EU referendum a huge threat to financial regulation and consumer protection

30th June 2015


The European Union (EU) referendum is shaping up to be a defining political event. But, what has not been appreciated is that financial regulation and consumer protection could be seriously undermined regardless of whether the UK votes to stay in or leave the EU. Real progress has been made on UK financial market reform. But the job is far from done. There is a long way to go before we can be confident that UK financial markets work for households and the real economy. We fear that while commentators and the public are distracted by the political drama of the referendum itself, the financial services lobby will launch a pincer movement to weaken financial regulation and consumer protection exploiting the referendum renegotiations and current EU initiatives designed to promote a more effective single market. The media doesn’t seem to have twigged that this isn’t just a question of Yes or No. It is also a question of what a Yes with ‘reforms’ could mean for ordinary UK households. Moreover, if the reforms lead to reduced social protection, this will undermine workers’ rights and could lead to even greater economic and financial security, increasing levels of financial exclusion and making it even harder for households to plan for the future. It is our view that UK consumers have gained much from financial regulation implemented at EU level even if reforms are needed to make EU policymaking institutions more accountable to consumers. However, the sort of reform the finance industry wants could be a hugely regressive step for UK consumers. We urge civil society organisations to be alert to the finance lobby’s efforts and campaign to ensure that hard won gains are not lost.

It is expected that the EU referendum will be held in 2017 although the government has been under pressure to hold the referendum a year earlier in 2016. The UK government’s position is that it will renegotiate the UK’s relationship with the EU. If the UK is successful in this renegotiation, the government will back a Yes vote.

But this is more complicated than just a straight choice between voting Yes or No to stay in the EU. Instead, it will be a choice between voting No to leave or Yes to remain inside the EU but with the relationship between the UK and EU reformed – possibly substantially reformed. It is important to recognise there are two critical phases to the referendum process – the referendum itself and the all-important renegotiation phase which will determine exactly what those who wish to remain in the EU will be able to vote for. When the time comes for UK citizens to vote Yes or No, the relationship between the UK and the EU may be very different to the one we have now.

But why is this relevant for financial services and, in particular, financial consumers? Well, although we don’t know the precise detail of the reforms the UK wants (this is being left to civil servants), we do know that one of the broad areas the UK government is seeking to renegotiate relates to the ‘competitiveness’ of the UK economy and the promotion of ‘free trade’.

At the risk of gross simplification, there are two basic ways to improve competitiveness. This can be done either by: i) improving the productivity of firms or quality of products and services produced so that demand increases; or ii) cutting costs so that margins increase and goods and services appear to offer better value.

Similarly, free trade can be promoted either by: i) improving consumer confidence and trust in cross border markets through better standards and quality of products and services; or ii) reducing social protection, consumer protection, and health and safety standards to ‘encourage’ firms to engage in greater cross border trade.

The financial services industry complains often and at length about regulation and consumer protection measures, arguing that these measures have pushed up business costs over the years. This, of course, is largely nonsense. The reality is that for years the industry has ‘underpriced’ the cost of maintaining a resilient financial system and producing safe, quality, socially useful products. The primary effect of regulation has not been to create new costs, but to force the industry to be more realistic about the cost of doing good business.

The financial services industry particularly targets what it sees as the additional risk management and compliance ‘burden’ imposed by new regulation. Of course, in other industries compliance staff and risk functions would be seen as a critical part of the business. Employees performing these roles are valued and called quality control or safety engineers. Tough standards, regulations and expert staff are not seen as a burden in other sectors but as an integral part of maintaining the quality and integrity of products and services.

Nevertheless, despite the industry nonsense about regulatory burdens, the fear now is that the finance industry lobbies will disingenuously use the EU pre-referendum renegotiations to push for reductions in financial regulation and consumer protection in the interests of competitiveness and free trade.

