EUC Report: MiFID II

Lord Hamilton of Epsom Excerpts

Tuesday 26th March 2013 Grand Committee

[Lord Hamilton of Epsom]

My Lords, the noble Lord, Lord Harrison, made reference to the technical advances mentioned in our report, and the problem is that, as we all know, technology moves on. I am absolutely sure there is going to be another financial crisis, possibly as big as the one we have just seen; I am absolutely convinced that we cannot anticipate today what it is going to be. One of the weaknesses of regulation and moves such as those that have been made by the EU is that they definitely involve closing the stable door. You can always guarantee that the next financial crisis will be different from the ones we have seen in the past. I suspect that, if we are looking for a solution to this, we have to look to very agile national supervisors, because I do not think that the EU is in a position to stop this sort of thing happening in future.

I would like to move on to the slightly wider issues which the noble Lord, Lord Harrison, touched on, namely the financial transfer tax. Students of the Bible will remember that the Pharisee used to get up in the morning and say, “Thank God I’m not like other men”. I get up every morning saying, “Thank God I’m not a Europhile”. If I were, I would feel that the European Union was letting me down extremely badly. Its attempt to deal with a financial crisis has been so ham-fisted that it really makes one doubt its capacity to run anything at all.

The reality is that the financial transfer tax will be incredibly damaging to the eurozone and the financial institutions within it. It will reduce liquidity in eurozone companies; clearly, if you are going to tax transactions in shares, people will just not buy and sell those shares as much as they otherwise would. It will make it attractive for a number of them to relocate to markets elsewhere in the world where they do not have to pay the tax, and it will make it much more difficult for the EU to raise money. It defies all credibility that it should want to do this.

Mr Bergmann, the deputy to the Commissioner who deals with all this in Brussels, came to see our committee and said that when 11 countries entered into this agreement, they would set an example to others that would then follow. If you believe that, you will believe anything. The fact is that the United States would never follow down the road of having a financial transfer tax, and I very much doubt that Hong Kong or Tokyo would either. There is therefore never going to be a global financial tax; all that you might ever have is one or two more countries within the EU joining in with it.

One of the issues that came up during our discussions on this today was the big question of whether companies in the City of London would be forced to collect the tax on behalf of the European countries that were involved in the shares that were being traded. We were left completely confused because Mr Bergmann told us categorically that there would be no question of City firms collecting this tax, but on the other hand it seems that there is serious evidence that the plan is that it should be collected on behalf of other Governments. I know that the Minister cannot reply on that now, but it would be nice if he could search that out for us and try to get a definitive reply on where we stand on it; it is a fundamental question for the City of London.

Another reason why I am glad I am not a Europhile is the whole management of the economic crisis, which has been absolutely abysmal. It is now more than 12 months ago that my right honourable friend the Prime Minister said that what Europe should do was get a big bazooka to solve the problems facing the eurozone. Chancellor Merkel was adamant: she was not going to expose the German taxpayer to picking up all the liabilities of the Club Med countries and the others that the Germans consider have not got their act together at all. A year to 18 months later, that is precisely what happened: the ECB got authorisation from the Germans to buy bonds in the secondary market across the whole of the eurozone. The result was that the crisis that there had been in funding government debt across the eurozone was completely stabilised overnight. It is quite interesting that to date the ECB has not had to buy any bonds in the secondary market of the eurozone, yet that stability has been brought about.

So what has happened in the mean time in the intervening 12 to 18 months? Chronic insecurity has spread across the whole of the eurozone, and people who might have made investment decisions have sat on their hands and done nothing. The result is that we have seen a much severer recession in the eurozone than we would have seen if that decision had been taken earlier. No doubt there were a whole mass of political reasons in Germany as to why Chancellor Merkel could not move quicker, but the fact remains that if that nettle had been grasped earlier, the eurozone would not have had as severe a recession as it has seen just recently. That recession has even spread as far as Germany as well. It is quite possible that Germany may pull out of it quite quickly but the fact is that the inactivity by Germany actually put that country into recession, which it has not seen for quite some time.

Now of course we see the Cyprus crisis being dealt with on the basis that the Cypriots themselves should pay a very serious price for the trouble that their country has got itself into. An amazing scheme was originally produced that said that all deposit-holders in banks in Cyprus should pay a tax. It had to be described as a tax because, as everybody knows, the EU has been working for some time on a deposit insurance scheme that means that people holding up to £100,000 in a bank will have that money secured. Somehow, when the whole country goes bust, your deposits are at risk, but if your bank goes bust your savings are secure. Come on—people are not going to sit there and say, “This raid on my savings is quite legitimate because it is a tax”. That decision has now been reversed and we are going to see deposit-holders above €100,000 maybe being taxed at 40% on their holdings.

