Calling London a haven of regulatory loopholes that spawns financial trading disasters could make it harder to align new transatlantic rules, figures in London’s financial and legal circles said on Wednesday.
Responding to attacks in Congress on London’s regulatory record, European policymakers, analysts and industry officials called the American comments ill-advised and politically driven.
“As the old saying goes, it is like the pot calling the kettle black,” analysts at Mediobanca said.
A hearing in Congress – on how supervisors failed to spot the buildup of $2 billion in derivatives losses at a London unit of U.S. bank JPMorgan Chase & Co – heard a top regulator and lawmakers describe London as offering a loophole American banks eagerly exploit.
“It seems to be that every big trading disaster happens in London,” Carolyn Maloney, a Democratic lawmaker told Tuesday’s hearing.
Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC), which regulates derivatives, added that U.S. firms, such as the JPMorgan branch in London, were set up abroad to find “lower regulatory regimes.”
AIG, the U.S. insurer rescued by U.S. taxpayers, and CitiGroup’s special purpose investment vehicle, which kept huge holdings of debt off the bank’s balance sheet, were both in London and could put American taxpayers on the hook, Gensler said.
“So often it comes right back here, crashing to our shores,” Gensler said, putting London on a par with other offshore centers like the Cayman Islands, a home to some hedge funds [and several re/insurance companies].
Yet Britain’s Financial Services Authority has repeatedly said JPMorgan operates as a branch in London that is mainly regulated by the U.S. authorities, with the Office of the Comptroller of the Currency having five of its examiners based in JPMorgan’s London building.
The FSA has long admitted its “light touch” pre-crisis regime failed and says it has become one of the toughest regulators in the world. Its top banking supervisor has seen no UK regulatory breaches for now at JPMorgan.
The UK watchdog declined to comment on Tuesday’s remarks in Congress.
Mark Boleat, policy committee chairman at the City of London, home to a big chunk of the UK financial services sector, said the comments bring heat but no light and that each country needed to put its regulatory house in order.
“What we need to do, however, is avoid political jousting and to work together to ensure that international regulation is congruent,” Boleat said.
Anthony Belchambers, chief executive of the Futures and Options Association, said the outburst was extraordinary after the financial crisis was sparked by a “no touch” U.S. regulatory regime towards derivatives and mortgage selling.
Defaults on U.S. home loans in 2007 triggered a global market meltdown, fuelled by the collapse of U.S. bank Lehman Brothers the following year.
“It is simply not helpful to wag fingers at other jurisdictions at a time when we must be thinking of how to establish a coherent framework for regulations across borders,” Belchambers said.
The accusations came on the day world leaders met in neighboring Mexico to congratulate themselves on how well their globally coordinated financial reforms were falling into place.
JPMorgan’s losses not only embarrassed the bank but also regulators like the CFTC, which was already under the gun for failing to spot the financial crisis and faces a Congress-inspired budget cut.
The bank’s losses coincide with a shift to implementing new rules at a time when there are already suspicions that some countries may try to row back on the detail.
“You would hope that regulators would be working in a more cooperative spirit and that is difficult where there is any lack of trust,” said Richard Reid, director of research at the International Centre for Financial Regulation.
This lack of trust has already prompted the financial industry to call on the G20 to redouble efforts to mesh their national rules to avoid extra costs.
Some regulatory over-reach beyond local borders looks unavoidable, as Gensler openly linked concerns about London with his commission’s push to get approval for new derivatives rules.
Leaving out the London branches of U.S. banks from the rules would be another loophole and a retreat from reform, Gensler said.
“I hope that the commission will vote … to get public comment this Thursday so that we don’t in essence create another London loophole,” Gensler said.
The European Union has been slammed for doing likewise with its new markets and derivatives rules, saying that U.S. firms who want to do business in the 27-country bloc should be complying with “equivalent” rules back home.
“This is just another manifestation of the iron curtain which financial services regulators are raising across the Atlantic,” said Simon Gleeson, a partner at law firm Clifford Chance.