Finance (No. 2) Bill

Lord Kerr of Kinlochard Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords
Wednesday 26th April 2017 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, I rise briefly in the gap to congratulate the Minister on her magisterial exegesis of what is still 148 pages and a dozen schedules. However, her reference to the plan to proceed—in due course after the election if returned—with the proposals for making tax digital slightly worries me.

I think everybody would agree that making tax digital for business is a good idea. However, both the Treasury Committee in the other place under the leadership of the admirable Mr Tyrie and your Lordships’ Economic Affairs Committee under the leadership of the admirable noble Lord, Lord Hollick, made rather serious criticisms of some of the details of the proposals. They are very big proposals. If the 780 pages were in front of us today, we would be debating a proposal that 2.5 million self-employed people, 1.5 million companies and 1 million landlords, even if their annual turnover was as low as £10,000, should be required to go online and make their tax returns quarterly—every three months—not annually. That would be for all these companies, including very small ones.

Both committees support the principle but your Lordships’ committee recommended that this should be phased in and made optional for small companies and the Treasury Committee in the other place proposed that the threshold should be raised to be in line with that for VAT. That seems reasonable to me. I hope that, back in the Treasury and in the Revenue, people will not be idle in the next few weeks and months, and will take careful account of the reports from the two committees. Both support the principle that the Government propose to follow but find serious fault with some of the details of implementation and particularly phasing.

Finance Bill

Lord Kerr of Kinlochard Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

I agree with the noble Lord, Lord Davies, about uncertainty, just as I agree with the Minister that this Finance Bill comes to us from a different world, the pre-referendum world. We now know that we face a decade of uncertainty, with growth consequently lower and recession, if there is one, deeper than it would otherwise have been.

I say a decade, as did the noble Lord, Lord Davies, because there are several stages to go through. Unlike the noble Lords, Lord Darling and Lord Davies, I think there will be an Article 50 deal. I think there will also be a framework deal—that is a precondition of the Article 50 deal—and a trade agreement deal. I think all three baskets are perfectly doable; it may take longer than two years, but I do not think anybody would want the default option of the noble Lord, Lord Darling. That is not in the interest of our continental partners any more than it is in ours, so I think a deal will be struck, but it will take two or three years. There will then be another year of uncertainty while it is ratified in the other 27 capitals and here. We need to remember that the trade deal with Ukraine came unstuck in Holland in a referendum, which was fought not over the merits of trade relations with Ukraine but to do with Dutch domestic politics, so there are many hazards on the way.

It is only when the content of our trade agreement with the EU and its status becomes clear that our position in the WTO can be established. We cannot be members in our own right until we have proposed our own MFN schedule of commitments, and that must be accepted by 164 members of the WTO, with plenty of room for mischief-making. Only when we have put forward our baseline MFN offer and it has been accepted can we realistically expect to strike trade deals with third countries. Why should they envisage a concession to us in trade negotiations when they do not know whether it is something we will offer anyway in our schedule for the world? Trade negotiation is a mercantilist arm-wrestling business, where people are looking for national advantage and concessions are hard to win.

So I do not know why Dr Fox is currently out recruiting negotiators, because I think they will have nothing to do for at least five years. We need to go through the extraction process with the EU. That trade deal we can strike, because it is a comprehensive agreement. We then need to become WTO members and have our membership terms approved by 164 members before we will find that even our Antipodean friends are willing and able to negotiate a trade agreement.

So a long period stretches ahead and, in the interim, inward investors will, in my view, tend to look elsewhere. The attractions of the gateway into the market of 550 million will be seen to be going, possibly gone. If Dr Fox is right—and I am sure he is—that we shall be leaving the customs union, British manufacturers, when their goods cross the Irish border or the channel, will be subjected to the rules-of-origin tests, the paperwork, bureaucracy, checks and transaction costs which Mrs Thatcher’s Government rightly took such pride in getting rid of in the 1980s, thanks to the single market programme and Lord Cockfield. All this points to a decade of uncertainty and growth lower than it would otherwise have been. I do not predict a recession; I simply say that that uncertainty must, as the noble Lord, Lord Davies, said, have an effect on the economy as a whole.

So this Finance Bill is pretty irrelevant to the real problems we face, and I agree with those who say that the Autumn Statement is likely to be rather more relevant. Speaking as a member of the committee chaired by the noble Lord, Lord Hollick, I support all that he said about what we would hope for in the Autumn Statement. In particular, I hope that the Chancellor means it when he talks about the importance of investment in infrastructure and encouraging investment in housing—particularly, as the committee emphasised to him, assisting local authorities to invest more in housing than they have been able to do.

That seems to me to be much more important than tax. I noted the Minister taking great credit for the fact that the plan is to have the lowest corporation tax rate in the G20 by 2020. I am much more encouraged by the fact that the current Chancellor has decided that he does not want to implement the faster and deeper cut that his predecessor was proposing after the referendum.

I think that Mrs May’s thinking will probably be slightly different from that of Dr Fox and Mr Davis, and what we read from the noble Lord, Lord Lawson of Blaby. Dr Fox does not want to protect any bits of our industry:

“We must be unreconstructed, unapologetic free traders”.

His schedule of MFN commitments might be quite easy to draft, but it seems to me that, politically, it would be quite difficult to sell in this country: difficult to sell to manufacturers; difficult to sell to farmers; difficult to sell all round. I suspect that Mrs May will prove rather more like Mrs Thatcher, who used to enjoy teasing her Chancellors by talking the Minford talk or the Alan Walters talk, but when it came to the walk she was much more pragmatic and shrewd in her judgment of what the country needed and what the country would take. I suspect that something similar will be seen with Mrs May.

And that makes it to me tragic that Mrs May is not going to Bratislava for the European Council this week. I simply do not understand that. We are members of this club until we leave it, and the empty chair is always a very bad policy. Mrs May should be there. I am told that the decision was taken in the last days of Mr Cameron. If so, that is another example of the disastrous consequences of the casual approach to diplomacy. If Mrs May were in Bratislava and were able—perhaps she is not—to explain how she envisages the Brexit process working, I think that our chances of getting a decent trade deal with our partners would be enhanced. They read the British press and believe that Dr Fox and Mr Davis, and the noble Lord, Lord Lawson of Blaby, are speaking for Britain. They believe we are heading for another big round of deregulation, for much less social protection, for a low-tax, low-wage economy—an offshore Singapore. If that is the kind of competition that they will face, that will colour their approach to trade negotiations with us.

As I say, I do not believe that that is where Mrs May is. If one believes Mrs May on the steps of Downing Street talking about reducing inequality, you do not reduce inequality by reducing wages and jobs. I should think they would find her presentation rather reassuring, and I am sorry that they will have to wait. Once she has decided how she will play this Brexit thing, it is very important that she should at an early stage give us a full explanation not just in this Parliament but in the European Parliament and to the European Council.

I ought to speak to the report of the noble Lord, Lord Hollick. I commend it. It is excellent and he has drawn our attention to all its merits, including the merits of our special advisers who are wonderful. I should add just one footnote to it. He did not mention what we said about the Office of Tax Simplification, which the Finance Bill puts on a statutory footing. Some might think it is a major change; I believe that it is a nugatory change.

My approach to tax simplification is coloured by working as private secretary for the noble Lord, Lord Lawson of Blaby, who shocked the Treasury on arrival by announcing that he wished to abolish one tax in every Budget—and he did. It was not a gimmick; the salutary effect on the Treasury of making it go through the exercise of looking at candidates for abolition was extremely good, and I commend the idea to Chancellor Hammond.

I also remember the Treasury’s great shock when, as he prepared his first Budget, Chancellor Lawson said that he intended to abolish all corporation tax reliefs, to make an instant reduction in the corporation tax rate and—this was the bit that really shocked the Treasury—pledged himself to five successive annual future reductions in the rate. He did so, and it was extraordinarily successful; the effect on certainty and confidence was considerable. That is the challenge for Chancellor Hammond. Can he emulate Chancellor Lawson as a simplifier?

On the need for him to do so, I quote three paragraphs from the excellent report of the committee led by the noble Lord, Lord Hollick. First, I quote from paragraph 228, which says that the first report from the Office of Tax Simplification,

“in November 2010 identified 1,042 tax reliefs in the UK tax system”.

By 2015, 53 had been abolished, but new reliefs had been introduced, making a total of,

“1,156 tax reliefs in statute as at March 2015 … a net increase of 114”.

Secondly, I quote from paragraph 229, which highlights that the Institute of Chartered Accountants pointed out that, in the same period, 2010 to 2015,

“the fact is we have had almost 3,000 pages added to the UK tax code, and that was on top of, I think, 9,000 when we started. It is very difficult to simplify a tax system meaningfully when you are faced with that level of extra legislation”.

Finally, I quote from paragraph 230, which highlights the evidence from the Federation of Small Businesses:

“Despite the laudable efforts of the OTS … We see neither the flow of new legislation abating, nor are we convinced that the administrative impact of tax measures undergo the same level of scrutiny as regulation more generally”.

Noble Lords will, I am sure, agree that one reason why there is inadequate scrutiny of tax regulation is that we do not get our hands on it here—we are made to keep off that grass.

There is a major job to be done in trying to reduce the size of the tax code, and I think that putting the Office of Tax Simplification on a statutory basis will not achieve anything. There are two routes you could go down: you could either follow the OBR route and make it genuinely independent and a power in the land, or you could keep it as it is now, or as it will be, on a statutory footing, inside the Treasury and dependent on the Treasury for pay and rations, but allow it—as it is not allowed now—to see tax measures in advance, and allowed in on the Budget process. As it is, it will remain neither one thing nor the other, as Churchill is said to have said of Alfred Bossom. It is neither going to be genuinely independent nor will it be up-stream. I would have gone for it staying in-house but being up-stream, which is something that the Chancellor could achieve by a flick of the pen, without any further legislation—and I very much hope that he will, as he rises to the dual challenge of reducing the size of the tax code during his time in office and abolishing one tax per Budget.

Pension Schemes Bill

Lord Kerr of Kinlochard Excerpts

Tuesday 16th December 2014 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, it is a pleasure and a privilege to participate in the tributes to the noble Lord, Lord Jenkin of Roding. I should like to add one footnote. As a former public servant when he was a great man in the Cabinet, I should like to say how much his courtesy towards the public service was appreciated. He was a great team leader. He was not one of those who thought that the public service was a lesser breed without the law. It was a privilege to work with him at that time.

I also agree with every word of what the noble Lord, Lord Freeman, said so elegantly, particularly the tribute he paid to the kindness of the noble Lord, Lord Jenkin, in welcoming new Members to this House. I learnt a great deal from him when I first arrived here, in particular about energy policy. I will greatly miss his consistent stress on the need for further back-up investment in generation. Governments of both hues have perhaps not paid sufficient attention to that. If the lights go out and we find ourselves in the dark as we brush our teeth, we will remember the noble Lord with very great affection.

Euro Area Crisis Update (EUC Report)

Lord Kerr of Kinlochard Excerpts

Wednesday 23rd July 2014 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, my text is taken from the fourth chapter of the book of Harrison. I pay tribute to the prophet for his skill in achieving a consensus, but I shall now try to demonstrate that there is a wide range of views on the committee, as I shall not agree with everything that the noble Lord, Lord Flight, has just said.

I am not competent to follow the noble Lord, Lord Davies of Stamford, into the economics, so I shall stick with chapters 3 and 4 of our report, where we argue about the institutional effects and the impact on the United Kingdom. In particular, paragraph 71 states:

“The economic fortunes of the UK and the euro area are intrinsically linked … moves towards integration leave the UK in an increasingly isolated position. In order to ensure that the UK’s interests are effectively promoted, the Government and the Bank of England should therefore maintain and develop constructive relationships with the increasingly powerful euro area authorities, notably the Eurogroup and the ECB”.

