Capital Markets Union: A Welcome Start (EUC Report)

Earl of Caithness Excerpts

Thursday 4th February 2016 Lords Chamber

[The Earl of Caithness (Con)]

My Lords, first, I thank our late chairman—if I call him that it is in the right sense—the noble Lord, Lord Harrison, for his huge contribution to the work of the sub-committee, which I am privileged still to sit on. He did an enormous amount of work. This report is another testimony to the success he achieved, but he would not have done it without the support of the backroom team. I also give my personal thanks to Stuart and Katie for their hard work, and to John Turner, who is now filling that role.

At the seminar we held about a year ago on 10 February, Hugo Dixon said of the CMU that it is,

“a slogan in search of a policy prospectus”.

What an indictment. The principles of the free movement of capital were enshrined in the treaty of Rome, which is 59—nearly 60—years old. It shows how little has been achieved in those 59 years and how much has yet to be achieved to meet the aim of the principles of the treaty of Rome.

In that respect, we are extremely fortunate to have the present Commission. It is a vast improvement on the previous one, but they will not all be like this. In particular, we need to look at the role of my noble friend Lord Hill. His title is worth bearing in mind and is very relevant to the debate. He is the European Commissioner, Financial Stability, Financial Services and Capital Markets Union. For the first time, the Commission has given the right title for somebody to get on and do the job.

The noble Lord, Lord Harrison, mentioned some of the needs for a capital markets union. It is quite clear that the banks are struggling and not meeting their objectives. It is worth remembering that new lending in the eurozone is lower today than it was 10 years ago. That is a terrible indictment of our financial system in Europe and bad news for all our companies.

The collapse in lending has now got to the state, as the noble Lord, Lord Harrison, said, where roughly 80% of companies’ debt comes from the banks, whereas in America it is under 20%. That is a huge area that the EU needs to improve on. We must retain our banks. The capital markets union must complement how the banking system works, but the figures I have given show that a huge structural problem needs to be addressed. A good capital markets union will address not just that structural problem but others, such as the pensions problem in Europe, which is grossly underfunded and needs finance, and the infrastructure problem. With the banks pulling back from infrastructure problems, how will Europe raise the €2 trillion of investment that it needs in telecoms, transport and energy infrastructure by 2020?

Europe needs to build bigger and better capital markets. According to figures that have been given to me, there has been a shortfall of more than $1 trillion a year between what European companies raised in capital markets and what they could have raised if we had operating in Europe a proper system of capital markets, as developed in the US. On 26 different measures, European capital markets are only half as big and deep as they would be if they were in the US. That is the size of the problem we face.

The action that the EU has already taken has been good. There has been substantial progress and I hope that my noble friend the Minister will update us. A regulation on securitisation and an amendment to capital requirements has been proposed, but perhaps more importantly, it is worth stressing that the drafting of the prospectus directive has been revised. This shows that the Commissioner is prepared to return to a problem to try to get a better solution. In evidence to us, which noble Lords can find on page 50 of our report, Jonathan Faull showed how difficult it was to get agreement on the prospectus directive. It was about getting the balance and what was required for the SMEs, and keeping investors interested without imposing excessive burdens. The fact that this has been revisited—we hope that progress will be made on it—shows that the Commission is more interested in listening to the concerns and in trying to get a sensible solution.

A number of problems still remain, some of which the report drew attention to. I highlight the first one in particular. In paragraph 90 we refer to the fact that significant obstacles remain, and to the problem of the financial sector being treated as silos. Has any progress been made on this? If no progress is made on that front, the capital markets union will never be the success it should be.

Paragraph 11 addresses a more difficult area that the Government alone cannot tackle: the problem of culture. There is a big difference between the culture of the EU financial market and the UK financial market, as was pointed out to us by a number of experts. There are differing “entrenched cultural norms”, and saving trends tended to be “compartmentalised” within different member states. The attitude to business failure is very different and insolvency laws are different, as are cultural and legal traditions. I was particularly struck by comments made during our seminar by Sharon Bowles—now the noble Baroness, Lady Bowles—who, luckily, is with us today. It shows the advantage of this House that she is back in a legislative Chamber. She raised exactly these points, and I look forward to hearing what she has to say and hope that she will expand on them. Unless the culture can change, it poses a serious hazard to sensible implementation.

There are also problems, as I said, surrounding insolvency law, security laws and tax. I ask my noble friend: is the Commission being too slow in tackling this? Do we expect a speedier response in future? Is the Commission doing enough to protect the retail investor and the consumer? There has been limited progress on this front. These are difficult issues. It is quite natural for the Commissioner to tackle the easy problems first, but as you start to dig deeper these are the problems that need to be addressed. I would like an update from my noble friend on that.

Another problem area is the Government’s response, which was one and a half sides of A4. That in itself was not so bad, as they had given a full reply to the CMU Green Paper; my concern is that the Government are so in agreement with the committee. That makes me think this is quite an easy ride. It is not. This will be a long, slow, drawn-out process. Given the amount of enthusiasm shown, we have to pay twice as much attention to the detail—I see the noble Lord, Lord Harrison, nodding. I am reminded of the financial transaction tax: not until our report came along did the Government wake up to the hazards. We will need to be very certain that the Government are alive to any pitfalls before us.

I want to return to one other matter before I conclude. These are the problems in Europe. There have been a number of different measures assessing how the market works throughout Europe and the relative depth of the capital market across Europe. As I said, it is not even. In fact, on every measure the rest of Europe is behind the UK. Therefore, to a lot of the countries we are talking a language they do not understand. We take it for granted. We have been brought up with it in this country. We know what the financial sector is. For many in Europe, it is not as easy as we think it is: it is much more complicated. I ask the Government to make certain that when the Prime Minister is doing his rounds, he explains in words of one syllable what the differences are and how important this is.

I wish the CMU well. Industry has to play its part. The Government cannot do this alone. Industry has to change, adapt and be very proactive to get these measures, which will bring so much benefit, on to the statute book.