EU: Financial Regulation (EUC Report)

Lord Flight Excerpts

Tuesday 7th July 2015 Lords Chamber

[Lord Flight (Con)]

My Lords, I have much enjoyed the four years I have spent on the committee. As the noble Earl, Lord Caithness, pointed out, there was a wide range of views but we never had any problem in reaching compromise and agreement. The quality of the reports we produced and the use to which they were put were significant: they have had an impact not just in this country but throughout the EU. I thank the noble Lord, Lord Harrison, for the civilised, human and excellent way he chaired the committee, and our excellent clerk, Stuart Stoner, and the rest of the staff.

The committee was really one of the only places where European law and directives got any sort of scrutiny at all in this country. It was hard work grinding through it all—nearly every week, yet another provision had to be addressed and the Government advised about it. It was indeed a never-ending stream.

I learned a lot from my membership of the committee. In particular, I well remember a visit to Frankfurt and Berlin. I was very keen to ascertain Germany’s position on the basic argument that if the euro is not to fall apart, Europe needs to come together politically and economically, and it needs a system of transfer payments from the more successful and more competitive economies to the less successful economies. However, the universal answer that came from Germany was “Not a pfennig”. There was an absolute “no” to any form of transfer payments to the less successful parts of the EU. I am afraid that, to me, that means that the euro will not be able to succeed as a currency and will go the way of the last European currency, which was in place from 1863 to 1893.

A second point about Germany that I found quite extraordinary was the failure to understand that if you take austerity measures which grind an economy into the dirt—leading, for example, to a collapse of 25% of GNP, as in the case of Greece—you are likely to get a nasty political reaction. Of course, the Treaty of Versailles after the First World War did just that to Germany, and Germany had a most unfortunate political reaction in its turn. However, the Germans seemed not to understand that point at all.

Turning to the report, I think we can say that it is a very professional, thorough and useful chronicle of EU regulatory initiatives and policy since 2008. As the noble Lord, Lord Harrison, pointed out, there was what I would call some polite criticism of a fair amount of what we felt to be overkill and perhaps wrong, but the report certainly refers to the main flawed items at that time. The great objection to AIFMD was that it was introduced to attack hedge funds but ended up embracing perfectly straightforward investment trusts and virtually anything other than a UCITS, imposing a huge and expensive body of work and reports that nobody reads. The bank remuneration arrangements simply serve to raise fixed salary costs to banks, which is hardly desirable, and we have not yet lost the threat of a financial transaction tax.

Although I agree with the report that much of the regulation would have been enacted in the UK anyway and that it was not specifically an EU initiative, I do not really agree that all the new regulations that have been introduced are needed or proportionate or that they achieve anything very much. I think that there has been a misguided and often wrong reaction to the financial crisis, particularly in Europe, where most of the problems have been about the euro, in contrast to the specific banking problems that this country experienced.

I like to try to step back and look at the enormous increase in regulation in recent years and to ask what it is contributing. We have gone down a route of extraordinary micromanagement and prescriptive regulation, the costs of which—ultimately passed on to ordinary savers and companies—are enormous. We have three layers of initiative: the international and US layer and the EU layer, and our own UK gold-plating of much that comes from both those sources.

Professor Gower would turn in his grave if he could see what has happened to the very sensible regulation which he introduced. His basic principle was about principle and about encouraging integrity. The plethora of overprescriptive regulation serves almost to remove the whole fundamental issue of requiring principled conduct and integrity. It is all about thousands of different rules and asking whether they have been complied with correctly. We now have a plethora of new bodies, with people not understanding what most of them are about. We have the FATF, FATCA, the FSB, the FSE, the ESAs, ESMA, MONEYVAL, the EBA and the JMLSG, to mention just a few. In 2001, the FSA had a staff of just 600; today, the FCA has 4,000 staff and the PRA more than 1,000. Coming down the pipeline are 420 pieces of EU level 2 legislation to be introduced. Within the financial services industry there are about an extra 100,000 people working as compliance employees. The FCA now has 16 handbooks of rules with 4 million words and, as I have said, huge costs are imposed, ultimately on the customers of the industry and often to little point.

To my mind, it was a mistake for the UK to surrender sovereignty in financial services to the EU. Of the 20 main measures of the last decade, I think that approximately half would have happened anyway and half very much reflect specific EU policies and objectives. There is a big issue that, although 28 EU countries—maybe it is more than that now—control the legislation, 22 of those countries have no skin in the game.

