Britain's regulators fear the power of Brussels.
Quite rightly, most Fools don't bother too much with European issues of compliance and regulation. Unless, of course, it's about making sure they're carrying all the appropriate papers when they go driving across Europe.
The problem for most of us is that the world of financial "com & reg" is pretty daunting. It's so full of acronyms that, as historian Paul Johnson once wrote about people who resort unnecessarily to highly specialised language, it hides behind an "electrified fence" that prevents everybody but insiders from understanding the subject.
And true to form, there's a full-scale battle between the acronyms for regulatory control of UK's capital markets -- in effect, the governance of much of the City with major implications for investors of all stripes.
Essentially, it's a fight between Brussels and London that pits UKLA, the long-established UK Listing Authority (not the UK Lubricants Association), against its imminent European counterpart. That's ESMA, the European Securities Markets Authority (not the European Smart Metering Association) that starts up next year and which is suspected of wanting to usurp much of UKLA's powers.
As Sarah Hogg, chairwoman of the Financial Reporting Council that supervises governance, accounting and actuarial issues, wrote in the FT on November 12: "As all agree, ESMA will be a serious battleground for Britain."
AIM in the firing line?
At stake are many of the practices that are regarded as having made the City the highly successful place it is.
As well as the likelihood of an all-powerful ESMA, in Baroness Hogg's words, "clamping down on UK successes such as the Alternative Investment Market (AIM)", there are fears that the City's relatively flexible principle of "comply or explain" will be replaced by rigid rules that effectively change the way it's done things in the past.
In short, Brussels wants to run the City in a regulatory sense.
Unsurprisingly, this has come about in the wake of the financial crisis. Shocked at the extent of the bank bail-outs, especially in Britain, the European Commission wants the establishment of "a single EU rule book applicable to all financial institutions in the Single Market" and, if possible, applicable to capital and equity markets in general.
In a cross-border world, the European Commission just doesn't trust domestic regulators any more and, you have to say, Britain's regulatory system hardly distinguished itself in the crisis. As even Sarah Hogg admits, it was "tested to destruction".
The European Commission's firm view is that most countries' supervisory systems were way off the eight ball ("lagged behind the integrated and interconnected reality of European financial markets") and just didn't work together in a mutually helpful way. This is why ESMA has been given overriding powers.
It will be hard for UKLA to argue with a body whose rulings must "prevail over any previous measures taken by a competent authority." ESMA certainly isn't leaving anything to chance. In totalitarian language, it promises to weed out all "exceptions, derogations, additions or ambiguities so that one harmonised core set of standards can be defined and applied."
Flexibility or harmony
To put it simply, the big issue for investors is whether a rigid ESMA demanding "maximum harmonisation" is better than a flexible UKLA wedded to "comply or explain", a principle the City has come to love.
Certainly, investors lost a bundle with shares such as Royal Bank of Scotland (LSE: RBS) but UKLA has learned a lot since then, as its latest annual report points out. It's a well-intentioned and effective body that rates high marks from its stakeholders.
Then there's the risk that investors would lose all over again if AIM was emasculated, as Baroness Hogg fears. According to the London Stock Exchange, its junior platform contributed a total £21bn to UK Inc last year and has become a global haven for the kind of start-ups on which many investors thrive.
It looks like we're going to have an EU-wide system foisted on us, for better or ill, and UKLA wants to arm itself for the coming fray. Baroness Hogg believes her Financial Reporting Council should be merged with UKLA (still part of the Financial Services Authority now being dismantled).
The combined entity would have more clout in Brussels because they would argue basically the same case. Namely, for a little flexibility. Let the battle of the acronyms commence.
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