The initial brief reply from Nicky Morgan, who was briefly Financial Secretary to the Treasury, said that we had correctly identified,

“that the changes in governance precipitated by the euro area crisis has seriously altered the EU’s decision making structure and that, in turn, impacts on the UK”.

However, she assured us that,

“going forward the Government will remain, as it has done so far, closely involved in negotiations … to ensure that proposals fully take into account the interests of all Member States”.

I thought that a little complacent. I was also struck by the passage in the balance of competences review that was published by the Treasury yesterday that states:

“Access to the single market in financial services and the Free Movement of Capital provides significant benefits for the UK financial services industry and for consumers … While the ultimate impact of the banking union is hard to predict at this stage, it is likely to pose a number of challenges to the UK’s interest in maintaining a central role of influence in an internationally competitive financial market in the EU”.

We got some advice, as has been mentioned, from Sir Jon Cunliffe, deputy governor of the Bank of England, who advised that the Government would do well to try to maintain,

“contacts with the Eurogroup, ensure its meetings took place in the context of other EU meetings, and being ready to offer technical advice without lecturing or providing unwanted counsel”.

I thought that rather good advice. Maybe Sir Jon could persuade the Governor of the Bank of England, or the Minister could persuade the Chancellor, that the euro group should be invited to hold one or two of its meetings in London, where it could be briefed about, and familiarise itself with, its key market—the City. Maybe the Minister could think about a suggestion made in evidence to the committee yesterday by Sharon Bowles, who until the European Parliament elections chaired the ECON committee of the European Parliament, that the eurozone should be encouraged to meet after, rather than before, meetings of ECOFIN so that it would be better able to take account of the interests of all 28 member states, as the treaty requires it to do.

The balance of competences is right to talk of challenges. I can think of five. First, the eurozone will have a qualified majority from November. Secondly, the UK, as a non-eurozone member, is in practice now ineligible for any of the top economic jobs in Brussels, including: the president of the ECB; the president of the euro group; the Economics Commissioner, who might be combined with the president of the euro group; and the President of the Commission and the President of the European Council, because such a large part of their agenda relates to the euro.

The third challenge is that the UK is in a different position from most other member states, including most other non-eurozone member states. Most non-eurozone member states purport to be, or see themselves as, pre-ins. They say that they want to join one day; we say very firmly that we have no intention of ever joining, which rather singularises us. We said the same about fiscal union—not that it was very stringent; it turned out to be a rather loose form of discipline to apply the austerity that we were at that time loudly preaching. But we chose, with our Czech friends, to flounce out. We alone have refused to contribute to any bailouts of member states in trouble during this crisis and we take great pride in that as one of our great achievements. We report that we have managed to avoid being involved in any bailout. On banking union, it is my impression that most of the pre-ins, such as the Poles and the Swedes, who are certainly not going to join the euro in a hurry, have managed to keep rather closer to banking union than we have done. That could be damaging to the City.

The fourth challenge is that we cannot have any key position on the economic side of the European Parliament as non-eurozone members—Sharon Bowles’s successor is an Italian. Regarding the institutions, the British Bankers Association brought out an interesting report the other day saying that the representation of UK public servants in the institutions is down to under 5%, proportionally lower than at any time since we joined. If that figure was based on our population share, it would be 12%. Only one in every 25 new recruits to the institutions is a British citizen, although one in every five comes from a British university. Why are the Brits not going? It reflects a wider problem: just as young people cannot be sure that a career in Brussels would not be brought to a sudden end, so other member states cannot be sure that it makes sense for them to do deals with us when, as the President of the European Council puts it, they can see that our hand is on the door-handle and when they hear the new Foreign Secretary saying—without defining what we want—that, if they do not give us what we want, he would be ready to recommend that we leave.

None of these problems is easily soluble. We are in a hole and, as the report says, we are “increasingly isolated”. We could remember the first law of holes, which I remember the noble Lord, Lord Healey, explaining: when you are in a hole, stop digging. It would be quite good, as Sir Jon Cunliffe said, to avoid lecturing people. We could also avoid hectoring or denouncing them, for example in articles in the weekend press. It would be good to try to avoid deliberate distancing. The French have a saying: “Les absents ont toujours tort”, or “Those not present are always in the wrong”. Alternatively, you could say, “We’ve got to be in to win”. Given that we are not in the eurozone, it behoves us, and the interests of the City, to stay as close to it as we possibly can.

Genuine Economic and Monetary Union (EUC Report)

Lord Kerr of Kinlochard Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Kerr of Kinlochard (CB)]

My Lords, it was a pleasure to take part in the work that led to this report. It was very enjoyable, largely because of the exemplary patience displayed by our chairman, the noble Lord, Lord Harrison, which produced a unanimous report, and because of the diligence of our clerk, Mr Stoner, who is extremely good at marshalling our arguments with rigour and, sometimes, imagination.

I take two texts for my sermon—I have a Scottish Presbyterian background. My first text comes from the Book of Job—that is, the Treasury. The Government’s response to our report states that,

“the government is clear that we are not joining the Euro”.

Yes, I think we got that. It goes on:

“Therefore it is right that we have said from the outset that we will not take part in measures designed to support full economic and monetary union”.

Yes, we have got that. It goes on:

“The Government has been clear that it will not participate in the Banking Union”.

There is a false logic there. It is perfectly possible that the banking union—although the impetus for it arose from the crisis in the eurozone—could be a good thing, irrespective of whether one was a member of the eurozone. Indeed, I notice that, of all the non-eurozone member states who are negotiating the texts of banking union, only the British and the Swedes are negotiating not on the basis that they intend to join.

If I were to dare to part company with the noble Lord, Lord Lamont of Lerwick, I would say that there was a moment in his speech when I thought that he was slipping into the error of equating banking union with economic and monetary union. As he rightly pointed out, our report, although entitled Genuine Economic and Monetary Union, was largely about banking union, because that was the key subject on the agenda. I would argue that it is not necessarily the case that non-members of the eurozone should decide that they have no intention of becoming members of the banking union.

On that, I would say that the committee was in a state of intelligent schizophrenia. It is intelligent because it is an extremely intelligent committee; it is schizophrenic because we all agree—the Government are of the same view—that the creation of an effective banking union, reducing the risks of future crises and making them easier to manage when they arise, is a good thing. We all agree with that. We on the committee felt, however, that it was hard not to acknowledge that the UK’s non-participation in banking union could have a deleterious effect on the City of London’s position as the transaction capital of Europe and one of the great three global financial centres. We felt that it was possible, over time, that that position could be eroded by non-participation in the structures of banking union. That is the point brought out in the passage of the report cited by the noble Lord, Lord Liddle, where we state, at paragraph 227:

“The Government may be ill-advised to assert that Banking Union is the sole province of the single currency for all time. It would be wise not to close the door on the possibility of some level of participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.

That is my view. However, I recognise that I will not persuade Job in the Treasury of that today and, perhaps, not for some considerable time.

[Lord Lamont of Lerwick]

Does the noble Lord remember that the Book of Job says, I forget in which exact chapter:

“There is a path that no fowl knoweth, and which the eye of the vulture hath not seen”?

[Lord Kerr of Kinlochard]

I cannot say that I think of that every morning as I arrive, but I will bear the noble Lord’s words in mind.

I want to make five minor topical, practical points arising from the report. First, in strict logic, the position that the Government take up—that banking union is nothing to do with us but is a matter for eurozone countries—could mean that the Government do not object to the proposal, much discussed in Brussels at the moment, that the heavily overloaded Commission’s single market directorate-general should be split, with banking and financial legislation moving to the financial directorate-general, the primary concern of which is of course for the health of the euro, leaving the single market directorate-general handling the classic single market agenda. That would be disastrous, from a number of points of view, not least from the point of view of UK interests. The British Bankers’ Association states:

“It is of utmost importance to maintain the structure of the relevant Commission services dealing with financial services so that their work is permeated with the priority of preserving the single market focus. We suggest that the UK Government should proactively defend the unity of DG MARKT and oppose any plan to move financial services out of it. It would be a mistake to move the work e.g. to DG ECFIN which has quite different priorities”.

I strongly agree and I hope that the Minister will be able to reassure us that we shall—to the extent that our current influence allows—work to ensure that that does not happen.

In my view, it is highly desirable and important that the current head of the single market directorate-general, the most senior of that very small and dwindling band of British personnel in the Commission, should stay where he is. I strongly agree with what has been said already today about the need to reinforce that. Retaining the unicity of the director-general is much more important than who is the single market commissioner—the issue that dominates the headlines. What matters is that it is the director-general and that he covers all the work that is of interest to the City of London.

My second point is also quite topical. I hope that the Government will, to the extent that their current influence allows, seek to discourage a second suggestion much debated in Brussels now, which is that the next finance commissioner should also be the next president of the Eurogroup, replacing Mr Dijsselbloem, the Dutch Finance Minister, when his term ends next summer. Combining the two jobs would be a prescription for serious schizophrenia, with a real risk that eurozone concerns might override single market integrity. This is not a moot point in the US sense. In our report we use “moot point” in the British sense, which means it is a key issue. In America, a moot point is a point so boring and irrelevant that it is worth discussing only in a moot court—a fine example of the difference between the two languages, as is “tabled”. If we said that our report had been tabled, people in Congress would say, “Oh, bad luck”, because it means shelved in America.

The moot point is that we have seen two recent examples of just what I am worried about—eurozone concerns overriding single market integrity. In the Cyprus crisis, when the eurozone imposed capital controls, that was a fundamental strike—which may have been necessary in the crisis—against a fundamental principle of the single market. It affected non-eurozone citizens. A British citizen with money in Cyprus could not move his money because of capital controls introduced by the eurozone. The result was that the case was quite rightly taken by the British Government to the Court of Justice against the ECB for its attempt to argue that clearing systems trading euro-denominated paper must be within the eurozone. That, too, is a clear breach of the single market and I applaud the Government for contesting it. It would be dangerous to see the two jobs of presidency of the Eurogroup and finance commissioner in the Commission combined. That may be difficult to prevent, given diminished influence, but I urge the Government to have a go.

[Lord Davies of Stamford (Lab)]

Does the noble Lord agree that in a crisis—this is true whether supervision and regulation are done on a national basis or on the basis of the Union as a whole—the need to prevent the crisis and deal with it must override market rules? That has always been the case in this country and in the United States. It has always been the case in any country run by good governance rules.

[Lord Kerr of Kinlochard]

I hasten to add that I do not know the detail of what happened over that weekend when the capital controls were introduced. The noble Lord may be quite right. I merely say that there is a risk here: we see it in the case we are bringing in the court and saw it over the Cyprus capital controls.

The third point, about the European Parliament, is very topical. The committee was lucky enough to take evidence from Sharon Bowles, who chaired the relevant committee in the European Parliament. She did so extremely well and has now retired from the Parliament. There were two other senior British Members of the European Parliament on the committee. I do not know who will be on the reformed committee, but it is crucial in relation to financial legislation. The new chairman of the committee is a highly effective, intelligent Italian, but I do not know whether there will be British members. Presumably, we cannot look to UKIP to do any work and, given the sad fact that the Conservatives are not in the EPP family, I do not know whether there will be a Conservative on this committee. There were two Labour members on the outgoing committee—they were both extremely good but have retired. I hope that the parties will get together and, in the national interest and the interest of the City, will ensure that there are some people on that key committee who are aware of the importance of the City and the importance for the City’s health of good European legislation.

The fourth point is not quite so topical. I urge the Government to think very carefully about the implications of the change in Council voting weights which happens in four months’ time. The UK’s voting weight goes up from about 8% to about 12% but comparable increases for other large member states, such as Germany, France and Italy, mean that the eurozone will, for the first time, have a clear qualified majority. That is in the Council but also in the ESMA—the European Securities and Markets Authority—although not in the EBA because of the dual-majority system. That is rather fragile but, for as long as it lasts, this will not apply there.

