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Speaking Out

London First, a pro-EMU campaigning group, announced in 1999, ‘Most European business leaders expect Frankfurt to overtake London as a financial centre within the next five years.’ How could that possibly be true?

Does it not matter that as one top Japanese stockbroker told me ‘You can only do local business in Frankfurt. In London you can trade with the world’?

What is it that we are in danger of losing? Ladies and gentlemen it is no less than the jewel in our economic crown.

As a short form, I am going to refer simply to London or to the City but of course the industry is spread across the UK.

London is the heart of the world's financial business and the centre of financial innovation. And the City itself has no less than 800 years' experience in providing those services.

I make no apology for listing what we are supremely good at: we do not often give ourselves a pat on the back!

Financial services account for over 15 per cent of UK GDP. They are the single biggest contributor to our economy. They employ around 1 million people, including over 300,000 in London. Last year they generated net overseas earnings of £14 billion.

The City has played a key role in establishing the euro as a major international currency for trading and investment. London is the leading centre for euro trading even though the UK is not in the euro. They could not have done it without us!

London is the biggest market in the world for derivatives traded over-the-counter with over one third of global turnover last year. 

LIFFE is the world centre for euro money market derivatives trading. It is the biggest electronic exchange.

The London Metal Exchange is the biggest metals exchange in the world.

London is the world's largest fund management centre, with total assets under management exceeding £2,725 billion in 2000.

London has the most comprehensive range of specialist maritime services in the world, and despite Gordon Brown’s best efforts, net overseas earnings are around £2 billion a year.

London is the world's most liquid spot market for gold, for gold lending and the world clearing centre for gold trading.

More foreign companies are listed on the London Stock Exchange than any other exchange including the New York Stock Exchange and NASDAQ combined.

London is the major centre for the international bond market.

London is one of the two leading centres for international legal services, the other being New York. Five out of the largest ten law firms in the world are based here.

London is the world's largest international insurance and reinsurance market.

The London foreign exchange market is the largest in the world accounting for a third of global turnover, more than New York and Tokyo combined, and is six to seven times the size of Paris and Frankfurt combined.

And last but not least, there are more German banks in London than in Frankfurt, and more American banks in London than in New York.

I think you get the picture!

Why is London pre-eminent? It has low tax, low regulation, London straddles the world time zones, we speak English, we benefit from English law, a low level of corruption and a top quality work force.

Despite all that, our jewel in the economic crown can disappear with lightening speed if the conditions change.

Let me give you one little known but personal example from over 30 years ago. My father was a bullion broker in the City. On a Thursday the British government upset the South African government. On the Friday, the bullion market closed in London as usual, but it reopened on the Monday in Zurich. That is how fast things used to move. Just think how fast they move today. Or as the head of my old firm Morgan Stanley used to say professionals will work anywhere. And they do – they catch the next plane out.

We have already seen with the art market what happens when the tax regime changes, in this case VAT, a Brussels tax. The British art market is on the move from London and much of it is now in New York.

Today, Britain’s financial service industry is under attack as never before and from several directions orchestrated by Brussels under its Action Plan for A Single Financial Market by 2005.

The plan combines changes in tax, pensions, regulation and creating one stock market. All these issues are equally important but today I am concentrating on the regulatory changes. But may I remind you that we are still fighting off the EU Savings Tax Directive and trying to divert its main focus to exchanging information on savings held abroad, though even that is not satisfactory.

So enthusiastic have we become in our attempt to deflect the worst of the tax that our man in Bern is telling his Swiss hosts at every opportunity that they should relax the famous Swiss confidentiality and provide EU tax officials with bank details of suspected tax dodgers. Our ambassador diplomatically says Swiss law is outmoded, immoral and wrong. This disgraceful state of affairs is all because the EU withholding tax on savings would severely damage the City's Eurobond market. And it is setting friends against each other.

So tax aside how far has the EU attack got? Starting as early as 1964 Brussels has been sniping at the City. The pace accelerated in the 1980s and 1990s with nine unhelpful directives particularly affecting insurance and banking.

That attack is now accelerating

 The trigger was the twelve years a take-over directive took in discussion only to be voted down and out. As a result France persuaded the EU Commission to speed things up. France wanted a new super-regulator that could adversely affect the London Stock Exchange and extend EU control over the City.

The bottom line is, as usual, a Franco-German stitch up: Frankfurt will eventually get the markets and Paris will control the regulation. At least that’s the plan.

In anticipation a voluntary Europe wide organisation was set up. The Federation of European Securities Exchanges is based in Brussels. Since 1999, the Federation has organised conferences on financial markets, in close co-operation with the Frankfurter Institute based in Berlin.

In July 2000 the EU Commission appointed a committee of so-called Wise Men to examine the regulation of the securities markets, which rapidly reported only eight months later. That tells us how badly they need our money!

A Belgian, Baron Lamfalussy, headed the Wise Men. He had been on the Delors Committee in the 1980s that led to the euro, and was later President of the European Monetary Institute, forerunner of the European Central Bank. A thoroughly sound man!

