Financial Services (Market Abuse)

Jacob Rees-Mogg Excerpts

Tuesday 19th June 2012 Commons Chamber

[Jacob Rees-Mogg (North East Somerset) (Con)]

I refer Members to my declaration of interests, as I am still actively involved in financial markets—though I am glad to say not in market abuse—and particularly in emerging markets, which has become more relevant in Europe. When I started in emerging markets, Greece and Portugal were such, and I have a feeling that they may soon be classified as emerging markets again.

I support the Government on not opting into the current criminal sanctions proposed by the European Commission. It is classic European Commission stuff. The Commission thinks harmonisation would be very useful because it is concerned about regulatory arbitrage. Regulatory arbitrage ignores the strength of the British position—that people want to trade in London. They are not particularly interested in trading in a Bulgarian bucket shop. Therefore we should remember the strength of our position and not be cowed by feeling that everything across Europe must be the same.

When we look at the wonderful documentation, we are reminded that the great joy of anything to do with Europe is that it provides thousands of pages to read and inwardly digest, almost always written in a form that is as impenetrable as possible, which is part of the problem with the European Union, as the hon. Member for Nottingham East (Chris Leslie) so wisely pointed out. There is such confusion in how laws are developed that very few people manage to get to grips with them.

I wish to quote a short excerpt about why the Commission wants the criminal sanction to be brought together. It is so that member states

“can contribute to ensuring the effectiveness of this Union policy by demonstrating social disapproval of a qualitatively different nature compared to administrative sanctions or compensation mechanisms under civil law.”

That is fine, except that we are already doing it. The Government have already said that all the criminal offences that the European Union wants to bring together are covered by our own law, so it is hard to see why they then argue that it is essential that there should be harmonisation.

It is important to remember, with this opt-in at this stage, that if we opt in we cannot opt out again. This is not going to be part of the block opt-out of opt-ins that we can get by 2014. Anything that we opt into at this stage is permanent, so we would have a permanent criminal sanction agreed at the European Union level, which may not be suitable for what we want in this country.

The real problem is that Europe is the wrong area of focus for this country when it comes to financial markets. I know that we have a large market share in a whole range of financial products, that about 80% of hedge funds in the European Union are based in London and that we do more than a third of all global foreign exchange transactions. However, I thought that it would be interesting to look up where we rank across the whole range of financial services. There is an index, “The Global Financial Centres Index”, which ranks countries and capitals by a variety of measures to show how successful they are in financial services. It includes the people they have and their skills, and the depth and breadth of their markets. When we look at it, we see that London comes first, which should not surprise us. New York comes a fairly close second, followed by Hong Kong, Singapore, Tokyo, Zurich, Chicago, Shanghai, Seoul, Toronto, Boston, San Francisco and then Frankfurt. Germany, at 13th, is the first European Union country with a financial centre on the list.

We should not be worrying about co-ordination with Europe. To do so is to look at the past, at an outdated and outmoded form of competition. We need to look to the broader world, to the people with whom we really compete: Hong Kong, Shanghai and, of course, New York. Therefore, the Government must show some backbone by not giving in to more Europeanisation, because that is what has been done previously, that is what the EU is used to, and that is the comfort zone of the bureaucracy. We need to look at how our arrangements and regulations compete with the further world, not with what might be called the near abroad. If we do that, we will find that we want our own regulation and we want less European regulation, and we can negotiate from a position of strength, because the financial markets in the United Kingdom are overwhelmingly larger than those in continental Europe.

Therefore, I support the Government in not opting in, but I do not support them in qualifying it by saying “at this stage.” There is no need for any further transfer of powers to the European Union. That is part of the coalition agreement and we should never opt in to anything further in future.

[Mr William Cash (Stone) (Con)]

I thoroughly endorse almost everything my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has said, but I would go somewhat further, because I have a complete aversion to the whole concept of the transfer of our jurisdiction over matters affecting the City of London. I have said that for many years now. In fact, when the de Larosière report was published I wrote in the Financial Times that I saw it as a ticking time bomb, or words to that effect, and that if matters were allowed to continue we would find ourselves mopped up by European jurisdiction.

Following the statement my hon. Friend the Financial Secretary made to the House only last week, I asked a simple question: in the light of the vast amount of commitment and time that has been spent transferring jurisdiction over matters affecting the City to the European Union, how on earth will we be able to protect the City, the related single market aspects, including financial services, and matters of the kind now before the House in the market abuse directive when they are governed by qualified majority vote? Those are the realities.

The truth is that we have made the most massive strategic mistake in relation to matters of this kind, which are governed by qualified majority vote, under directives such as the MAD directive otherwise known as the market abuse directive, which was bitterly opposed by the City of London in the early part of this century. I have to say that events then turned for the worse and those proposals have now been overtaken.

