By ADAM COHEN in Brussels and ALISTAIR MACDONALD in London
A plan to tighten financial-market regulation is pitting the U.K., home of Europe's financial center, against other members of the bloc.
At a European Union summit starting Thursday, a key issue will be how much power should be handed to regulatory bodies that the EU's executive arm, the European Commission, wants to establish, and who will head them.
The U.K.'s resistance to the EU plan comes amid tensions among British officials over financial regulation.
In a speech Wednesday, Mervyn King, the head of the Bank of England, warned that the U.K. government must get its debts under control -- and offered a vision of regulatory reform that differs in key respects from that of the government. Among other things, Mr. King said the U.K. should consider forbidding banks from combining government-guaranteed retail operations with riskier investment-banking business, and said the government hadn't given the central bank the tools to fulfill its new responsibility for financial stability.
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Bloomberg News U.K. Treasury chief Alistair Darling says banks need to improve their governance, but other EU countries want a stronger pan-European regulator helmed by the ECB.
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Mr. King's comments came at the same event where Alistair Darling, Britain's Treasury chief, made his own regulatory demands -- among them, that banks must improve their governance. Mr. Darling didn't mention issues such as a separation of businesses, which he has said is unnecessary.
A spokesman for the Treasury said Messrs. King and Darling "share the same objectives."
The public strains come on the eve of the EU summit to discuss the proposal for tighter financial rules. The U.K., home to the region's largest and most lucrative financial-services market, is resistant to pan-European regulators supervising individual banks and other financial-system players. France and Germany, among others, say the financial crisis has exposed flaws in the bloc's patchwork of national rules and enforcement bodies. They have called for a stronger EU-wide authority.
Run-Up to a RevampSept. 2008 Lehman Brothers collapses, sending shock through global financial marketsOct. 2008 European Commission establishes panel to study revamping EU supervision of marketsFeb. 2009 Panel issues report calling for more pan-EU supervision and the creation of powerful authoritiesJune 2009 EU summit to consider plan for tighter market regulation.
Under a commission proposal the leaders will debate during the two-day summit, the president of the European Central Bank would head a new European Systemic Risk Council that would broadly monitor the stability of the financial system. A second body would set standards for close supervision of banks, insurers and other financial institutions.
Giving the ECB, now headed by President Jean-Claude Trichet, a leading role on the risk council would rankle the U.K. -- which doesn't use the euro -- as well as some East European countries. EU finance ministers have tentatively agreed that the ECB president or another risk council member could lead the supervisory group.
The ministers also tentatively agreed that the new overseers couldn't force countries to pay for bank bailouts, leaving unresolved a question that has plagued EU policy makers for years before the financial crisis: Who pays if a large bank operating across the bloc's borders fails?
The U.K. likely will remain opposed to any deal that gives Brussels more sway over its financial markets, according to an EU diplomat. For the U.K., the proposals herald a further assault on what the country has guarded for decades: its sovereignty over financial services and taxpayers' cash.
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Reuters ECB President Jean-Claude Trichet
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Still, having battled for years against European attempts to tighten regulation, Britain has been among the first countries to ramp up its own rules after the financial crisis. It agrees in principle with the need for broader monitoring of financial stability in Europe but doesn't want a pan-European body supervising individual financial firms. The U.K. believes that only national regulators have their ears close enough to the ground to do that and doesn't want a pan-European body making decisions that could involve British taxpayers' money.
The plan under discussion is an early text setting out the EU's intentions. Legislation creating the regulators -- which would have to be approved by EU leaders -- isn't expected until the fall.
Brussels also is skirmishing with the U.K. and in particular with its financial industry over proposed regulations of hedge funds, private-equity firms and other fund managers. The fund industry, the majority of which is based in the U.K., has expressed opposition to legislation proposed in late April.
The industry argues that the proposal would limit the ability of U.S. and other non-EU managers to market in Europe. Hedge-fund managers and even some investors -- whom the proposal is designed to protect -- dislike the potential restrictions on how much leverage, or borrowed money, a fund manager can use to invest. Complaints about the proposal are echoed by the private-equity industry.
-Cassell Bryan-Low and Paul Hannon contributed to this article.
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