EU: Financial Regulation (EUC Report)

Lord Ashton of Hyde Excerpts

Tuesday 7th July 2015 Lords Chamber

[Lord Ashton of Hyde (Con)]

My Lords, I thank the noble Lord, Lord Harrison, for his five years chairing the committee and for producing the report. I also thank the other committee members for their preparation of this comprehensive report. Of course, I thank all noble Lords for their contributions.

The UK is home to some of the world’s most successful and competitive financial firms, benefiting businesses and working people across the country. It is therefore right that we remain focused on the legislation that provides the framework within which businesses and customers operate. It must provide the foundations to ensure that the financial services industry plays a leading role in creating jobs and generating growth, delivering for customers at every stage of their lives, but it must also provide the foundations to ensure that the sector remains strong and stable.

We are emerging from the worst economic crisis in living memory—a point well made by the noble Lord, Lord Davies of Oldham. It is important to remember that context when considering the significant volume of EU financial services legislation since the crisis. I particularly draw the attention of my noble friends Lord Caithness and Lord Flight to this. In making their criticisms they have to bear in mind the situation pertaining and which we are addressing, and the chaos and misery that it caused to many people in the European Union. It was crucial that we acted quickly and decisively to shore up the financial system and then put in place measures that aim to ensure that we never face such a situation again.

There have been benefits: an increase in transparency; a more level playing field across the EU for financial actors; the tools to end the adverse relationship between sovereign countries and bank, to ensure that taxpayers are never again in line to bail out banks; and a more stable financial system. However, the speed of action and complexity of issues means that there will be some unintended consequences.

I shall now address some of the points that the noble Lord, Lord Harrison, made. He asked for the latest on the so-called Juncker plan, also known as the European fund for strategic investments. I can report that the 25-26 June European Council approved the fund and called for its rapid implementation.

The noble Lord, Lord Harrison, also mentioned the committee’s finding that the UK’s influence in Europe was diminishing. We continue to be an active and influential member of the EU and have many examples to prove that from building a coalition to deliver the first ever reduction in the EU’s budget to delivering fundamental reform of the common fisheries policy. We are at the heart of the debate on interests that matter most to the UK but I accept what the report said. The Government will definitely consider those views addressed in it.

Both the noble Lord, Lord Harrison, and the noble Lord, Lord Davies of Oldham, asked for an update on the financial transaction tax, which has many problems as far as the UK is concerned. The UK believes that the Commission’s proposal is unlawfully extraterritorial. We also believe that the proposal is technically flawed. Following this lack of agreement, the 11 participating member states have committed to finalising a watered-down first stage of the tax covering shares and some derivatives by the end of this year. The Chancellor will not hesitate to challenge in court the final FTT directive if our legal concerns are not addressed.

My noble friend Lord Flight talked about gold-plating. I draw his attention to the bit in the report which said that arguments about gold-plating in the UK are “finely balanced”. He also mentioned the fourth anti-money laundering directive. We have been in regular discussions with the private sector to take its concerns into account both throughout the year and prior to making any amendments to the regulations. This directive has been agreed by all EU member states and was published in the EU Official Journal in June 2015. The Government are required to transpose this directive into UK law and we intend to run a full consultation prior to the next set of amendments that are due to come into force by June 2017 at the latest.

Finally, my noble friend Lord Flight mentioned politically exposed persons for UK purposes. The revised global standards, to which the UK is fully committed, require that they be treated as politically exposed persons on a risk-sensitive basis. The revised standards require that for all foreign PEPs enhanced due diligence is required. Domestic PEPs will be subject to enhanced due diligence and ongoing monitoring when the business relationship is assessed as high-risk. The Government seek a risk-based approach to the application of this requirement in negotiating the fourth anti-money laundering directive.

I turn to the report and again thank the noble Lord, Lord Harrison, and the committee for their work, which I believe constitutes a useful and valuable contribution to the debate on financial services regulation within the EU. The Government agree with the committee’s recommendations on the need for reviewing the financial regulatory framework following the upheaval in recent years. Under First Vice-President Timmermans’ Better Regulation Package, as mentioned by my noble friend Lord Caithness, the Commission has moved to strengthen its programme that assesses the existing stock of EU legislation to make it more effective and efficient. The Government also strongly welcome the plans of the noble Lord, Lord Hill, to undertake an assessment of the cumulative impact of financial services legislation.

The Government also agree with the committee’s calls for improvements to the Commission’s approach to impact assessments, which was the first question of the noble Lord, Lord Harrison. We particularly welcome Vice-President Timmermans’ proposals to lighten the regulatory burdens for small and medium-sized enterprises. I say to my noble friend Lord Caithness that the Government acknowledge the important role that small businesses have in supporting the economic recovery. We are committed to creating the best possible environment for a sustainable private sector. This includes our approach to EU legislative proposals, where there is a commitment to the “Think Small First” principle when preparing initiatives, including lighter regimes for SMEs in new legislation and exemptions for microenterprises. Vice-President Timmermans’ proposals on better regulation include guidelines for mandatory SME and competitiveness tests in all impact assessments, and we particularly welcome these proposals. These are welcome steps in the right direction. The Commission must now deliver on its proposals to improve the process of EU lawmaking.

My noble friend Lord Flight mentioned the alternative investment fund managers directive. The Government recognise that this has imposed new costs on the alternatives sector, particularly managers above the AIFMD threshold. This underlines the need for better impact assessments and improvements to the better regulation agenda.

