Britain's euro fox without fangs

Since it was over-ruled by other EU countries over the appointment of Jean-Claude Juncker as president of the European Commission, the UK has spent the last few months lobbying hard to obtain the Brussels job that it most wants - the one with wide-ranging powers over the City of London.

But the proposed appointment of a Brit to supervise a clean-up of a sector whose world capital is London has been compared by European critics as akin to putting a fox in charge of the chicken coop.

UK intransigence seemed to have paid off when a conciliatory Juncker backed Cameron's nomination of Lord Hill, offering him the plum job of commissioner for financial stability, financial services and capital markets union. But after three hours of questioning by MEPs on Wednesday, during which Hill pledged to work for the European interest, the former lobbyist failed to win majority support.

Some MEPs on the influential economic and monetary affairs committee said that Hill had not proved his grasp of the financial services brief. But his ­supporters claim that the knives were out for Britain's man in Brussels, with many blaming the Anglo-Saxon neoliberal business model as a ­principal cause of the crash of 2008.

Others, meanwhile, have thought it unlikely any chum of Cameron was ever likely to confront vested interests in the City in the same way as the previous internal market and services commissioner, Frenchman Michel Barnier, who was viewed with a mixture of suspicion and loathing in the Square Mile.

Next week, Hill will have a second chance to convince sceptics in Brussels. If he fails to do so, he could - humiliatingly for Cameron - be rejected as a commissioner, or moved to another job.

Assuming he scrapes through, one of his key tasks will be overseeing the introduction of a new eurozone banking union, which some regard as the EU's main response to the four-year debt and currency crisis. The new commissioner will, from next month, oversee a massive transfer of sovereignty from national capitals to the European Central Bank when it becomes the supervisor of the eurozone banking sector. But questions have been raised in Brussels circles over the suitability of having a commissioner from a non-euro country in the role.

In a possible bid to disarm critics in the European Parliament ahead of last week's hearing, Juncker had taken away from Hill responsibility for implementing plans to cap ­bankers' bonuses at twice their annual salary - a move widely resented by the City of London.

Hill would also be expected to oversee the creation by 2019 of a so-called capital markets union, which aims to secure more financing from markets for companies and infrastructure projects in an effort to drive growth.

The aim is for Europe to follow the example of the United States, where up to 70% of funding for the national economy comes from markets, and the rest from banks. In Europe, the ratio is almost the exact opposite. The US's lesser reliance on bank funding is widely thought to have helped its economy bounce back from the financial crisis more quickly than Europe during a time when banks have cut lending to focus on building up capital buffers.

Claims that regulation is restricting creativity in the financial sector appear not to have widespread support among industry leaders north of the Border, who have more practical and narrower concerns.

Laura Lambie, Edinburgh-based senior investment director at Investec Asset Management, said any move which aims to improve the flow of cash - such as the proposed capital markets union - would be good for companies, the financial services industry and for the national economy.

The asset management industry had been more seriously affected by recent US regulations which require EU companies to report the identities of certain policyholders - some of whom have no American connection - to the US tax authorities. Complying with this created far more extra paperwork for asset management firms than any recent rules from Brussels, Lambie said.

Ian Fraser, a financial journalist and author of an acclaimed account of Royal Bank of Scotland and the financial crash, noted the significance of there being around 1700 lobbyists in Brussels working to advance the interests of the financial sector, and only two or three organisations lobbying to advance the interests of consumers and other users of finance.

Because of that, and the need for consensus politics in EU institutions, most commission proposals end up being heavily watered down before they are finally agreed.

Fraser said bankers' bonuses were one of the fundamental causes of the crash as they had encouraged excessive risk-taking aimed at quick short-term profits, and discouraged long-term thinking.

The fact that Chancellor George Osborne was using taxpayers' money to try to challenge the legality of the new rules on bankers' bonuses showed the Conservatives are "in the pocket" of the City, Fraser said.

Greg Ford of Finance Watch, a Brussels-based lobby group which describes itself as a "public interest counterweight to the powerful financial lobby", said that the last four years have seen a barrage of new EU legislation designed to stop any repeat of the financial crisis.

These have included proposals to curb the freedom of the largest banks to engage in proprietary trading (where banks use their own funds for investments to boost profits for their own gain) and regulating the shadow banking system - which includes hedge funds, private equity and securitisation - which also helped spawn the credit crunch.

