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Europe Economics have written a report for the Financial Conduct Authority on an evaluation of the costs and benefits of a change to the accountability regulations in the financial services sector and amendments to the rules on remuneration. This included the development of a cost of compliance model and estimation of the indirect costs and benefits.
This report was commissioned from Europe Economics by Business for Britain. Chancellor George Osborne recently stated: “If we cannot protect the collective interests of non-eurozone member states then they will have to choose between joining the euro, which the UK will not do, or leaving the EU.” This report considers whether the concern Osborne raises is applicable to EU-level setting of finance and financial services regulation and, if so, what reforms might address it.
We argue that prior to the Eurozone crisis, the general thrust of EU financial services measures reflected the UK’s traditions of liberalisation, competition and the encouragement of trade. This was particularly so in the ways EU-level financial regulation affected other Member States much more than it affected the UK, because EU rules mirrored pre-existing UK rules. We illustrate this with the examples of the Markets in Financial Instruments Directive and the Takeover Directive. Furthermore, there was a traditional reluctance to over-rule the EU on financial services regulation as the UK was the centre of the largest finance / financial services industry in Europe, whilst the EU in turn offered UK firms large and growing financial services export opportunities.
Since the financial crisis of 2008 and especially since the Eurozone crisis of 2010 onwards, the UK’s influence on EU-level financial services regulation has declined markedly. In many parts of the EU the financial crisis and thus the Eurozone crisis are blamed upon “light touch” regulation failing the discipline the activities of “Anglo-Saxon” financiers in the US and UK. For many in the EU, the UK’s pre-crisis influence upon financial regulation is seen as malign.
Both in the UK and in the rest of the EU, there has been a significant change in the spirit and thrust of regulation since 2008. But whereas in the UK the change has been towards increasing quality of supervision and strengthening market incentives, at EU level the focus has been much more upon extending scope of regulation, curbing specific behaviours, and protecting the integrity of the Eurozone. The Eurozone is now set to have the collective weight in qualified majority voting to impose any financial regulation it chooses upon the UK, and its significantly divergent interests mean it may do so.
This considerable loss of UK influence is exemplified by the UK being reduced to pursuing four legal cases in the financial services regulation area at the European Court of Justice — at least three of which it seems likely to lose. At the same time, opportunities for financial services exports outside the EU are now growing (and expected for the foreseeable future to grow) much more rapidly than inside the EU, increasing the cost to UK exporters of an EU focus, whilst the main threats of regulatory arbitrage to the UK are less and less from other European countries and more and more from outside the EU.
We consider potential reforms to EU-level setting of financial services regulation, including the extension of “double majority voting” (whereby changes to Single Market rules would require a majority of both Eurozone and non-Eurozone members to pass) and specific undertakings for forbearance from other EU Member States in respect of financial and financial services regulation. We argue that although such measures may offer some protection in the very short term (up to around 2018) they are unlikely to be sustainable over the longer term because almost all current non-Eurozone members of the EU intend to join the euro by 2020, meaning “double majority voting” would become very close to a UK veto on any new financial regulation — and thus unacceptable to Eurozone members.
To make such reforms to voting procedures viable over the longer term would require a large influx of new EU members that would not be required or expected to join the euro for many decades. Given the change to the nature of the EU that would result and the pool of countries from which such an influx would have to come, the challenges of achieving such a large expansion would be very significant indeed.
These are complex issues, and further research would be warranted in a number of areas. But we believe the central message is clear: For EU-level setting of finance/financial services to be in the UK’s interests long-term, as well as amendments to a number of existing EU regulations, there would also need to be a set of new principles for how EU financial regulations are agreed. Even then that would be unlikely to be viable unless the long-term membership of the Eurozone and non-Eurozone EU are much closer to balance than is currently planned.
Europe Economics has conducted an assessment of the weighted average cost of capital (WACC) to be applied in three Irish communications sectors (mobile, fixed-line, and television broadcasting) for the Irish Commission for Communications Regulations. Our recommendations have been used to model the financing costs in the three industries for multi-year price controls.
The EDA has published a report conducted by Europe Economics, entilited 'Study on R&D/R&T contracting policies in support of SMEs”. The study is to identify contracting policies that would be most effective in raising the participation of defence-related small and medium sized enterprises (SME) in R&D/R&T programmes and defence equipment development projects. In particular, the study examines: incentivising SME participation in co-financed (government and industry) national R&D/R&T programmes; establishing a common requirement in national R&D/R&T contracts to integrate an SME when contracts exceed a certain threshold; and requiring or persuading primes and higher tier suppliers to open a percentage of their sub-contract business to SMEs and non-traditional suppliers.
Europe Economics have prepared a report for Shelter to provide analysis in support of policy recommendations which seek to address some of the barriers to growth faced by existing firms and barriers to entry for potential entrants, with the ultimate aim of increasing competition, diversity and resilience within the housebuilding sector.