Gold-Plating or What You Will


The Charles River research report published recently by the City of London Corporation (The Implications of the New Financial Regulatory Architecture) reveals that the financial services industry has a preference, namely that the FSA should not apply any gold-plating to European directives. That may not amaze you. After all, do turkeys vote for Christmas? Is there any reason why the industry would say anything else? Well, actually, yes.

When the turkey was asked the question, it made an assumption: Christmas or no Christmas, that was the question. But it wasn’t that simple. Actually it was Christmas or solstice; which would you prefer? Given that there are two solstices to every one Christmas, suddenly Christmas looks like the smart choice. So what is the alternative to gold-plating?

The instinctive answer is simply to say that EU directives can stand on their own two feet and should need no help from national regulators. Let’s just have the raw material and get on with our lives. Nice idea, but life is not like that, not in the EU anyway. Directives come in two main forms, minimum harmonisation and maximum harmonisation. Minimum harmonisation allows for national gold-plating, or, to be less pejorative, they expect national regulators to provide the appropriate detail that makes the basic European requirement work practicably, in the context of the local financial services structure. Maximum harmonisation, on the other hand, is the version where gold-plating is prohibited, national regulators are not allowed to add any requirements, the same standard applies, in theory, across the whole EU. That is the one the industry is voting for. What is wrong with that?

With both scenarios, the basic requirements hail from the EU; the difference is who produces the detail. In opposing any gold-plating, the industry is implicitly asking for detailed regulations to be produced by EU institutions, whether that is the European Commission or one of the European Supervisory Authorities. The advantage is that exactly the same rules apply to all firms based anywhere in the EU. The disadvantage is that the rules are not tailored to the circumstances of the national industry, they are frequently crudely constructed, failing to differentiate adequately between different sectors, they cannot be waived by national regulators, removing flexibility for special cases, they still don’t provide a level playing field with competitors based outside the EU, and they are virtually impossible to change in any reasonable timeframe. Add to that the practical expedient whereby, for want of the power to improve bad regulations, supervisors exercise arbitrary discretion. While all of that is bad enough to be going on with, it does not deal with the question of how the regulatory burden compares.

There is no one answer to the burden question. To date, where regulations are made by the FSA, they have been required to have regard to the impact on the competitiveness of the UK industry. That is a pretty useful start point, but sadly it is to be abolished in 2013. So there is no certainty that the regulatory burden under minimum harmonisation will be less weighty than under maximum harmonisation. But what there is is greater flexibility for tailoring, changing and waiving as well as a degree of democratic control with the regulator answering to parliament.

If the industry’s preference seems to be a perverse, we should ask how it has emerged. Several reasons underlie the position taken. First, regulators elsewhere in Europe frequently leave directives unembellished and unenforced, leaving the UK industry at a disadvantage. Secondly, the FSA is sometimes perceived as unsympathetic and unresponsive to the industry. Thirdly, the Governor of the Bank of England has expressed a determination to impose higher standards in the UK, particularly for bank capital. Fourthly, the industry suspects that European regulators will produce less burdensome requirements than our domestic regulator. Most of these are legitimate concerns and complaints, but I question whether they justify the deployment of the nuclear option, one which will quickly deliver the permanent loss of national control over financial services regulation. And if that nuclear weapon is fired, there will be no going back. What then if European regulation eats away at the global competitiveness of the industry? How much of our GDP would depart these shores for sunnier climes? Is that a gamble we are really ready to take? Which do you prefer, standardisation or flexibility? The industry should be careful what it wishes for.

Oliver Lodge

November 2011

Oliver Lodge is a director of OWL Regulatory Consulting (


The Implications of the New Financial Regulatory Architecture:





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