Leading City institutions fear that the new Financial Services Bill, which is being debated tomorrow, fails to include a clause which will allow the proposed regulation enough scope to protect the UK's international competitiveness.
They are concerned that the Bill, which is due to have its second reading, no longer takes into account the competitiveness of London's capital markets, a move the institutions warn could threaten future business opportunities.
The CBI, the British Bankers Association, the Listing Authority Committee and the Council of Mortgage Lenders, as well as commercial groups such as the London Stock Exchange, HSBC, Fidelity International and Axa have all expressed their worries in submissions to the Treasury during the consultation process.
At present, the UK Listing Authority must have regard for the "international character of capital markets and the desirability of maintaining the competitive position of the United Kingdom". But this has been lost in the new regulation that sets out the framework for the three new bodies overseeing London – the Prudential Regulation Authority, the Financial Policy Committee and the Financial Conduct Authority. It is the FCA, headed by Martin Wheatley, which would have this ability to consider whether regulation might impact on competitiveness.
Tracey Pierce, head of the LSE's primary markets, said: "The Government is already taking big steps to promote UK PLC internationally, driving our competitiveness and it absolutely makes sense for our financial regulators to do the same. Enshrining competitiveness in our regulatory framework, as many other countries do, will send a very powerful message that the UK is open for business."
Ms Pierce added: "Being competitive does not lead to 'light touch' regulation – international companies listing on the London Stock Exchange do so because of the market's depth, the UK's track record in innovation and our strong and stable regulatory environment."
One trade association source added: "We are all bewildered to discover that it's been dropped. It may seem arcane but it's important that the UK regulatory body has this mechanism.
"The danger is not now but in five years' time when there might be events which cannot be foreseen."
He added that it's all the more bizarre because the Government has made the UK's ability to compete internationally a key part of its growth strategy. It was behind the campaign to host China's first off-shore currency centre outside of Asia, and by fighting the UK's interests in Europe.
Other countries that incorporate such a clause into their regulatory systems are Hong Kong, China, Australia, Singapore and Switzerland. Having this principle is considered vital for the UK's ability to influence events in Europe where the UK makes up around 70 per cent of all EU securities trading, but where the UK has only 8 per cent of the vote at the European Securities and Markets Authority. ESMA will be able to override national regulators, so City bodies argue that the FCA must have the ability to fight the UK's corner.
However, a Treasury spokesman said the Bill includes the principle of proportionality for the PRA and the FCA which the Government believes will cover the issues of stability and competitiveness.
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