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Traders fear threat of political agendas

By Nikki Tait in Brussels
Published: January 4 2011 20:09 | Last updated: January 4 2011 20:09
Radical changes to Europe’s system of supervising its banks, insurers
and securities markets, taking effect this week, are central to plans
by the European Union to bolster financial regulation and oversight in
the 27-country bloc.

The creation of four new pan-European agencies is aimed at helping to
prevent a repeat of the region’s financial crisis. But the new
supervisory bodies are being watched warily by traders and executives
in the City of London, Europe’s biggest financial centre.

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London’s fear is that the new entities’ job of drawing up common,
harmonised rules for the finance sector and protecting it from
systemic problems will be overtaken by political agendas, and that the
bodies will not appreciate sufficiently the need to keep Europe
competitive with other global financial centres.

“It’s an unsettling process. A single market [for financial
services] is a good thing . . . But people need to be close to
the markets they’re regulating,” says Barney Reynolds, head of the
financial regulatory group at the law firm Shearman & Sterling in
London.

The concern, he adds, is that the agencies may follow “a moralistic
political agenda”, rather than conduct a “dispassionate technical
exercise”.

On Tuesday, the European Commission hailed the creation of the new
regulators as a “turning point in financial supervision in Europe”,
saying they would strengthen a system whose weaknesses had been laid
bare by the financial crisis. In the process, they will also make
Europe’s financial sector more attractive to investors and more
competitive, it said.

The four new agencies comprise three European supervisory authorities
(ESAs) to oversee the banking, insurance and securities markets
sectors, together with a broader European Systemic Risk Board (ESRB),
which will warn about dangers building in the financial system.

The European Banking Authority (EBA) will be based in London; the
European Securities and Markets Authority (ESMA) in Paris; and the
European Insurance and Occupational Pensions Authority (EIOPA) in
Frankfurt.

All three are being created from existing pan-European
“committees”, which are made up of national regulators from the 27
EU member states and function on a co-operative basis. By contrast,
the new authorities will have more powers – including the ability to
override national authorities in emergency situations – and greater
resources in terms of staff and finance.

Officials involved say it may take a few months before staffing is
complete. The final appointment of the new chairmen at the ESAs is not
expected until early spring, although rounds of interviews were
conducted before Christmas

But the ESAs are expected to have about 150 staff in total in 2011 and
cost about €40m ($53m) to run. That staffing should then double
during the next four years – although it will remain a pale shadow of
some national supervisors. The UK’s Financial Services Authority, for
example, employs more than 3,000.

The ESAs are expected to line up their new powers quickly: ESMA, for
example, plans to hold a board meeting next week.

EU policymakers have already stacked up tasks for the new authorities.
One of the first jobs for the EBA will be to oversee a new, and
hopefully more convincing, set of stress tests for European banks,
which Brussels would like to begin in February.

That process of building up the ESAs’ responsibilities is likely to
accelerate through this year. At least a dozen significant legislative
proposals for the financial services sector are due to be released in
2011. Most will give specific rule-making rights to the ESAs.

That means City institutions and their advisers will need to keep a
close watch on Brussels, but also on Paris, Frankfurt and London, as
they try to guard against excessive regulation.

“Unless you’re keeping a hawk-eye, you blink and miss things,”
warns Mr Reynolds.


The new watchdogs

Securities and markets based in Paris: The European Securities and
Markets Authority has a full plate. Charged with harmonising
regulation of shares, bonds and other financial instruments, it has
also been given responsibility for several fresh areas of regulation,
including the new directive on hedge funds and private equity,
oversight of credit rating agencies and new rules on over-the-counter
derivatives. It will also tackle the first big update of the markets
in financial instruments directive and create rules against market
abuse and insider dealing.

Banking based in London: The European Banking Authority will have an
early chance to gain, or lose, credibility, when it administers a new
round of stress tests of the continent’s banks, as early as next
month. The EBA’s predecessor entity was criticised for not running
more robust tests last summer. The criticism was borne out in November
when two Irish lenders required state bail-outs. The authority will
also play an important role in determining how Europe adopts
international regulatory standards on capital and liquidity.

Insurance and pensions based in Frankfurt: The European Insurance and
Occupation Pensions Authority’s big task is to complete and implement
a new set of capital rules for the insurance industry. The so-called
Solvency II rules, which have attracted heavy criticism from the
industry, are designed to improve alignment of the capital that
insurers hold with the risks they take. The rules are complicated and
require more sophisticated modelling and management techniques than
many insurers, or their regulators, currently use.