How the UK holds back global financial regulation

This report argues that the UK is subverting progress towards a safer financial system, and has become a major barrier to international efforts for reform. The report, 'Subverting Safer Finance' by NEF reveals that compared with other major financial centres, including even the US, the UK is part of the problem in key areas of financial reform, rather than leading the search for solutions.

“In the UK, we are presented with the idea that we cannot act alone on financial reform and other nations stand in the way of global financial stability. We ask whether the reverse might be the case, and the UK itself is a ‘haven’ that threatens the stability of the global economy. We call for the UK to live up to its image as a pre-eminent global financial centre and demonstrate strong international leadership on better regulation instead of pandering to vested financial interests.” says Tony Greenham, head of Finance and Business at NEF.

In areas including potentially damaging commodity speculation, the Alternative Investment Market, naked short-selling and the operations of British tax havens, the UK is holding back urgently needed regulation. Subverting Safer Finance finds that:

- London is a major centre for commodity trading, yet instead of demonstrating leadership, the UK is lagging ever further behind the US.* And while the EU is trying to support global regulation by raising standards towards those of US legislation, the UK’s response is to block any attempt at reform.
- A London exchange called the Alternative Investment Market (AIM), has pursued a strategy of winning new business by driving down standards of transparency, governance and investor protection.
- The US banned naked short-selling (a form of trading that many argue increases market volatility and instability) in 2008. The European Parliament is seeking to impose an EU-wide ban on naked short-selling. But, the UK government is trying to derail this initiative.
- While the UK claims it cannot influence tax havens, many of which territories are in fact UK Crown Dependencies or Overseas Territories, a past history of intervention suggests otherwise. An HM Treasury review confirms that the UK has reserve powers enshrined in the constitutions of the Overseas Territories to affect and block legislation. The UK also has the power to intervene to uphold ‘good governance’ in the Crown Dependencies. This means that in several cases the UK is actively choosing to not tackle tax havens.

* The US banned naked short-selling (a form of trading that many argue increases market volatility and instability) in 2008. The European Parliament is seeking to impose an EU-wide ban on naked short-selling. But, the UK government is currently trying to derail this initiative.

London and the Crown's overseas tax havens - world financial nexus of crooked capital:

* In several cases the UK is actively choosing to not tackle tax havens. While the UK claims it cannot influence tax havens, many are UK Crown Dependencies or Overseas Territories, where a past history of intervention suggests otherwise. HM Treasury confirms that the UK has reserve powers enshrined in the constitutions of the Overseas Territories to affect and block legislation. The UK also has the power to intervene to uphold ‘good governance’ in the Crown Dependencies.
* London is a major centre for trading in commodities, including food, yet instead of helping ensure that these vital markets operate in a fair and orderly manner, the UK is lagging ever further behind the US, and blocking EU attempts at reform.
* A London exchange called the Alternative Investment Market (AIM), has pursued a strategy of securing new business by driving down standards of transparency, governance and investor protection.



In order for the UK to demonstrate that it wants a to deliver a safer financial system, NEF believe the minimum necessary actions include:

- Bringing standards up to US levels by introducing position limits on speculators in commodity markets and creating a UK equivalent of the US Commodities Futures Trading Commission.
- Eliminating tax havens that are under UK control, and work with the US, the EU and other international authorities to co-ordinate regulation of global tax evasion and avoidance.
- Banning naked short-selling to bring the UK into line with the US, Japan, Hong Kong, India and Australia.

“Pushing soft-touch regulation as good for an ailing economy is like doping a horse that is already sick from taking too many drugs. It isn’t going to work and will probably make matters worse. If the government wants a safe and stable financial system it should stop the UK dragging down international efforts toward financial reform. If it doesn’t we are in danger of being seen by our neighbours as a financial rogue state, subverting safer finance,” says Andrew Simms, nef fellow and a co-author of the report.

”The UK exerts a downward pressure on the quality of financial regulation in a range of ways. These findings contrast starkly with the dangers of Britain ‘acting unilaterally’ that are frequently voiced by the banking lobby in response to even the slightest hint of real reform. London can and should compete on the quality of its services, not on the laxness of its regulation and its tolerance of market abuse.” says Lydia Prieg, a nef researcher and a co-author of the report.

In order for the UK to demonstrate that it wants to deliver a safer financial system, NEFcalls for a range of minimum necessary actions to be implemented immediately which include:

* Commodity speculation: Bring standards up to US levels by introducing position limits on speculators in commodity markets and create a UK equivalent of the US Commodities Futures Trading Commission.
* Tax havens: Eliminate tax havens that are under UK control, and work with the US, the EU and other international authorities to co-ordinate regulation of global tax evasion and avoidance.
* Naked short-selling: Ban naked short-selling to bring the UK into line with the US, Japan, Hong Kong, India and Australia.

The risk is that by engaging in a race-to-the-bottom on financial reform, the UK undermines global financial stability with potentially devastating consequences for the global economy.

Ann Pettifor, nef fellow and Director of PRIME says: "Last week the Chancellor argued in his Budget statement for the City of London to be a 'leading financial centre' and for Britain to lead in "advanced manufacturing, life sciences, creative industries..(and) green energy.” The two are incompatible. The City of London's interests conflict with those of industry. Unlike industry, the City enjoys massive taxpayer-backed subsidies and protection. By refusing to reform the City, the government is condemning industry to a prolonged drought of lending and to high borrowing costs - not just in the UK, but around the world. We must return bankers to their role as servants of industry and society - not masters."

Neal Lawson, Chair of democratic pressure group, COMPASS says: “The British government seems eager to return to business as usual when it comes to City excesses. The lesson of the crash is that finance has to be saved from itself at a global level – our government seems to want to hinder this process rather than help it.”

John Christensen, Director, Tax Justice Network says: "By placing the special interests of the City of London and its offshore tax haven satellites ahead of public interest, the government threatens future prosperity and stability around the world. Britain cannot continue to duck its responsibility to effectively regulate its offshore financial sector."

Richard Murphy, director of Tax Research UK says: "The UK has a sorry record on tax havens. It does not demand transparency and accountability of the great many for which it approves legislation. Nor does it demand that they comply in full with regulation such as the European Union Savings Tax Directive. Worse, the current government is actively opposing adoption of measures such as country-by-country reporting for all multinational corporations that would reveal just how much they hide in the world's tax havens. Maybe that's because their latest corporation tax initiatives actively encourage UK based companies to hide their profits in those places. If, however, it's going to solve the deficit this will have to change. You can't balance the books when some of the cash is hidden from view and sometime soon the UK will have to realise that reform is essential."

Julian Oram, Head of Campaigns at the World Development Movement says: “The UK is one of the main hubs for financial speculation on commodities. This is pushing up the price of food and fuel for people everywhere, and causing hunger and political unrest in the world’s poorest countries. The government needs to stop protecting the interests of a handful of super-rich traders and start doing what’s right for the good of all.”