This lobby should be dismissed out of hand for what it is – an attempt by vested interests to exploit an opportunity. But, the reality is that the UK’s financial sector is seen to be critically important to the UK economy and the financial services lobby is very powerful and influential. Despite the financial damage wreaked on the UK economy, it is still regarded as the goose that keeps on laying the golden egg. We all want to see a more competitive, thriving UK financial sector that supports the real economy. But the way to do that is to improve financial market efficiency, not weaken financial regulation and jeopardise the integrity of and confidence and trust in the financial sector. However, we have real very fears that the UK government will seek to achieve favourable treatment for the UK finance industry as part of the reform package which will lead to reduced financial regulation and consumer protection standards.

The second part of the pincer movement will happen under the cover of the European Commission’s Capital Markets Union (CMU) and Retail Market Integration initiatives. The CMU is critically important as the main goal is to improve the efficiency of capital markets in the EU so that firms in the real economy can get access to the capital they need. Equally important is the forthcoming Retail Market Integration initiative aimed at achieving greater cross border integration of retail financial services.

These two initiatives could well produce very real benefits for EU and UK households and the real economy. But there are serious risks of regulatory arbitrage. We think the financial services industry will use these initiatives to argue for a reduction in prudential regulation and consumer protection standards claiming that these present a barrier to an efficient single market. This is also nonsense of course. One of the biggest barriers to a truly effective single market is consumer confidence and trust. We want to see better, not necessarily more, regulation. But reducing regulation to suit the finance lobby will do nothing to inspire confidence and trust in markets.

It has to be said that real progress has made on financial market reform. But the job of making sure the UK’s financial markets work for households and the real economy (markets that are safe, resilient, fair, efficient, consumer focused, provide innovative and value-for-money products and services, trustworthy, transparent and accountable) is far from done. The hard won progress we have made in improving financial regulation and consumer protection is under threat by this pincer movement by the powerful finance lobbies exploiting the opportunities provided by the EU referendum and CMU/ retail integration.

One last point to make is the EU referendum may have a further indirect impact on UK financial consumers. It isn’t just the finance lobby who will use the renegotiation stage to press its own interests. Big corporates will try to reduce important social protection measures during the renegotiations. But why is this relevant for financial consumers? Losing the social protection provided by the EU will weaken workers’ rights and could lead to greater economic and financial insecurity. Huge numbers of people in the UK already face economic insecurity due to changes in the labour market and the rise in ‘non-standard’ work such as zero hours contracts. But the business models of mainstream financial services have tended to be built on the assumption of predictable jobs and incomes growth and so on. The financial services industry has not adapted to the new world of work. Anything that exposes more workers to greater economic insecurity will increase financial exclusion and make it harder for people to plan for retirement and so on.

It is our view that UK consumers have gained much from financial regulation implemented at EU level even if reforms are needed to make EU policymaking institutions more accountable to consumers. However, the sort of reform the finance industry wants could be a hugely regressive step for UK consumers.

Civil society organisations need to be alert to effects of this pincer movement and raise awareness of the potential consequences for consumers if the finance lobby is successful in rolling back hard won gains. The media, so far, has focused on the referendum  and does not seem to understand that pre-referendum renegotiation stage could be just as important as the vote itself.

European financial market reform-priorities for the new European Commission

7th October 2014

The decision by President Elect of the European Commission, Jean Claude Juncker, to carve out financial services from DG Internal Market and establish a powerful new financial stability, financial services and capital markets portfolio in the new Commission is hugely significant and reflects the importance given to financial market reform. The decisions made by the new Commission will have important consequences for UK financial services, not just European financial markets.

Last week, MEPs in the European Parliament got the first opportunity to question Lord Hill who has been nominated as Commissioner of the new powerful brief. In an unusual move, MEPs asked him to come back for a second confirmation hearing (taking place this week).

Lord Hill’s nomination certainly raised a few cheers and a few eyebrows. City lobbyists seemed to be over the moon about it – the feeling was that the City had got its man in a very powerful, influential position. Civil society and consumer representatives raised alarm given Lord Hill’s previous connections with the finance industry.

My personal view is that we should judge Lord Hill (or anyone for that matter) by his deeds, not by his past. More important than an individual is the creation of this powerful, new financial services portfolio. Carving out financial services from DG Internal Market provides a great opportunity to focus on rebuilding and reforming a broken financial system. There are risks of course as it gives the powerful financial services lobby a single point of focus (but more on this later).

