http://www.ft.com/cms/s/0/554d5076-5f62-11dd-91c0-000077b07658.html
City of London warns against EU crackdown
By Nikki Tait in Brussels
Published: August 1 2008 03:00 | Last updated: August 1 2008 03:00

European Commission efforts to strengthen the regulation of financial services
in the wake of the credit crunch risk exacerbating the sector's downturn and
adding to the tens of thousands of job losses already forecast, the City of
London will warn today.

"Proposed changes could greatly increase the cost of capital across Europe with
detrimental effects far beyond the financial services industry," said Stuart
Fraser, chairman of policy and resources at the City of London, which will today
publish its gloomy forecasts.

His comments are targeted, in particular, at amendments to the European Union's
capital requirements directive. These are due to be formally presented by the
Commission in the autumn as part of its broader response to the crisis in the
financial markets.

Draft proposals have already been circulated in Brussels, and one possible
measure could involve tightening the "originate-to distribute" model used by
banks to devise then off-load securitised products that have been at the heart
of the recent crisis. Brussels has suggested that originators should retain
capital for at least 10 per cent of the exposures they securitise. This idea
has, however, already been attacked by banking organisations.

Mr Fraser cited the proposal as the type of regulation that the City believed
could seriously hamper the financial sector's prospects.

"The message we're trying to get across is that it's a very difficult
environment for financial services. What we don't need is regulation that will
exacerbate the downturn. The 10 per cent holding rule is exactly what we don't
need," he said.

Intervention by the City - home to the UK's largest financial services sector -
brought an equally forceful response from Brussels. "If the industry wants to
avoid a materially tighter regulatory environment, they must come forward with
more robust and meaningful proposals to clean up their act," said a Commission
official.

"When the financial sector is in such a state that losses risk being socialised
while profits from risk-taking are privatised, nobody should be surprised if, in
the absence of meaningful and comprehensive industry response, there is a
regulatory response to address the misaligned incentives that are at the heart
of the problems that have arisen."

Investor confidence would not be restored by a race to the bottom, said the
official.

The City is preparing to publish its annual report on wholesale financial
services and their role in the EU economy. It is expected to predict the
sector's contribution to the EU economy by 2009 will have fallen by 8.3 per cent
from the €225bn ($350bn, £177bn) of last year.

About 75,000 jobs could also be lost in the sector, which last year employed a
record 1.4m people in the 27 EU member states.