Turning to the European supervisory authorities—ESAs—it is clear that they are an important part of the European regulatory framework. They have been tasked with a significant workload and they have performed well under difficult circumstances. We fully agree with the report in these respects. Given the large amount of secondary legislation the ESAs have had to deliver since their inception, it is understandable that they have been focused on the creation of the single rulebook, but we believe that, as the flow of post-crisis legislation slows, they should focus on delivering other parts of their mandate, such as pushing for greater convergence in supervision, ensuring consistency and raising standards. They have a crucial role to play as system managers and in improving supervisory standards across the single market.

However, one area where the Government disagree with the conclusions of the report is on additional funding for the European supervisory authorities. The report recommends that additional funding should be given to the ESAs to fulfil their mandate. The Government believe that, at a time when Governments across the Union are tightening their belts, it is not appropriate for the ESAs to seek large increases in their funding. The Government are convinced that, through proper prioritisation of their work, the ESAs can deliver against their existing mandate with their existing funding.

The Government join the committee in welcoming the work of the Financial Stability Board on tackling “too big to fail”. It is clear there have been positive developments in the EU and internationally. The stabilisation of the banks through the implementation of capital requirements under Basel III through the EU’s fourth capital requirements directive is one good example.

I also ask noble Lords to note the publication of the final report of the Fair and Effective Markets Review, which was mentioned by my noble friend Lord Caithness. The review, established by the Chancellor, made far-reaching recommendations to improve the fairness and effectiveness of wholesale fixed-income, currency and commodity markets. Given the global nature of these markets, we will be taking forward several of these recommendations internationally, including with the Financial Stability Board and the International Organization of Securities Commissions. The review warmly welcomes the Bank for International Settlements’ work to create a single global FX code. The review has worked with colleagues from other central banks to develop a work programme that will deliver a robust set of standards. It has recommended that once the global standards are in place, the UK backs these standards with a new regulatory regime for FX spot markets. Given that the same standards should be upheld in all jurisdictions, this should not affect the UK’s competitiveness.

Indeed, ensuring global regulatory consistency is essential in stopping the build-up of risk from the variation of reform, regulatory arbitrage and market fragmentation, and the UK continues to play a significant role in the international push for a stable, safe and globally regulated financial system. But we also need a smart regulatory approach which also recognises that in some cases member states can be best placed to determine what regulation is appropriate for their markets.

The Government understand that the euro area is moving towards greater integration, and that this has implications for the UK. The committee’s report rightly notes the risks to the UK of further eurozone integration. We have consistently recognised the wish of euro area member states to achieve closer economic and fiscal integration to strengthen the single currency. The crisis unfolding in Greece has underlined the desire—and, indeed, the need—for collective action across the euro area in times of difficulty.

A stable and growing eurozone is in the interests of all EU member states, including the UK. At the same time, the Government have been clear that we will not be part of this closer integration. We have, however, been closely involved in the negotiations, particularly over banking union, to protect UK interests. The UK continues to be an active and influential member of the EU and the Government continue to be at the heart of the debate, working closely with other member states, including euro area member states, on the key issues of the day—improving Europe’s competitiveness, the single market and trade.

The report states that while the UK’s expertise in financial services is respected, the UK’s influence over the legislative process is diminishing. While I appreciate that there is always more that can be done and welcome the constructive recommendations in this area from the committee, the Government have secured positive outcomes for the UK, at times having to fight hard for them. For example, the Government have successfully worked with our European partners to introduce tools for resolving EU banks that are credible, workable and closely aligned with existing UK legislation, through the bank resolution and recovery directive. We have also secured flexibility for the UK to implement its macroprudential regime, within the scope of the capital requirements directive IV proposal, and exempted British pensions from new rules on disclosure for investment products. Where the Government thought that EU legislation was at odds with the treaties, we have challenged it in the courts as we have on short-selling, the financial transaction tax, location policy and the bonus cap.

There are some questions I am afraid I did not manage to get hold of but I remember one in particular from my noble friend Lord Caithness. He asked: what am I doing to control the regulators? The answer is that the European supervisory authorities are held to account through their respective boards of supervisors, where the FCA and the Bank of England are represented. Domestically, the FCA and the Bank are held to account by the Treasury Select Committee, Her Majesty’s Treasury and Parliament. Regulators need to be independent to serve as a second pair of eyes for the single market.

As the Prime Minister has set out, and as the noble Lord, Lord Davies, mentioned, we need to make the EU a source of growth, jobs, innovation and success, rather than stagnation. We strongly support Mr Juncker’s vision of a well-regulated and integrated capital markets union of all 28 member states which maximises the benefits of capital markets and non-bank financing for the real economy. We fully agree with the committee that the concept of capital markets union should be welcomed. It is a project to which the UK is fully committed. But if the single market is to continue to be a driver of growth, European legislation must focus on finding the right balance between enhancing the EU’s competitiveness in an increasingly global environment, promoting growth, maintaining stability and protecting consumers. We need strong regulatory standards applied internationally but this also means proportionate and consistent legislation that continues to decrease barriers between member states and recognises that, in some cases, the responsibility for regulating markets best falls to member states themselves.

I therefore repeat my thanks for noble Lords’ comments and the committee’s review of the regulatory framework since the financial crisis. The Government can safely say that by far the majority of its recommendations were accepted. I counted at least 23 out of 33 recommendations that were accepted without any qualification; even some of the others were accepted with some qualification. Generally speaking, the Government accept the review and warmly welcome it, as I warmly welcome the insights of noble Lords this afternoon.