Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Lord Davies of Stamford Excerpts

Wednesday 6th June 2018 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, I served on this committee in the last Parliament and I was delighted to do so. I was not at all surprised that the noble Baroness who chairs the committee has received all these compliments from the current members because she really was a formidable chairman in my time and I am sure she has remained so. I do not think I have ever seen a chairman of a committee in either House who does his or her homework quite so thoroughly, and that starts the committee off on exactly the right foot because everyone else feels they have to live up to that kind of example, which probably none of us did. Her direction and leadership were always stimulating and sometimes very demanding. As the noble Baroness, Lady Falkner, also knows, I am very blunt, and I am going to be quite blunt about this report. I hope I shall be forgiven by colleagues but I think it is important to have a frank debate on these occasions so that we expose different perspectives to any members of the public who might be interested in our proceedings or our views on these subjects, rather than just the perspective that is enshrined in the report.

The report contains a lot of very good work. I found most interesting the examination of the costs to us of Brexit in the financial services area, which I think is in appendix 4 of the report and is something that should be widely read. However, I have three problems with it. First, on the whole it tends to be too kind to people. I was very amused to see that Prudential apparently got away with arguing that it left the annuity market because of Solvency II. It is nothing to do with that; it is because the fall in interest rates means that annuities are an even worse deal than they ever were in the past. People are better advised now anyway, thank God, so a much lower number of people have been inclined to put their savings into that particular form, and very happily so. Solvency II has actually been a considerable success; the general insurance field is not complaining about it. Both the companies and the Lloyd’s market are generally overcapitalised in terms of Solvency II. It would not make any sense at all to revise the Solvency II criteria as the committee has suggested.

Secondly, and more significantly, I thought the report was far too kind, dangerously so, to the financial regulators in this country. It said what a wonderful reputation we have and that our financial regulators are respected worldwide and so on—I paraphrase because I do not have the exact words in front of me, but they occur several times in different contexts in the report. Historically, that was probably true, but sadly that reputation was eroded about 20 years ago by a series of banking scandals such as Barings and BCCI, and there is very little left of it at all after what happened during the Lehman Brothers collapse, when we had the notable collapses of banks that obviously had not been properly supervised either on the liabilities side of their balance sheet, like Northern Rock, or on the assets side of their balance sheet, like RBS and Lloyds.

What happened in the RBS case was an appalling failure of elementary supervision. Mr Hector Sants at the FSA had all the power required to stop the AMRO transaction. He never used it: he was out to lunch. How he has managed to make a continuing career for himself in the field of financial supervision and regulation, I do not know. That itself worries me, and is not a commendation of the British financial supervisory and regulatory system. One needs sometimes to be quite harsh in examining our treasured institutions in the hope that they will, over the long term, improve their performance. They certainly need to in this respect in this country.

What a contrast between us and France. The British love to run the French down, but BNP Paribas, Société Générale and other big continental banks—German banks and Spanish banks such as Santander—sailed through the crisis. We literally had the worst record of anyone. That is my first problem with the report.

My second problem with the report is that a fundamental contradiction runs through it. At times, it says that it is in the self-interest of the continentals to accommodate us, to have mutual recognition, and so forth; at other moments, that it is in their selfish interest—but I suppose that that is the same thing as self-interest—not to accommodate us but to keep us out. We must make up our mind what is in the mind of the people who we are dealing with.

I will give my answer to that question. I think there are two fundamental motivating views on the part of our counterparties in these negotiations. One is the sense that if you have a club and someone wants to leave it, that is fine: they leave it. If they want to leave it, remain fully engaged but somehow juridically leave, that is problematic but something that you can talk about. If they want to leave it but actually want to keep all the benefits but not have any of the disciplines or costs and have special new rules crafted for them, that is insufferable. That is ridiculous. I think that we would react that way if the boot was on the other foot.

The second thing which has not come out in the report, which I think is the major motivating factor on the other side of the table, so it is important to consider it, is the issue of financial stability. If, as a banking regulator or supervisor, you are concerned about financial stability, as you must be, you want to be in control. You want to decide who is a fit and proper person to be dealing in your markets. If you have a crisis, you need to give orders to people and tell them to change their behaviour rapidly. You cannot have people who operate in your market, creating assets, lending money or whatever—perhaps contributing to the crisis, who knows?—who suddenly put their hands up and say, “We’re British. We have special rules. We have a different adjudication procedure. We do not have to obey your demands”. That is a hopeless situation. If you were Mario Draghi, I think that you would reasonably not want to accept it.

I come to my third difficulty with the report, which is most fundamental. It is far too optimistic and sanguine. It starts off by saying, “We need to continue to do our financial services business”. Quite right: of course we do. “Equivalence is certainly not sufficient for our needs”. Quite right: I totally agree. “Therefore we need mutual recognition”. But it never says that mutual recognition is fairyland, cloud cuckoo land—what other cliché can I use? It is absurd. It will not happen. I am happy to put money on that if any Member of the House on either side wants to take me up on it. We are not going to get passports unless we stay in the single market, when of course the whole range of activities will be open to us.

Of course it is true that during the transition period, we continue to have full access, as we do today. That is not that much of a help, you know. What does it mean? It means that until the end of 2020, we can carry on with the false—self-deceiving—situation in which we think everything is all right and nothing will change. It means that we postpone the so-called cliff edge for 12 or 18 months, or whatever. Perhaps we can negotiate a longer period. It now looks as though we will go into this transition period not knowing what its terminal date will be.

Europhiles such as me would be happy for it to go on indefinitely, if we cannot go back fully and juridically into the European Union, which I would like to do and which is far and away the best solution. Of course the Eurosceptics in the Tory party will fight like cats about that and threaten to overthrow Mrs May if she does that, so what she will do if she is running into the deadline of next March and does not have an agreement on the terms of transition nor the period of the transition, heaven only knows. When the period of the transition is known, we are heading for another cliff edge, and the uncertainty which businesses in the City are complaining about now, which is well recorded in the report, will simply be carried forward for a little longer. That is unhelpful. We will have had a major structural uncertainty in this country for three, four or five years. That is not a very clever thing to do. I think that that is my understatement of the evening.

I am worried, because I fear that anyone reading the report will get a false impression of the situation into which we are headed. Barnier is quoted as saying that we cannot get financial passports unless we stay in the single market—and if people do not listen to Barnier, they are unlikely to listen to Quentin Davies; I quite understand that. It is no consolation when you think that we are walking into potential disaster that we have a blindfold over our eyes for the time being.