Financial Supervisory Framework: EUC Report

Lord Hannay of Chiswick Excerpts

Thursday 12th January 2012 Lords Chamber

[Lord Hannay of Chiswick]

My Lords, now that the clouds have belatedly lifted from that Mount Olympus where the gods known to us as “the usual channels” meet, and a debate on the outcome of the European Council of 9 December has been scheduled for 31 January, we can treat the report before your Lordships' House—which, as other speakers said, covers matters that were at the heart of the discussions at that Council meeting—as an opportunity for a kind of hors d'oeuvre to that wider debate. For that reason, and also because this report is a thoroughly useful and professional look at an arcane and complex subject, I add my thanks to the noble Lord, Lord Harrison, and his committee for making such a valuable contribution. I cannot leave the issue of the timing of that wider debate on 31 January without commenting—not for the first time, I fear—that the way debates are scheduled in this House sometimes seems to be carefully designed to minimise the extent to which any views expressed are still valid and topical. Holding the debate on the day after the next European Council seems a miraculous piece of sleight of hand of that kind—surely a perfect example of what I am describing.

Today’s debate is also a serious case of “Hamlet” without the Prince of Denmark, for reasons that my noble friend Lord Kerr has explained. Why is this so? At no stage have the Government brought to the attention of either House of Parliament, or of either House’s scrutiny committee, the text of the protocol on financial regulation that they are widely reported to have tabled at the December European Council, and which appears to have been rejected on that occasion by 26 out of the 27 member states. I can understand why the Government should not be particularly keen to draw attention to that lamentable fiasco. What I cannot understand is by what procedural sleight of hand they can possibly justify failing to convey to Parliament the text of an instrument that was clearly intended to be a piece of EU legislation, and which, had it been adopted, would have altered in a number of respects the further development of the financial regulatory framework which is the object of today’s debate.

I very much hope that the Minister will be able to fill this lacuna in our evidential base and perhaps he might place in the Library of the House tomorrow the text of this famous protocol, which clanks in and out of our debate rather like the ghost of Hamlet’s father. I very much hope that he will also be able to explain to the House why this lacuna has been allowed to occur in the first place. I really cannot see how the House can be expected to perform its required function of overseeing and scrutinising EU legislation if our own Government do not convey to it the text of a piece of EU legislation which it tabled itself. There are plenty of words to describe that action, some of which are not of a very parliamentary kind. “Respect for Parliament” is not an epithet that could be applied to it.

The report before us has some wise things to say about the financial industry being highly mobile, and about global co-operation being essential to ensure that parts of that industry do not relocate outside the EU. This consideration is highly germane to the proposed financial transactions tax, which I appreciate is not covered by this report. Am I correct in assuming that the proposed Tobin tax will be discussed at the next meeting of the G20 finance ministers in February and, if so, that that should provide a clear indication of whether there is any prospect of such a tax being adopted globally? If there is no such prospect—and the chances of the present US Congress enacting a new tax in an election year must be remarkably slender—the risks for the EU, the eurozone or any of its members that decide to go ahead on their own will become very clear, and would bring the rather unworldly debate on this issue down to earth.

Chapter 4 of the report before us is devoted to the UK’s influence on EU legislation in the field of financial services. As other noble Lords have said, Britain is the EU’s centre of this major industry and it is therefore clearly of the utmost importance that Britain’s influence should be deployed both wisely and effectively. Shortly before the December European Council, one of the Government’s supporters in the other place, Mr Jo Johnson, argued in an article in the Financial Times that the last thing London’s financial services industry should want was to be wrapped in the union jack—how wise he was.

If only the Government had paid attention to him—but they did not. The least that can be said about the manoeuvring at the December European Council is that it does not make the task of deploying that influence any easier. But it could be a good deal worse than that. The risks of marginalisation are very real, and the Government have yet to explain convincingly how they propose to avoid them. Perhaps the Minister will either do that when he replies to this debate or will take the matter away and reflect—I have no doubt that we will return to this on 31 January.

Altogether it is not easy to be optimistic about the developments in this field of financial regulation and supervision. The earlier unity of purpose in the G20 seems to be ebbing away—taking with it the prospects for strengthening the world’s defences against the next crisis when it comes along. There is a widely perceived leadership vacuum which is sapping the chances of restoring confidence in the financial markets. The people who cheered the loudest at the lamentably inadequate outcomes of the G20 summit in Cannes, and of the December European Council, actively want the eurozone to collapse and want Britain out of the European Union—either of which courses would have extraordinarily damaging consequences both for this country and for London’s financial services industry. It is surely time that the Government recognise that their mantra “we are all in this together” applies beyond the boundaries of this nation.

