* Regulation chief to meet UK finance minister in London
* Two set to discuss reforms after recent EU summit split
* Smooth relations important in drive for financial reform
By John O'Donnell and Huw Jones
BRUSSELS/LONDON, Jan 20 Michel Barnier,
the official in charge of regulating finance in the European
Union, meets George Osborne on Monday in what are likely to be
tough talks over rules the British finance minister believes
will hurt the City of London.
Relations between Brussels, where the European Commission
sets the direction of regulation for banking and finance, and
London, which fears losing its autonomy in supervising its
powerful financial centre, have reached a low ebb.
At a December meeting of EU leaders, British Prime Minister
David Cameron made a series of demands to shield the City,
Europe's financial capital, from some EU rules in return for his
backing for a treaty to underpin tighter state-budget controls.
But the demands, which one diplomat compared to seeking
"offshore" status for London, were rejected in a split that saw
Cameron leaving Brussels empty-handed and other EU countries
left to press ahead for a fiscal pact without Britain.
Divisions with Britain place another obstacle in the way of
Europe's drive to reform finance, a push some analysts believe
had lost its way in the continuing banking crisis.
Next week's visit by Barnier to Chancellor of the Exchequer
Osborne's official 11 Downing Street residence in London will be
his first official meeting with Osborne since the December
summit and an important opportunity to bridge the divide over
the City, Europe's equivalent of Wall Street.
"The last few months have seen ups and downs in the
UK-Commission relationship," said an EU official, speaking on
condition of anonymity. "Commissioner Barnier is looking forward
to seeing the Chancellor to discuss the many issues of common
They will address divisive questions, such as EU rules that
will dictate how much capital banks must set aside, and which
Osborne wants to change before they are finalised to keep leeway
to impose stricter standards on banks in Britain.
Barnier is also set to discuss the powers that a newly
created pan-European watchdog will get in intervening in markets
for trading derivatives, such as those that hedge the risk from
price moves on oil, gas or other commodities.
Britain is keen to protect its hold on this $700 trillion
market, which is mainly split between London and New York.
Osborne is worried about the influence of the Paris-based
European Securities and Markets Authority over the City, which
generated more than 60 billion pounds of taxes in the last
financial year and accounts for 9 percent of Britain's economy.
He is determined to prevent what many UK politicians see as
covert moves in Brussels to bolster three EU agencies created
last year to supervise financial markets, banks and insurers.
One British official, speaking anonymously, expressed
concern the new watchdogs were setting standards that are too
rigid. "Rather than saying everyone must wear a suit, they are
saying everyone must wear a Chairman Mao suit," he said.
Reaching compromise in the European Union, an alliance of 27
countries stretching from prosperous London to the crumbling
streets of Bucharest, Romania, is not easy.
Next week's meeting brings together Barnier, a French
politician close to former President Jacques Chirac who prefers
talking in his mother tongue than English, with Osborne, an
aristocrat educated at Oxford University.
Good relations between the two could be important in
agreeing financial regulation.
The European Union has been struggling to catch up with the
United States, whose lawmakers signed off on the so-called
Dodd-Frank reforms in 2010 and are now racing to finalise the
bulk of the new regime by the end of this year.
"Rightly the EU is looking at what it can do to improve
regulation but it seems to be emphasising quantity at the
expense of quality," Andrew Tyrie, Conservative chairman of the
UK parliament's treasury committee, told Reuters.
Some rules could be better handled at the global or local
levels, Tyrie said.
Some financial reforms in Washington go further than
Brussels, with a rule banning banks from trading on their own
account and by setting up a powerful resolution authority to
take control of failing financial firms.
Barnier will find it hard to win friends in Britain.
"What are the reasons for British euroscepticism? History
(World War II), geography (Britain is an island nation) and
newspaper groups that want Britain to leave the EU," said
Charles Grant of the Centre for European Reform, a London think
tank. "And, for the past year or so, Michel Barnier."
"The perception in the City ... is that he is pursuing a
Franco-German agenda to curtail its business."
Barnier will also visit the City to meet senior bankers,
some of whom are uneasy about Britain's stand last year.
One financial lobbyist in London, speaking anonymously,
described one of Cameron's demands for a veto over new rules
from Brussels as "completely bonkers".
Chris Cummings, chief executive of TheCityUK, the main body
for promoting London as a financial centre, said, however, that
the government's stand had heightened the importance within the
EU of keeping Britain onside.
"Since the December meeting what we have seen is (that)
other European states are demonstrably keener to keep the UK
inside the tent," he said. "The message we want Barnier to take
back with him is that the City is a European asset."
(Editing by Sinead Cruise and David Holmes)