FSA chief executive Hector Sants says UK regulators will effectively become an arm of the wider European agenda and the shift is already under way.
Speaking in London last week at Reform’s conference on the future of financial services, Sants said firms need to temper their expectations over how much the UK can influence changes in EU regulation.
He said: “The London supervisory architecture is effectively an arm or an extended part of a wider, European agenda. The City, despite pleading with regulators to influence Europe, I think underestimate the degree to which the regulatory landscape has already changed fundamentally.
“Until all firms understand that shift has already occurred, I think there will continue to be a mismatch between expectations and the reality of what the national regulator can do.”
Treasury financial secretary Mark Hoban, speaking on a separate panel at the conference, agreed that Europe is “increasingly setting the framework” for regulation but said UK authorities want to work with industry to influence the changes.
He cited the “complete reversal” negotiated by the UK over the European Commission’s alternative investments fund managers directive as evidence that the UK does influence European regulation.
He said: “In the space of just a few short months, we negotiated a complete reversal of the commission’s position. Rather than see managers from outside the EU frozen out, they will now be able to trade in Europe as well. From my point of view, this is of huge significance.
“While important, in the grand scheme of things, this is only one small victory. There are many other directives over the horizon, so we want to work with the sector to identify ways we can improve the function of the European markets.”
He said that any new European regulation should be “appropriate” and avoid “kneejerk reactions” as a result of the financial crisis.
British Venture Capital Association’s head of public affairs Tim Hames told conference delegates that the shift of regulatory power to Europe is so fundamental that domestic regulatory changes are almost irrelevant. He said domestic regulatory changes are only relevant to the extent of the disruption they could cause.
Hames said the upheaval could mean UK regulators “take their eye off the ball” during the technical negotiation stage of the alternative investment fund managers directive which is under way after it was passed by the EU in November.
He said: “The sheer force of the migration of regulatory policy means transition within UK regulatory arrangements is only relevant in as far as the disruption effect of that process may screw up the UK and the FSA during the two years of negotiations that follow this directive.”
Hames also said there has been a failure to understand the scale of the “huge shift” to a safety-first culture in Brussels. He said: “It is understandable but it comes with certain risks. After all, the monkeys that stayed in the trees pursued a perfectly rational safety-first strategy but they missed out on humanity.”