Before I turn to the specifics of the matter before us, I ought to mention that the veto on the fiscal compact, which the European Scrutiny Committee said was effectively unlawful on the evidence we received, has not been followed up. The Government and the Attorney-General are clearly of the view that the agreement on the fiscal compact between the 25 was unlawful, but in reality nothing has been done. We have just had a reply from the Government to our report on the question, and on which we held an inquiry, but in no way do they continue to do anything to put to the test the illegality that lies at the heart of the fiscal compact. We are therefore still in the position whereby the Government regard the fiscal compact of the 25 as being a matter of irregularity, but they do not do anything about it.

That is a dangerous situation, and it has gone beyond that—to the fiscal union itself being promoted and advocated by the Government. That will make things even worse, with an even deeper black hole, as I said on television yesterday. The banking union proposals, which are also now being pressed upon us, will come to fruition around the time of the summit on 28 June, and I fear that we are being taken down an extremely dangerous route.

The market abuse directive before us is one example of that tendency to legislate continuously on financial services matters, and my hon. Friend the Member for North East Somerset is quite right that we could legislate for ourselves on them. Bad markets, as I have said in articles I have written in the past, are bad business, and we have at our disposal in this Parliament every means to pass legislation on our own account, without necessarily or by any means having to leave it to the European Union. I would be going beyond the remit of this debate if I went into that in any further detail, but I repudiate the idea that we cannot legislate for ourselves on such matters.

I am by no means convinced that the Government intend to make it entirely clear whether or not we will opt in, and that is the problem with the opt-in. I think my hon. Friend is of the opinion that the Government have decided that we will not. I am not sure, but I thought he said that.

[Jacob Rees-Mogg]

I am grateful to my hon. Friend for giving way. No, that is not what I think. I think that the Government have not opted in, technically, at the moment, but hope to do so in future, and I think that will be a great mistake.

[Mr Cash]

In that case we are, as so often, ad idem and in agreement, and I am glad to hear that confirmation from my hon. Friend.

This whole business has one way or another been developing over the past 12 years—and before. It has been before the European Scrutiny Committee, and we have recommended it for debate, but it has been overtaken by further developments, particularly since the financial crash, which we are now in. I am extremely doubtful about whether market abuse in itself—important as the subject matter is, and something that needs to be dealt with—is in any way a contributor to the financial mess that the European Union is in.

We are in an economic crisis, we are in a black hole, and we should have a convention at which all those matters, including directives of this kind, are put before the member states with their cards on the table. We should say unequivocally that we want a different kind of Europe and put it to them, and the negotiating position that we adopt, those red lines, should then be put to the British people. We should have a referendum on those matters to make it absolutely clear that the direction of this over-legislated, over-burdensome European jurisdiction is doing no good whatsoever to the free markets—

--- Later in debate ---

[Mr Cash]

Well, to put it simply, the Committee is concerned that the Government might opt into the draft criminal sanctions directive once it is adopted. There would be a debate on that matter if they decided to do so. I do not think that we should opt in. That matter is part of the broader landscape and specific issues that are before the House.

The question of what the draft directive means by the word “intentionally” in relation to market abuse raises some very important legal issues. Then there is the question of whether the draft directive would apply automatically if there were proof of intent or whether there would be discretion to apply an administrative penalty rather than a criminal one. Those are all matters on which we could legislate on our own account if we wished to do so. I make no apology for repeating that point.

A further point concerns the practical application of the proposed new definition of “inside information”, which involves the whole issue of insider dealing. The trouble is—I say this with respect to Madam Deputy Speaker—that definitions in relation to European legislation raise the question of how this matter will be adjudicated on by the European Court of Justice. We have our own means and opportunities to pass legislation in this House that will define these questions.

[Jacob Rees-Mogg]

My hon. Friend has come to the absolute crux of the matter. Once we opt into something, it is then justiciable by the European Justice of Justice. That brings the ECJ into a role regarding our criminal law, and that is a very substantial step for the Government to be taking.

[Mr Cash]

I am deeply grateful for the support of my hon. Friend, who is also a member of the European Scrutiny Committee and who has very considerable expertise in his own right. He has developed an acute sense of British and United Kingdom interests in relation to matters of great importance to the City of London.

A further point is that there is no useful recital in the directive, as there normally would be, to indicate the parameters of the draft regulations. We are deeply concerned about that. There is no certainty that we will opt in, but that does not alter the fact that there is grave concern that we will eventually end up being told that we will do so. If that is what happens, I, for one, will undoubtedly vote against it.