The voting weight change in the Council reduces the viability of a purely defensive strategy of the kind that the United Kingdom has adopted on the banking union dossier. We have argued, as the Minister has, that our aim is to protect the interests of non-eurozone single market members, in particular the interests of the UK financial community. We have been doing that by objecting to various things and looking for support. We have often been able to obtain that support, but it will be more difficult in future. We will need to change our tone and our posture: we will need to be a little more proactive and a little more constructive. In particular, we should be trying to field City experts to advise our partners, in a non-polemical way, on how they can best, in their interests, keep their transactions capital—London—healthy and ensure that the EU remains in the big league, playing host to one of the big three global markets. The saga of our handling of the ludicrous financial transactions tax proposal shows that we are not very good at that. Recent events show us deliberately distancing ourselves and not being very good at adding up votes. That will prove even more unwise when the eurozone caucus has a qualified majority, as it will have from 1 November.

My last point is a more difficult one to put in the hard-edged way that I have tried to put the previous one. Networks of regulators and supervisors matter: informal contacts and knowing the guy at the other end of the telephone. In some ways, that matters a lot more than the formal. Informal contacts used to develop organically and naturally, but that is harder to do now. The Governor of the Bank of England naturally cannot be on a close terms with his fellow central bankers on the continent as were Gordon Richardson, Robin Leigh-Pemberton or Eddie George, who met them in meetings all the time, with so much of the central bank’s work being done on a eurozone basis. For example, the meeting this coming weekend sounds a very important one—but there will be no Brit in the room.

I agree with what the noble Lord, Lord Flight, said about the relationship between the Bank of England and the ECB being very good. I believe that it is, and that it is very important to go on ensuring that it is very good. As we staff new supervisory and regulatory structures in this country and they work out their modus operandi, we and they really should be aware, too, of the cardinal importance of informal co-operation and advice from and to concerned colleagues. Intelligent and well informed advice, privately conveyed but not in a hectoring tone or as if we knew better, will be well received. London’s expertise is still well recognised among the experts and such practical links will become even more important, the more we slide into self-isolation at the political level.

--- Later in debate ---

[Lord Newby]

I think that the noble Lord, Lord Lamont, explained at the start of his speech the trade-off between influence and being a member of the EMU. I will come to this later but, obviously, in certain respects, we are going to be outside the room by not being members of either the eurozone or the banking union. We have to work very hard to ensure that we maximise our influence in those areas, of which the single market is the most central, in which we have a common view with many, if not most, of our EU partners about the need to reform and the direction that reform should take.

I will attempt to deal with many of the questions that I was asked by individual noble Lords during the debate. The noble Lord, Lord Harrison, asked whether the single resolution mechanism was too complex and therefore would not be effective. By definition, all resolution processes are complicated but the role of the single resolution board is very strong. This may be a vain hope but, from our own experience, we hope that the plethora of legislation and new structures will reduce the likelihood of major crises of which we have been previously largely unaware emerging at great speed.

One of the problems in the UK when RBS had to be effectively nationalised over the weekend was that the storm arose with great speed. If you contrast that with the position of the Co-op Bank last autumn, when it faced major, potentially life-threatening problems, a resolution was undertaken, not formally using the legislative framework but largely using the mechanisms that were envisaged there, and with the Treasury and the Bank playing a major role over a number of months in getting the Co-operative Bank into a position where it was able to resolve its own problems.

The involvement of political bodies other than the single resolution board is inevitable because of the significance of the decisions that are taken and the fact that if major banks are in real difficulty—a weakness we have seen in the UK—there is a political component and you have to take that into account as you are taking decisions. We would hope that the scope of the decisions that have been left to the Council is very circumscribed and that most interventions, even involving the single resolution board, would not require going up to that level.

The second question that the noble Lord, Lord Harrison, raised was whether the resolution fund is too small. On its own, it demonstrably is, if there were a major simultaneous problem with a number of the largest eurozone banks. The key thing here is that it does not have to bear the whole brunt of the resolution process on its own. Arguably, it does not have to bear the main brunt of it. That is the whole point of the resolution recovery directive and the bail-in procedure. The fund is not capable on its own of solving a major crisis, but it is one of a number of tools and not necessarily the largest or most important.

The final question, I think, that the noble Lord, Lord Harrison, asked related to the replacement of senior positions in the EU. As he knows, over the coming weeks, the European Council President will be taking soundings on this and I am no more able to suggest whom we might put forward, than my noble friend was at Question Time today. The UK is fully engrossed in those negotiations with the aim of making sure that we have candidates who will be able to deliver on the priorities agreed by the heads of the European Council last week.

Among other things, the noble Lord, Lord Lamont, has introduced a definition of nirvana that means that I will never think of the concept in the same way again. He ended his speech by saying, I think, that his feet tended to have to accommodate themselves to the shape of the shoe. My experience and expectation is that my shoes will amend themselves slightly to take account of the shape of my foot. I think that that is a rather important distinction in the way that we view our involvement.

This brings me to one of the central points of discussion, which was the importance of political will in terms of the future of the euro. In certain respects, the euro has defied logic because of the strength of the political will supporting it. I strongly agreed with the noble Lords, Lord Liddle and Lord Jay, about that. Once the political elites of the major eurozone countries have made up their minds that this thing was going to continue, it was going to continue barring the most unforeseen disaster. Those who predicted its demise simply did not grasp a very straightforward political fact.

The noble Lords, Lord Liddle and Lord Maclennan, asked linked questions about how we could play as full a part as we can in both the banking union and the mechanics of the eurozone. Obviously, we have ruled out membership, so the question is the extent to which we can play a role. I thought that the point of the noble Lord, Lord Kerr, about the role of informed co-operation and advice was very important here. We have very good relations with the ECB at all technical levels and UK officials are playing, and will continue to play, a big role.

The noble Lord, Lord Kerr, developed the concept of playing a bigger role in the banking union by saying that there was no logical reason why we should not be in it while remaining out of the eurozone. I am sure that that is logically the case. Why has it not happened? There are a number of reasons. First, the banking union has flowed from the eurozone crisis. I think it is inconceivable that we would have had such a banking union if all had been well with the eurozone, so the two are inextricably linked. I would also be interested, as a newcomer to the theoretical concept, to know whether there has ever been a banking union with banks that had two different basic currencies, or several currencies, because presumably the Swedes and others might also join.

The noble Lord, Lord Jay, made an important point about having more British people involved—

[Lord Kerr of Kinlochard]

I do not quite follow the logic of the Minister’s answer to my point. Because something has emerged that is driven by a wish to support the eurozone, that does not necessarily mean that it is bad or something from which we should be determined to distance ourselves. I do not think that the point about currency is relevant to whether we should be in a single supervisory mechanism. The non-eurozone countries that are negotiating do not think it is, nor do I see why, logically, it should rule us out from being in a single resolution mechanism. I understand that a separate argument would apply in respect of resolution, which is that it means somebody pays. Resolution costs money. However, we are not into these kinds of arguments. I am not saying that we should join either the single supervision mechanism or the single resolution mechanism today; I am merely arguing that it annoys the foreigners when we take the blanket approach that this is nothing to do with us. That undercuts the role—which I am glad the Minister acknowledges is very important—of the City quietly advising the ECB, and on these new structures being developed on the continent, as to how the job is best done.

[Lord Newby]

I was simply trying to understand, partly for myself, why we have taken this view on the banking union. An element of it was a political view and an element of that was borne out of the way in which the banking union itself developed; namely from the eurozone, of which we are not a member. At some point, we may decide that we want to be a partial or full member of a banking union—although I suspect that point is some way away, whoever the Government are. While I am on the subject, the noble Lord, Lord Dykes, made a point about timescales. However, as he is not in his place, I will have to pass over it.

The noble Earl, Lord Caithness, asked about the common guarantee scheme. He said that the Government were being rather spartan in their response—which, indeed, we were. However, the reason for this is that any common deposit scheme would be for the eurozone rather than the UK. If the eurozone decides that it wants to go down that route, that is fine but we will not be playing any part in it.

The noble Lord, Lord Desai, pointed out that the eurozone operated on a sort of gold-standard basis by being a deflationary tool. The first example in recent times in Europe of real wages falling significantly was with the monetary union between West and East Germany. I would not say that Germany got a taste for it, but it got an understanding of how that could work. What has been surprising is the extent and speed to which Ireland, Spain, Italy and Greece have been able to adjust, in particular, real wages downwards in order to begin to make their economies more competitive within the eurozone. The noble Lord made another interesting point about how important the three words—“whatever it takes”—issued by the head of the ECB were. The fact that they were so effective says a lot for the credibility of the ECB because markets believed it, which is encouraging in terms of the strength of the ECB.

Along with other noble Lords, the noble Lord talked about the challenge of what used to be called—although I am not sure it has been today—the “democratic deficit”: the fact that there is a low engagement in European elections and a low understanding of many of the issues. A number of suggestions were made about how to deal with this, possibly by having more direct elections or voting for the President of the EU. I am possibly the only person in the Room who has gone on a demonstration carrying a placard in favour of direct elections for the European Parliament, which I did as a student. We had very high hopes for the European Parliament then, not just as a technical body in terms of scrutinising legislation, which, on balance, it does extremely well, but as a symbol of a uniting Europe, which I was all in favour of. We thought that having a Parliament elected by the peoples of Europe would bring that concept to life but it has not, so I am rather sceptical about whether we can solve that problem by more elections. I fear that we may have to rely more on the role of national Parliaments, which is the subject of another report by your Lordships’ committee.

The noble Lord, Lord Kerr, raised a number of extremely interesting points about the way that appointments might be made and how the directorates might change. I absolutely see the strength of his very important institutional points and will take them back to my colleagues in the Treasury, who are rather more closely involved in those negotiations than I am.

The noble Lord, Lord Davies, spoke about the threat to the single market in financial services of the banking union and about different legislative frameworks. In fact, what we have to a very large measure is that wherever you go across financial regulation, it is regulation under directives. Our own legislation is very much framed within the plethora of directives which I always think of Sharon Bowles presiding over. She has been the one person who has understood all this stuff. Although under a directive the way that we do something and the way that the European Central Bank does it may be slightly different, it is no more different in this area than in any other area of the single market, where we implement things by directive and the detail of the way it is done varies from country to country. I am not sure I share the noble Lord’s concern in that respect.

Queen’s Speech

Lord Kerr of Kinlochard Excerpts

Wednesday 11th June 2014 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, it is always a pleasure and a difficulty to follow the noble Lord, Lord Ashdown. I agree with much of what he said. However, I wish to address a particular issue raised by the noble Lords, Lord Jopling and Lord King, that of Ukraine. If I could catch the Minister’s attention, I would remind her that she told us in her speech that we deprecated the attack on Crimea and the destabilisation of the Donbass and that we welcomed President Poroshenko’s election. I agreed with all that. What I did not hear from her was a policy or a strategy. Sanctions are a very useful support for a strategy but not a substitute for one. I would like to hear a little more about what we are trying to achieve and how we are going about it.

Like the noble Lord, Lord King, I do not think one can approach this without talking to Mr Putin. We need to know what he wants. If Mr Putin wants to break up Ukraine, and really meant that new doctrine about Novorossiya, then there is no deal to be done. If he really means that Ukraine must have no relationship with the European Union, then there is no deal to be done. However, I do not think that even he believes that the association agreement with the European Union prevents a grown-up trade relationship between Ukraine and Russia—which of course it does not. It permits Ukraine to have as many other free trade areas as it likes, and the Russians did not object during the four years in which it was negotiated between Ukraine and the European Union. It is the customs union into which the Russians have spatchcocked Belarus and Kazakhstan that creates the incompatibility, because in that customs union those three countries—Russia, Kazakhstan and Belarus—have conferred negotiating powers on the centre, and none of them can now form a free trade agreement with, say, Ukraine or the European Union. However, Mr Putin knows all that. I do not know what he really wants and it surely is an important policy aim to find out.

