David Worsfold considers the impact the chaotic domestic fallout from the European elections will have on the investment industry
Amid the chaotic domestic fallout from the European Parliament elections in the UK it would be very easy to lose sight of some of the wider issues that the results will influence.
Top of my list is the debate on the reform of financial services regulation as this could lead to some major upheavals for fund managers, product providers and IFAs that trade across borders.
The UK appears to have been forced onto the back foot in this debate with the European Commission setting the agenda through the report submitted last month by former International Monetary Fund managing director Jacques de Larosière with its central proposals for the setting up of pan-European regulatory bodies that potentially downgrades the role of the Financial Services Authority and other national regulators.
As well as advocating tough new rules for hedge funds and ratings agencies, this new European approach could see any firms trading in more than one EU territory regulated at an EU rather than a national level.
This could create a two-tier system and should strike fear into the IFA sector as most of Europe has a very poor grasp of the function and value of (independently) intermediated business. The UK has been lukewarm, even quietly hostile, to this policy.
The Larosière Report proposes empowering the European Systemic Risk Council (ESRC) to provide early warnings of risks to the EU financial system and giving the European System of Financial Supervision (ESFS) binding powers over national supervisory bodies - a major shift from the current system of advisory EU committees on financial regulation (the Committee of European Securities Regulators, the Committee of European Banking Supervisors and the Committee of European Insurance and Occupational Pensions Supervisors).
These proposals have been backed by the commission and are due to be discussed by European leaders at a meeting next week before going to the new Parliament.
Last week's elections make it even more likely that the European view - driven by an intense belief that the Anglo-Saxon approach to financial services regulation was one of the causes of last autumn's financial meltdown - will triumph.
In France, where President Sarkosy has led the way in challenging the US-UK view of regulation, the President's centre-right party swept the board. Similarly in Germany and, to a lesser extent, in Italy.
UK voters might find this hard to believe but from reading and listening to reports from those countries it is clear their endorsement of their governing parties is in part a vote of confidence in their reaction to the economic and financial crisis.
What this means is that the centre right European People's Party, which was already the largest party in the European Parliament now dominates it. This huge strengthening of the EPP in the European Parliament is a major boost to the backers of the Larosière approach.
In tandem with this significant electoral endorsement of the pan-European regulatory solution we have the British Conservatives walking out on the European People's Party: with them goes the one hope of any real UK influence as the proposals make their way through the Parliament.
Inside the EPP, the Conservatives might have had some say as they appear to share the broad stance of the UK government that strong national regulators backed by true global action as proposed by G20 is the right way forward, not regional regulation.
Outside the EPP, they will have no say as they line up with various fringe right-wing parties from Eastern Europe. This debate on the Tories' place in Europe may have a few twists and turns yet, however.
With a weak and totally distracted British government and no voice in the major group in the European Parliament, it is hard to see how the UK can stop it being full steam ahead for the Larosière approach.
David Worsfold is secretary to the All Party Financial Services and Insurance Committee
