Thursday, 1 October 2009

London Bankers Balk at EU Regulation as Lea Invokes Secession

By Simon Clark and Tom Cahill

Oct. 1 (Bloomberg) -- In a Georgian townhouse four minutes walk from Parliament, bankers, lawyers and economists held an off-the-record evening meeting to plot how to fight European Union financial regulation that they deem a threat to London.

“I am extremely worried about the City of London,” said Ruth Lea, a director at Arbuthnot Banking Group Plc, who agreed after the Sept. 24 meeting at the Institute of Economic Affairs for her comments to be published. “Britain may be able to influence EU regulation, but we won’t be calling the shots. Britain should consider the nuclear option of leaving the EU.”

Europe is making new laws and institutions that may challenge London’s ability to set the rules in the region’s largest financial center. At meetings across the city, investors are discussing how to respond to Brussels, the EU capital. Where some see the rules as a threat to Britain, others argue that the challenge is to capitalism across all of Europe.

“It’s good to avoid mentioning London in every single sentence and start looking at this from a European point of view,” said Mats Persson, research director at Open Europe, a London lobby group that’s critical of EU integration. Persson also spoke at the IEA. “I am Swedish, and I have sympathy for this kind of thinking.”

The EU last week proposed three regulatory agencies with the power to overrule national authorities. The European Parliament is preparing to debate the Directive on Alternative Investment Fund Managers -- proposed rules pushed by European Socialist Party President Poul Nyrup Rasmussen to limit borrowing by private-equity firms and hedge funds and to enforce them to establish bases within the EU.

Added Costs

“Bit by bit we’ll have these three EU regulators above us,” Lea said. “There’s one for banking, one for insurance and one for securities inevitably calling the shots.”

London’s hedge fund and private-equity managers argue that the directive targeting their industries will restrict Europeans’ ability to invest worldwide and make it harder for non-EU managers to raise money in Europe. The new rules could cost funds as much as 1.9 billion euros ($2.8 billion) through increased compliance costs in the first year and 985 million euros annually thereafter, according to Open Europe.

“Everywhere in Europe people feel an unease about the Anglo-Saxon way of doing business in markets,” Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets, said at a conference in London yesterday.

‘Political Agenda’

“Clearly there’s a political agenda when so many regulators and politicians are saying the Anglo-Saxon model is wrong,” Steven Woolfe, a London-based general counsel for hedge fund Boyer Allan Investment Management LLP said after Hoogervorst spoke. “Why should the U.K. allow its finance industry to be attacked? The French wouldn’t allow their farmers to be attacked like this, and neither would the Germans stand by as their automakers were attacked.”

U.K. Prime Minister Gordon Brown is also criticizing the city as he prepares for an election next year. “We will pass a new law to intervene on bankers’ bonuses whenever they put the economy at risk,” Brown told the Labour Party’s annual conference in Brighton, England, on Sept. 29.

In the past, London’s financial community has warned of an exodus of financial companies and the wealthy when faced with the threat of higher U.K. taxes or regulation. Up to now, that hasn’t happened.

The IEA debate took place in a 54-year-old research organization whose goal is “to explain free-market ideas to the public.”

IEA Panel

Lea, 62, is a former head of policy at the U.K.’s Institute of Directors, an employers’ lobby group, and a former Lehman Brothers Holdings Inc. economist. Charles Leach, a member of Parliament’s House of Lords, and a director of Jardine Lloyd Thompson Group Plc, the U.K.’s biggest publicly traded insurance broker, led the discussion. Hugh Trenchard, a member of the House of Lords, and Simmons & Simmons lawyer Richard Perry also spoke.

Arguments against EU legislation in terms of the threat to London are counterproductive, said Angela Crawford-Ingle, who advises private-equity firms at Ambre Partners. “You’re missing a trick here,” she said. “If you take the emotion out of the debate for a moment, there are a lot of areas where you can get a European focus.”

Investors, including real estate funds across Europe, oppose the directive, Crawford-Ingle said. Open Europe’s Persson said that three-quarters of Europe’s 1,785 private-equity firms are based outside Britain.

‘Not a French Plot’

The proposed EU directive on hedge funds and private equity “is not a French plot against the city,” Patrice Berge- Vincent, head of asset management at French regulator Autorite des Marches Financiers, told London investors at a conference yesterday. “We do welcome the directive, however we have to redraft almost all the proposals,” he said.

Two days before the IEA debate, 300 dinner-jacketed city workers dined beneath the gold-topped pillars of The Great Egyptian Hall in the Mansion House, the official residence of the Lord Mayor of the City of London. Mayor Ian Luder said financial services were “a national asset” and toasted Queen Elizabeth II. Luder criticized Adair Turner, chairman of the Financial Services Authority, who has said some banking activities are “socially useless.”

“Few people realize more than you the vital role the financial-services sector plays in providing the fuel for our economy,” Luder said to Turner. “We must do nothing in the spheres of tax, regulation and other business bureaucracy which damages our competitiveness.”

Turner Critical

Turner wouldn’t retract his criticism of bankers. “The real enemies of the city’s success and of the market economy, with all its great potential to spread prosperity and opportunity, are not those who raise these issues, but those who want to ignore them,” Turner said at the dinner.

Arbuthnot’s Lea said in an interview that Turner’s arguments may aid London’s socialist critics across Europe such as Rasmussen.

“I was dismayed to hear his comments about socially useless banking activities,” Lea said. “We should all be talking the city up, not down.”

For Martin Allison, a diner at the Mansion House banquet and dean of Leeds Metropolitan University’s business faculty, Turner’s criticism may be vital to the city’s survival as Europe’s financial center.

“I came away feeling very refreshed that people can openly disagree in public,” Allison said. “That is essential if London is to thrive as a financial center that serves Britain, Europe and the world. It’s a sign of a healthy cosmopolitan nation.”

To contact the reporters on this story: Simon Clark in London at sclark4@bloomberg.netTom Cahill in London at

Last Updated: September 30, 2009 19:01 EDT

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