Last time we talked about Ukraine, I mentioned to the noble Lord, Lord Wallace of Saltaire, who presided over the debate, that it might be worth his thinking about talking to Mr Poroshenko and to Mr Putin about the precedent of the Austrian state treaty. The noble Lord gave me a rather dismissive brush-off at the time. I will just make eight quick points in the hope that his doppelganger, the noble and learned Lord, Lord Wallace of Tankerness, might be prepared to ask the brilliant young women in the Box for a considered reaction this time. I apologise to the noble Baroness, Lady Falkner, for the tautology, as all young women in the Foreign Office are brilliant by definition. I will not say that all people from the Foreign Office are brilliant, for obvious reasons, but the young women are extremely brilliant.

First, the Austrians took the initiative and negotiated the treaty in 1955 with the Russians. Secondly, it was premised on the neutrality of Austria. President Poroshenko is not asking to join NATO, although he is saying that he wants Ukraine to join the European Union one day. Thirdly, it guaranteed the rights of the minority communities in Austria. Fourthly, it prohibited Nazi organisations. Fifthly, it left Austria free to negotiate its own external relations, and 40 years later Austria joined the European Union. Sixthly, it prohibited foreign troop deployments or bases, and 40,000 Soviet troops left within a month. Seventhly, outside powers, including us, were brought in as guarantors and nobody lost face. Eighthly, it worked—to the benefit of Austria and all of us.

If Mr Poroshenko means what he said in his inauguration speech, the points that he raised would be covered in an agreement along the lines of the Austrian state treaty. And it seems not inconceivable that even Mr Putin might be prepared to accept that he could follow a precedent set by Mr Molotov. This is a shot in the dark—I do not know—and there may be many better ways of achieving conflict prevention and resolution in Ukraine. However, we have to try. It is not enough to threaten and say, again and again, “There will be consequences”. We need to talk to the Russians, talk to the Ukrainians and see whether a solution can be brought about. That is my recommendation.

EU: Financial Transaction Tax (EUC Report)

Lord Kerr of Kinlochard Excerpts

Tuesday 17th December 2013 Grand Committee

[Lord Kerr of Kinlochard (CB)]

I would like to reassure the Minister that we support the Government’s present position. It was the abstention that surprised us, not the litigation. We were rather keen on the idea of litigation.

We have been disappointed by the disdain with which the Government have dismissed our concerns down the years. I was disappointed in 2012 when the Minister wrote to us, saying:

“We are sceptical whether other Member States will agree to a … sub EU-27 … FTT or that it would work. If they decide to go ahead with a EU17 FTT, it may not necessarily be bad for the UK because: UK may gain market share … and … the impact on the UK may be no different from that on other international financial centres outside the euro area such as New York or Hong Kong”.

Really? New York and Hong Kong are not subject to the mutual assistance directive; we are. New York and Hong Kong would not collect this tax, as the noble Lord, Lord Hamilton, pointed out. They would be laughing all the way to the bank. The true cost of the financial transaction tax—if it comes in—would be the transactions displaced, which would migrate offshore, out of the whole of the EU, including away from London. It is a pernicious proposal.

I was disappointed when the Government, in explaining why they abstained rather than opposed the idea of an FTT at 11, told us in Mr Clark’s letter this year that,

“the Government attaches great importance to the principle of tax sovereignty, and therefore believes other member states should be free to set their own tax policies … We also recognise that introduction of a FTT is of great importance to several of the participating member states. Voting against the authorising proposal, rather than abstaining, could have undermined these messages”.

I think that is completely absurd. I entirely agree with the doctrine of the principle of tax sovereignty, but that means that member states are entitled to impose whatever taxes they like in their own countries provided they do not discriminate against other member states and do not damage the interests of other member states. However, it does not mean that they are entitled to impose a tax that damages us because we have to collect it at no benefit to our Exchequer but at great damage to our markets. That is an absurd reading of tax sovereignty. It shows a defensive Treasury that is refusing to get out there, argue proactively and build alliances. After all, 17 member states are not going to implement this tax. Had we approached them and argued the EU interest, and argued that EU markets, including their markets as well as ours, would be damaged by this tax, I do not believe that it would have been impossible to block it. I think that the Government now agree, because they are litigating, that it is a highly undesirable measure.

I draw four short morals from this sad story. First, it is almost always a mistake to say, “Roll out the red carpet, let them do as they like, the business will come to London”. That was Boris Johnson’s position. As usual, he got completely the wrong end of the stick. Sadly, the Government seem to have held on to the wrong end of the stick for some considerable time.

Secondly, as the noble Lord, Lord Vallance, said, the enhanced co-operation procedure is a new procedure. Case law is being developed. It will take some time to construct sensible ground rules for ensuring that Articles 326 and 327 are respected. I suggest three rules: first, the substantive proposal must be on the table before the procedural decision is taken, as was suggested by the noble Lord, Lord Vallance; secondly, the Commission and the Council secretariat must ensure that any subsequent amendments do not introduce detriment to non-participants; and thirdly, the overall EU interest must be respected at all times by all the institutions, including the Commission, which must not allow itself to become the secretariat of a subset of member states.

Lastly, we know that the Treasury is short-staffed and short on EU expertise. It is all the more sensible, therefore, to listen to the expertise available in this House and stop dismissing our reports with delay and disdain. I know that the Minister will not do that.

--- Later in debate ---

[Lord Newby (LD)]

My Lords, I am extremely grateful to the noble Lord, Lord Harrison, for introducing the report, and to all noble Lords who have spoken. I think that all bar a couple of members of the committee have participated in the debate or are here. I therefore feel that I am giving evidence to the committee rather than making a speech to the Grand Committee, which makes the challenge all the more formidable. As one would have expected from the committee, the document is thorough and well researched, and is bound, as previous reports on this subject have been, to help colour perceptions and debate in Brussels and across the EU, where sometimes the reports of your Lordships’ EU Committee are read more carefully than they are in the UK.

The committee’s report makes a number of points with which the Government strongly agree. First, the committee expresses strong misgivings about the legality of the FTT proposal. Obviously, the Government share those misgivings and that is why we have taken the case to the European Court of Justice. As the committee notes, of particular concern to the UK is the extraterritorial impact of the so-called residence principle, which, for example, would bring into scope of the tax a UK pension fund buying UK government bonds from the London branch of a bank headquartered in Frankfurt. This is, in our view, an infringement of the provisions of the treaty designed to protect the position of non-participating member states under enhanced co-operation, and that is at the heart of our challenge to the proposal.

That brings me on to the second point that your Lordships’ committee discussed and which has been raised this afternoon: the credibility of enhanced co-operation as a way of doing business at all. The committee makes the perfectly valid point that there is a real risk of harm to the credibility of enhanced co-operation as a tool in the future because of the way that it has been operated in this case. We agree that there has been a triple failure: in bringing forward this legislation in undue haste; in paying insufficient regard to the views of non-participating member states; and in failing to support the proposal with a sufficiently thorough impact analysis—a point tellingly made by the noble Lord, Lord Hamilton. We completely agree with the committee that, particularly if this tool is to be more frequently used, it must command the confidence of all member states. Indeed, this is the very point that the Government have been making to Council colleagues during these negotiations.

The conditions that govern the use of enhanced co-operation are set out in the treaty in quite high-level terms, which makes it important during these early uses of enhanced co-operation that the right precedents are set in order to give the kind of confidence that we believe all member states need if it is to be used more frequently. Like the committee, we do not believe that this has been a helpful precedent in that respect. The conditions set out by the noble Lords, Lord Vallance and Lord Kerr, about the future use of the procedure seem eminently sensible.

The third concern, rightly highlighted by the committee, is that it is highly unclear how the tax will be collected, and what collection obligations are implied for non-participating member states. What is clear, as the committee points out, is that the UK will be required to fulfil any obligations it incurs under the mutual assistance in recovery directive. For that reason, as the committee acknowledges in its report, we have included in our legal challenge the ground that an FTT would impose collection costs on non-participating member states that should properly, under the terms of the treaty, be fully borne by the participating member states.

However, there is a theme in the report on which I cannot agree with the committee: the suggestion that the Government have been in any way complacent in relation to the risks of an FTT. The Government made their concerns about an FTT clear from the outset. In November 2011 the Chancellor highlighted the serious problems with the Commission’s original proposal to other member states, and indeed UK-led opposition to what was on the table resulted in that proposal being dropped.

It was obvious then that the proposal had not gone away, and the Government were very soon considering, and indeed taking legal advice on, the implications for the UK of an FTT under enhanced co-operation. When Council authorisation for enhanced co-operation was sought at ECOFIN this January, we tabled a statement to the minutes of the meeting recording our serious reservations about the legality of the authorising decision. The report acknowledges the Government’s point that it would not have made a difference to a vote if we had voted against the decision, rather than abstained, but argues that we should have sought support for a blocking vote.

[Lord Kerr of Kinlochard]

It is certainly true that the report quotes the Government’s view, but I do not think that we shared the Government’s view or acknowledged it as being correct. The view of the committee was that it was a pity that the Government had not been out seeking allies against the tax.

[Lord Newby]

My Lords, we will probably have to agree to disagree on this. As the previous Financial Secretary pointed out in the correspondence that the noble Lord, Lord Kerr, quoted, it was clear from discussions that took place in the lead-up to the ECOFIN meeting that a qualifying majority of member states was prepared to support the authorising decision. Moreover, abstention had no bearing on the prospects for our subsequent legal challenge. The noble Lord, Lord Kerr, talks about building alliances, an issue that arose when we last discussed this matter, but we have to accept, as the noble Lord, Lord Liddle, pointed out, the strength of the political will across much of the EU to introduce this tax. The UK standing up to say, “We are going to vote against it” would not have affected that. It is inconceivable that this would not have gone ahead at that meeting, whatever we had done.

--- Later in debate ---

[Lord Newby]

As I said earlier, we will have to agree to disagree on that. I do not believe that the Government have lost credibility in the EU because of the stance they took. People believe that the Government understood the political realities.

[Lord Kerr of Kinlochard]

I am sorry to interrupt the Minister again, but from all I hear, I do not think that there was a campaign with a ministerial delegation and a City delegation visiting capitals other than the 11 arguing the damage to their markets and ours—the overall EU market—which would result from the FTT. If I am wrong about that and such a delegation did go out to Europe, I will withdraw my criticism.

I believe that Policy Network is right when, in its report this week to the City of London Corporation, it states that there is an urgent need to:

“Upgrade the UK’s presence and leadership in Brussels by building up close ties with like-minded member states. Moving from a reactive to a preventive and agenda-setting position seems particularly paramount in that respect”.

I hope that the Minister will at least agree with that.

[Lord Newby]

My Lords, I completely agree with it.

[Lord Newby]

I apologise if I said that. What I meant to say was that there was not a qualified majority against the proposal. There was not a sufficient weight to prevent the proposal going through. I think that that was borne out by what happened at the relevant Council meeting.

[Lord Kerr of Kinlochard]

My Lords—

[Lord Newby]

My Lords, I have 12 minutes, of which I have used 11, and I have not answered a single substantive question posed by noble Lords. It is just possible that I might do so if I am allowed to respond to some of the points that have been raised.

I was asked where matters stand in terms of discussions in the Council. A Lithuanian document was produced last week which I think has been rather mischaracterised as to its significance. It is a short document and I have it with me. It was discussed briefly at last Thursday’s working group, but many participants were reluctant to discuss it, taking the view that the technical discussions should not run ahead of and potentially prejudice the more substantive discussions, so consideration of it was limited. There has been no substantive breakthrough in the negotiations recently, largely because of the situation in Germany. As noble Lords will be aware, the German coalition deal has now been ratified and we expect more progress in the new year.

The noble Earl, Lord Caithness, asked about the timing of the resolution of the difference between the Council and the Commission legal opinions. The conflicting opinions of the Commission and Council legal services were discussed by the 12 December working group and it is now for the Council members and the 11 participating member states to weigh these as they begin to consider a compromise proposal. We are not aware of any challenge from Luxembourg.

