Capital Markets Union: A Welcome Start (EUC Report)

Lord Harrison Excerpts

Thursday 4th February 2016 Lords Chamber

Moved by

[Lord Harrison]

That this House takes note of the Report from the European Union Committee Capital Markets Union: a welcome start (11th Report, Session 2014–15, HL Paper 139).

[Lord Harrison (Lab)]

My Lords, I am delighted to introduce this EU Committee report, Capital Markets Union: A Welcome Start. A year and a day ago, the noble Lord, Lord Hill of Oareford, gave evidence to the EU Economic and Financial Affairs Sub-Committee—which I then had the honour of chairing—in advance of the publication of the European Commission’s Green Paper Building a Capital Markets Union on 18 February 2015. We undertook a short inquiry into the Green Paper, of which this report is the result. The report is based on our evidence session with the noble Lord, Lord Hill, and on a discussion among interested parties on 10 February. Incidentally, Jonathan Faull, who was then the right-hand person of Commissioner Barnier, participated in that discussion. I thank Katie Kochmann, who was our policy adviser, for convening that very important discussion, and John Turner and Stuart Stoner, who have been the clerks of the committee. I am also grateful to the noble Baroness, Lady Falkner of Margravine, for allowing me to speak today, and to the noble Lord, Lord Boswell of Aynho, who I know cannot stay for the whole debate because he is going to another part of Europe—deepest Northamptonshire.

Capital markets provide, among other things, an alternative to bank lending for business. The Green Paper stressed that the market was fragmented, leading to overreliance on banks and problems for small businesses in accessing funding. Indeed, the noble Lord, Lord Hill, told us that,

“the purpose of Capital Markets Union is to make it easier to link savings to growth and to channel savings from anywhere in the EU to be invested in businesses anywhere in the EU. The goal is a true Single Market in capital”.

The Green Paper makes many references to the fact that, in the United States, capital markets make up a higher proportion of the borrowing and lending market. By contrast, in Europe, bank-based funding makes up the majority of those channels into the economy. The key theme of capital markets union is about rebalancing and generating greater diversification of funding channels. As indicated by the noble Lord, Lord Hill, from the beginning the process would be legislation-light and involve reviewing legislation, proposing it only where necessary. Might the Minister reflect on whether that has been achieved, as we are in midstream? Perhaps he could also think about the Dutch presidency, which has made this a focus of its six months. I would be grateful if the Minister could tell us of any discussions he has had with his Dutch friends.

As well as suggesting ways to diversify financing sources, the CMU Green Paper suggests methods to reduce fragmentation in the financial markets, to strengthen cross-border capital flows—incidentally, only 6% of capital flows at the moment are encouraged by cross-border financing—and to improve access to finance for businesses, especially of course for small businesses. I wonder again whether the Minister will reflect on the importance of small businesses, which I think we have not always permitted, allowed or released into the workings of the European Union single market.

The paper identifies challenges such as the fact that investment in Europe remains heavily reliant on banks—something like 80% of finance in Europe is drawn from banks, whereas in the United States more like 80% is drawn from the capital markets. That is a very important difference. What more has been done to reduce the barriers and make the rules and market practices, which differ for certain financial products across the European Union, more helpful? There is also of course the inhibiting cultural element in that shareholders and corporate debt buyers rarely invest across borders. Again, what more can we do about that?

As the title of the report suggests, the committee welcomed the proposal of the noble Lord, Lord Hill, and, later, the Green Paper. We concluded that the proposals could,

“provide an opportunity to create a … Single Market in capital by diversifying funding and improving investment opportunities across the EU”.

We also noted that:

“The proposals aim to spread and mitigate risk throughout the financial system, while at the same time tackling … regulatory and administrative barriers and the cultural obstacles to growth”,

which I have talked about before. We also said:

“We particularly welcome the commitment to ensuring that Capital Markets Union is for all 28 Member States”,

which is very important for us now, especially in the Government’s negotiations, which are coming to some kind of fruition, and not just for the eurozone countries. In addition, we noted that a fully developed capital markets union would help to absorb any future asymmetric shocks across the union that might be prompted, thereby, of course, reducing the vulnerability of the European Union economy.

The Commission advocated a bottom-up rather than a top-down approach, consulting so-called shareholders widely. It also advocated a gradual process over a number of years, with the first stage being introduced through a capital markets union action plan later in 2015. That action plan was indeed published in October last year on the basis of responses made to the Commission’s consultation, among which our report figured.

I will not enumerate all the actions proposed in the plan but will talk briefly about some of those which have been introduced. Again, I encourage the Minister perhaps to reflect on the many actions of those he would seek to enhance and endorse. The action plan recognises that banks are lenders to a significant proportion of the economy and act as intermediaries in capital markets, and therefore will play a central role in capital markets union. The Commission has therefore introduced a securitisations regulation with the aim of creating a framework for simple, transparent and, indeed, standardised European securitisation to free up capacity on banks’ balance sheets and provide access to investment opportunities for long-term investors.

When we took evidence last February, we heard from the noble Baroness, Lady Bowles of Berkhamsted. I am so pleased that she is contributing today, as she has spent five years saving British bacon in her role as the chair of the appropriate European Parliament committee. She told us that securitisation had not been particularly problematic in the European Union but had suffered reputational damage because of the US subprime crisis. I look forward to her comments on that. The European securitisation market had regrettably shrunk in terms of issuance volume from €367 billion in 2009 down to €156 billion in 2014, with barely half of that volume placed with investors.

