Capital Markets Union: A Welcome Start (EUC Report)

Lord Flight Excerpts

Thursday 4th February 2016 Lords Chamber

[Lord Flight (Con)]

My Lords, I add my great appreciation of the noble Lord, Lord Harrison. I spent four years on the EU Economic and Financial Affairs Sub-Committee, which he chaired. There were, shall I say, widespread views among the members of that committee, but we never had any problems in putting together sensible papers, and it was very much due to his most courteous and constructive chairmanship. I am sure that the noble Baroness, Lady Falkner, his successor, will be an equally good chairman. I always thought that it was wrong that the committee should just be a sub-committee of the EU Committee, because it is an incredibly important committee. It is at the front line of looking at all the stuff that comes through, such as whether we will have a financial transaction tax, and goodness knows what; it is a crucial part of our interface as a member of the EU. I also add my congratulations and appreciation that my noble friend Lord Hill got the job—he is a decent and sensible person and will cope with some things that urgently need doing.

To me, the “EU” bit of the capital markets is in fact not so fundamental; Europe needs more capital investment—it does not matter where it comes from. London has been the key place for channelling international capital, much of it into Europe, and America is probably the largest private equity and venture capital investor in Europe already. As we know, the problems are that the banks cannot lend more and that there is a super-rated dependency on banks anyway, but debt problems and so forth limit what the banks can lend to SMEs anyway, and the euro crisis killed cross-border bank lending within the EU. Therefore what is left, which is crucial, is the need to get more equity money to SMEs. I think my noble friend Lord Hill described his task as channelling savings from anywhere in the EU to be invested anywhere in the EU; I would amend that to say “to channel investments from anywhere to be invested anywhere in the EU”.

I pick up the point which the noble Lord, Lord Harrison, made, which is that there is a pretty strong lack of willingness within the EU to invest in other countries; I think 94% of EU citizens very much shy away from any sort of financial involvement in other countries. That task of just increasing capital flows in the EU will very much come from London, and on the back of the US. I hoped that I would learn today about how my noble friend Lord Hill has been getting on in achieving the action plan that he drew up last September, and indeed, I have learned some quite important points. However, something slightly disappointed me.

I remember when we had our session with my noble friend Lord Hill, I made the point to him that the enterprise investment scheme—I declare an interest as chairman of the EIS Association—has raised a lot of high-risk equity capital for SMEs: about £12 billion or £13 billion. France wisely came over to look at what the UK was doing, copied us and put in a similar scheme, which is gaining some momentum. I suggested to my noble friend Lord Hill, “Why don’t you try to persuade each of at least the main economies within the EU to put in their own EIS-type scheme?”. However, not only has nothing happened, but, unfortunately, the EU Competition Commissioner has decided to attack the UK’s EIS schemes, holding a sort of pistol to our head in terms of state aid approval, and has required a great deal of complications and for money which a company can raise under EIS to be significantly reduced. Worst of all, she has required us to put in a 2025 date for ending the enterprise investment scheme. Who knows whether that will happen? I thought it quite extraordinary that, where the EU desperately needs more capital flows for SMEs, you have the Competition Commissioner of all people deciding that she wants to get rid of the EIS arrangement for raising risk equity for small companies. As regards the measures, a small company—the size is determined by the number of employees and the size of the balance sheet—could raise up to £5 million a year under the EIS scheme, but now it has a cap it cannot raise more than £12 million over its lifetime, whereas it was £5 million a year unlimited.

I do not know how successful things such as peer-to-peer lending or crowdfunding have been on a cross-country basis. Mostly, what has happened has been organised through London and some of it through Guernsey. However, I have some reservations about such arrangements, because I cannot help feeling that, when a bad economic period inevitably comes, there will be significant losses on peer-to-peer lending; for some people it does not matter if rich people lose money, because “They can afford it”, but if it is not rich people, people will claim that they were misled and did not know what would happen. I also got a huge shock when I noticed that peer-to-peer lending had been exploited in China to develop a Ponzi fraud that has involved 880,000 people and £5.3 billion, so there is some vulnerability to fraud there.

The Government have not exactly shouted from the rooftops but have been realistically supportive of the capital markets initiative. They have been keen to kick-start securitisation, develop the private placement market and to enhance SME credit information through non-legislative means. The UK Government have been strongly opposed to any attempts to establish a system of pan-EU supervision on the grounds that this would be prolonged unhelpful distraction, which is probably true.

To come back to London and its importance and contribution, just yesterday afternoon I spoke at a conference on the most esoteric subject imaginable: the difference between what is known as NPPR—the old, historic rules, under which if a fund wanted to market itself in Europe, it got permission from the Government directly—and AIFM passporting, which is supposed to enable you to market a fund across EU members. To my amazement, 350 people turned up at this seminar, not to hear me in particular but because of the subject. That is a classic example of what London is doing. In this case, London has a mixture of UK, US and other nationality funds raising money and marketing themselves in Europe and then very much investing the proceeds in Europe, so the middleman role in London is actually happening loud and clear. I ended up thinking that it is motherhood and pie. Of course we want a much bigger and more effective capital market across Europe. We want to have as effective a market as the USA. What the EU could do to improve things is limited—quite a lot of the constraints are cultural—but it is happening slowly and London is completely at the centre of it.

Going back to my comments about EIS and the Competition Commissioner, the EU can shoot itself in the foot and, by what it has been doing, damage the very objective it is seeking, which is more capital flows for SMEs. Let us hope that we do not get any more of that. Otherwise, let us get a move on and do things.