The EU is now out in front in the race to reform financial services regulation

The European Commission this week whole-heartedly backed the Larosiere report, which proposes a new, pan-European, regulatory system that would transfer powers away from the FSA, especially for firms that operate in more than one member state. The UK has been very lukewarm about these proposals but looks increasingly isolated and ineffectual in its opposition. Many will see the failure to follow through on the initiatives announced at the G20 Summit as one of the casualties of the MPs' expenses scandal which has totally consumed the British body politic for the last three weeks. With the prospect of an autumn General Election growing by the day it seems that our attention will continue to be diverted while the EU turns these proposals into legislative reality.

There are a few unknown factors to take into account, however, which may influence the course of this debate. The first is the European elections next week. At the moment, support for the Laroisiere report seems to spread right across the political divide in the European Parliament: this could change. The second is the next installment of its report on the banking crisis from the Treasury Select Committee which is expected next week and will focus on regulation. If this gives its backing to the Financial Services Authority as the lynchpin of regulation then the debate about the direction of the European debate might gain new vigour. If, on the other hand and as seems more likely, the Select Committee casts doubt on the ability of the FSA, Bank of England and Treasury to be an effective regulatory force then the European proposals will look increasingly unassailable.