--- Later in debate ---

[Lord De Mauley]

My Lords, I am grateful to all noble Lords who have participated today in—as the noble Lord, Lord Liddle, said—a thorough and insightful debate on the new EU supervisory framework. I particularly pay tribute to the noble Lord, Lord Harrison, and the members of the EU Sub-committee on Economic and Financial Affairs and International Trade for their report. It is of considerable interest as we seek to strengthen supervision following the recent financial crisis, both domestically and internationally.

In the United Kingdom, through the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority, we are bringing greater judgment and foresight to micro and macrosupervision, ensuring that we put greater focus on the key links between the two. Likewise, as your Lordships have made clear, it is vital that we reform at the European level to ensure effective and consistent supervision of financial services, to realise the full potential of a single and stable market in European financial services. Noble Lords have also today referred to the very real threats that face us. That is why the Government—along with, I am pleased to say, the noble Lord, Lord Liddle, and all other noble Lords today—welcome and fully support the establishment of the three new European supervisory authorities as well as the European Systemic Risk Board. Indeed, we are very pleased to have the European Banking Committee here in London.

Together, this new framework has the potential fundamentally to improve the quality and consistency of supervision, to ensure more effective rule-making and enforcement, and to improve identification of risks in the system. I welcome the fact that the committee’s report shares those objectives and, along with its recommendations, supports the Government’s position on the European supervisory authorities. Of course, there is still much work to do to improve and refine supervision through this new framework to allow the new institutions to build a reputation for their independence and quality of rule-making. It is a substantial task and the drive by some to grant even more power and responsibility would in our view merely add to the challenges they already face and risk undermining the success that we expect them to deliver between now and the 2014 review. Several noble Lords have referred to resourcing issues. I will come to those in a moment.

The Government believe that there are three key priorities for the new EU authorities. First, as the committee has argued, it is vital to build a single rulebook and ensure the implementation of robust, internationally consistent regulatory standards in order to minimise the risks of regulatory arbitrage. That work needs to be based on open consultation and a rigorous assessment of the effects on growth and the competitiveness of EU business, balanced with the need to protect financial stability and users of financial services. Secondly, the actions of the ESAs should not undermine national supervision. Here again, the committee was very clear. The ESAs, when mandated by legislation, have rule-making powers and are required to ensure that those rules are implemented, mediating if disputes between supervisors arise. Day-to-day supervision and the exercise of judgment within the law are not within the ESAs’ remit.

Finally, we support greater co-ordination and the valuable role that the ESAs can bring in providing consistency of supervision across the EU. We see this as spreading best practice rather than forcing all supervisors to take the same approach. The business models, size and structures of firms—some very local, some global—require different approaches. It is vital that regulators have the capacity to deal with issues unique to their markets.

I would like to take the opportunity to comment on two further themes in the report. The Government strongly agree with the committee that UK influence in the ESAs is important. We have many talented people in the UK authorities and our history of consultation and impact assessments means that we have both the evidence and the experience to play a leadership role. I will return to this, if I may, in a moment.

The regulated community will also have an important role to play—not just in providing evidence of the cost, but also in assessing the potential benefits of effective regulation. We also agree with the committee’s assessment of the ESA’s powers and its wish to be consulted prior to an emergency being called. I will also come back to that point. Where emergencies are called, we will always endeavour to provide information in a timely manner.

The noble Lord, Lord Harrison, raised a number of specific issues. He was not entirely satisfied with the Government’s response to the committee’s request to be consulted if the Government envisage asking the Council to declare an emergency or detect that another member state is likely to do so. Given the rapidly moving nature of such situations—often outside normal business hours—there may be practical considerations. Perhaps more importantly, there is often a great deal of uncertainty in these periods: sometimes markets and commentators overreact, so absolute confidentiality is of paramount importance. There will, therefore, be the key issue of market sensitivity and so on. Within those constraints, I can confirm the Government’s intent to inform the committee as far as is possible about a Council declaration of an emergency.