What effect is this going to have on many of the other very unstable Club Med countries in the eurozone? Jeroen Dijsselbloem, who is the president of the Eurogroup, although I gather he has not been there for very long, came out with an incredible statement only yesterday, I think, saying that what had been done in Cyprus was a template for all the other countries in the eurozone. Can you imagine a more crass and stupid remark than to say that this was a template to be applied elsewhere? What it immediately does is put the frighteners on absolutely anybody—any company or any individual—who holds a bank account with money in it in any country such as Spain, Portugal, even Italy and certainly Greece. Greece is completely unstable. It is completely recognised that it is unsustainable as it is and that it cannot go on. The reason why nothing has been done about Greece is because German elections are coming up on 22 September. After that, they will want to restructure the whole debt of Greece. They will have to do it yet again and the Greeks will have to take another massive haircut. Any Greek who is standing around at that point with money in a Greek bank needs to have his head looked at. You are actually better off taking the money out and stuffing it under the mattress than you are leaving it in a bank account, where they can impose a tax on it.

This is absolute lunacy. Once again, I hate to say it, but this is why I am so glad that I am not a Europhile, because it strikes me that these people cannot run anything competently whatever. The choice for the future of the eurozone is quite simple. It can go mutual so that the rich countries have to guarantee all the poor ones, but the Germans are flatly refusing to do that and, if they do not, it is going to break up. As night follows day, the weak countries are going to go, and then eventually it will get to the centre and some of the stronger ones will go as well.

If the Germans did decide to underwrite all this, with some eurobond or something of that sort, then of course you have a future made up of fiscal transfers from the rich countries to the poor. We have seen a bit of that already with the so-called bailouts and so forth. They are bitterly resented by the Germans, who have to pay them; and because of the conditions with which they arrive in Greece, say, they are bitterly resented by the Greeks, who get the bailout.

With fiscal transfers, you will only have that continuing but writ large. This then of course encourages extremism in places such as Greece and very nasty parties start to crop up. If we go on like this, the whole of this system will just not work. The best thing that could possibly happen would be if the Germans pulled out of the eurozone and created, with other sensibly run countries within the eurozone, a strong currency which can actually survive. If we go on the way we are now, chaos beckons.

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[Lord Liddle]

My Lords, before I begin I should say that the think tank that I chair, Policy Network, has received funding from the City of London Corporation.

I will make three points in introducing what I have to say. First, I agree with the final point of the noble Lord, Lord Kerr, and with his tribute to my noble friend Lord Harrison and his fellow committee members—that should go on the record—for the excellent work that they do in bringing informed debate to the House.

Secondly, I will avoid the considerable temptation offered by the speech of the noble Lord, Lord Hamilton, to engage in the debate about the euro that he has so richly offered. I will just say—this is not meant to be a cruel point—that he has been making the same speech ever since I was privileged to join the House in 2010, and the euro has not collapsed yet. Even in what I agree was the mismanaged Cyprus crisis, the Cypriot Government decided that they would prefer to take the pain and stay in the euro rather than leave it.

[Lord Hamilton of Epsom]

Does the noble Lord accept that the pain has not even started in Cyprus yet?

[Lord Liddle]

They knew perfectly well what they were doing by signing up to the deal that they did. Perhaps I may make another aside. The idea that taxpayers should always pick up the bill for the irresponsibility of bankers is offensive. A lot of people in Cyprus have enjoyed the benefits of relatively high interest rates, which pensioners in Britain have not enjoyed over the past few years. The idea that they made these investments in a noble way that should be protected by the European taxpayer is, I think, offensive.

Thirdly, I agree with the noble Viscount, Lord Brookeborough, that the issues raised in this report are very complicated. I am certainly not in a position to talk about the details. Instead, I want to focus on the Government’s political strategy for handling these financial services questions. This is not a party point; it seems to me that as a nation we have a real difficulty here. A number of propositions form the approach on this side of the Room. The first is that we need a healthy financial services sector; I agree strongly with the noble Lord, Lord Hamilton, and the noble Viscount, Lord Brookeborough, on this. Yes, we need to rebalance our economy. My noble friend Lord Mandelson was right to say that we have had too much financial engineering and not enough real engineering, but the financial services sector is a huge overseas earner for us and we cannot do without it. It is a vital national interest where we have a comparative advantage. However, we have to acknowledge that things have gone wrong in the City in the recent past. Grave reputational damage has been done as the result of the LIBOR scandal and the scandals around mis-selling. Risks were taken that should never have been, and as a result we need to rethink the way we regulate the City.

