Financial Supervisory Framework: EUC Report

Lord Woolmer of Leeds Excerpts

Thursday 12th January 2012 Lords Chamber

[Lord Woolmer of Leeds]

My Lords, first may I add my voice to the congratulations to the noble Lord, Lord Harrison, on his chairmanship of EU Sub-Committee A and the way in which he has managed to take the committee to a unanimously agreed report. It is a pleasure to follow the noble Lord, Lord Kerr, and I will be truncating some of my remarks at the end as a result, because that was the second theme on which I was going to remark.

I would like to start by making some observations on the operations of the three supervisory authorities, although I recognise that the Systemic Risk Board itself is of course of enormous importance. In your Lordships’ House I chaired the relevant Select Committee that examined the Lamfalussy proposals at the time, so I have always had a very close interest in them. Although there are successors to the level 3 Lamfalussy committees, they are very different animals. I should like to remark on a few of those differences.

First, the authorities have the power to create a single European Union rulebook in financial services. That gives them the power to issue binding technical standards, effectively secondary legislation. Secondly, they are in some cases being given market-moving responsibilities—that is, responsibilities which, when they exercise them, have the power to move markets immediately: for example the stress testing of banks; the endorsement and regulation of credit rating agencies; third-party recognition of CCPs; and other examples that noble Lords will think of. The nature of the legislation and the exercise of powers of the supervisory authorities needs to reflect that, because it would clearly be very market sensitive.

Thirdly, they have an enhanced ability to ensure harmonised implementation of supervisory practice in all member states. I will look with great interest at the extent to which they have managed to achieve that over 27 member states, but they are certainly pursuing it with some vigour. Fourthly—this has been remarked upon already, and I will return to it—all key decisions will be by majority vote, on policy matters by qualified majority voting, and on other matters by a simple majority. Finally, the link between regulation and financial stability has been strengthened by the establishment of the stability board but also by the contribution of the supervisory authorities to the work of the European stability board.

Now that these authorities have been established, increasing pressure on their workload has emerged. The financial crisis followed by the eurozone problem put a spotlight on financial services. There is a strong political sense, not only in this country but even more so in Europe and the European Parliament, that more regulation is urgently needed. There is mistrust of light-touch regulation and, to a degree, mistrust in some parts of the European Parliament of the position of the United Kingdom. In the face of this, the resources of these supervisory agencies are indeed very limited, as the noble Lord remarked earlier. They depend heavily on financial regulators and other member states. I regard this as a good thing. It certainly should be a very good thing for the United Kingdom because, in order to function at all, they need an enormous input of resources and expertise from member states. That should place the United Kingdom in a very strong position.

It is important that the supervisory agencies have proper time to develop proposals for legally binding standards, time to consult fully, time to undertake impact assessments, time to draft legislation rigorously and time to consult further on such draft legislation. On 11 October, the executive director of ESMA—the European Securities and Markets Authority—remarked that the authority is,

“extremely committed to stakeholder consultation but we are concerned that tight legislative deadlines for ESMA’s work on technical standards and advice will restrict our ability to consult as extensively as we would ideally like”.

A few weeks later, the chair of the authority commented as follows:

“writing … technical standards … is important for achieving a single rule book … The quality of technical standards is crucial for the proper implementation of Directives and Standards. ESMA has made it clear that on average it takes about 12 months to accomplish all steps required for good technical standards. A shorter period negatively affects, for example, the possibility to consult with stakeholders like you”—

he was talking to investment managers. He continued:

“In that perspective it is very unfortunate that the recently agreed Short Selling Regulation requires us to deliver technical standards by the end of March 2012”—

that is, in six months rather than 12. I make this point because there is enormous pressure from level 1 legislation on the supervisory agencies. The legislators, whether the Commission, the Council or the European Parliament, need to be realistic about the timetables for implementation that this means if we are to have effective regulation implementation by the supervisory agencies.

My question to the Minister is whether the Government believe that the supervisory agencies have the capacity to deliver what is expected of them. When I looked at the workloads in the 2012 work programmes for the three agencies, they looked to be extremely busy. Who in the Government—or is the FSA?—assesses the viability of the workloads of the supervisory agencies? What is the process within the UK for considering and endorsing the proposed workloads and priorities of the supervisory agencies? What is the political input into these?

I welcome the report in today’s Financial Times confirming the point made by the noble Lord, Lord Kerr, that the latest draft eurozone treaty omits a commitment to closer co-operation towards a single market, recognising that that is a province of the European treaties of the 27 member states. I share the noble Lord’s concern that in practice it is unlikely that the 17 eurozone member states will not indeed look carefully at and discuss the operations, priorities and actions of the supervisory agencies, including the stability of this board, when they meet. I add my support for the question that the noble Lord asked: how do the Government intend to respond to this situation? The constructive suggestion that the noble Lord proposed might be pursued seems an excellent idea.

The United Kingdom ought to continue to be welcomed as a major player in the development and implementation of financial services regulation in the European Union. We are indeed an asset to the Union, and it is simply in the interests not only of the UK but of the EU that the UK continues to be a major financial centre in global terms. I hope that the Government, in all their thinking and in how they address the political and diplomatic relationships and dynamics of the EU, will seek to ensure that that remains the case. I hope that the proposal of the noble Lord, Lord Kerr, meets with the Minister’s approval.