On the timing of the legal challenge, we have exchanged written arguments with the Council. Several member states and other eligible parties have intervened. Written proceedings will come to a close in January, and it is then down to the court. But, as noble Lords will be aware, oral proceedings would ordinarily take place after written proceedings close.

On the argument that has repeatedly been made about our engaging positively with other member states, the UK has been closely engaged with these negotiations from the start. We have held numerous meetings with other member states about the FTT. UK officials are closely engaged in the Council working groups, of which there have been five, including submitting detailed written technical questions to the committee. It simply is not the case that we have not been and will not continue to be fully engaged.

I have gone over my time, for which I apologise. I thank the noble Lord, Lord Harrison, and members of the committee again for the report, and for generating what has been, as usual, an extremely stimulating debate.

EUC Report: MiFID II

Lord Kerr of Kinlochard Excerpts

Tuesday 26th March 2013 Grand Committee

[Lord Kerr of Kinlochard]

Since this is the last report from the committee chaired by the noble Lord, Lord Harrison, to be debated this Session, I should start by paying tribute to him. I have learnt a great deal from serving on his committee. We have benefited from his huge experience, linguistic skills, total impartiality and unfailing good humour. One of the reasons why it has been rather a productive committee is that it has been extremely well chaired, and I thank him. I also thank our clerks, Rose Crabtree and Stuart Stonor, the latter a man of astonishingly fertile mind, deserving of congratulations on his output.

On the matter that we are discussing today, I thank the Government for maintaining a civilised dialogue with us. The government response to our report was a serious point-by-point reply, and at all stages the discussion with the Government has been informative. I hope that what we have said has proved helpful. I contrast the Government’s response with that of the Commission, which always replies to our reports but in this case sent a particularly deadpan response. The Government sent a very interesting and helpful one. Why am I saying this? To make a point, of course. On this matter, the Government have maintained a dialogue with us, but on the matter which has been raised by all previous speakers in this debate because it worries us the most, the financial transactions tax, there is a complete dialogue of the deaf with the Government. We are unable to persuade Mr Greg Clark to engage with us. Our correspondence with him is wholly unsatisfactory, and he has still to address the key point we raised in our report—a much larger and more substantive report than the MiFID report—exactly a year ago.

I would like to take advantage of this debate by putting six questions to the Government about the financial transactions tax. First, do the Government agree that the enhanced co-operation of 11, if implemented, will damage the European Union? Secondly, do they agree that the enhanced co-operation of 11, if implemented, will damage the London market? Thirdly, if so, why did the Government abstain at the January ECOFIN? Why did they not oppose the proposed enhanced co-operation? Fourthly, did they seek before then, and are they seeking now, to construct an alliance against the enhanced co-operation of 11 among our natural allies not participating in it—the Dutch, the Danes, the Swedes, the Poles, the Finns, the Irish and the Luxembourgers? It is not Britain against the rest; we have a majority on our side. Are we making use of that? Is there any active diplomacy?

Fifthly, did we seek and are we seeking legal advice on whether the conditions laid down in the treaty for permitting enhanced co-operation are met, given that these conditions include the need not to prejudice the interests of non-participating member states? Sixthly, why did the Prime Minister at the European Council this month merely take note of this pernicious proposal? According to its conclusions, the European Council noted it. I do not know how well briefed the Prime Minister was. Can the Minister confirm that the Prime Minister is fully briefed on the damage that the FTT proposal could do to the European Union and to the United Kingdom?

Now, to follow the example of the noble Lord, Lord Harrison, I am going to revert to my usual bonhomie and to the subject of this debate. MiFID II is the grandson of the original 1993 investment services directive, on which I was one of the negotiators. Our aim was and still is to create a single market in financial services, which is of course massively in the UK’s interests since the UK is the principal EU provider of such services; they are our largest export; and our share of the EU market has grown as the internal barriers have come down. That is what we hoped, and it is what has happened.

The particular purposes of MiFID II are to create greater competition in trading in securities in order to reduce costs for investors, to apply equivalent regulatory rules to different market models and to enhance and harmonise investor protection—all plainly worthy aims that are beneficial to the EU and the UK. However, the devil lies in the detail. As our report shows, and the Government have agreed with us, we need to be in there fighting. I believe that on this subject, unlike the financial transactions tax, the Government have been in there fighting and that UK negotiators have done very well. It is very important that UK negotiators have been present. Let us suppose for a moment that we were in the nightmare situation of Norway. Let us suppose that we were country members of the single market and we had to take the rules, written in Brussels in the sort of process that we are talking about today, from the fax machine when they had been completed with no say in what they said.

As I say, the Government have done well and the chances are that MiFID II is going to come out okay. However, I have a two-part question for the Government and a comment. My particular concern about MiFID was with the provisions for third-country access, as discussed by the noble Lord, Lord Harrison. The committee thought that they were deeply flawed, and the Government agreed. The proposal was that third-country firms would have to register with the European Securities and Markets Authority and could trade in the EU only if authorised to do so by ESMA, which would be required to certify that these third-country firms came from countries whose home-country jurisdiction imposed requirements equivalent to those in MiFID II and provided equivalent reciprocal recognition of EU firms. Try selling that on Wall Street. It would not fly there, and the effect would be to restrict third-country access into our markets, which would be damaging to them and to us. Clearly, this amounted to a significant risk of shrinking the EU market and hence the London market, since it is the premier location for third-country firms and their branches.

The Commission, which, as I have said, replied to our report, was a little bland on this point. It said:

“The Commission’s objective is to ensure that EU financial markets remain open but are safe for investors … The Commission’s proposal is, therefore, mindful of the need to achieve the correct balance between open access with minimal duplication of administrative and other requirements on the one hand and investor protection on the other hand”.

Yes, Sir Humphrey, I would have been proud of that 20 years ago. The fact is, though, that the balance was not correct. The Government have since told us in their helpful reply to our report that the requirements for equivalence and reciprocal access have been eliminated in Council discussion, one of the reasons why I feel like congratulating them. However, I need to ask a question: is that still the case? Is there a stake through the heart of these third-country provisions? Has the Commission dropped its emphasis on equivalence? If not, and if the Commission is still going on about it, will the right-minded, such as the UK Government, hold firm in Council?

Secondly, as the noble Lord, Lord Harrison, said, what about the Parliament? Compared with my days in Brussels in the early 1990s, the Parliament has—rightly, in my view—much more power than it had then. Sadly, though, our Government have rather less influence than they had, which may be the inevitable consequence of the Conservative Party choosing to distance itself from the EPP in Brussels and Strasbourg, thus sharply reducing its chances of obtaining senior and influential positions in the Parliament, and of course removing a principal opportunity for influencing and alliance-building with like-minded Members of the Parliament. How confident are the Government that a good deal in Council—if it is a good deal, which I think it probably is—will not unravel in co-decision procedures with the Parliament? Are the Government acting on the first point that we made in our report when we said,

“we particularly urge the Government to ensure that they liaise with and pay due attention to the European Parliament in its consideration of the MiFID II proposals”?

Are we, in alliance with our friends in Council, lobbying hard in Strasbourg? Are Ministers going to Strasbourg specifically to talk about MiFID? Are all British MEPs, of whatever party, fully briefed on the importance of this directive for the City of London and the risks to us in the United Kingdom if it all goes wrong?

That is nearly all I want to say, but since the debate has ranged a little beyond MiFID, I will make one final point. As eurozone Ministers, along with those aspiring to join the eurozone, get together more and more closely—in the past fortnight they have been meeting a great deal—to discuss banking union, FTT, bail-outs and bail-ins for Cyprus, it becomes more important, as the noble Lord, Lord Harrison, pointed out, that we in the UK try even harder to stay alongside the debate or, ideally, at the heart of it, among the same people on the EU financial services legislation that is so important to this country. There will be caucusing among eurozone and eurozone-plus members. There is nothing we can do about it because it will happen informally. The Commission will try to prevent it. If in the end we wanted to go to the Court, we would obtain valueless rulings on our side. Caucusing is wrong but it will happen. And “les absents ont toujours tort”.

The best way of limiting the risk and mitigating the damage is to be as active as we can in making the European case for open markets. We should bring other countries’ Ministers, officials, European Parliament Members, journalists and opinion-formers to look at the City and understand the benefit that it represents for the EU as a whole—that of having a great global market on EU territory. This grows more important with every passing month and I hope that the Government, who I know do not agree with me on a number of things, agree with me on this and will try very hard.

I will say one last thing. Given the identity of the two speakers who are to follow me, I will quote from one of my heroes, Lord Thomson of Monifieth. George Thomson was one of our two initial commissioners. In 1999, talking about 1973 and the experience of going to Brussels with Christopher Soames, he wrote:

“I recall the remark of a wise Dutch Commissioner … ‘My dear George,’ he said, ‘there are now two countries in the Community who are stubborn about defending their national interests, France and Britain. But a word of advice … France always describes opposition to her position as a betrayal of Europe. Britain makes it appear as if Europe is betraying Britain. Not the best way to get results!’”.

It was not the best way then, and it is not the best way now.

--- Later in debate ---

[Lord Newby]

My Lords, like other speakers, I congratulate the noble Lord, Lord Harrison, and his committee on producing such a comprehensive and thoughtful report on such a technical subject. I hope that noble Lords will forgive me if I start by dealing with some of the technical issues that the report covers before I get on to some of the broader issues that we have discussed.

As noble Lords have accepted, since it came into force in 2007, MiFID has had a major impact on how EU financial markets operate. This in turn has fed through to a significant impact on the wider economy. The directive has been instrumental in reducing barriers to trade in financial services and increasing competition in trading services. To build on these benefits, the Government agree with the committee that a review of MiFID I was necessary. The Commission’s proposals for a new directive and regulation broadly seek to address three areas where problems have arisen: negative side-effects resulting from the implementation of the original legislation; technological developments in how financial markets function; and issues exposed by the financial crisis.

There is much to welcome in the proposals. For instance, the creation of a new category of trading venue, called the organised trading facility, will capture virtually all organised multilateral trading. Another objective of the review—greater transparency in financial services—should help to protect investors and generally lead to greater efficiency in price formation. A policy of open access between trading venues and clearing houses will remove an important obstacle to competition, helping to create a more competitive single market in clearing and trading services. However, the policies contained in the MiFID review must be extremely carefully designed. The Government’s primary focus is ensuring that the measures contained in the review meet their objectives and do not damage competition or the efficiency of financial markets.

First, the Government share the committee’s concerns over the design of the organised trading facility. The Government continue to work hard in negotiations to try to ensure there is sufficient detail in primary legislation so that the proposals achieve their purpose.

Regarding the Commission’s proposal to extend the rules on market transparency to non-equity markets, the committee rightly notes that we must avoid a one-size-fits-all approach, as trading characteristics can differ significantly across asset classes. As the committee also observes, without proper understanding of these issues there could be an impact on liquidity and the cost of capital. The Government agree with both these points and continue to prioritise these issues in negotiations.

The proposals also increase transparency for so-called systematic internalisers. The Government believe that the systematic internaliser model has a role to play, but we acknowledge the committee’s comments that this category has not been heavily utilised and that some clarification of the purpose of the regime may be helpful.

As a consequence of recent technological advances in financial markets, the Commission has proposed new rules governing the operation of high-frequency trading. As the committee recommends, the Government’s position is that measures applied to algorithmic and high-frequency trading should be firmly grounded in evidence about its real impact. The Government note the welcome contribution that the Foresight report has made in this regard.

The Commission’s proposals also introduce an EU-wide third-country regime. This would harmonise the rules under which investment services can be provided by non-EU firms into the EU. Although we believe that there would be an economic rationale in extending the benefits of the single market to third-country firms, we fully agree with the committee’s comments on the global nature of financial markets. Our prime objective is to ensure that the UK, and indeed the entire EU, remains open to trade in financial services worldwide. The UK has worked hard in Council to amend the proposal and we believe that the current compromise will avoid the disadvantages and difficulties that the committee has identified.

