European Union Committee: 2012-13 (EUC Report)

Lord Harrison Excerpts

Tuesday 30th July 2013 Lords Chamber

[Lord Harrison]

My Lords, I, too, pay tribute to the noble Lord, Lord Boswell of Aynho, for his excellent stewardship of the Select Committee, and for his encouragement for us to think outside the box sometimes, in ensuring that our work is mirrored in the work of the House as a whole. I say to both our Front Benches—I give an example of the Tyrie commission on banking that was recently published—that we are going to see the advent of the Liikanen proposals that will come before us from the European Union, and are not always sure that things done on the European scene in the single market are matched in the way that they should be by the work in this House. I hope that we in the Select Committee can promote that process even more urgently.

Some of the important elements of the Economic and Financial Affairs Sub-Committee of the European Union Committee that I chair include the European banking union, on which we published a major report in December 2012, led by the President of the European Council, Herman Van Rompuy in his four presidents’ report, backed up by the European Commission’s blueprint.

Suggestions were for a proposed three-pillared approach; that is, a single supervisory framework, a single resolution mechanism which was recently published, and a single deposit insurance mechanism. However, the last of those three was quickly dropped under German pressure and progress on the second, as I have said, has been recently published. As such, the proposals initially were set out only in relation to the first pillar, the single supervisory framework. The committee’s report reflected on those proposals as well as on the further steps towards banking union that were required. We undertook a very deep inquiry which included evidence from the President of the Council, Herman Van Rompuy; the Commissioner for Internal Market and Services, Michel Barnier; the vice-president of the European Central Bank, Vitor Constâncio; and the chairman of the European Banking Authority, Andrea Enria. I should also say that when we were in Brussels we took advice on the European Banking Union from Sir John Cunliffe. He, of course, has now been nominated as the new Deputy Governor of the Bank of England.

The committee found that a European banking union was urgently required to restore credibility to the euro area banking system and to break the vicious circle between banks and sovereigns. Although the UK has stated that it would not participate, the consequences for this country could be enormous. The committee warned of the significant risk that the UK could be marginalised as banking union participants moved towards ever-closer integration. This, in turn, threatened to fracture the single market as the authority of EU’s 27 bodies, such as the European Banking Authority, came under threat. The committee warned that the Government’s assurances about the impact on the City may prove to be misplaced. It called for the Government to ensure that London’s pre-eminence as a financial market was not imperilled and that the integrity of the single market was retained. UK isolation in such debates would be disastrous.

The committee also expressed regret that the three-pillared approach was so quickly undermined under political pressure. However, it welcomed the single supervisory mechanism proposals as a significant first step. It agreed that the ECB should take on supervisory responsibility over euro area banks but warned that the concentration of so much power in one institution meant that powerful safeguards needed to be put in place, and that there should be no conflict between the European Central Bank’s supervisory and separate monetary policy tasks. Indeed, the ECB should be accountable to the European Parliament and to national Parliaments in the exercise of its supervisory powers, and there should be equality in the decision-making process within the ECB between the euro area and the non-euro area participants and the role of the European Banking Authority in representing the 27 member states must not be undermined. It now represents the 28 member states.

The committee has not rested on its laurels since publication of the report. It has engaged in several rounds of correspondence with the Financial Secretary to the Treasury as a deal on the single supervisory mechanism emerged, which, in spite of some of our concerns about the bail-in deal, is in itself an undoubted achievement. We have given particular consideration to changes to the voting arrangements in the EBA and the so-called non-discrimination clause, which the Minister argued would be a significant achievement and safeguards against any restriction of the UK’s role as a financial centre of the single market. However, we were concerned that such safeguards were not as watertight as thought. There will be a review of voting arrangements if and when there are four or fewer non-participating member states. As recent developments with Latvia remind us, all but two member states are under a legal obligation to join the single currency.

We examined banking union in the context of the Commission’s broader proposals to strengthen fiscal, economic and political union in our new inquiry into genuine economic and monetary union and its implications for the United Kingdom. One notable recent development is the publication of the Commission’s proposal for the second pillar of banking union, the single resolution mechanism. We will continue taking evidence on these important subjects. We have meetings lined up with the Commission’s Vice-President, Olli Rehn, who recently said that that vicious circle between the banks and sovereigns was to be diluted rather than broken. We shall quiz him on that. In Frankfurt, we shall meet Dr Constâncio who we have interviewed previously on these important issues.