The appointment letter from President Elect Juncker to Commissioner Elect Hill was very encouraging from our perspective. It set out in no uncertain terms what the new Commissioner designate is expected to achieve in terms of making financial markets work for the real economy and consumers and will be a very powerful tool for holding the new Commission to account.

The new Commissioner in charge of this brief faces a huge challenge rebuilding financial markets and making markets work for EU citizens. Let’s remember what’s at stake here. The crisis in the financial markets rapidly turned into an economic crisis in the form of severe recessions across the European Union, which then turned into a social crisis (as society is picking up the bill for the failure of the finance industry). It has not been forgotten that the actions of the finance industry nearly wrecked the economies of Europe (some major economies still haven’t recovered) and ordinary households are paying a terrible price.

But, not only did the finance industry threaten the stability and integrity of our financial system, the finance industry failed at many of its primary economic and social functions.

We cannot allow the actions of the finance industry to threaten such economic and social destruction again and we need to make financial markets work in the interests of society, not the other way around. So what needs to be done? Three priority challenges lie ahead.

There will be new financial crises in future so we need to continue the reforms aimed at restoring and maintaining financial stability (macro prudential regulation)and making our major financial institutions more resilient to future financial crises (micro-prudential regulation).

But we also need to begin a series of major reforms on the third challenge of making markets work for society, the real economy, and financial users. What does making markets work mean? It means serious improvements in the way the finance industry performs core economic and social functions including:

  • providing long term, sustainable capital and efficiently allocating resources to the real economy;
  • efficient financial intermediation (transforming savings and deposits into loans);
  • providing an efficient, resilient, accessible money transmission and banking system;
  • efficient risk management; and
  • for financial users, making sure they had access to the safe, affordable, fair products and services they need to help them save for retirement, protect against risks of losing their income and/ or health and so on.

There is much to be done – not least cutting out the huge waste in critical areas such as investment banking and asset management. There has been a huge amount of financial ‘innovation’ over the past two decades – new financial products and instruments, new technologies, new services and layers of financial intermediaries, furious competition between agents in the markets and so on.

But we have to distinguish between the illusion of innovation and competitive activity, and socially useful competition and innovation. Judged against the core economic and social functions described above, these new activities and innovations have not produced markets that work better for society. Indeed, the net effect was to introduce greater risk into the financial system, inefficient allocation of resources away from productive economic uses, while the asset management industry overall has failed to deliver decent risk adjusted returns for retirement savers – exacerbated by the extraction of value in the form of layers of fees and charges for all the various intermediaries in the market nowadays.

Remember what I said above. We have not forgotten the damage the finance industry caused to our economies. Moreover, investment bankers, analysts and fund managers are self-appointed arbiters of economic efficiency – that is, their actions, views and opinions can affect share prices and force real economy firms to cut costs and, most importantly, jobs. But the painful irony is that the finance industry is just not very efficient. In future, the well paid finance professionals must be held to account on their own terms.

So, those are the challenges ahead of the new Commissioner (whoever that turns out to be) if markets are to work for society. This needs tough policy and regulatory reforms supported by robust enforcement.

But if this is to happen, the activities of the powerful, influential and well-resourced industry lobbies must be severely curtailed. The industry spends around Euro 120million a year on lobbying – outspending civil society by a ratio of 30:1. For every meeting civil society had with policymakers, regulators and other decision makers, the industry and its lobbyists had seven[1]. The industry also dominates the important technical committees and advisory groups that influence the development of policy and regulation. The more successful the industry lobbyists are, the more damage is done to the public interest.

Moreover, effective policy and better regulation needs the engagement of civil society and consumer representatives if we want to avoid the group think that bedevilled policymaking and regulation in the run up to the financial crisis.

So, there we have it. The policies and decisions that are made by the new Commission will have far reaching consequences for EU and especially UK financial services. The stakes are high and civil society representatives will campaign as hard as possible to fight off industry lobbies so that we can produce genuine, long overdue reform of our finance industry. Interesting times ahead.


This article was first published on the MindfulMoney website