While we support greater transparency in commodity markets, the Government agree with the committee that price volatility in these markets is dependent on a range of factors. In particular, in 2011, the G20 commodity study group was clear that fundamentals—in other words, supply and demand—have been driving commodity prices. The Commission’s proposed rules for commodity markets did not recognise this, placing undue emphasis on a particularly rigid regulatory regime. However, we are satisfied that the current compromise in Council provides for a suite of position management tools that will ensure that commodity derivatives markets are properly regulated throughout the EU.

Turning to the powers granted to ESMA under the MiFID review, the Government agree with the committee that ESMA has a strong coordinating role to play. However, it is important to ensure that powers assigned to EU agencies are in accordance with the treaties and relevant EU case law. The outcome of a legal challenge on certain powers conferred on ESMA in the regulation of short selling and certain aspects of credit default swaps will inform our long-term approach on this issue.

Finally, the Government believe that the Commission’s proposed measures to improve investor protection could be strengthened. However, there is considerable pressure from other member states to not implement an inducements ban at EU level. Therefore, the Government’s main objective in the remaining discussions is to ensure that the UK is still able to implement tougher measures domestically under the FSA’s retail distribution review.

The noble Viscount, Lord Brookeborough, talked about inducements. Our view is that the evidence suggests that inducements are being shown time and again to bias advice. Mis-selling, as we have seen many times in the UK, is an extremely serious issue and we must protect people against future scandals. It is relevant that research for the European Commission by Synovate suggests that as many as 57% of investment recommendations in Europe are unsuitable. We cannot ignore this very serious and ongoing issue.

I will say something about where we have got to in the negotiations. Our current expectation is that the Irish presidency will try to seek political agreement in May, although no firm schedule has yet been confirmed. There are still a few areas of outstanding disagreement. The main obstacles are the open access provisions, which Germany and a group of member states oppose, and the equity transparency regime, where France and some others want to see a uniform standard of transparency across all venues. On both these issues, the Government’s objective is to ensure that the regulatory framework does not impose unnecessary costs on the end users of financial services and supports growth in the real economy. We continue to work constructively on these high priority areas in Council, with the aim of reaching a compromise.

Questions were asked about the European Parliament and whether we are trying hard in both the Council and the Parliament. The Parliament compromise was agreed in September. As it stands, it is likely that the biggest difference between the Parliament and the Council will be the third-country regime. Although the Council has deleted much of the regime, Parliament has broadly opted to retain it, but with some positive amendments. However, in many other areas the Parliament and the Council texts are broadly aligned. We have been lobbying hard in Strasbourg and are working extremely hard in the Council to ensure that we get the best possible outcomes.

I turn to some of the broader comments which have been made. It is fair to say that they have occupied the bulk of this afternoon’s deliberations. There has been a lot of discussion about the financial transaction tax and where we are on it. The noble Lord, Lord Kerr, asked me six questions about that tax. As he knows, the proposals are relatively recent; some aspects of them are relatively unclear and the Treasury is, at the moment, analysing the proposals and seeking to understand them in greater detail.

[Lord Kerr of Kinlochard]

I have tremendous respect for the noble Lord, but that is the kind of answer we have been getting for a year on the financial transactions tax. The Council made a decision in January, with the UK—absurdly, in my view—abstaining. The point of principle is whether we agree that they may go ahead with levying a tax among 11 countries but requiring the rest of us, including the UK, to collect the tax for them and send it to them. Do we agree to damage our market? Do we agree that they have the right to do that? The key question is whether our interests are adversely affected. If so, they do not have the right to do it. Why did we abstain?

[Lord Newby]

We agree that they have the right to do it. The question which the noble Lord asked about whether this measure would damage the EU and the UK is not one to which there is a simple or straightforward answer. There are two completely different views about the impact of this tax on London. To a certain extent, we will not know, until it is implemented, which of these two views is correct. One view is that London will benefit significantly because we are out of it. If you look, for example, at what happened in Sweden, which had a transaction tax, the bond market collapsed totally and Sweden had to abolish it. If you take that view, a financial transaction tax is good for London.

Other people take a completely opposite view. The modalities of collecting the tax, and exactly how those will work, are clearly, from everything that the Commission has said, a work in progress. It is not, I believe, a unique suggestion within EU law and practice that member states will collect taxes that revert to other member states. I do not think it is a matter of principle; it will be a matter of practice and whether it is possible to put in place a practical solution.

[Lord Kerr of Kinlochard]

Surely, the complacent school of thought that says all the business will flow to the United Kingdom, others will damage themselves and we stand to gain, does not still exist in Whitehall. Surely, Whitehall has now persuaded itself that putting more grit in the cogs of the London financial markets is a bad thing, as is trying to persuade two American banks doing a transaction in London that, according to an instrument which originated in Germany, we should collect from both banks not for the British Exchequer but to send the money to the Germans. Surely, Whitehall has decided that that scenario is mad because the American banks will not trade in London if we apply this absurd regime. Surely, Whitehall is clear that we are approaching a crossroads and that we do not know which road to take. What are we going to do? Are we going to sit at the crossroads?

We have to decide what to do on the balance of the evidence. Surely, the balance of the evidence is overwhelming that this measure is a bad thing for the EU and a bad thing for the UK. Eleven countries do not agree, but I guess that 15 or 16 other countries do agree with us. Are we trying to construct an alliance with them or have we, as the noble Lord, Liddle, said, such a pariah status that we cannot construct an alliance? I do not believe that. I still think that this situation could be remedied. Are we going to go to law? We need legal advice on who is right. I believe that if we could be damaged by this measure, and the chances are that we will be, it is not permitted under the treaty. Therefore, I do not understand why we abstained and I do not understand why the Prime Minister was silent.

[Lord Newby]

My Lords, if I did not know the noble Lord better, that speech would seem to me to typify the attitude that gets us into difficulty. He asserts with absolute certainty that the French do not know what is best for them, the Germans do not know what is best for them and the other nine who have signed up to this tax do not know what is best for them as he believes that it will be very damaging.

[Lord Kerr of Kinlochard]

I am sure that none of my friends or none of the noble Lord’s friends would do this but it is just possible that some people in France would like to damage the London market.

[Lord Newby]

I am sure that some people in any country will want to do virtually anything, but the question I was addressing was whether the 11 countries that have signed up to this tax can be dismissed as not knowing what is best for them, even though we are deeply sceptical about it and are not going to sign up to it. We have had a number of debates in your Lordships’ House about Greece, for example, in which some noble Lords seem to have known what is best for Greece. It is just that the Greeks have not agreed. We have to let other member states move forward with this within the rules because they are keen to do so.

[Lord Newby]

I think that my noble friend should ask them because I have not the faintest clue what was in their mind, but they have now formed a view. If the German Government have a settled view, even if I do not agree with it, I would not write it off as a mad one. I am sure that we will come back to the financial transaction tax, but it is not unreasonable to say that an extremely complicated tax using very difficult mechanisms to make it work should necessarily be capable of instant analysis in terms of how we are going to deal with it. We are looking at it. We have had the proposal for only a few weeks, and my right honourable friend Greg Clark, as the noble Lord, Lord Harrison, pointed out, is actually one of the better Ministers in any Government in terms of working with Parliament and, indeed, across the EU. I am sure that in due course he will come back with a full description of our response.

[Lord Kerr of Kinlochard]

I am testing the Minister’s patience, but we are now past the point where we can affect it. The only question remaining for us is whether we can overturn it. After the January ECOFIN it is now up to those who participated in it to devise the tax as they think is best for them. We cannot affect that, but we will be obliged to collect it. I am not clear what we are working hard on at the moment. What are we trying to do? We are not in the room any more. I would say that we ought to try to derail this exercise by going to law. We need to mount a legal challenge. We must create a political alliance and mount a legal challenge.

European Banking Union: EUC Report

Lord Kerr of Kinlochard Excerpts

Thursday 24th January 2013 Lords Chamber

[Lord Kerr of Kinlochard]

My Lords, I spoke about the noble Lord, Lord Harrison’s, committee’s report—I am a member of the committee—on 17 December, immediately after the European Council that discussed banking union. The noble Lord, Lord Harrison, himself could not take part in the debate in this Chamber. I paid a well deserved tribute to his chairmanship, and also to the role played in the committee by the noble Lord, Lord Hamilton. In the light of the remarks by the noble Baroness, Lady Falkner, I should also have paid tribute to the role played by the noble Baronesses, Lady Hooper, Lady Maddock and Lady Prosser, in what is an extremely strong committee in which I feel privileged to serve.

In what I said then I spoke of general issues concerning banking union and the European Council’s ratification of the decisions reached in ECOFIN. I do not intend to talk about that any more, because I know that the noble Lord, Lord Newby, spent Christmas with the relevant Hansard entry of 17 December, cols. 1388 to 1391, at his bedside, and that every time that he had difficulty falling asleep he read my limpid language. I want to talk this time only about the impact on the United Kingdom and the United Kingdom financial services industry.

The Government declared victory in the European Council on 12 December and the Prime Minister referred again to that victory yesterday, when he talked in his speech about his success in,

“securing protections on banking union”—

protection, that is, for member states that choose not to be members of the European banking union. My concern today is to try to establish just how secure these protections are. I want to make a couple of general points first, and then I want to put three specific questions to the Minister. They are questions which are pretty obvious really, and they cover exactly the same territory as the noble Lords, Lord Harrison and Lord Trimble, and the noble Baroness, Lady Falkner, took us into. So there will not be any shock or surprise.

I shall take my general points first. First, if we were to leave the European Union, the sort of protections that the Prime Minister was talking about are written on water. We would have no say in EU legislation, regulation and supervision if we were not members of the EU. I entirely agree with what the Prime Minister said yesterday about the impossibility of seeing the United Kingdom in a Norway or Switzerland situation. I think it is very important to recognise that the sort of protections that you get in the single market require you to be a member of the European Union as well as the single market.

Secondly, I worry that the possibility of our leaving the European Union could have a chilling effect on the City. The City has critical mass, of course, in a way that no other European financial centre does. We have not seen entities flee the City because we are not in the eurozone—at least I have not; I do not believe that there has been much—but nor have we seen, until yesterday, a British Prime Minister raise the possibility that he might, in a referendum, recommend our leaving the European Union. That is the logic of what he said yesterday—that it is conceivable that he might. The new settlement he seeks depends on our convincing every other member state either that they buy our prescription for “fundamental, far-reaching change”, or that they agree that we may have carve-outs, specific to the UK, from existing EU treaties to which we have previously signed up. Either of these is quite a tall order.

Therefore it is at a minimum conceivable that the new settlement will not be available, or that it will be so small and so trivial that the Prime Minister’s party will mock him if he says, “This is a new settlement”. Where then does he go? He was not prepared to acknowledge the logic of his position yesterday when Nick Robinson put the question to him. My worry is that foreign investors may draw their own conclusion. I do not know how big this effect will be, and I may be exaggerating the risk; but in this House we have all, when talking about Scotland, agreed with the Government in their criticism of Mr Salmond for delaying his referendum until October 2014, because of the chilling effect on inward investment of the uncertainty created and prolonged for two years. We have now created for the United Kingdom as a whole a precisely similar uncertainty, which is actually more existential for the financial services industry which we are talking about in this debate. I do not know how valid the point was when it was made about Scotland, but to the extent that it had validity when the Government made it about Scotland, they should be acknowledging it when it is now made about the United Kingdom as a whole.

The protections that the Government secured seem to be threefold. First, the non-discrimination clause states that,

“no action, proposal or policy of the ECB shall directly or indirectly discriminate against any member state or group of member states as a venue for the provision of banking or financial services in any currency”.

I think that that is an achievement. I agree with that. I think that what the Government said about it is correct. It is worth having, although it says nothing more than is in the treaty. It is worth having because we have cases in the European Court of Justice on precisely this point. It will have some beneficial effect in those cases. What goes without saying is often best said. So I regard that as an achievement.