Regarding short selling and credit default swaps, as an exception to a general rule about ESAs not having enhanced powers without the need to declare an emergency, the noble Lord referred to the committee’s argument that giving ESMA intervention powers might be necessary. Indeed, there was quite a lot of debate about short selling. The Government believe that there is a case for giving national regulators a reserve power to impose a temporary ban on certain asset classes where there is a threat to the stability of the market. This would probably be in the context of an emergency situation, but could be confined to one or more local markets where a ban may be appropriate and there is a need to respect that national decision. In these cases, ESMA should have a significant role in co-ordinating the response and ensuring that any decisions are implemented and enforced.

The noble Lord, Lord Harrison, mentioned that the committee had expressed a concern that the Government’s decision to abolish the FSA and replace it with the new regulatory authorities could compromise the UK’s leadership role in engaging with the ESAs. I understand the concern. The Government are fully committed to ensuring that the UK authorities continue to take a leadership role in European reforms, working both with one another and with the wider stakeholder community to deliver sound reform. This complements changes proposed to the UK framework. Given the relatively small size of the staff in each ESA, the ESAs will rely heavily on their members. We will expect the FSA—and, in due course, the PRA and the FCA—to put significant time and effort into ensuring that the UK’s voice is heard and that the ESA’s decisions are appropriate. The UK regulatory authorities will be well placed to influence and take part in the technical work of the ESAs—for example, the development of binding technical standards and the production of guidance and advice.

Alongside this, the FSA—and, again, in due course, the PRA and the FCA—will have a significant formal role in representing the UK’s competent authorities in the ESA board of supervisors and voting in the board on ESA decisions. Similarly, the Governor of the Bank of England will be represented in the ESRB and vote on any warnings and recommendations. Finally, it will also be very important that the UK regulatory authorities encourage their staff to take up temporary secondments in the new ESAs. I think the noble Baroness, Lady Valentine, referred to that. The FSA is currently reviewing its staffing and deployment policies to ensure that they promote such participation in the new ESA. We will expect the Bank of England to take a similar approach to the ESRB. Therefore, I generally agree with the comments of my noble friend Lord Newby in this regard.

On macroeconomic stability, the noble Lord, Lord Harrison, spoke about the sharing of information. A memorandum of understanding that fully respects the confidentiality of individual firms has now been drawn up by the agencies and is in the public domain. I hope noble Lords will accept that we are moving in the right direction on that.

The noble Lord, Lord Harrison, referred to the Government’s proposal to legislate to require the establishment of a statutory MoU between Her Majesty’s Treasury, the Bank of England, the PRA and the FCA, and the further use of MoUs to frame relationships between regulators. I accept my noble friend Lord Newby’s point that an MoU on its own is not enough, but I agree with the noble Lord, Lord Harrison, that the draft legislation provides for the UK regulators to include in the MoU provisions relating to co-operation between any of them and a body exercising functions relating to the stability of the UK financial system or the regulation of financial services.

Perhaps I should also say that legislation can go only so far in setting down how a wide range of functions are to be conducted. Therefore, it is entirely reasonable and, indeed, vital that it is planned and conducted carefully, set down in detail and agreed and understood by all. There will of course be ample opportunity to debate the legislation over the forthcoming months.

The noble Lords, Lord Harrison and Lord Woolmer, the noble Baroness, Lady Valentine, and my noble friend Lord Newby asked about the resourcing of the ESAs, especially the EBA. They are right: the ESAs, including the EBA, have limited resources in the sense of the number of officials directly employed. However, they can and do call on the resources of the national regulators. This enables them to secure the necessary expertise and experience. If an emergency were to be called, that co-operation from national regulators—including, importantly, those in the United Kingdom—would ensure that the necessary work could be undertaken. As I say, we are committed to providing that assistance.

I am grateful to my noble friend Lord Marlesford for his suggestion about stamp duty, which I will certainly pass to my colleagues at the Treasury.

The noble Baroness, Lady Valentine, and my noble friend Lord Newby referred to the recommendation of the Joint Committee on an international co-ordination committee. The Government welcome all the work that the Joint Committee has done. We are considering its recommendations and will respond in due course.

My noble friend Lord Newby specifically asked whether the capital requirements directive could limit our ability to implement the Independent Commission on Banking. My noble friend Lady Wheatcroft also referred to this. The CRD is designed as maximum harmonisation legislation. This could indeed restrict our ability to impose higher standards but others agree with us, including the ESRB. Therefore, in discussions in the Council and the European Parliament we will work hard with like-minded member states to ensure that the CRD, when adopted, will include flexibility to implement the ICB recommendations and, more generally, to impose higher standards.

