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EU Economics

Forbes – London’s City Financial Markets, EU Passports And Brexit Threats

Tim Worstall
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I have opinions about economics, finance and public policy.

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The Governor of the Bank of France, along with all too many other policy makers, really just has not understood the issue of European Union passports for financial services, the implications of Brexit and so on. The real underlying point here being that the passport issue is of importance to retail financial institutions, most certainly it is. But The City, those financial markets which are the lifeblood of London, are the wholesale markets. There the issue is much less certain – so much less certain that I would argue that not gaining such a passport is beneficial in the longer term.

To explain a little. EU regulation works, in this manner at least, the other way around from US regulation. Yes, we’ve different nations just as you have different states. And regulation of many things, insurance say, much banking, is done at the level of those nations and or states. However, we in Europe (correctly, the European Union plus some associated countries like Norway, Switzerland and so on) have one over-riding rule. If you are licenced under the rules of any one country then you are licenced under the rules of them all. Take the example of a money transfer business. In the US, to do this, you need 51 separate licences, one for each State plus DC. And they all have dizzyingly different requirements, capital necessities and so on. It costs tens of millions if not hundreds of millions to acquire all of those before you can even think about doing business. In the EU, or Europe, just get one licence from one nation and you’re good to go all over the continent. This is why Facebook FB +0.28% trialed its money transfer business over here (with, if memory serves, an Irish licence) rather than over there.

This is what this “passport” issue is about. If you are regulated in one nation, pass those rules, then you’re cool to do business everywhere. And if the country you’re in isn’t in the EU (or, perhaps, doesn’t have a specific agreement about this) then you don’t have that right. Thus, as Britain gears up to leave the EU following the Brexit referendum there’s a question about those firms in The City. Which leads to the following:

AIX-EN-PROVENCE, France—Bank of France Governor François Villeroy de Galhau, said Sunday that the city of London was at risk of losing its EU passport and clearing houses, unless it can quickly find an agreement with the European Union.

The EU “passport” enables a firm established in one EU country to operate in the others without having to undergo separate regulatory oversight.

Many U.S. and other non-European institutions run their EU operations out of London. Following the British vote on June 23 to leave the union, it is believed some banks may move at least part of their operations to another country to secure an EU passport.

Such passporting is interesting to those running retail businesses. For, obviously, retail takes place where the customers are. For wholesale markets this is all very much less certain. The activities of the London Metals Exchange, The Baltic, won’t be affected one iota by whether those institutions, or member firms, can or cannot sell retail across Europe. And it’s those wholesale markets which are the lifeblood of The City. So, perhaps less of a rush to insist upon arrangements which allow said passports.

But there’s another side to this as well. Which is that gaining such passports will mean that the UK regulation system must be much the same as that elsewhere in the EU. And that’s one of the major aims of Brexit in the first place, not being subject to those stultifying rules. And in the longer term being free of the very prescriptive, Civil Law- style, EU regulation is going to be much more important than retail outlets into the EU. Especially since the passport can be gained by opening a small Dublin office with all the real work still being done in London.

 

At which point we’ve two options. Benefit those retail operations by maintaining roughly the current EU based regulatory system and thus gaining that passport system. Or opt out of the EU based regulatory system, lose some part of the retail business to other jurisdictions but leave the wholesale markets to develop as they wish under a different regulatory system. And I would argue that the second is the correct response. For those wholesale markets developed under that very different regulatory system, one dominated by Common Law. Don’t lie, don’t cheat, don’t steal and so on, but the detailed rules about what people do will be emergent from the voluntary interactions in the system.

As an example, what is possibly the world’s most important private sector interest rate, LIBOR. Sure, there have been problems recently (breaching those Common Law guides of course) but no one sat down and planned this. It just growed like Topsy out of the eurodollar market, itself an outgrowth of the Americans trying to control who could and could not hold and deal and borrow in dollars and with or without taxation at source. What’s going to grow in the future I have absolutely no idea but that’s rather the point. Having a regulatory system that does allow things to grow, leaves the space for them to grow into, is much more important for a marketplace than any of these issues over passporting.

My suggestion would therefore be to tell the EU to take a hike. We’ll regulate London and The City as we like, in that really very English manner. You can allow our firms in or not as you please. But we’re not going to undertake your regulatory rules just so that they will be let in.

Tim Worstall (born 27 March 1963, Torquay) is a British-born writer and Senior Fellow of the Adam Smith Institute.[1]

http://www.forbes.com/sites/timworstall/2016/07/03/londons-city-financial-markets-eu-passports-and-brexit-threats/#510f205b6bcd

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