Secondly, we have established the principle of,

“symmetry of treatment between the ECB”—[Official Report, Commons, 19/12/12; col. 102WS]—

and other supervisors. I am not really sure what that is worth. I do not think that it is worth very much, because whatever the principle, the ECB will be a very big beast on this stage. It is going to be a very big supervisor. There will be only one other very big supervisor, and that is the Bank of England. I think that the text that we have not seen—that has not been drafted, that does not yet exist—of the proposed memorandum of understanding between the Bank of England and the ECB is probably much more important than a European Council text enshrining this principle.

The third protection—the really big protection, the one that has been spoken about by every other speaker in this debate—is the double majority, the requirement for 50% or more both of participants in banking union and of non-participants in banking union, subject to review if the number not participating falls below five.

Hence I come to my specific questions to the Minister, and there are three. First, how many member states have, like the United Kingdom, declared that they definitely will not be part of a banking union? I think that it is only the Czechs so far. Is that right? Secondly, how many of the non-eurozone 10 have declared that they definitely will join? I think that it is four. Is that right? Thirdly, what view do the Government take of the likely decisions of the others—four, if I am right, but I do not know whether I am or not?

It is really very important for reasons that previous speakers have given and because we know that the ECB intends to ensure that the majority group in the EBA speaks with one voice. That is what the ECB’s opinion says, so retaining a viable minority group matters, and if the review clause is triggered, we all know what will happen. The matter will then go into the Council where, by definition, we will not have a blocking minority. I ask because, given the risk that the only strong protection secured in December—this one—falls away, it really is important for the City to know how many friends we have. Is the number going to fall below five or not?

Lastly, and briefly, market practitioners will make their own decisions about all these things. European Council and ECOFIN conclusions and ECJ cases are all very important and keep people like me very happy, but they do not actually determine what the market does. As, us apart, the eurozone becomes over time more coterminous with the European Union, we need to think about what perceptions market practitioners will have. Will they believe that it is plausible that the majority eurozone group, plus the extra members of the banking union who are not members of the eurozone but are candidates and postulants—pre-ins—to the eurozone, will conclude for all time that their major financial centre should still be offshore, in our country? Will they believe that the ECB will be willing to allow non-euro-area resident entities here in Britain to have free access to its free discount facilities? Will practitioners believe that they might be wise to reduce their counterparty risk by relocating into the eurozone? I do not know, but I am speaking of the possible perceptions of market practitioners.

Insisting on our rights in the single market is absolutely correct. Going to the Court when we think that these rights are under attack is absolutely correct. I am sure that we can play a good defensive game. But markets will make their own judgments. Financial services can relocate very fast, far faster than any other industry. That is one reason why I am so worried about our increasing isolation in Brussels, and about the signal that we have sent this week. The Channel is getting wider so quickly that I fear the movement may be visible from Tokyo, Beijing and New York. We already know that our friends in Washington have seen it and worry about it. I think that we should all worry about it.

[Lord Hamilton of Epsom]

Like the noble Lord, Lord Kerr, I pay tribute to our chairman, the noble Lord, Lord Harrison. He has always been a very genial and capable chairman. I am particularly grateful to him for the fact that we now seem to be getting before our committee rather more representative witnesses, who on occasions represent the majority of the British people. Unlike the noble Lord, Lord Kerr, who I enjoy having on our committee—we have our differences but they are always agreeable ones—I am not going to speak too much about the Prime Minister’s speech as my noble friend Lady Noakes has a debate on it next Thursday, to which I hope to contribute. All I would say is that it is a very clever speech. Rather like the Old Testament, there are bits in it which suit absolutely everybody. It does not really matter whether you are a Europhile or a Europhobe. There is something in the speech to keep everybody happy.

On our report, I do not know how many people have actually read it; certainly not an awful lot of action has been taken on it. We must be well aware that the single supervisory mechanism has been adopted, but an awful lot of other things that were heavily recommended in our report have not. I refer particularly to the recovery and resolution directive, which is possibly equally important, if not more so. Of course, the intention was that it would be introduced at the beginning of this year. I now gather that the Dutch and others who see themselves as picking up the tab for ECB intervention into banks have backed off. They do not want to get involved in that anymore. They are going back on earlier undertakings, which is rather typical of how the EU operates most of the time. It takes two steps forward and one step back, and if everything gets rather difficult or if things, as it seems to believe today, are looking rather better, it is a wonderful excuse to do nothing. If that is the EU of which we all want to be part, that is fine, but it certainly does not seem to be the answer for the United Kingdom. Earlier this week, we had some witnesses who described the state of European banks as they now are: they are European in life but still remain national in death.

We are now in a very significant situation. The problem with the EU is that it does things, with enormous reluctance, only when faced with a very major economic crisis. You merely have to lurch from one crisis to another before any difficult measures are taken. There may be people in this House who are dreaming of the day when Europe moves towards much greater integration but it is quite difficult to see how that will happen. It also seems quite clear that it will happen only when there has been one crisis after another.

In 2011, the Prime Minister called for the “big bazooka”. He wanted a major move made that would stabilise the sovereign debt crisis in the EU. What happened? Absolutely nothing happened and things got worse and worse. Interest rates on Club Med debt went through the roof. It became such a crisis that eventually the Germans agreed that Mario Draghi should make his statement that he would do anything necessary to stabilise the eurozone. At that stage, the markets calmed down. It was only because it took that long for German agreement to come through and, by that time, confidence had been undermined all over the eurozone. Sovereign debt was getting completely out of control. Investment decisions were being put on hold. When you get that across a large economic area such as the eurozone, you see the economy moving into recession and things getting very much worse.

I always get a wonderful narrative from my son-in-law, who is German and works for a German bank in London. He says that Merkel is playing a fantastically clever game. She is delaying like mad and restructuring the economies of countries in the eurozone. But what she has actually done is bring recession across the whole of the eurozone. Germany itself is now in recession. That does not strike me as being statesmanship. It comes as no surprise to me that she has just lost some Länder elections in Germany. I will be quite surprised if she wins the general election in September of this year. I do not think that there is much to be happy about with the way in which the eurozone is performing at the moment.

Earlier this week, our witnesses said that eurozone bank indebtedness would disappear like the snow in the sunshine once we had economic growth in the eurozone. There are two problems with that. First, we have absolutely no idea of the scale of bank indebtedness in the Club Med countries in the eurozone. However, we know that we are reaching a situation where a number of countries—because they are faced by serious social problems—have said that their banks cannot repossess properties and throw people on to the street. That means that people in those houses stop paying their mortgages because they cannot afford to do so. The next thing you have is moral hazard when someone says, “Well, hold on, my neighbour is not paying his mortgage repayments because he can’t. But I think I won’t pay mine either, although I can”. That leads to a very major problem in the banking sector because all the mortgages are going wrong and you are talking about sliding property prices anyway.

I agree that economic forecasting seems to have gone a bit wobbly right across the board, but if there is any consensus it is that there will be absolutely minimal growth in the eurozone for the next two years. I do not think there is any point in looking much beyond that. However, two years is a long time to have no growth and no relief on this side of things. For that reason, the banking crisis is certainly not over. If the ECB is not going to make itself liable for bank debt, another banking crisis will lead to a sovereign debt crisis and we will be back in much the same situation we were in a few months ago.

There are also serious questions about how much freedom the ECB has to buy sovereign debt. Officially, it is not allowed to print money and the Germans are desperate to try to keep a hold on how much money the ECB spends. They want to pass resolutions in Parliament before very much more money is extended to the ECB. We must accept that, although the recovery and resolution directive has not gone through, there probably will be a crisis which will eventually force it through. Then we will have a very interesting situation. There has been a lot of comment in this debate already about whether we are covered by a double lock voting system in the European Banking Authority. But, come on, let us live in the real world. In the real world, the executive arm will be the ECB, which will make up the rules as it goes along. I do not think that it will constantly refer back and say, “We have a crisis on our hands. Is the EBA happy that we can do this, that or the other?”. I think that the guidance that will come from the EBA will be extremely broad in anybody’s language and that the ECB will become very much more powerful as it goes along.

We also have the problem of what on earth we do about democratic accountability. It is not going to be a very satisfactory situation when the ECB moves in on a large bank and says, “This thing is going absolutely nowhere. Its liabilities are appalling. We must lay off half the people, break it down and get it into a more sensible state”. That will not be a popular move when thousands of people are put on the street. You can imagine that at that point the local politicians will all say, “This is nothing to do with us, you know. It is the ECB that is doing this. We don’t like to mention it but it is the Germans standing behind them”. That is the sort of situation you are going to get. If you have no democratic accountability—there is absolutely none as regards the ECB—you will have some very serious problems when things start to go wrong with banks. This is all far from being satisfactory and does not bode well at all for those eurozone countries which desire this great process of integration.

[Lord Kerr of Kinlochard]

The problem of democratic accountability is very real, as described, but I think that everybody is well aware of it. Certainly the European Parliament is extremely well aware of it, which is why it is linking the two texts. The ECB text is nothing to do with the European Parliament but it will not agree it until it has agreed the EBA text, which is to do with it. I am sure that it will insist on some sort of democratic accountability provision being built in.

[Lord Hamilton of Epsom]

I wish that I shared the noble Lord’s confidence, but I do not. I cannot see where this democratic accountability is going to come from because at the end of the day the EBA is the only thing that has any democratic accountability, and if it is laying down broad policies and the executive action is being taken by the ECB, that is where the rub is going to come—with the executive action being taken by the ECB. Perhaps something will happen, but there does not seem to be much sign of it at the moment.

We will face crisis after crisis, which will merely prolong the uncertainty and the general conditions that we have in the eurozone today whereby people are still very reluctant to invest in this area and stagnation seems to be continuing. Resentment will increase. Everybody says that we need a completely integrated fiscal union in the eurozone. Well, come on. You will have a growing problem with the Germans resenting massive transfers of money to the Greeks—to talk in extremes. The Germans will not allow those transfers of money to take place without enormous conditions being placed on the Greeks. The Greeks will all riot in the streets because they will say that the terms under which the money is being transferred are too stringent, and the Germans resent giving the money. Is this the sort of Europe we want to live in? Already we are beginning to see very extreme parties appearing in Greece. Everybody goes on about the fascists in Greece, but you have to bear in mind that the communists are much bigger than the fascists and much more likely to win the next election. Either way, we are seeing very extreme parties emerging.

Then we have the Prime Minister’s speech and the idea that we should have a referendum in 2017-18 on whether we should be in or out of the European Union. If the eurozone is going absolutely nowhere and is no better than it is today, as many people think will be the case, I cannot see this country ever voting to stay within the European Union.

--- Later in debate ---

[Lord Newby]

My Lords, I thank the noble Lord, Lord Harrison, and the European Union Committee for the report and for the typically thorough work they undertook before they drew up their proposals and thoughts on the European banking union. As we made clear before, we believe it is vital for the UK that financial stability is restored to the eurozone, and these proposals set out ambitious reforms to help achieve that. Their potential impact is significant in the UK as well as in the eurozone, and it is important that they are properly scrutinised and that the issues they give rise to are properly debated. So I am grateful for the committee’s efforts and for the chance to do just that today.

As noble Lords are aware, the Government support proposals to establish a comprehensive banking union in the eurozone and have been engaging positively in the negotiations. Achieving a genuine economic and monetary union and restoring stability within the eurozone will require a comprehensive set of measures, including a single supervisory mechanism, risk mutualisation plans, such as mutualised deposit guarantees, a common fiscal backstop and a common framework for rescuing eurozone banks. These measures together will help to break the dangerous, and mutually destructive, link between indebted countries and unstable eurozone banks by mutualising financial risk across eurozone countries.

The December Council meeting marked a significant point in the negotiations to establish a single supervisory mechanism and, importantly, as we have been discussing, the Council agreed a number of safeguards for the single market which will ensure that neither the City nor the UK will be marginalised. A number of noble Lords have referred to some of them, but I hope the House will not mind if I set out some of these protections.