The noble Lord, Lord Kerr, asked three questions, which my noble friend Lord Dykes echoed. Both noble Lords have given me much food for thought. I assure them that the United Kingdom will continue to use all avenues available to it to press its case, suitably evidenced by facts and examples of the costs and benefits of the UK’s thinking on the key issues. We do not expect to be outvoted by our European partners, but we have recently experienced Commission proposals that are not evidence-based, and could have a negative effect on growth and harm the EU’s global financial centre in London. Securing safeguards would have been helpful in ensuring that these concerns could not be ignored. The consequence of raising these concerns has been beneficial in focusing minds across Europe on the need to ensure that legislation is evidence-based and that the ESAs are not overburdened with new powers before they have built a reputation prior to the 2014 review. The noble Lord, Lord Kerr, gracefully offered me the opportunity to respond further in writing, and I shall take advantage of that offer.

The noble Lord, Lord Woolmer, asked several questions. He asked whether the Government believe that the ESAs have a capacity to deliver what they are mandated to deliver. Yes, we do. The ESAs were established with a view to undertaking certain tasks and were resourced accordingly. Their operation and success was to be reviewed, as I have said, in 2014. However, if additional tasks are given, they will not have sufficient resources, nor are they likely to be able to procure the expertise or experienced supervisors. That is a matter that we need to keep a very careful eye on. He also asked whether we agree that engagement with the EU is important. Of course we do. Ministers and senior officials are engaging with our European partners on a daily basis, either in meetings, bilaterals, or through other means.

I agree with the noble Lord, Lord Hannay, that a financial transaction tax, the so-called Tobin tax, would need to be agreed globally. I note the continuing interest in the intervention of the Prime Minister in the European Council on 9 December. I am afraid that I am going to disappoint him on the matter of Hamlet’s father. I do not think that he will be surprised to hear that we do not publish informal draft text proposals. This has been government practice for a long time and continues to be so, particularly when those taking part are in the middle of negotiations.

[Lord Hannay of Chiswick]

Am I to understand that the reason the Government give for not conveying the text of a proposal for European legislation to both Houses is because they were entering into negotiations on it? Can I deduce from that that they would have been willing to compromise on the text they put forward, and if so, why did they walk away from the table?

[Lord De Mauley]

My Lords, to answer that in detail would be way above my pay grade. I will see what I can find for the noble Lord by way of an answer, but I cannot promise anything.

The noble Baroness, Lady Valentine, spoke about the importance of UK competitiveness of financial services to the UK economy. I agree with her. Financial stability supported by an effective regulatory framework provides a strong platform for the growth of the financial services sector. She asked how we will ensure the UK’s influence in the ESAs. I have covered a lot of this in earlier answers, but I shall just say once again that the Government are fully committed to ensuring that the United Kingdom authorities continue to take a leadership role in European reforms, working both with one another and the wider community to deliver sound reform which complements the changes proposed to the UK framework. She asked a specific question about staff remuneration to attract and retain the best people. I agree that the ESAs need the best and most qualified staff.

The noble Lord, Lord Liddle, questioned our commitment to Europe. We remain a full member of the European Union, and this membership is—I am agreeing with him—vital to our national interests. It makes us the gateway to the largest single market in the world, which secures half of our exports and underpins millions of British jobs. I assure him that Ministers from all departments continue to engage actively in defence of UK interests in meetings in Brussels and bilaterally with their member-state counterparts. We will continue actively to engage on all financial services legislation and secure our national interests.

I am conscious of the time. If I have not answered any questions from noble Lords, I will, if I may, write to them. Today’s debate takes place a year after the new EU supervisory framework came into force. The European Stability Risk Board and the ESAs are now established. They have agreed their working procedures and recruited staff to support their tasks. The ESAs in particular face a challenging time in delivering a large number of technical standards in banking, securities and insurance. In doing so, we believe they will build their reputation if they concentrate on quality rather than quantity. The Government are committed to supporting the ESRB and the ESAs as they move forward. We will seek to resist overburdening them with new tasks and prioritise work and limited resources towards their core tasks—namely, improving the quality and consistency of supervision, delivering high-quality rule-making, ensuring effective enforcement and identifying risks to the financial system. The Government will continue our close engagement with our European partners to achieve these objectives.