Financial Regulation

A little-known aspect of EU reform over the past few years has been the creation of new laws designed to ensure that the financial crisis of 2008 can never happen again.  The crisis, when many of Europe's banks and building societies were crippled initially due to massive losses in America, illustrates the necessity of coordinated common action on an obviously cross-border issue.  The financial crisis was bigger than any one country, and common rules ensuring banks cannot play one state regulator off against another ensure the system as a whole should be more stable.

Major banks and companies now have subsidiaries in many European countries besides their home state and financial transactions can now cross borders in the blink of an eye.  Co-operation across the EU single market will ensure transparency in regulation.

The EU has introduced: 

  • A new set of laws on capital requirements for banks which ensures that they have an adequate buffer in terms of equity to survive a downturn in fortunes.
  • A cap on bankers' bonuses to eliminate the perverse incentives which see bankers given short term incentives to speculate against long term stability, and which reward them even for poor performance.
  • Updated laws regulating derivatives and exotic financial instruments which helped cause the crisis through mass exposure to bad debt, and preventing excessive speculation in commodities.  Hedge funds are also regulated for the first time.
  • New bank resolution procedures and funds will ensure that there will be no public bailouts for failed banks in future.  The banks themselves and their creditors will pay for their resolution, and they must have a clear plan in place for an orderly wind-up or sale if the worst happens.  The major banks in the Eurozone will also be directly supervised by the European Central Bank.
  • The European Commission has proposed the strengthening of deposit guarantee schemes to ensure that small and medium sized depositors do not lose their money if their bank goes bust. 

The EU is also taking action on tax avoidance and evasion by multinational companies.  Laws such as the Parent-Subsidiary Directive make it more difficult for these companies to avoid tax by transferring profits and losses between different branches in different countries.  And the Commission is now cracking down on lucrative "sweetheart deals" between certain Member States and major corporations known as "tax rulings" which enable them to pay a special low rate of tax.  For example, the European Commission decided that the Netherlands gave Starbucks unfair tax advantages, that this constitutes illegal state aid, and Starbucks will have to pay €20-30 million back to the Dutch taxpayer.[1]

Leaving the EU would mean Scotland would no longer - necessarily - be protected by these standards.  It is possible that the UK Government would prioritise the consumer over the banks and financial institutions, but we have their track record to judge them upon.  The UK Government certainly has had EU financial regulations in its sights for some time - they attempted, unsuccessfully, to have the European Court of Justice rule the bonus cap illegal.[2] And they have not taken tackling tax avoidance seriously at all: shown by the recent agreement by HMRC to allow Google to pay only £130 million in back taxes on billions of pounds of sales in the UK going back to 2005.[3]  It's in Scotland's interests to be part of broader efforts to protect against financial instability, and with EU membership we can have a direct say in shaping these laws.