Restoring UK Law Freeing the UK's Global Financial Market
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Barnabas Reynolds Restoring UK Law Freeing the UK's Global Financial Market POLITEIA Editor: Sheila Lawlor A FORUM FOR SOCIAL AND ECONOMIC THINKING POLITEIA A Forum for Social and Economic Thinking Politeia commissions and publishes discussions by specialists about social and economic ideas and policies. It aims to encourage public discussion on the relationship between the state and the people. Its aim is not to influence people to support any given political party, candidates for election, or position in a referendum, but to inform public discussion of policy. The forum is independently funded, and the publications do not express a corporate opinion, but the views of their individual authors. www.politeia.co.uk Restoring UK Law Freeing the UK's Global Financial Market Barnabas Reynolds POLITEIA 2021 First published in 2021 by Politeia 14a Eccleston Street London SW1W 9LT Tel: 020 7799 5034 E-mail: [email protected] Website: www.politeia.co.uk © Politeia 2021 ISBN 978-1-9163575-1-8 Cover design by John Marenbon Politeia gratefully acknowledges support for this publication from The Foundation for Social and Economic Thinking (FSET) Printed in the United Kingdom by: Millnet Limited 6-7 Princes Court 11 Wapping Lane London E1W 2D FOREWORD* Sheila Lawlor I For a snapshot of how closely Britain’s constitutional principles and its economic system are linked, there are few better places to look than London, the heart of the UK’s financial services sector - and at how its many different businesses, which were often established to facilitate trade and shipping, have developed over centuries, operating under UK laws. By the end of the 18th century, London, a successful port and commercial centre since Roman times, had grown to 1 million people. Merchants came to the UK and joined others, such as shipowners and insurance underwriters, to establish banks and businesses. These included the Bank of England (1694), which began as a private corporation to finance the government’s military campaign of that time; Lloyd’s of London (1688), which provided marine insurance; and the London Stock Exchange, begun by stockbrokers. These last two had their origins in the coffee houses, where people met and did business and which had come to play a central part in London’s cultural, business and social life since the 1650s. London overtook Amsterdam, the leading financial centre in the 17th century, and rivalled, then replaced, Paris at the end of the 18th century, following the French hyperinflation of the 1790s. But there was more to the story of remaining a pre-eminent centre, as the sector’s evolution throughout the twentieth century was to reveal. Economic historians have provided a rich and complex picture of change, as banking and finance adapted through the century, often with changes in the law. The first decades were punctuated by World War One, the 1930s depression, and World War Two, after which New York emerged as a leading global financial centre, at times to dominate, and invariably to rival, London. But it was after the Second World War that the sector’s ability to contend with and adapt to change was particularly tested. High UK public debt between the later 1940s and 1970s had implications for other lending. The introduction of new technology from the 1980s put an end to long-established working practices. But it was from the EU that the winds of change were particularly keenly felt: the change in governance and a raft of legislation ushered in during the 1990s for the Single Market (by the Single European Act, 1986) and for EU political and monetary Union (The Treaty on European Union (TEU, Maastricht, 1992) and the Treaty on the Functioning of the EU which updated the founding EU treaty, the Treaty of Rome 1957). Further protracted regulatory change from the EU followed the financial crisis of 2007–2008, along with the international and UK response. Perhaps more than at any other period before, the intensification of EU legislation in the wake of these developments put the spotlight on what politically would become increasingly problematic for the UK’s electorate. It highlighted the very real differences in aims and expectations between the EU and many people in the UK. These differences were not only political and constitutional. They involved a clash of two economic systems, that of the UK’s free market, competitive and entrepreneurial system and that of the EU, which continues to operate a model inspired by the French, centrally directed system, whose conceptual approach was integral to the founding project, the European Coal and Steel Community in 1951 (under the Treaty of Paris in 1951). II That precursor, which developed into the EEC with Italy and the Benelux countries under the Treaty of Rome in 1957, reflected the French desire, as conceived by Robert Schumann, the French foreign minister, to secure the country against the inevitable resurgence of Germany as a potentially hostile economic and military power. The plan was that Germany, subject to Franco-German cooperation and agreement, could rebuild as Europe’s most powerful economic power, but peacefully and only under joint Franco-German control and cooperation. The arrangements governing future economic life for the EEC and later the EU followed those that had served the French state since the 17th century, with its dirigiste economy, protected and controlled centrally for the political and military aims of France. Today, few brands can be so potent a reminder of that fact than the Sèvres porcelain which graces Emmanuel Macron’s refurbished Elysée. The French state has had a stake in its porcelain factory since * I am very grateful to Forrest Capie for his helpful comments, which I have used. i Louis XV moved it to Limoges, backed by the firepower of the state’s finances and laws to promote the project and protect it from rivals, who were initially prohibited by law from decorating their wares with gold rims, in the style characteristic of Sèvres. By contrast, Britain’s economic arrangements have been of a different order, tending to reflect an economy built on competition, markets and trade and underwritten by a law that encourages such goals. Throughout its history, sectors have flourished and declined, as others take their place, facilitated and accelerated, on occasion, by popular support, with the law following. The popular and political movement to repeal the corn laws took off in the early decades of the 19th century, when political theorists and politicians, industrialists and the people themselves joined forces in a movement demanding an end to the corn laws, which protected the farming sector by imposing duties on imported corn, so preventing competition from cheaper imports. Repeal was won in 1846 when enough MPs joined forces with Sir Robert Peel in a parliamentary battle against the landed interest. The momentum which developed in the decades before the 2016 referendum is reminiscent of that earlier movement, though with a different goal: to restore a system of freedoms, under clear, understandable and transparent laws made by MPs sent to Westminster who can be removed by those people who flocked to the meeting rooms and polling booths. They wanted to restore the right to determine the laws under which lives are led and businesses run rather than to accommodate the EU’s highly centralised, precisely controlled and often counter-productive rules. III The focus of this analysis by Barnabas Reynolds is on the nature of the differences between the EU’s centralised system and this country’s common law tradition, and the implications for the financial services sector. This follows earlier proposals by Reynolds, who leads his City law firm’s financial institutions practice, setting out the path for future UK-EU cross border trade under two possible options. The first is for both parties to trade under their own laws, with each party agreeing that the other’s laws achieve equivalent outcomes, including the paramount aim of preventing systemic risk. This ‘equivalence arrangement’ would be enhanced to include mechanisms to give businesses greater certainty, e.g. so that the rules cannot be changed unilaterally or at short notice, and are subject to joint agreement. That proposal, which was broadly the basis for the UK’s negotiating aim in the Brexit talks, is still on the table, and there remains all to play for. The second option, or ‘Plan B’, has already provided banks and businesses with a way forward, now that the EU passport arrangements have stopped. It shows how most businesses can continue to trade cross-border, without a formal trade treaty or chapter in a trade treaty, with different mechanisms available, which would not involve the setting up of a subsidiary in the EU.1 Reynolds addresses, for financial services, the conceptual differences between the EU’s centralised approach and this country’s common law approach. He considers how the different EU legal system has often been in conflict with the aims and means traditionally deployed under the common law to ensure the freedom of participants to develop their businesses in line with the rule of law and its evolution. In particular, he contends that EU law, as it has developed especially since the 1990s, has tended to supersede much of the UK’s common law tradition for the sector. He explains how EU laws have developed and makes clear proposals for the UK to tackle the legacy of the inherited layers of EU law, which have been grafted onto the UK system, so as to restore UK law. The message is clear. Now that the UK has emerged from the transition period during which the existing legal framework continued, the task for the Government is to address and reverse the legacy of EU law.