half a trillion pounds
taken from business investment funds in sponsor companies. It would
hammer growth and job creation."
On the proposed capital requirements directive,
Mr Cridland argued that these "would be a problem for London,
with its "maximum harmonisation" approach:
"We want a competitive, level playing field at a time of
economic peace. But to combat emerging bubbles or respond to signs
of financial stress, the UK and all member states need the full
range of policy levers at their disposal. The directive would take
them away."
On proposed audit market reforms, he said
that Brussels's concerns about
over-concentration in the audit market and the risk of failure in
one of the "Big Four" are legitimate, but imposing mandatory joint
audits are not the answer:
"In the UK, we can already appoint joint auditors. Few have
ever chosen to - although BCCI, Barings and Polly Peck did. Hardly
a great advert. In reality they just add costs and open up cracks
through which audit quality can disappear.
"A ban on non-audit services is on the agenda too, yet
there's no evidence that these affect audit quality or independence
- and could just reduce choice, hit quality and add costs. It could
also destroy the business models for some of the UK's best firms -
and biggest graduate recruiters. Mandatory audit rotation is
another idea that could pile on costs and offer only dubious
benefits."
On Barnier's proposals for corporate governance,
he said that proposals seem to be based on a worrying
mistrust of the UK's principles-based code and the
"comply-or-explain" approach:
"Recent experience from the US and Sarbanes Oxley shows what
happens with a law-based, prescriptive approach: you get minimal
benefit but massive extra cost.
"There's a lack of understanding that set rules can't work
for every type of company, with dangers of reforms for financial
institutions being imposed over listed companies, and talk of
extending corporate governance rules to the unlisted
sector.
"This appears to be yet another Brussels power grab, with
EU-wide rules imposed when we know that national codes of
governance are far more able to reflect different market places and
shareholder bases."
Concluding his speech, Mr Cridland said: "I'd like to take
you back to the mantra I've been using with British ministers: "If
a policy doesn't boost growth, bin it."
"I have the same message for President Barroso. He needs to
show leadership here, to set out the red lines and make it clear
that what EU citizens need above all else is sustainable economic
growth and the jobs it'll bring.
"That means working with business, not against it. And that
means boosting professional and financial services firms, not
battering them with unsound, costly reforms.
"There are parts of President Barroso's empire he needs to
get a grip on, and now, before lasting damage is done.
"Our friends in Europe need to consider the cumulative
impact of all the ill-judged decisions they're taking, and get with
the growth agenda."
Notes to Editors:
The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.