A Happy New Year to all our readers and welcome to the January 2008 edition of our Financial Services Briefing.
This edition of the Briefing contains in Part II, an analysis by George Walker of the principal UK, EU and international regulatory developments that have taken place in the last two months. In Part III, George Walker considers in a separate article, some of the regulatory issues that have now emerged from the Northern Rock debacle.
The campaign to reunite customers with forgotten cash reached a key milestone on 21st September last year with the year’s 200,000th visit to the dormant account pages of the British Bankers’ Association website. Claims through the BBA’s free account tracking service have increased considerably following an awareness drive over the summer. The BBA received 8,500 claims in July and August – more than the total for the whole of 2006 – as customers wake up to forgotten assets worth an estimated £350 million to £500 million. In addition to this, many customers claimed directly through their bank. During July and August last year the BBA’s dormant accounts web pages attracted 75,000 visits, compared with 150,000 visits for the whole of 2006. Unclaimed money is often held in long-forgotten school savings accounts, or old bank books that come to light when account holders move house or elderly relatives go into care or die. Later in the year, the Government promised us in the Queen’s Speech a Parliamentary Bill to deal with these matters. Grania Baird and Adam Carvalho include an article on the latest proposals in relation to this subject in Part IV of this Briefing.
In Part V, we include an article by Adam Carvalho on the FSA’s latest progress report on Treating Customers Fairly.
In Part VI we include an article by Heather Thomas, Solicitor, formerly the General Counsel of Wellington Underwriting plc and the author of The Regulation of Insurance Brokers and Intermediaries (published by Butterworths Lexis Nexis, London), on the FSA's new regulations for insurance business.
Following the article on emissions trading and the regulation of the European Climate Exchange in the previous issue of Financial Services Briefing, in Part VII of this issue is a further article by Martin Day and Adam Carvalho on weather derivatives trading and its regulation.
In Part VIII, is an article Susan Gordon of Deacons, Hong Kong has kindly contributed, on some recent developments in the investment funds industry in that jurisdiction, which we hope will be of particular interest for our funds clients.
Finally, in Part IX Kate Troupe includes an article on the new Money Laundering Regulations. This contains important information for clients subject to the Regulations.
The New European Treaty
This being the first issue of Financial Services Briefing in 2008, it is appropriate to pose the question in this Editorial as to whether the UK’s financial services industry is likely to benefit from the European Union’s new constitutional treaty (“the Treaty”) signed at Lisbon towards the end of last year? Will it concentrate, as some fear, even more power in the hands of a bureaucratic elite in Brussels or Paris (the home of CESR) whose ideas of regulation involve a multitude of rules controlled by the Commission? Or could it open the way instead to fewer rules and to more flexible markets as optimists like us and many of our clients would prefer to hope?
There is no immediate answer to this question unfortunately as the Treaty itself says nothing about the financial services industry nor about financial regulation. Moreover, Her Majesty’s Government is more concerned at present with sorting out the consequences of the credit crisis than disentangling the details of this constitutional document. However, the Treaty is bound to affect the financial services industry, if only because of its aspirations to improve the governance of the European Union and to make it more efficient in future. The real problem seems to us to be that nobody really expects either of those aspirations to occur since the EU’s record on financial services regulation has not been particularly good in recent years: a large number of directives having been enacted, but little in the way of new markets have been opened up in practice, particularly in the retail sector. The presumption now amongst many of the participants in the UK’s financial services industry is that the Treaty is a bad thing. This is perhaps unfair to the small element in the Commission that remains well-intentioned and competent, but it is nevertheless a perfectly understandable position for the industry to be taking.
The other important consideration is that London as a financial centre is unique within the EU: it is not only a bigger financial centre than Paris and Frankfurt combined, but more importantly, its reach is global. This is the case because it has been managed hitherto largely in the British interest. The UK needs to be sure that the Treaty will not mean handing over greater control to wider EU interests, which may not understand our financial service industry’s special needs, and indeed may even wish to rein in the UK for competitive reasons.
Geoffrey Fitchew, a former head of DGXV, the EU directorate responsible for financial services (now reorganised into the Single Market Directorate) is reported to be of the view that the Treaty could threaten London as a financial centre since the UK will lose control over the formulation of laws and regulations in this area. For example, the Treaty allows more EU legislation to be proposed by qualified majority voting (QMV). This is likely to mean that there will be even more EU legislation in the financial sector than hitherto and therefore possibly more bad legislation. The move to QMV will also make it harder for the EU’s member states to form blocking minorities. These minorities are essential to attack the devil that is in the detail of many of the technical directives. These now include most of those affecting the financial markets, where only a few other EU member states have shown any real interest, and of course none share the UK’s special interests as the major global centre, now even, thanks in part to US legislators Messrs Sarbanes and Oxley, surpassing New York.
The Treaty will also alter the structure of the European Commission and, for five out of every fifteen years, the UK will not have any European Commissioner, and thus will be excluded from all new law-making proceedings.
The so-called “self-amending” provisions which allow the European Council to propose the removal of remaining vetoes and to alter any substantive policy provisions in the European treaties at any time are also of very real concern. Although our Prime Minister has said he will not accept any more changes, the EU Council could quite simply decide to sidestep him and force through potentially damaging reforms in the interests of greater administrative efficiency. One of these in the longer term might well be the creation of a single EU financial regulator. On the face of it, this makes some sense: if we are meant to have a single financial market, why not also a single regulator for it? But this argument assumes that the single regulator will protect the UK industry’s uniqueness. There is little in the EU’s record to date to give us any confidence in that regard. There is also scope under the Maastrict Treaty for the European Central Bank in Frankfurt to become the EU banking regulator without need for any further amendment to the European Union’s treaties. This too is rather alarming and is not as widely known as perhaps it should be.
In short, the Treaty in our view does pose a real threat to UK’s financial services industry as it transfers power to the centre in the EU. There is nothing in what it contains that gives the member states greater control over the EU institutions. Indeed, the opposite will apply.
Our Spring Seminars
As our regular readers will know we run a seminar programme on topical issues in the Spring and Autumn of each year.
Our Spring 2008 programme comprises:
On Tuesday 5th February in London and on Monday 28th January in Edinburgh:
Regulatory Universe for Investment Managers
On Monday 3rd March in London:
Regulatory Universe for Private Banks
On Tuesday 15th April in London and on Monday 21st April in Edinburgh:
Unregulated collective investment schemes
and on Tuesday 1st July in London and on Monday 23rd June in Edinburgh:
FSA Authorised Funds Update and Review
All seminars take place at 5.30pm in London (at Farrer & Co’s 66 Lincoln’s Inn Fields offices), or in Edinburgh at 5pm at The Balmoral Hotel, Princes Street.
Full details of the contents of each seminar can be found on our website.
We hope you find this Briefing useful.
Jonathan Bayliss
Grania Baird
Financial Services Team Farrer & Co
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