I have talked about the problems of the AIFMD. Another area that needs to be mentioned is MiFID II, which is now imposing upon what we used to call stockbroker private client activities some, I think, quite ridiculous requirements. Just yesterday, I heard of a case where an individual went along wanting a significant amount of wealth to be managed and was given 120 pages to digest and six different forms to sign—he ended up walking away saying, “You must be mad if you want me to try to digest all this and sign anything”. Also, unless older clients specifically say that they require a bold investment approach, they are put under what is viewed as a more cautious approach for older people, and that means a significant amount of government bonds—arguably government bonds are about the highest risk investment category for the next five years, as and when interest rates return to normal.

The latest issue, and since our report, is the EU fourth AML directive. I wonder whether Members of this House are aware that everybody now will become a politically exposed person. If you are a PEP, your bank has to monitor every transaction over your account and, if anything looks to be slightly out of the normal, report it as a potential source of corruption. The cost of doing this sort of thing is absolutely enormous. That is why banks are increasingly sacking their PEP clients. But PEPs are not just Members of the other place and of the House of Lords—they are their spouses, their children and their parents, if alive. It is a completely and utterly ridiculous system that has been brought in, particularly when I think that the power of Back-Bench Members of Parliament and working Peers to engage in corruption is virtually non-existent anyway —so watch out.

It is now also very difficult to do business with many emerging economies. If those emerging economies do not meet the required FATF standards, the bank of an exporter cannot accept payment from the bank of the company in the emerging economy to which they are exporting without an enormous process of assessment as to whether that bank is a proper institution. It is becoming more difficult as a result to export to many emerging economies.

I wish my noble friend Lord Hill success with his capital markets directive. That has been one of the really positive initiatives in recent times. But even with that there is a problem, in that the principle of the EU is that financial products and investment funds should not be marketed to ordinary citizens, because it does not think that they can understand them adequately, other than USIT funds. For example, it is making it very difficult to promote debt funds to attract investors, where SMEs in particular very much need additional finance. ESMA is trying to regulate 95% of market-making activities, which will purely clutter up the market.

However, there are even bigger, wider issues. The single market is in many ways about protection; it is about keeping out of the EU market other than EU-based products and institutions. It is no wonder that a lot of large players rather like the system, because if you are part of a cartel in a protected market, what could be better? You certainly do not want the competition of institutions from America or Hong Kong.

Those who like a command economy, having failed to achieve that in government, have moved to the regulatory sector, where they have had a heyday in introducing command economy measures. It is not just in financial services; there are now more people working in DfID than there are farmers left in this country.

I understand that part of the Government’s renegotiation agenda is to seek to acquire for the UK a veto over directives relating to the financial services industry, just as France has such a veto in relation to its biggest industry, agriculture, and Germany in relation to engineering.

[Lord Liddle (Lab)]

It is not the case that France has a veto in relation to the common agricultural policy, as I think the noble Lord well knows. All the decisions on the reform of the common agricultural policy have been taken by majority voting in the Council of Ministers. Of course, the council tries to take into account the views of member states which have particular interests. Surely he would acknowledge that, in the case of financial services, that is what has happened with Britain: our interests have been taken into account by the council.

[Lord Flight]

I would have thought that what I have just said demonstrates that what I call sensible interests, including our interests, have often been overridden. With regard to agriculture, while I am well aware that the overall reforms of the system have been pan-EU, I think that France still has some protective vetoes. We will see whether this is correct, and what the negotiations are able to achieve.

I am critical also of the UK. There has been a lot UK gold-plating of what has come to the UK both internationally and from Europe. The introduction of RDR has simply removed financial advice being available to 70% of the country’s population, as a result of which the Government are struggling with providing guidance on pension fund services and leaving people hanging in mid-air as to who they might approach to manage their pension assets.

There is the need for an independent new appraisal of what regulation in the EU and even internationally is good and useful for markets and for clients, and what is unnecessary, harmful, and incurs a cost and adds no benefit. I would like to think that the UK will give an EU lead to reform of regulatory overkill and I wish the noble Lord, Lord Hill, enormous good fortune in his commitment to review the cumulative effects of the various regulatory reforms.

[Lord Liddle]

Does the noble Lord accept that the Commission has just produced precisely what he is asking for? Commissioner Timmermans has put forward a whole set of propositions on regulatory reform and on reviewing existing legislation to make sure that unnecessary regulation is cut back. The noble Lord, Lord Flight, appears to be making statements without full regard to what is happening currently in Brussels.

[Lord Flight]

I am aware of what is happening in Brussels but I specifically said that I wanted to see the UK more active in terms of a programme of regulatory rationalisation and review. The key point I am seeking to make is that when I stand back, I perceive what I believe to have been enormous overkill, often not addressing the right areas, since the 2008 financial crisis.