We therefore welcomed the priority placed by the Commission on building a high-quality securitisation market on the grounds that these markets had a key role to play in managing and transferring risk in the financial system and lowering the costs of funding and restoring growth and jobs to the top of the agenda. We cautioned, however, that there were obstacles to achieving greater standardisation and transparency for small business securitisations thanks to the intrinsic informational asymmetry. We need a more common and recognised system across what is actually being offered.

The proposed securitisations regulation was the first legislative action emanating from the CMU action plan to be introduced, and a general approach was reached in Council before Christmas last year. I understand that trilogues are taking place between the European Commission, the European Council and the European Parliament. I am particularly alive to concerns that fragmentation could occur between those securitisations which are indeed standardised and transparent and those which are not—again, perhaps the Minister might reflect on whether he shares concerns in that area—and between the EU and other international regulatory regimes. Under securitisation, there are 29 criteria which it will be very important to comment on.

Alongside the CMU Green Paper, the Commission launched a review of the prospectus directive. The noble Lord, Lord Hill, told us at the time that it was important to review the prospectus directive to see if it was possible to reduce burdens on issuers, to make it easier and more affordable to raise funds. The consultation paper noted in particular the lengthy, complex and expensive process of getting a prospectus approved by the national competent authority, and that practices at a national level differed considerably.

We welcomed the review, noting that it was important to ease the burden of issuers, particularly small-business issuers, and to increase the consistency of approach to liability and sanctions across member states. However, we did warn that consumer protection must not be weakened, as doing so might reduce the demand for any new financial instruments that might be devised. A balance needs to be struck to ensure that markets are attractive, both for issuers and investors.

The action plan included a proposal to modernise the prospectus directive. What has emerged is a new regulation to replace it and, again, I look forward to action to help small businesses publish a prospectus. Again, the Minister might like to reflect on that. He also might like to reflect that of course we mention in our paper peer-to-peer lending, which is not my lending him five bob for a cup of tea, and crowdfunding, both of which have enormously increased. The finance firms have doubled their lot in terms of peer-to-peer lending from last year, from €2.2 billion. Christine Farnish, the chair of that section of funding, said that that industry is a real alternative to the traditional lenders, which are typically the banks.

I will conclude by briefly touching on the implications for the role of the United Kingdom. We concluded that the CMU project was a significant opportunity for the UK positively to promote the importance of capital markets, benefiting not just the UK economy but the EU as a whole. We encouraged the Government and the UK financial sector to share best practice with other member states while recognising that the United Kingdom could itself learn from others; I look forward to hearing from the Minister in a minute.

I did take the opportunity, when the Statement was repeated by the Leader of the House just now, to make a suggestion about capital markets union. The single market was the creation of Lord Arthur Cockfield in this House when he was the British Commissioner 20 years ago. I wonder whether the Government might become more positive about what they are intending to do by holding this referendum, get on the front foot and say that there are benefits from the single market which are considerable for the European Union and for the United Kingdom. In collaboration with the Dutch presidency, why not invite the noble Lord, Lord Hill, to be a chair or at a meeting which promotes and reports on the capital markets union, something where the Prime Minister might actually stand up and say, “This is why we are in the single market and in the European Union, because it helps the City of London, it helps small businesses, it helps consumers, and it helps us become abuzz and alive again as a trading nation”? I beg to move.

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[Lord Harrison]

My Lords, I am grateful to all Members who have contributed so positively to this debate. We can see that the noble Baroness, Lady Bowles, is going to be a considerable addition to the House. The noble Lord, Lord Dykes, reminds us as ever that the euro’s position as a reserve currency is breathing hot breath behind the greenback. It is a joy, as ever, to box and cox with the noble Earl, Lord Caithness, in a debate on financial affairs, as we have done so well in the past. To the noble Lord, Lord Flight, I have to say, I would go 500 miles to hear him among 350 eager citizens dilate upon the AIFMD. I dwell, though, on my noble friend Lord Davies of Stamford’s characterisation of the chairs of the committee and I thank him for those compliments to both me and the noble Baroness, Lady Falkner of Margravine.

I will tell a little story in conclusion. Many years ago—some 20 years ago—the editor of the Wirral Globe, improbably called Robin Bird, followed me to Strasbourg when I was an MEP and then wrote a piece about me, highlighting the fact that I was born and brought up in Oxford, and characterising me by putting “Morse” at the top of the story that followed in the Wirral Globe. I am very happy to be a prequel to the noble Baroness, Lady Falkner—the prequel, of course, is “Endeavour”. I look to the Minister: show some endeavour on this. Use the capital markets union to go on to the front foot and say that the United Kingdom is pre-eminent in financial affairs, with the City of London, with small businesses for which we have always had a strong concern. Ensure that the opportunities arrive, either, as I say, under the Dutch presidency or through some long-term planning for the British presidency, which will arrive at the back-end of 2017. We can do something; we can go on the front foot.

I am very grateful to all those who have contributed not only to the capital markets union but on that theme, which now becomes so vital for this country.

Motion agreed.