The committee published an important report on markets in financial instruments regulations and directives, MiFID II: Getting it Right for the City and the EU Financial Services Industry. We highlighted the threat to the City of London by trying to block off third countries coming into the single market of 28 members; the dangers of the pre-trade transparency that was originally there which threatened to undermine proper competition within these trading instruments; and the algorithmic or high-frequency trading, an issue to which we will have to return under a different title.

We also highlighted the financial transaction tax. At the end of the 2011-12 Session, we published our report, Towards a Financial Transaction Tax?. The committee’s report was highly critical of the Commission’s proposal for an FTT. We argued that it would not fulfil any of the Commission’s five stated objectives and that there was a significant risk that financial institutions would relocate to avoid the tax. The UK had made clear that it would not participate. Yet we warned that an FTT would nevertheless have a significant effect on the United Kingdom, not least because of the obligation placed on UK authorities to collect the tax under EU mutual assistance agreements or under the provisions of joint and several liability.

Follow-up work to that report has consumed much of the committee’s attention during the 2012-13 Session and at the start of the current Session. We criticised the Government and the City for what seemed to us to be an entirely complacent attitude, assuming that such a flawed proposal could never survive, but this seriously underestimated the political will behind the proposal in Brussels. While the Commission’s original proposal was ditched in late 2012, 11 member states, led by Germany and France, announced their intention to implement the FTT under the enhanced co-operation procedure, whereby a smaller number of member states may pursue a proposal, so long as the rights of non-participating member states are not infringed. When the new proposals were published, they included a new provision, the so-called “issuance principle”, whereby financial institutions located outside the European Union would also be obliged to pay the financial transaction tax if they traded securities originally issued within the EU; for example, a trade in Volkswagen shares between London and New York would be caught. This raised concerns about the potential extraterritoriality of the tax and added to the committee’s concerns about the potential deleterious effect on the United Kingdom.

In light of this, we undertook a follow-up piece of work early this year when we urged the Government to consider a legal challenge against the proposal. This finally did the trick and awoke the Treasury from its slumber. Sure enough, the United Kingdom has since launched a legal challenge. Indeed, the Minister has acknowledged,

“that the grounds on which the Government has challenged the authorising decision are all points on which your Committee has previously flagged concerns”.

It is also becoming clear that participating member states are growing increasingly nervous about the impact of the financial transaction tax. Informed observers have predicted that, given the political capital invested in the project, an FTT will survive in some form, but that it will be significantly watered down, possibly to mirror UK stamp duty. We wait to see and, of course, the committee will continue to keep a close eye on developments.

Finally, the euro area crisis: amid these complex legislative proposals the committee has also sought to remain informed on the political and economic context in which the eurozone and the European Union as a whole operates. During the 2012-13 Session we continued with our twice-yearly updates on the eurozone crisis. In January and February 2013, we held a seminar on the effects of the austerity agenda on the EU, which was attended by academics, campaigners, think tanks and a number of EU member state ambassadors.

At that time, EU leaders were suggesting that the worst of the crisis was over. In that context, we warned that the biggest enemy in the worst of the crisis was to suggest that the worst of the crisis was over. Complacency is a danger that we must guard against, especially as it can affect the United Kingdom and the integrity of the single market. Your Lordships will be pleased to hear that the committee has not let up on its examination of these issues. Even this morning I have hot-footed it straight from a meeting of Sub-Committee A, where we agreed our latest letter on the crisis, in which we set out our views that the EU tendency to muddle through the crisis may not be enough.

I conclude with this: as others have expressed, we, too, have been disappointed by our relationship with the Treasury and, in particular, the Financial Secretary to the Treasury, Mr Greg Clark. We have been disappointed both by the tardiness of receiving explanatory memoranda and the lack of quality that we should expect from the Government. When he was before us last week, we were so angry with these failures that I threatened from the chair the meeting’s conclusion that we would bind up all his explanatory memoranda in a leather-bound document to be presented to him when he left so he could take them away on his summer holidays and read some of the poor quality explanatory memoranda that we received from Government. Whether he is keen to have that happen, I do not know.

Finally, perhaps I may say that it is a joy to have chaired the committee. I am particularly pleased that Stuart Stoner and Rose Crabtree have been working so hard—as all the members of the sub-committees have expressed. We really are blessed with the very best of help from the young men and women who attend to us.