VZCZCXRO8565
PP RUEHAG RUEHROV RUEHSL RUEHSR
DE RUEHLO #1828/01 2220946
ZNY CCCCC ZZH
P 100946Z AUG 09
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 3110
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 LONDON 001828 
 
SIPDIS 
 
TREASURY FOR SOBEL, MEYER, WINN 
NSC FOR HENNESSEY-NILAND 
 
E.O. 12958: DECL: 08/03/2014 
TAGS: ECON EINV PGOV UK
SUBJECT: U.S. NEEDS TO TALK MORE WITH EUROPEAN COMMISSION ON FINANCIAL SERVICES REFORM; PROPOSED CHANGES IN UK UNDER SCRUTINY  

Classified By: Economic Minister Counselor Richard Albright for reasons  1.4 b and d.   

¶1. (C) Summary. The U.S. needs to ramp up its engagement with the European Commission on financial services reform measures, HMT and City of London officials urged in recent meetings with EMIN and ECONCOUNS. Brussels is moving ahead faster on reform than Washington and London, and more worrying, without sufficient consultations with the U.S. and the UK, Stephen Pickford, Director International Finance, HM Treasury, commented, Stuart Fraser, Chairman, Policy and Resources Committee of the City of London Corporation, encouraged the U.S. to work specifically with European members of the G20, to get its voice heard more in Brussels. UK interlocutors all stressed the need for regulatory convergence between Europe and the U.S., warning that without greater engagement by the U.S., the risk of regulatory arbitrage increases exponentially. In recent meetings, HMT, City of London and other industry officials also raised concern about the plan by Conservative Party, if elected, to abolish the Financial Services Authority and fold its authorities into the Bank of England, which they said, could weaken oversight of the financial services industry, especially in the short term. End Summary.  

U.S/UK Not Paying Enough Attention to Brussels ---------------------------------------------  

¶2. (C) Stephen Pickford, Director International Finance, HM Treasury, expressed concern that while Washington and London have focused primarily on domestic reform of their financial services industry, Brussels has been drafting legislation that could have far-reaching consequences.  The Directive on Alternative Investment Fund Managers (AIFMs) is just one example. The debate over the AIFM has become acrimonious in Brussels, he said.  The French feel the directive is too weak; the Germans believe it has just about the right amount of teeth, and the British see it as too wide-ranging in scope.  The U.S. should have engaged more with the Commission before the directive was written, but conceded that even the UK had been justifiably criticized by industry for not following and influencing the debate in its early stages. However, when asked by EMIN how the US could usefully engage now, he advised against aggressive USG engagement on AIFMs now.  The U.S. would be seen as trying to protect its own self interest. Though the UK also has lost some moral standing, he said it would be best that the UK do the fighting in Brussels.  Pickford did acknowledge, however, that the British have no natural allies in Europe on market reform measures.  (Comment: Pickford also believed that the UK rather than the U.S. would be a more effective voice on the AIFM given the importance of London's equity firms for the European-wide economy. He also thought that new head of the European Parliament Economic and Monetary Affairs Committee, Sharon Bowles who is from the UK, would be more understanding of London's position. Bowles recently told the FT that there was a risk of "unintended consequences" to the draft directive and that it was time to fix "bits to make it workable.")  

¶3. (C) Regarding the AIFM directive, Fraser of the City of London was more optimistic that the directive would be modified.  He credited HMG for understanding the ramifications of this directive on London, but  thought HMG could do better at building alliances with other non-euro-zone countries such as Poland and Sweden.  He said Brussels is being driven by pressures from euro-zone countries, particularly the French, who, he said, see the crisis as opportunity to draw business from London. (Comment: Pickford made nearly the same remark about the French, saying the French see this as their moment to strike back at London's financial dominance.)  He commented that a significant part of the problem was that the regulations were being drafted by officials who lacked a full understanding of the derivative and hedge fund markets. Fraser noted that in conversations with Commission officials, he was struck by how quickly they dismissed the need to consult with and coordinate with the U.S. Fraser argued that that the UK and U.S. governments need to increase their engagement with Brussels in a deliberate and scheduled fashion. He criticized HMG for not doing a better job of explaining the importance of London's financial services industry to all of Europe, noting the lingering impression on the continent that financial services is a UK industry, whose failings were now costing all the member states. He viewed this false  LONDON 00001828  002 OF 003   impression as motivating some of the unhelpful regulatory impulses coming from Brussels. Without greater engagement by the U.S, Fraser - and Pickford as well - raised concern that regulatory arbitrage would result. The risk exists that Europe would be "walled off" - and firms would have to choose between operating within Europe or elsewhere, not both. Fraser also recommended that the U.S. work bilaterally with all European members of the G20 on financial services reform. By doing so, the U.S. voice would be better heard in and understood by the Commission.  

