In announcing his team of commissioners, European Commission president-elect Jean-Claude Juncker appears to have taken to heart Machiavelli’s oft-repeated dictum: “keep your friends close and your enemies closer.”
British peer, Jonathan Hill’s appointment as the commissioner in charge of financial services, was one of many key portfolios given to politicians from leading member states, the specific responsibilities of which are actually the cause of significant concern for those countries.
Despite his appointment being considered a coup for Cameron by many, the reality is that Hill must balance serving two masters and his new job may actually be a poisoned chalice for the UK government. As a UK-nominated commissioner, he will be expected to strive to protect the interests of the City of London and the leading global position of the UK financial services sector.
But, in fact, his role is to work towards improving the oversight, supervision and regulation of the EU banking sector, which continues to be shored-up following the 2008 financial crisis.
There are three pressing economic and political challenges that Hill is tasked with tackling: the banker bonus cap, regulation of the shadow banking sector and a proposed financial transactions tax. Many of these policies are well on their way to completion and so Hill – and Cameron – risk being tarnished by their association with the implementation of tighter regulation.
Bonus cap battle
The most high profile issue is that of the bankers’ bonus cap. Already approved by the European Parliament in April 2013 and due to be applied fully in January 2015, the City of London and UK government continue to raise their objections to it. The cap limits bankers’ bonuses to 100% of their salary or 200% by shareholder agreement. This has already been breached in the UK, including payments exceeding the cap to the chief executives of Lloyds and RBS, both of which were bailed out by the UK taxpayers in 2008 (who still own 81% of the latter).
The UK government has also filed a challenge to the bonus cap at the European Court of Justice, arguing that the cap is contrary to other European treaties. The governor of the Bank of England, Mark Carney, has also spoken out against the cap. So Hill’s task is to tread a fine line, balancing the City of London’s interests with EU legislation and the will of the EU parliament. And, with a UK general election on the horizon in 2015, the Conservative-led government is unlikely to gain any political mileage from opposing the cap, unless the court in Strasbourg comes to the rescue.
A second issue that Hill must deal with relates to European Commission’s proposals for greater regulation of the shadow banking sector, which includes hedge funds, private equity funds and securitisation vehicles. These proposals reflect widespread concern about the overly loose regulation and supervision of the sector – notably its lack of access to central bank support and deposit insurance.
The global financial crisis highlighted the sector’s inherent vulnerability, given the magnitude of the risk inherent in its operations and the role these financial groups played in transmitting financial instability and contagion. Global shadow banking assets are estimated at €51 trillion, equivalent to around half of the regulated banking sector, with around €23 trillion in the EU – a significant proportion of which is in the UK.
The proposed regulations aim to improve transparency so as to monitor risks, increase financial stability and limit contagion channels. They also aim to ensure access to liquidity by introducing capital requirements of 3%. In addition, the proposals will require EU banks to separate their risky trading activities from deposit-taking business, as is the case in the United States.
These measures remain at the proposal stage and can expect to generate further conflict between the “light touch” regulation and supervision advocated by the City of London and the more interventionist approach generally favoured by the European Commission and European Parliament. Implementing this legislation will again require Lord Hill to seek a regulatory and supervisory balance, albeit with greater policy room to manoeuvre than on bankers’ bonuses.
Financial Transaction Tax
Finally, there is the thorny issue of the Financial Transaction Tax, originally due to be introduced in January 2014 but postponed until 2016 because of legal challenges, notably from the UK. This tax is effectively a “Tobin Tax”, imposing a transaction tax on short-term speculative deals (0.1% on bonds and equities and 0.01% on derivatives).
While several member states already impose similar taxes, UK opposition (among others) means that this tax will not gain the unanimous support required for EU-wide legislation. Instead, it has been proposed for the eurozone. The UK position on the Financial Transaction Tax, however, may soften, depending on the outcome of the 2015 general election.
These proposals for the EU financial services sector match Jean-Claude Juncker’s guidelines for his term as president of the EC, A New Start for Europe, which focus on improved regulation for growth.
Ultimately, Hill’s job is non-political, he is neither Cameron’s servant, nor the UK’s – but the EU’s. In reality he can do very little to protect the City of London and so may ironically find himself at the heart of implementing legislation to which his government at home is opposed.