Government and Institutions

Costly EU regulation has not made financial services safer or better – but Brexit is no silver bullet

The City is split when it comes to Brexit. Certainly, the larger City institutions with significant EU business tend to side with Remain. However, smaller companies and those with a more global business model are more divided.

The supporters of the EU value the Single Market. They seem to believe that it promotes free trade and reduces regulation: in reality it does neither. The main benefit of the Single Market is that it reduces the costs for large companies of dealing with up to 28 regulatory systems. Meanwhile, smaller companies that do not trade with the EU suffer from the full force of EU regulation.

Whether we are talking about the regulation of securities markets, the fund management industry or the insurance industry – all huge export earners for the UK – responsibility for regulation has become centralised in Brussels.

But it is not necessary to have uniform regulation across the EU to promote free trade in services. What is necessary is a strong European Court of Justice that strikes down national regulations that inhibit trade. For example, Spanish and UK stock exchanges do not have to operate by the same rules as long as Spanish companies and investors are not prohibited by their government (or the UK government) from listing and trading on the UK exchange.

There are many problems with unifying regulation across the EU. If regulation is badly designed, all countries are affected at the same time when it goes wrong. And there is no possibility of trial and error whereby countries learn from each other what works best.

Secondly, in the centralised EU system, it is relatively easy for countries that want more regulation to combine together and vote for it to be imposed on governments that want light regulation. And the nature of the EU bureaucracy is such that, once given power, it tends to regulate without restraint.

One indication of the extent of regulation is its length. The 1870 Insurance Companies Act which, in effect, lasted 100 years before we adopted EU insurance regulation in the early 1970s, was shorter than the list of typographical errors alone in one tiny part of the EU’s Solvency II regulations entitled “the technical specifications for the preparatory phase” of Solvency II. Another indicator is its cost: preparing for Solvency II cost UK insurers an incredible £3bn.

Rather than centralising everything at the EU level, we could have an evolutionary system whereby countries agree to unify their regulation if it suits them. This could include EU countries, but the principle could be extended beyond the EU (it might make more sense, for example, for the UK to unify its life insurance regulation with Canada than with Germany).

Certainly, financial regulation should not be an EU competence. And the regulation arising from the Single Market process is a big problem. However, it does not follow that Brexit will improve matters. Since the mid-1980s, we have been making a bad job of financial regulation ourselves. We have wrapped consumer markets up with more and more regulation; we have regulated defined benefit pension funds out of existence; and we now have a central bank, through so-called macro-prudential regulation, influencing the allocation of credit.

Unfortunately, it was the UK government that championed the Solvency II programme within the European Union. For 30 years now, the trend in financial regulation in the UK has been to create more of it – just as it has been in the EU. And our financial system is neither better nor safer for it.

The choice we have in June is between Britain in an over-regulated European Union and an over-regulated Britain outside the European Union. If we are going to improve how we regulate financial services, leaving the EU is not a silver bullet.

Prof Philip Booth is the IEA’s Academic and Research Director, and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. This article was first published in City AM.

Read Prof Booth’s chapter ‘Young, single, but not free – the EU market for financial services’ in the IEA monograph ‘Breaking up is hard to do. Britain and Europe’s dysfunctional relationship‘.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.