In The Press

Changing the regulations must never blunt the City’s competitiveness (in The Telegraph)

6 April 2009

By Roland Rudd

When Zhou Enlai, the Chinese Prime Minister from 1949 to 1976, was asked to assess the effect of the French revolution, he famously responded: "It's too early to tell." By the same token, the London summit that took place this week, will have a variety of short-term consequences, but it's too soon to tell whether it will have a fundamental impact on precipitating the road to recovery.
With the financial crisis highlighting weaknesses in the regulatory system, there was huge public pressure to start framing a new regulatory architecture and to propose greater regulation for hedge funds, and action against tax havens.

The summit communiqué identified regulatory failure as a cause of the crisis, and called for "much greater consistency and co-operation between countries".The G20's thinking on regulation was heavily influenced by the EU de Larosière report issued in February this year. This should not come as a surprise. In addition to the UK playing host to the summit, there were four EU voices in the G20 and Turkey − an EU accession state − round the top table. Also present at the London summit were leaders from Spain, the Netherlands and the Czech Republic.

The de Larosière report stopped short of calling for an all-encompassing, trans-national EU regulator, which would have been unpalatable to the UK. However, it did call for the creation of two new pan-EU regulatory bodies: a risk body, featuring a prominent role for the European Central Bank, and a beefed-up umbrella group for national regulators. Under de Larosière, there is the prospect of more European rule-making under national supervision. The British government has indicated some measured support for these proposals.
The Turner report, carried out by the chairman of the FSA, chimes largely with the de Larosière report, for instance in supporting a strengthened European umbrella group. Furthermore, there is significant overlap with plans for financial regulation in the US, most recently the Geitner plan announced by the US Treasury Secretary. This is why transatlantic leadership and co-operation on regulatory issues makes so much sense.

Since last September, more than 30 major international banks have either gone bust or been bailed out. Meanwhile, stock markets have more than halved in value.

While few would argue against the need to make changes to the regulatory system, we must be wary of the adverse impact these changes will have on the competitiveness of the City and financial services more generally.

Within the de Larosière committee itself, it is intriguing that the two members of the eight-strong committee who dissented from the orthodoxy of an automatic increase in regulation were those with a background in regulation rather than the private sector. The "gamekeepers" understand what damage well-intentioned but misguided rules can wreak.

The dangers of well-intentioned but knee-jerk regulation are apparent. Just ask American businesses about the damage inflicted by Sarbanes-Oxley, adopted after the Enron episode. The attacks on financial services in Europe can sometimes be motivated by envy at London's long stretch of success in this area. There are those who would wish to clobber the City, using a sledge-hammer to crack a nut.

The French and German governments lobbied very hard at the London summit for tough action on regulation, and in the end, a series of compromise positions were adopted. But Sarkozy and Angela Merkel had been preoccupied with this in the past few weeks. In the aftermath of the publication of the de Larosière they took the rare step of writing a joint letter arguing that "hedge funds and other funds susceptible of creating systemic risk be registered, regulated and appropriately supervised", yet the report itself had not focused at all on hedge funds or private equity.

The G20, though, managed to work through these differences. It balanced out the French and German governments' desires for action on regulation with the UK's wish to see firm but sensible action. Working through the EU, Gordon Brown has been arguing for more co-operation and co-ordination, in preference to centralisation. So long as this approach holds, it should help to avoid a disaster for the UK's financial services industry.

Regulators cannot and should not be expected to play God. With the temptation of excessive scatter-gun regulation hovering over the financial centres of the world, it is more important now than ever to accept this.

Roland Rudd is the chairman of Business for New Europe

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