Britain is part of the problem on financial reform

By Lydia Prieg

The UK is subverting progress towards a safer financial system and has become a major barrier to international efforts for reform, according to a new report from the New Economics Foundation.

Compared even to the US, a jurisdiction with a reputation for market friendly regulation, and other major international jurisdictions, the UK is found to be part of the problem in key areas of financial reform, and not leading the search for new solutions.

For example, the US and other countries are actively intervening to help facilitate smooth-running commodities markets, whilst the UK is shirking this important duty, despite being a global centre for commodities trading.

Unlike in the US, even minimal limits on derivatives positions which guard solely against market abuses such as “squeezing” the market, are not in place in Britain. As a result, anti-competitive behaviour has occurred in London.

For example, a hedge fund “squeezed” the cocoa market in summer 2010 by building up an enormous holding of derivative contracts. According to the Financial Times, this manoeuvre “helped push the cost of cocoa to a 33-year high of £2,732 a tonne”.

Similarly, the US, Japan, Hong Kong, India and Australia have already banned “naked short selling”, a process whereby speculators sell shares they do not in fact own. This opens the door for prices to be driven down artificially, and vulnerable companies in particular may be targeted aggressively. A former US undersecretary of commerce concluded that naked short selling had ruined 1,000 firms and wiped $100 billion off share prices.

The European Council is currently drafting legislation that would effectively ban naked short selling in the EU. However, the UK is campaigning against this initiative.

The UK is also found to be ignoring its powers to reign in British-affiliated tax havens. For example, the UK has the power to uphold “good government”, which is left undefined, in the Crown Dependencies.

Furthermore, a London exchange called the Alternative Investment Market (AIM) is found to have pursued a strategy of winning new business by driving down standards of transparency, governance and investor protection.

These findings contrast starkly with the dangers of Britain “acting unilaterally” that are frequently voiced by the banking lobby and the UK press, in response to even the slightest hint of real financial reform.

It is time for the UK to step up, and stop subverting many key global reform initiatives.