I have always assumed that Wellington was taller than Napoleon. We have been told this and believed it throughout the past 200 years of history. In truth, they were both roughly of equal size.
Similarly, we are told that the EU is a free-trade zone for financial services. This is another European myth.
The New City Initiative in the UK was established to push for a change in the culture of finance, especially fund and wealth management. We would like to see a reversion to old-fashioned, employee-owned firms that are properly aligned with their investors. We want to stand up to the regulators who lump us in with the mega banks, help change behaviour, and encourage competition and choice for savers.
As a result we have always treated Europe and the regulatory mesh surrounding it with some suspicion. We have now set out a series of recommendations for reform in a report written with Open Europe, a fellow think-tank.
Astonishingly, our study found that far from an open market, Europe is neither a free-trade zone nor an open market. We discovered that if you wish to sell your Ucits fund, the European retail fund structure, in each of the 28 member countries, it would cost you an initial €1.5m and then €1.4m annually simply to maintain that access.
Alongside this is the cost of EU regulation to my industry in the UK, which we estimate to be around £2bn.
We are very troubled by what we see happening in Europe and make a few suggestions.
The first reform has to be a truly unified single market for financial services products. Our study found that rules are applied inconsistently and some regulators had little understanding as to their own obligations.
Second, we found that countries such as Germany use tax reporting as a further barrier to entry for fund companies wanting to sell to that jurisdiction. We would push to nullify these anti-competitive measures.
Third, Europe takes a one size fits all approach to financial services when it comes to differentiating between retail and institutional investors. This means every document of every share class requires translations into local languages. We would press urgently for a split between the two industries, thus negating the need for many of these translation costs.
Four, the international boutique asset management industry is a jewel in the crown of the UK. However, international companies, with clients based outside the EU and doing no business in the EU, still suffer the same regulations as a business working in many EU countries. We would press the UK government to gain a “ carveout” for companies located in London, but not doing business in the EU.
We want a vibrant network of countries where, within a solid regulatory framework, we can operate and grow. We want to see a proper free-trade zone, not the distorted version we currently have.
The truly frustrating point we make in our paper is that everyone has to pay the high cost to be in Europe — but almost no one, except for the largest companies, can take advantage of the markets on offer.
One of the main challenges facing Europe is to find a way to grow its economies. The only way we will be able to achieve this is if we have a free and open economy in the first place. We must balance the costs of regulation with the opportunities presented by the markets and bring some common sense back to how we encourage capitalism to flourish.
Our ambition is to present a positive case for a proper free-trade zone and I hope that our paper will help policymakers and negotiators achieve this goal.
Dominic Johnson is chairman of the New City Initiative and founder and chief executive of Somerset Capital Management
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