¶4. (C) Pickford also cautioned about precipitous moves by any major economy or bloc to enact rules that affect global markets, and pointedly criticized the U.S. action on accounting standards. He noted that the G20 April Summit Communiqu called for convergence of accounting standards, but the day after the Summit, on April 2, the U.S. Financial Accounting Standards Board eased the mark-to-market rules without consulting other governments. This move had particularly riled the French, he said.  

The September G20 Summit - Missing Elements -------------------------------------------  

¶5. (C)  Pickford raised concern about the insufficient attention given to the winding down of failing firms. There is not yet a global plan for dealing with another Lehman-like collapse. While both the recent Obama Administration and HMT proposals for financial services reform discussed the winding down of firms in the U.S. and UK, respectively, neither had adequately addressed the problem of truly global firms. Pickford also said there needs to be a better understanding of capital transfers. The USG, for example, did a laudable job of netting out U.S. domestic claims on Lehman, but has yet to fully address international claims, he claimed. The UK would like the issue of cross-border winding down of firms high up on the September G20 agenda. Pickford advocated having global firms "write their own wills", saying that if they don't do so voluntarily, G20 governments should require this from "systemically important firms."  

¶6. (SBU) Insurance industry oversight also needs to be high up on the September Summit agenda, said Fraser of the City of London. Insurance industry liabilities are a hidden time bomb, he argued, and the cross-border importance of these firms requires coordinated action plans.  Prudential PLC executives also asked about insurance oversight in a recent meeting with EMIN and econoffs. James Wilcox, Head of International Public Affairs, and Gordon Scott, Head of EU Regulatory Affairs, said they were monitoring the proposals in the U.S. to create an Office of National Insurance in the Treasury Department and the systemic risk proposals coming from the Administration.  They were particularly concerned how those proposals would affect a UK plc with a U.S. subsidiary. (Note: Prudential PLC is a UK-based financial services company, and owns Jackson National Life, based in Michigan.) Scott also noted that Prudential PLC broadly supports the EU regulation of systemic risk, but believes that supervision should be done at the national level, especially given, they said (in contrast to Fraser) that most insurance transactions are not cross border.  

The Conservatives' Plan to Abolish the FSA ------------------------------------------  

¶7. (SBU) In its July 20 paper outlining proposals to overhaul the UK's financial regulatory framework, Conservative Party Shadow Chancellor Osborne said that if elected, the Conservative party intends to abolish the Financial Services Authority and the tripartite system financial regulatory system (with responsibility shared among HMT, the Bank of England and the FSA) and replace it with a more powerful Bank of England (BOE) and a Consumer Protection Agency (CPA). Fraser from the City of London harshly criticized this proposal. "The Tories feel that just because Gordon Brown created the FSA, they need to tear it down.  This is foolish, especially in the midst of a crisis."  Elaborating, he noted that a lame-duck FSA would now find it hard to recruit retain staff - just when an experienced FSA staff is needed to step up banking oversight.  Andrew McHallum, Deputy Director of the International Financial Services, London - a trade association - raised the same concern: "With the sword of Damocles hanging over their head, who in their right mind would want to stay with the FSA?"  There is no need to abolish the FSA, added Fraser. Even if no new regulations were adopted nor greater oversight done, there would not be  LONDON 00001828  003 OF 003   an economic crisis of the scale of today's for 10-15 years, he argued.  There is just too much risk aversion in the market to permit a new crisis.  

¶8. (C) While HMT officials did not comment specifically on the Conservative Party plans, Clive Maxwell, Director of Financial Services, told us that HMT civil service had started engaging with the Tories on policy issues through the well-established pre-election consultation process.  He said that such discussions would likely intensify in the autumn and would address the possible ramifications of different policy approaches.    Visit London's Classified Website: XXXXXXXXXXXX  
LeBaron