By Huw Jones
LONDON, June 16 (Reuters) - - Exempting Britain's banks fromplanned European Union rules to curb risky trading would beillegal, the bloc's lawyers said on Monday in a legal opinionthat marks another setback for UK attempts to limit Brussels'influence on the City.
EU financial services commissioner Michel Barnier hasproposed a law that would slap curbs on so-called proprietarytrading or banks taking bets on the market. It is similar to theso-called Volcker Rule that the United States has alreadyapproved.
Britain has expected an exemption from core parts of thedraft law because it has already approved a similar rule knownas Vickers, a law that requires banks like Barclays towrap their deposit-taking arms with a "ring fence" of extracapital so that customers' money is safe even if the trading armgets into trouble.
France was annoyed that the draft EU law as proposedcontained an article - known as Article 21 - that effectivelyexempted Britain because it had passed its Vickers rule into lawby a certain date.
"The derogation mechanism established in Article 21 of theproposed Regulation is not compatible with the legal basis ofthe proposal, with the nature of the proposed instrument asdefined in the [EU Treaty] and with the general institutionalprinciples established in the Treaties," the legal opinion seenby Reuters concludes.
A legal opinion from lawyers for the member states' councilcarries weight and will almost certainly force the EuropeanCommission to make changes to the proposal.
Britain's Prime Minister David Cameron has pledged tonegotiate a new "settlement" with the EU in order to curb itsinfluence over the UK financial services sector, the EU'sbiggest and a major tax earner for Britain's Treasury.
Britain has already lost a challenge in the EU's top courtagainst an EU law giving the bloc's markets regulator powers toban short-selling, and is also challenging two other EUpolicies, including a proposed tax on financial transactions.
The legal opinion will be another blow for Britain'sattempts to limit the reach of EU rules on one of its mostimportant economic sectors as may give more ammunition to the UKIndependence Party whose anti-EU stance helped it come top inthe European Parliament elections last month in Britain.
The legal opinion, dated June 16, looks solely at thelegality of Article 21 in the draft EU law to curb risky tradingat banks.
It allows a member state which has already adopted laws withthe same aims as the EU measure to make a request to the EU'sexecutive Commission for an exemption from parts of the measurewhich require the separation of some trading activities from themain part of the bank.
The Commission has said this would allow member states thathave already taken steps to curb risky trading to avoid costlyalignment of existing, effective provisions with the bloc'sproposed law.
To qualify for the exemption, national legislation must havebeen approved before Jan. 29 2014 and meet certain criteria,conditions which bankers say Britain meets.
"It is difficult to conclude that restructuring costs thatare to be borne out by an admittedly quite limited number ofcredit institutions, which by definition are of a certain sizeand with consequential financial clout, would have any bearingon the economies of their host member state...," the legalopinion says.
Such an exemption lacks an objective justification andincludes a cut off date that is not explained, the legal opinionsays.
Bowing to national law also goes against the principle ofsupremacy of EU law, it added and suggests the exemption couldbe ditched, allowed for a limited period of time or the cut offdate properly explained. (Editing by David Evans)