First, the ECB will have a duty to have regard to the unity and integrity of the internal market in performing its supervisory tasks. The noble Lord, Lord Kerr, said that that may not be a new duty, but it is quite helpful to have it reiterated. Not only that, it will also be subject to an obligation to ensure that no action, proposal or policy of the ECB shall directly or indirectly discriminate against any member state or group of member states as a venue for the provision of banking or financial services in any currency. The ECB will be required to agree a bilateral memorandum of understanding with the UK—by which we mean the PRA—setting out how it will co-operate in discharging its supervisory tasks, so we can look forward to a constructive and collaborative supervisory dialogue underpinning the robust supervision of cross-border firms and activities throughout the EU. The way in which the supervisory authorities in the UK and the EU work together now, not least the ECB and EBA, is through close, professional working. It is not done in the spirit of two mutually opposed forces coming together on a day-to-day basis with different views. They are technicians, very often, trying to deal with common, difficult, technical problems, and that has infused the discussions to date.

In December, there were two important decisions on parity within the single market, which mean that the PRA and ECB will be operating on equal terms. The Council agreed the principle that the ECB’s supervisory powers should be analogous to those available under Union law to national supervisors in non-participating member states. Powers and decisions of the EBA, for example in cases of binding mediation in the event of disputes between supervisors, will apply equally to the ECB and other supervisors. So the ECB has no special status.

Perhaps most importantly, as a number of noble Lords have pointed out, the Council agreed that key decisions in the EBA will be made by a double-majority voting system. Therefore, although we hope that the EBA will continue to be driven by consensus, with votes very much the exception, the voting arrangements will ensure that all member states, whether or not participating in the banking union, will continue to have a meaningful voice. In practical terms, where the EBA votes on a standard which applies to firms throughout Europe, this will require the support of those in the banking union and those outside it. Not only will the usual qualified majority apply, but a majority of the group of non-participating member states—which, of course, includes the UK—will also have to support any proposal.

A number of noble Lords have expressed support for these protections. It is fair to say that even if the Council had not actually read the report of the committee of the noble Lord, Lord Harrison, it did address a number of the other issues raised in it. First, it clarifies the scope of ECB supervision. It establishes robust governance arrangements in the ECB which separate the performance of the ECB’s monetary policy and supervision tasks. These arrangements will also ensure that those non-eurozone member states which choose to participate in the SSM will have a voice in decision-making. We should not think that separating those two elements of what the ECB does is too difficult a job. That is, broadly speaking, what we are going to be doing with the Bank of England, the PRA and the other bodies that we have just established here. It is eminently doable. The way in which the EU and the ECB are setting about doing it looks perfectly reasonable.

The Council decision also confirmed that the EBA will ensure a geographical balance in its appointments. On this point I need hardly remind noble Lords that the UK plays a leading role in the EBA and currently holds one of the six seats on its management board, which is based in London.

While the Government are broadly content with the outcome of the December meeting, noble Lords will be aware that negotiations are ongoing. However, I assure you that we are working hard to ensure that the final agreement continues to reflect these points. As for the next steps, negotiations concerning the recovery and resolution directive are similarly active. I will come back to those shortly.

However, proposals relating to the second and third pillars of the banking union—the common resolution mechanism and the common deposit insurance scheme—have not yet been issued. We recognise that the decisions relating to the funding of any resolution mechanism and deposit insurance scheme are politically difficult, particularly within participating member states, and decisions relating to debt mutualisation and common fiscal backstops are more difficult still. None the less, in the context of a banking union for participating member states, the UK supports these concepts in principle. Having said that, we cannot provide more detailed views until the proposals have been published, although of course we take note of the points that members of the committee have raised in their report and today.

On the specific points raised by noble Lords in their speeches, the noble Lord, Lord Harrison, was the first to raise the question of the concentration of power in the ECB, which I have spoken about in part. As I have said, there is an analogy with the Bank of England to a certain extent. For clarity, although there are 6,000 banks within the eurozone area, the ECB proposes to directly supervise on a continuing basis probably a couple of hundred of them. However, it will retain the power to go in if there is a particular problem, where a national supervisory body may be thought by the ECB not to be dealing with an issue adequately.

In that respect the noble Lord, Lord Flight, used the analogy of the ECB’s role being a bit like the PRA as opposed to the FCA in the UK. It is not a direct analogy but there are some relevant comparisons. We think that the system we have set up will be robust. If that is the case, in principle, the one being envisaged here also should be. The problem is that it is a multiplication of the kind of problems that we had here when the crisis struck. When everything is going well, you can make things work. But, here, we had a real problem with managing a financial crisis because two or three individuals could not make the system work.

We hope that we have changed the system to make it less dependent on individuals but when you have a system involving a minimum of 17 national supervisors and a super-supervisor, as it were, no one in their right mind would think that dealing with a crisis will be easy. In particular, by definition, no one will have been through it before, so they will be learning on the job. That is an inevitable consequence of doing anything new. The ECB is working very hard to put in place systems which it hopes will be very robust in stressful times.

The noble Lords, Lord Flight and Lord Trimble, asked about what is happening next and whether the steam has gone out of the negotiations. We are very confident that the steam has not gone out of the negotiations in terms of the SSM. The Irish have got this as one of their top priorities during their presidency. We are hoping that relatively soon there will be the final agreement on the regulation which will underpin these changes. We hope that the SSM will be operational by March 2014, which, in anyone’s view, is as quick as one could reasonably expect.

The noble Lord, Lord Harrison, was the first to raise the dread word “referendum”. He described it as new-fangled. I have very fond memories of the 1975 referendum. However, I remind him that the Government have legislated for referendums to take place on European matters in the UK when significant changes are due to take place. That was before the Prime Minister’s speech yesterday. I am delighted that next week the House will have the chance to spend considerable time talking about this matter; not least because it enables me to say today that I am not going to talk about it because the House will have considerable time to talk about it next week. As noble Lords can imagine, that is a considerable relief.

Among other things, the noble Lord, Lord Trimble, asked about the timetable on the recovery and resolution directive, which is obviously of huge importance for the whole of the EU. Again, these are one of the priorities of the Irish presidency, which is looking for an agreed approach in the first quarter of this year. Member states, including ourselves, are actively and positively engaged in these negotiations. We strongly support this timetable as it is essential that all member states need to get a common set of credible tools and powers to deal with resolution and recovery as soon as possible.

The noble Baroness, Lady Falkner, was worried about the male-dominated nature of the debate. I think that this gets back, in part, to the male-dominated nature of the financial services sector, which will take a long time to sort out. However, as other noble Lords have pointed out, on this subject, we have some extremely eminent female economists and knowledgeable women in your Lordships’ House. I hope that they will speak in future debates.

The noble Baroness referred to bond yields and breaking the debt spiral. I think that I can give her more than a glimmer of hope in terms of bond yields. The bond yields of Greece, Spain and other countries under stress have fallen significantly. In Greece, they have fallen by one-third over the past two months. This is a very big shift in the right direction as far as they are concerned. Bond yields now in the vast bulk of the eurozone, even among the difficult economies on the periphery, are at a sustainable level.

The noble Baroness referred to the financial transactions tax and asked whether this could damage London. The Government’s view is that we have no intention of joining the FTT. We do not believe that it will have a deleterious effect on London, quite the opposite; however, I have severe doubts as to whether the FTT will ever raise anything like the funding that is envisaged for it. I remind noble Lords that we already have our FTT in the City on shares; it is known as stamp duty, so this concept is not totally unknown to us. However, it has to be said that the City is very keen for us to abolish it and believes that there would be significant economic benefits if we did so.

The noble Lord, Lord Kerr, as always, asked a number of very specific and penetrating questions. He asked how many countries will remain with us in our “out” group, and what they have said so far. Their attitudes are, like ours, dictated by their domestic debates. Some have confirmed that they will not join for now, some have confirmed that they are unlikely to join in the long term and others have said that they intend to join at some point. However, given that the eventual package is not known, we do not think that it is wise for us to give names at this stage because it would be unfair to say that all those countries have formed an absolutely settled view about what they are going to do. As noble Lords say, if the number of “outs” falls, there will have to be a review and we are confident that we will be able to secure a sensible voting arrangement going forward. However, we do not envisage that we will be in that position for some considerable time, if at all.

[Lord Kerr of Kinlochard]

I am very grateful to the noble Lord for giving way. Can he help me? In the cases where countries have declared a position, will he write to me and set out what that position is? I drop my third question, which is: what is the Government’s assessment of where those who have not declared are likely to go? However, my first two factual questions are the following. What are the public positions? Where there are public positions, will the noble Lord write and let me know what they are?

[Lord Newby]

Yes, of course. It will not be a comprehensive letter in the sense that not all the countries have expressed a position, as I said, but one or two have and we can collate those relatively easily.

The noble Lord referred, as I did in my introductory remarks, to the importance of the MoU between the Bank and the ECB. We agree with him that it is crucial in setting the tone for the supervisory relationship. The Bank and the FSA are already working with their ECB counterparts and both sides, as it were, are keen to ensure that we have a robust approach to supervision of cross-border banks and cross-border financial services activities.

The noble Lord, Lord Hamilton, was the gloomiest voice in the debate. I would like to comment on two of the points that he raised. The first was about accountability and the extent to which there is a democratic deficit. The ECB is accountable to the European Parliament and the European Council. National parliaments of participating member states will be able to hold it to account through questions. I think that for the foreseeable future national parliaments will play a larger role in terms of the profile of the accountability than does the European Parliament, given its low profile. This debate here is an example of the kind of thing that one hopes would be happening across the EU.

The noble Lord, Lord Davies of Stamford, raised a number of issues and came up with three logical outcomes in terms of our supervision compared with that of the ECB: either we do what it says or it will be more or less strict—I paraphrase the noble Lord. That is slightly misleading, given that we are working towards a common rulebook. So the supervisory approach will be broadly common. For example, the recovery directive is one way in which there will be a broadly similar approach across the EU, with or without the banking union.

Financial Services Bill

Lord Kerr of Kinlochard Excerpts

Tuesday 6th November 2012 Lords Chamber

[Lord Flight]

My Lords, it seems to me that none of these things makes any difference. The real issue is that if a board of directors cannot sack the chief executive if it thinks that he is not doing his job properly, then it is an enfeebled board. That is the fundamental issue. As long as we have the chief executive appointed for a term period and not able to be removed by the board, then there will be an issue about the effectiveness of that board.

[Lord Kerr of Kinlochard]

My Lords, I did not take part in the Second Reading debate. I should have done so. I support what the noble Baroness, Lady Noakes, said, which seemed to me to be absolutely correct. On the point made by the noble Baroness, Lady Wheatcroft, I find Amendment 3B the most bothersome in this group. If the court is merely preparing, not determining, who is determining? There is a danger here of the decision-taking power moving to this oversight committee.

I cannot see that Amendment 3A has any real effect. Clearly, there is an overseeing role if the committee is called “oversight”, but I think that the noble Baroness, Lady Noakes, is quite right about that.

The amendment that seems to be completely correct and would go some way to meet the point being made from the opposition Benches is Amendment 3C, which proposes that the committee should be entitled to a degree of professional support. That seems sensible to me.

--- Later in debate ---

[Lord Kerr of Kinlochard]

I think one has to draw a line between the past and the future. I once again found myself very much in agreement with what the noble Baroness, Lady Noakes, said. If a report was made to the oversight committee and it believed it should be published, and the decision goes to the court, as it should because a subset of the court cannot decide that, it seems to me extraordinarily unlikely—almost unthinkable—that the governor, from a position of one or four against nine, would be able to overturn the view of the oversight committee. The decision must be taken in the court, but it will be a very rare occurrence when a decision as to what is the public interest is taken by the executives overturning the majority view of the oversight committee when the issue comes before the court, so I do not understand the amendment.

[Lord Peston]

My Lords, I do not understand the intervention. Why has the governor been given the power if he cannot use it? If you do not want him to use it you do not give it to him.