According to Ford, the following five-year mandate of the European commission and Parliament will probably be a period of consolidation, implementation and "perhaps even some backtracking," he said. "The big question is whether we now see the pendulum swing back to a period of laissez-faire."

Nevertheless, there remains a number of dossiers to be taken forward by the next commission. Foremost among them is the implementation of the so-called Liikanen Report on restructuring Europe's banks which are deemed as too large to be allowed to fail.

If the report's recommendations are implemented they would force creditors to take the hit when banks fail, reducing the risks to taxpayers of having to bail them out - during the financial crisis, publicly funded bank bailouts swallowed up 13% of the EU's gross domestic product.

Ford said: "We do think that the banking proposal is fundamental because it goes to the heart of so many problems in the banking sector, such as speculative trading, conflicts of interest, excessive risk-taking and risk transfer."

The EC also wants to regulate financial and commodity benchmarks in an attempt to stop any repeat of the Libor rate-rigging scandal. The aim here is to beef up criminal sanctions on market abuse and attempts to manipulate the reporting of key interest rates.

Another proposal, which the UK fought successfully to resist, is the introduction of a "Robin Hood" tax on financial transactions. The original aim was for it to be EU-wide, but it now looks set to be introduced in only 11 of the 28 member states.

The proposed tax would cover transactions on derivatives, shares and bonds involving a party located in one or more of the 11 countries which have opted in. However, the original proposal has been watered down so much that it will probably resemble the UK's existing stamp duty on equities by the time it is finally implemented.

The proposed tax is seen by supporters as a way of ensuring the financial industry makes a fair contribution to the public purse and make banks pay for their share of the cost of rescuing them during the financial crisis.

Owen Kelly, chief executive of Scottish Financial Enterprise, which represents the country's financial services sector, said the current focus of the industry is establishing a single market for financial services, which will allow companies to sell their products throughout the EU.

He said: "Further entrenchment of the single market is good for Scotland's fund management and asset management.

"These are areas that Scotland is good at and where the single market is really working, and we think there is opportunity there."

He added: "There has been a lot of additional work for the industry because of recent regulatory changes in terms of compliance. What is needed now is a period of time for the legislation to bed in.

"Most of the measures introduced by the EU in recent years have made the financial system more stable and in the long-term that has got to be good for consumers."

According to Colin McLean, managing director of Edinburgh-based SVM Asset Management, most of the regulatory measures imposed on the financial sector by Brussels have so far had a limited impact in Scotland as the country's main expertise is in investment and asset management.

He said: "New rules have added slightly to complexity and costs, but I think that most of them have not fundamentally impacted on our business model. The financial services industry is more transparent, more competitive and more stable, and consumers will benefit from fewer systemic risks."

McLean also questioned how much real power Hill will have, and said he doubted he would be as influential as Liberal Democrat politician Sharon Bowles, who chaired the economic and monetary affairs committee of the European Parliament until she stood down as an MEP in May. The Conservatives had lost much influence in Brussels since 2009, McLean said, blaming Cameron's decision not to join the mainstream centre-right political group in the European Parliament.

He said: "Overall, I think the UK is reasonably well placed but there is still a lot of pressure on the financial sector from a lot of politicians who are elected with mandates to impose tougher legislation. There is a big underlying pressure to make the banking sector pay for a long period of austerity and misery around Europe."

SNP MEP Alyn Smith also wondered how much power Hill will really wield. Smith thinks those who fear Hill is a City-sponsored fox, unlikely to act to the benefit of the chicken-like European consumer, may eventually be persuaded he will be a fox without fangs.

He has already been stripped of any responsibility for the implementing caps on bankers' bonuses, and the new structure of the College of Commissioners means any proposal put forward by Hill could be over-ruled by either commission vice-president, Frans Timmermans, or by Juncker himself.

France's Pierre Moscovici - lined up to become the economic and financial affairs, taxation and customs union commissioner - is also likely "to be calling the shots over Jonathan Hill", said Smith.

"The idea that this is some sort of plum role is nonsense: it is a classic Brussels stitch-up. It makes the British think they have got something significant when they haven't."

Hill clearly has a lot to prove. It could even be that the suspected fox could yet emerge as a promoter of chicken welfare.