Mandelson: We've won fight with Europe over regulation

Business Secretary tells City that Brussels will take common sense approach

Lord Mandelson sought to ease City anxieties about the growing influence of European regulators over Britain's financial services industry yesterday. The Business Secretary said the British Government was committed to ensuring that the City did not lose out in a regulatory backlash following the banking crisis, warned the European Parliament that he would not accept "regulatory grandstanding", but said he thought the new European Commissioner with responsibility for financial services, France's Michel Barnier, would take a "common sense" approach.

Lord Mandelson, speaking a day after Mr Barnier's appointment was ratified by the European Parliament, said Britain's financial services sector had to accept that regulatory reform was needed following the credit crunch, but added that the Government was close to securing a balanced response from Brussels.

"Some, as we have seen, in the European Parliament will interpret the banking crisis as a clarion call for more business regulation in general – we need to push back against this intelligently," Lord Mandelson said. "Of course, the City is sensitive about its regulatory burden and I understand the caution being expressed. We do not need regulatory grandstanding – we need regulatory coherence, joined up between jurisdictions. We do not need multiple, cumulative layers of regulation that amount to overkill."

In practice, the Business Secretary said, the approach agreed by European governments following the crisis under proposals made by Jacques de Larosiere, a former governor of the Bank of France, would achieve that objective, with the European Union defining a collective approach to regulation of financial markets but leaving the responsibility for implementation and supervision to individual countries. "This makes prudential sense – this is the level at which markets and banking operate. And in my view Michel Barnier gets this, and that forward looking common sense will guide his actions," Lord Mandelson said.

"I don't see how the UK can detach itself from a single European regulatory regime. If it wants to be the main capital and financial markets centre for the single market and if we want to be the main route or centre for investment into the single market, it doesn't make sense to detach ourselves from a single coherent European system."

Nevertheless, Lord Mandelson warned that Britain was continuing to face a battle on certain fronts, particularly in the area of regulation of the hedge fund and private equity industries, where Britain has a much larger presence than any other European country. He said the Alternative Investment Fund Managers Directive, a French-backed initiative to police the first of these sectors more closely, was "badly flawed".

The directive has become something of a cause célèbre for City figures convinced that the appointment of Mr Barnier, described at the time by the French President Nicolas Sarkozy as a "defeat for the Anglo-Saxon model of capitalism", would herald a concerted effort to curb the competitiveness of Britain's financial services industry.

Lord Mandelson said efforts to secure an overhaul of the directive, which he said "read more like a long-standing grudge against the hedge fund industry than a serious attempt to address systemic risk", were continuing and that "British influence has been brought to bear".