The second proposition that should inform government policy on a national strategy in this area is that the City benefits hugely from being the financial centre of the European single market. The noble Lord, Lord Kerr, is right to say that what Britain achieved in the 1990s and the early 2000s—I was slightly involved in the 1999 Financial Services Action Plan—was tremendous. It opened up the market and ensured that London got a larger share of it. What happened, though, was that we had liberalisation without putting in place proper cross-country regulation, and we have to acknowledge that that was a UK mistake. It was a UK consensus that we should have light-touch regulation and we got it wrong. The Turner report that was published at the start of the financial crisis said that we have to choose between European regulation and being part of the European market or going back to national regulation, and that is basically right. I think that both the then Labour Government and the new Conservative/Lib Dem coalition have accepted that we are part of a properly regulated European single market in financial services.

However, the result of all this is that on the Continent there is now a great suspicion of UK motives in this field. I sense this an awful lot as I travel around to various meetings. Therefore, the third objective we have to set ourselves is to accept that we need re-regulation at the European level, but that it has to be done in a proportionate and sensible way. I have some sympathy with the remarks of the noble Lord, Lord Hamilton, about shutting the stable door and things moving on so that the new regulations will not cope with the new circumstances, but we must recognise that we have to put a national effort, as the noble Lord, Lord Kerr, said, into getting our regulatory strategy right.

We face big problems here. There are some basic asymmetries that put us in a difficult position. We had very strong support from what you might call the northern liberals for the positions that we took in the 1990s and 2000s but I am not sure to what extent that support is as solid as it once was, which I think is one of the reasons why the coalition on the financial transaction tax that the noble Lord, Lord Kerr, wants has not occurred. There is an asymmetry of expertise. People complain about the bureaucracy of the Commission, but when you look at the thousands of people employed in the regulatory agencies in London and the dozens who are dealing with these matters in the Commission—a very small group of people covering a very wide brief—it is not surprising that sometimes the proposals that come forward are flawed in key respects. The Commission tries to listen and amend in the light of representations made to it.

Another major asymmetry, which is a very serious one, is that there are euro-ins and euro-outs. We are among the euro-outs, and that is the way it is going to be, but we have to recognise, as a euro-out, that financial regulation is fundamental to the financial stability of the eurozone. If they are going to do whatever it takes to stabilise the euro then they will be prepared in the eurozone to adopt whatever financial regulations they believe are necessary to stabilise their currency.

In this situation, the national strategy clearly has to be to go out of our way to win friends and influence people. That is where the Government—or perhaps only one part of the coalition—has got it so badly wrong. There is a difficult environment for us in the European Parliament. They think bankers are to blame for the crisis and that Britain is, in part, to blame because we pushed a deregulatory agenda. How do we deal with that? Not by going in with the Thatcher handbag, nor by doing what David Cameron did at the December 2011 European Council in circulating a paper—which, incidentally, has never been disclosed to Parliament, although we have seen it and know what is in it—that had “unanimity” written at the top and which, to anyone who looked at it, would look as though the British Government were basically seeking to reverse qualified majority voting on a large number of financial services questions. It was a disastrous strategy: how could you expect the eurozone to agree to surrender sovereignty over their currency to Britain through our having a veto over financial regulation? We have to argue from a position of qualified majority, and we have to win friends and base our position on reason and good argument.

I agree with the noble Lord, Lord Kerr, that we have to point out to people the advantages of London being the global centre of the single market and all that that brings. At the same time, though, we have to acknowledge the criticisms of the City that have been made and demonstrate that we are prepared to see them tackled. That is basically the question that I put to the Minister: how are the Government going to do that? What is their political strategy for dealing with these questions, which are of vital national importance, even though they are of great complexity and difficulty for many members of the committee?

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[Lord Newby]

I am sure that some people in any country will want to do virtually anything, but the question I was addressing was whether the 11 countries that have signed up to this tax can be dismissed as not knowing what is best for them, even though we are deeply sceptical about it and are not going to sign up to it. We have had a number of debates in your Lordships’ House about Greece, for example, in which some noble Lords seem to have known what is best for Greece. It is just that the Greeks have not agreed. We have to let other member states move forward with this within the rules because they are keen to do so.

[Lord Hamilton of Epsom]

Does my noble friend accept that at one stage the Germans were very much against this proposal and then they changed their mind? Was it that they did not know what was best for them originally and then they did know subsequently, or did they get it the other way round?

[Lord Newby]

I think that my noble friend should ask them because I have not the faintest clue what was in their mind, but they have now formed a view. If the German Government have a settled view, even if I do not agree with it, I would not write it off as a mad one. I am sure that we will come back to the financial transaction tax, but it is not unreasonable to say that an extremely complicated tax using very difficult mechanisms to make it work should necessarily be capable of instant analysis in terms of how we are going to deal with it. We are looking at it. We have had the proposal for only a few weeks, and my right honourable friend Greg Clark, as the noble Lord, Lord Harrison, pointed out, is actually one of the better Ministers in any Government in terms of working with Parliament and, indeed, across the EU. I am sure that in due course he will come back with a full description of our response.