The directive aims to prevent insider dealing and the misuse of financially sensitive market information in the financial markets. That cannot be separated from the broader landscape of the manner in which the European Union is interfering in matters in the United Kingdom that affect the City of London. The City of London represents some 20% of our gross domestic product. I entirely take on board the point made by my hon. Friend the Member for North East Somerset that we are at the top of the league in global financial market activity. I believe that a serious attempt is being made by other members of the European Union—with Frankfurt at No. 13—to move further up the positions. That will be done partly through regulatory collusion and the use of qualified majority voting, as Professor Roland Vaubel has indicated in his general concerns about the manner in which qualified majority voting and directives are dealt with.

The intervention of the financial crisis in 2007 delayed the implementation of the original provisions and prompted a rethink. Whether that rethink is beneficial is another issue. The new EU regulation that will replace the original directive, which is proposed alongside the new directive, provides for minimum harmonised standards of enforcement and sanction throughout the community. Although the UK Government are broadly supportive of the measures, there are procedural uncertainties, notably in the problem of aligning the three interlocking legislative measures at the same time. That has led the Government to conclude that the UK should not yet opt into the directive. I am interested to hear whether the Minister has a view on the words “not yet”. I do not think that he will commit himself at this stage, but there will be considerable difficulty and trouble for the City of London if we do opt in.

I do not believe that the directives are in the interests of the United Kingdom. We can legislate on these matters ourselves. There is much talk of fiscal union, banking union, supervisory authorities and the wholesale transfer of our jurisdiction over the City of London, which means so much to our gross domestic product and to our ability to compete internationally. That is being undermined by proposals of this kind, whether or not they are brought into effect.

[Mr Hoban]

I will respond briefly to the hon. Member for Nottingham East (Chris Leslie) and to my hon. Friends the Members for Stone (Mr Cash) and for North East Somerset (Jacob Rees-Mogg).

The challenge that we face is that there are three interlocking legislative initiatives: the markets in financial instruments directive, which provides the scope of markets; the market abuse regulation, which looks at broadening the scope and is intimately linked with MiFID; and the criminal sanctions directive. Because the UK has a world-leading regime on market abuse, has historically taken a tough line and has a range of sanctions in place that few countries in the European Union can match, we are shaping the debate in this area and playing a major role in getting it right. We are trying to ensure that we maintain the high standards that the Financial Services Authority has in its investigatory powers and its sanctions.

The progress on these matters is not as quick as we would like, but that is partly because there are three interlocking initiatives. It is not quite the case that one moves at the speed of the slowest ship in the convoy on these things, but there is a challenge. The hon. Member for Nottingham East said that the matter is being passed across to the Cypriot presidency. A whole raft of things are being passed across to the Cypriot presidency. There is nothing new in stuff passing from one presidency to another. [Interruption.] The hon. Member for Nottingham East asks from a sedentary position when we will get some movement. Discussions on MiFID are proceeding and it is one of the priorities of the Cypriot presidency. That will perhaps form the keystone and get the rest of it happening.

We are reserving our position on the opt-in. It is vital to London’s continued success as the world’s leading financial centre that we have the right measures in place on market abuse. That is why we have not opted in.

[Jacob Rees-Mogg]

Will the Minister give way?

[Mr Hoban]

Very briefly.

--- Later in debate ---

[Jacob Rees-Mogg]

I am extremely grateful to the Minister. I have just one question. What advantage is there to opting in if the rest of Europe is going to do it anyway and we already have something better in place?

[Mr Hoban]

We have an interest in ensuring that criminal sanctions are applied across Europe if we think the directive is appropriate, because shares and instruments that are traded within our borders can be affected by market manipulation outside our borders. It is therefore important that we have a proper regime in place, but let us leave the decision whether to opt in until the three interlocking pieces that I mentioned come closer together. Then I am sure the European Scrutiny Committee will bring us back to the topic once again.

Question put and agreed to.

Resolved,

That this House takes note of European Union Documents No. 16010/11 and Addenda 1 and 2, relating to a Draft Regulation on insider dealing and market manipulation (market abuse), No. 16000/11 and Addenda 1 and 2, relating to the Draft Directive on criminal sanctions for insider dealing and market manipulation, and No. 8253/12, relating to the European Central Bank Opinion on market abuse legislation; recognises that an efficient financial market that aids economic growth requires market integrity and public confidence; welcomes the UK’s leading role in combating market abuse; and supports the Government’s decision not to opt-in to the Criminal Sanctions Directive until it is clear that related provisions within the Markets in Financial Instruments Directive Review and the Market Abuse Regulation are further progressed in order to enable the Government to evaluate the implications for the UK, and ensure high standards in tackling market abuse are maintained.