Financial Supervisory Framework: EUC Report

Lord Newby Excerpts

Thursday 12th January 2012 Lords Chamber

[Lord Newby]

My Lords, this is a very timely debate given the state of play in the development of both the EU financial supervisory framework and our own financial services architecture. Nobody could accuse the EU or the British Government of not acting to put in place new structures which aim to stand a better chance than their predecessors of preventing another bubble-based banking crisis. As the noble Lord, Lord Harrison, pointed out, at the EU level we have the ESRB and three sectoral regulatory bodies. Here in the UK we will soon have a new Financial Policy Committee, a Financial Conduct Authority and a Prudential Regulation Authority, along with the Treasury and the court of the Bank of England involved in setting and implementing financial regulatory strategies.

All these bodies are new or in gestation so there is a considerable degree of uncertainty about how well they will work, both individually and—possibly more importantly—in relation to each other, particularly at times of financial crisis. The noble Lords, Lord Harrison and Lord Marlesford, talked about how the European bodies would operate, what constitutes an emergency and what powers they would exercise in those circumstances. The truth is that, at the moment, we do not quite know because they are so new that they have not yet had to invoke those powers. From the evidence that the sub-committee took, it is clear that they are still feeling their way in some respects on how those powers would actually be used.

I have had the privilege of serving on the Joint Committee on the Financial Services Bill and as part of our work we looked at how the new UK bodies would relate to their European counterparts and how the UK interest would be best represented. It is on this area of the sub-committee’s report that I would like to concentrate my remarks this afternoon.

There are several obvious problems. First, the structures of the European and British bodies are quite dissimilar in that at the European level, we have three sectoral bodies covering banking, insurance and markets and at the UK level, we have two: one covering prudential regulation and one covering conduct of business regulation. These clearly are not equivalent bodies. When those involved in the FSA or the EBA have been asked whether this matters not, it has been pointed out that across the EU, there are many forms of regulatory structure and the twin-peaks approach that we are going to be adopting is by no means unique. As a matter of principle, however, I do not think one could argue that three bodies playing two bodies with completely different remits is an ideal starting point. It is an issue that we have to address.

Secondly, as has been mentioned, the European bodies are very lightly resourced for potentially a very big job, particularly at a time of emergency. The European Banking Authority will have 120 staff; if there is an emergency tomorrow, it could be asked or expected to wield powers across the whole of the EU and it will clearly struggle to do it. There is no prospect in the foreseeable future of these bodies getting any additional resources, which is a bit of a worry. There is also a more general worry that its 120 staff are playing 3,500 staff of the FSA; no doubt, staffing will increase in the equivalent bodies across the EU. Therefore, it is going to be hemmed in as regards what it can do simply through the paucity of its own resources.

The third problem is obviously Britain’s relationship more generally with the EU. At the ill fated recent summit, it was regulation of the financial services sector that was cited as the reason for the UK Government refusing to go along with the rest of the EU. Some of the arguments that were advanced seemed to me quite bizarre. It was suggested that we should have, as a matter of principle, a declaration that there would be no moving of the European Banking Authority out of London. No one was suggesting that it would be moved out of London, so why was that a big issue? It was suggested that there was a huge problem in that the EU was going to stop us increasing the capital requirements in our banks beyond a certain level, when it was absolutely clear from both the EBA and Commissioner Barnier that, whatever they originally thought in this area, they were not going to push this as an issue. Therefore, we have been pursuing lines of argument related to the management of financial services regulations which seem to me to be bizarre. Whether they are or not, however, they have undoubtedly caused major difficulties in our short-term relations with at least some of the principal member states. However, it seems to me—I am sure everybody would agree, whatever their views on the euro, the eurozone and the Prime Minister’s strategy—that it is absolutely key for the UK to be in a position to maximise its influence in EU financial services regulation. Therefore, we now need to think about how we can best achieve this.

First, there is our role within the EU and, in particular, the supervisory bodies. I gather that, despite the screaming headlines, the attitude of many of those involved in managing the process in member states and EU institutions has not undergone a revolution; and that there is still a residual willingness to work closely with the UK on these matters, which is almost surprising in some cases. This is particularly true given, first, the small size of the resource at the European level; and, secondly, the even smaller resource and aptitude for involvement in detailed negotiations on many of the technical issues in many smaller member states with small financial services sectors. There still seems to be a very big opportunity for the UK to play a major part in those bodies. We have not been frozen out and we must make sure that we remain as active as possible.

Secondly, there is a problem with the new architecture throughout financial services regulation and how it relates to the European bodies. According to the draft Bill, the PRA will exercise the UK vote on the European Banking Authority and the insurance authority, while the FCA will exercise the UK vote on the European Securities and Markets Authority. However, substantial areas of the ESA’s work that are not the primary responsibility of the institution that holds the voting seat apply, so there will be a real problem there with the relationship between the UK and the European bodies. That can be dealt with only through good co-ordination at the UK end.

As the noble Lord, Lord Harrison, pointed out, the Government plan to have an MoU involving all our bodies here that are related to this. However, as we saw with the tripartite agreement, MoUs on their own are not worth the paper they are written on if the participants in the MoU never meet or if they have fundamentally different views about what to do. It seems that although an MoU is no doubt necessary, it is not sufficient in this area. In their evidence to our Joint Committee, a number of bodies—including the CBI and Nationwide, for example—suggested that a way of dealing with this would be to establish an international regulatory committee of the various bodies of the Bank and the Treasury here in the UK. It would be responsible for co-ordinating British involvement in the European regulatory activities. This seems to me to be an extremely sensible suggestion.

The Joint Committee suggested that this committee should, because of its importance, report to the Chancellor and be chaired by the Treasury. I agree, although I might add, in parenthesis, that it should be chaired by someone from the Treasury with a sophisticated understanding of how the EU institutions and authorities work and what is realistically achievable in both the short and medium term. This may be a big ask but it is the best chance that we have. These are sensible suggestions, which I hope the Government will adopt. I also hope that the Treasury and the Bank will encourage their brightest people to work with the EU bodies, either as UK reps on their various committees, or as permanent or seconded members of staff. British voices around the table need to be as numerous and as resonant as possible.

I realise that the Government are still considering our committee’s recommendations and it may be slightly premature for the Minister to give a definitive response on this issue. However, I hope he will urge those of our recommendations that relate to EU co-ordination on his colleagues.