In the 20 years to 2008 the UK’s exports of financial services rose over 17 times, at an astonishing compound annual rate of over 15%. In 2008 they totalled almost £53 billion, about 4% of our national output and more than 20% of our trade receipts from abroad.
The surge in international financial services was part of a larger boom in international business services, which was basic to the economic dynamism of London and the south-east of England in this 20-year period.
Part of the boom in financial services reflected the emergence of new kinds of fund management business, notably private equity funds using innovative leveraged financing and management incentivisation methods to extract the best return from unquoted company assets. Hedge funds with more diverse investments have also prospered using similar leveraged funding.
But since 2008 the UK’s exports of international business services have fallen, with a particularly marked decline in financial service exports. These are now down by over 25 per cent compared with the peak quarter three years ago. Part of the explanation is of course a cyclical weakening in activity due to the Great Recession. But also important have been new regulations and restrictions imposed by the European Union. While the challenges to our prosperity from the Great Recession will fade over time, the challenge from the new EU regulations is long-term, radical and very dangerous.
AIFM Directive addresses a problem that does not exist
For private equity funds and hedge funds the most immediate new regulatory threat is the EU’s Alternative Investment Fund Management Directive which will be in force by January 2013. By making demands for the supply of new information to regulators and others, it will impose constraints on normal business practice (where confidentiality is often essential for a transaction to proceed) and add to costs. It also imposes impracticable investment consultation obligations and restrictions on remuneration. Worse, it enables national regulators to impose limits on leveraging relative to funds’ equity share capital, regardless of the quality of assets acquired.
The Directive addresses a problem that does not exist. The financial crisis may be laid at many doors, but not at those of private equity and hedge funds. It was imposed without any genuine impact or costs assessments being carried out by the EU. Teams of top professionals in these fields, often with outstanding records of management success, have left the UK and moved to a non-EU location in Europe (such as Zurich or Geneva) or to a non-European centre altogether. The UK and in fact the EU have lost well-paid jobs and valuable expertise. Other continents, notably Asia and North America, are the winners.
The pernicious AIFM Directive is to be administered by the newly-created European Securities and Markets Authority (ESMA) based in Paris. ESMA controls are likely to include powers to determine the jurisdictions in which funds may deposit cash and assets on the grounds of “prudential supervision”, in effect restoring a kind of exchange control. The new regime will also mean individual firms will be subjected to enforcement of more than 20 distinct EU laws with additional directives falling under ESMA power. American and Asian money has already been deterred from investing in European private equity and hedge funds, and these funds face contraction due to restrictive conditions to be imposed by the ESMA.
With 80% of all European hedge fund business being conducted in the City of London the impact on the Directive on the UK is grotesquely disproportionate. The EU seems determined to penalise the most successful part of the British economy. Yet it was openly supported by the Coalition in ECOFIN in October 2010
EU supervisory regime
Also deeply worrying are ESMA decisions to ban the short selling of certain types of securities, and restrictions on the origination and trading of OTC derivatives. Meanwhile, the ESMA has announced that credit rating agencies are to come under its control. It is fantasy to imagine that – while the UK remains in the EU – the powers of the ESMA over our financial sector can be contained. The UK has only 8.7% of the votes on decisions made under the new supervisory regime. Michael Barnier, the EU’s Commissioner for the internal market and services warned in July 2011 “….we are moving towards a single European rulebook, with more directly applicable legislation. Rules which will be imposed on everyone will have to be interpreted in the same way across Europe, unlike what has been happening until now”. And yet, astonishingly, Conservative MEPs voted to support this regime.
Real and imminent danger for the City
We must now do everything in our power to defend the City of London’s position as Europe’s main financial hub. If we wait, the pace of decline will gain momentum and we will lose our present advantage of “critical mass”. The UK financial system benefited, until very recently, from the ability of our own Parliament to determine the legal and regulatory framework, and from the flexibility and “light touch” approach of the Bank of England. Unless the City of London reinstates and defends a favourable business environment, its international leadership could be lost in a few years.
Those impacted by these threats must recognise that – while our country remains in the EU – they cannot be dispelled by any power or will of the British government. Only withdrawal from the EU regulatory regime imposed from Brussels and Paris can bring back the business freedoms on which the City depends in the highly competitive global marketplace of the early 21st century.
The UK Independence Party is committed to restoring British control of the legal and regulatory framework of all international business service activity carried out in our country. We are therefore making a direct appeal to you. UKIP is now seen as likely to top the poll in the 2014 European elections. This will put immense pressure on the government to hold an ‘In/Out’ referendum as a condition of UKIP support for a Conservative party desperate to staunch the leakage of votes in the General Election a year later. Help us to secure the City before it is too late
You may not agree with everything that UKIP represents. You may not vote for us. But UKIP is the only political party devoted to the recovery and preservation of our national independence. If you donate to this appeal, you do not become a member of UKIP or make a voting commitment of any kind. But events have combined to put us in a position in which we can both place the City at the top of the political agenda and also require a referendum on our exit from the EU.