The "wise men's group" was rightly seen in London as an attempt to harmonise stock exchange rules. You may remember that Laurent Fabius, the French Finance Minister, charged that he had been unable to read a British counter plan for financial regulation, because the British had not faxed it until midnight on the Sunday before the initial meeting, and he did not have a fax machine in his hotel room. The British plan focused on competition and flexibility and let each country set its own rules. Some hope of that! No wonder a Frenchman did not want to read it!

In November 2000 the wise Belgian, Baron Lamfalussy, and his men decided there should be no European version of America's Securities and Exchange Commission  - yet. The Wise Men noted the incompatibility of legal systems and business cultures in different states. Corpus Juris will of course sort that problem out!

And the mind boggles at the vision of a European version of the American SEC when it does come, kicking down doors in London, confiscating documents and ordering Anglo-Saxon capitalists to answer questions.

Meanwhile the report proposed a committee of EU regulators, the European Securities Committee. And it has recently started work in Brussels.

Broad principles are established through primary legislation, under the codecision procedure, with the details left to the new European Securities Committee (ESC).

Amazingly this unelected committee has legislative power and decides by majority voting. So decisions may well go against the interests of some member states - for that read the UK. This is some committee!

An EU Commissioner chairs it and monitors the whole process. Its members are at secretary of state level.

To maintain a residual member state interest that committee is advised by the new European Securities Regulators based in Paris (note, not even in the same country as the parent committee) and chaired by a member state representative.

In summary, the EU Commission runs the first committee in Brussels, which legislates, and the member states can advise from Paris.

The whole system will be reviewed in 2004 when member states, and democracy itself, can expect to be further demoted.

There is no doubt that the ESC is an embryonic Securities and Exchange Commission. The Stock Exchange told me that the French are talking very seriously about this proposal, nicknamed EuroSec, and it is causing concern in London.

So what is being enacted? The Lamfalussy Report laid down a 4-stage procedure for implementing 42 items of securities legislation by 2004 from the principle to enforcement.

The four most important directives out of the current 42 are:

1 The Investment Services Directive is rightly called the constitution for the capital markets of Europe. This key directive upgrades a previous one and new proposals are due out this month. It will give market operators a passport or licence to go anywhere in the EU to do business and involves harmonising standards. There is of course concern in London that one size does not and cannot fit all.

2 The Prospectus Directive applies to issuers wishing to raise money – the lifeblood of the financial exchanges and why they exist in the first place. The principal is that if you wish to raise money you should be able to go anywhere to do so. In fact the EU is proposing that you will have to go to your own country first. No longer will you be able to go anywhere that would suit your company and your shareholders which British companies do today. So we are going backwards.

The City thinks this is contrary to an Anglo-Saxon free, flexible approach and we don’t need it.

3 The Market Abuse Directive (aptly called MAD) seeks a common approach. We in Britain are content with our system especially since the FSA was given more powers this time last year and our system is sophisticated. The new directive is likely to be finalised by the end of this year. Unfortunately Brussels has got an attack of anti Americanitis and specifically Enronitis and is trying to include research analysts in what should be a simple directive. It will be complex and retrograde.

4 The Regular Reporting Directive concerns information companies put out to investors. We in London have a very sophisticated system enhanced again at the beginning of this year. On top of the twice-yearly company reports all companies can put out ad hoc alerts via screens round the markets, and to individual investors via email alerts. In that way price sensitive information gets out quickly and widely.

Unfortunately Continental companies have no history of being good at putting out price sensitive information on an ad hoc basis – they have no flexibility - and it is to that level they wish to reduce us. So quarterly reporting is likely to be introduced which will be more costly and less flexible  - somewhat like the US. Again going backwards.

With these four directives, and the other 38 in the pipeline, the EU expects that there will be fewer markets and ultimately one market, an EU market.

Nor is this all. You would think that such a great success story as the City would have few serious detractors within, only those trying to make it even better. Unfortunately there are Quislings. Not only are some of the banks like Deutsche Bank firmly on the EU side, as we would expect, there is now a branch of the Britain in Europe campaign in the City set up just over a year ago with over 50 members on its council. Many superannuated politicians now have remunerative and influential positions in the City.

Here are just a few of the old favourites active in the City in Europe:
 Lord Brittan and Lord Tristran Garel-Jones at UBS Warburg; Lord Tugenhat Chairman of TU Fund Managers;  Lord Howe at JP Morgan; Peter Sutherland Chairman of Goldman Sachs; Lord Dick Taverne, Chairman of AXA, and Adair Turner, Vice Chairman of Merrill Lynch Europe. Interestingly the Chief Economists of both KPMG and PricewaterhouseCoopers are both members. Perhaps they are anxious for the many lucrative contracts put out by Brussels.

In conclusion, ladies and gentlemen, we in Britain are being lined up to take the financial strain from the struggling German economy. And French and German envy and their need to dominate and control are paramount. As a result we will be very second rate, on the fringes of Europe.

I am sad to say as a Conservative that my party in Strasbourg not only voted for the Single Financial Market, but in speeches enthusiastically supported it.

There can be no excuse for cheering at the destruction of the City of London.

Ó Lindsay Jenkins, London November 2002

Lindsay Jenkins is the author of Britain Held Hostage, The Coming Euro-Dictatorship (foreword Frederick Forsyth) and The Last Days of Britain, The Final Betrayal (foreword Lord Lamont of Lerwick)