Mr.
Timms: There is a provision, which is clearly needed, to
enable member states with non-euro currencies to convert the
directive’s euro amounts. They are required to ensure that the
local currency amount is equivalent to the directive’s limits,
rounded to the nearest €100. The exchange rate and date of
conversion are left unspecified, so there is a little leeway, but the
hon. Gentleman is right. We are unlikely to end up with a round number
of
pounds.
Mr.
Gauke: Does the Minister accept that that has the
disadvantage of lack of clarity for investors, and that substantial
fluctuations in the currencies—we have seen such fluctuations
compared with the euro in recent months—will mean that, to some
extent, bank account and deposit holders will be vulnerable because
their protection will fluctuate, along with the
pound?
Mr.
Timms: I am not sure that there will be any loss of
clarity. I suppose that there will be a loss of memorability, but that
is not the same as loss of clarity. There is a question of how
fluctuations will be reflected, and how frequently the amount will
change. I would not expect it to vary frequently, but it will need to
be updated periodically in the light of currency changes. Yes, the
number will be less memorable, but I hope it will be as clear as it is
now.
The
Chairman: Order. The hon. Member for Sevenoaks expresses
some discontent that I did not call him a moment ago. The powers of the
Chair are limited, but whatever his or her abilities they do not extend
to being psychic. If the hon. Gentleman wants to ask a question, he is
welcome to do so.
Mr.
Fallon: I apologise, Mr. Bercow. I was hoping
to speak at some point, should we move on to the
debate.
The
Chairman: I am sure the hon. Gentleman is aware that there
is a question procedure to be followed, at the end of which the debate
will take place.
Mr.
Gauke: I have a few more questions, although I know that
my hon. Friend is anxious to proceed with the debate.
I return to
the capital requirements directive and the question of hybrid capital.
It is significant for the UK because of the treatment of preference
shares under English corporate law, but that is not necessarily
applicable under other European jurisdictions. Does the Minister have
any concerns that preference shares will not be treated as tier 1
capital, which could be a disadvantage to UK banks as it may make it
harder for them to raise capital? That is particularly significant
given how important it is for UK banks to be able to raise capital in
these difficult times.
Mr.
Timms: It certainly is important. We are in a time of
capital scarcity. The proposal before the Committee addresses the
capital needs of institutions, and with some grandfathering provisions
we will be able to ensure that there is no disruption for the
organisations that the hon. Gentleman is concerned about. The
grandfathering clauses will last for up to 30 years for preference
shares, so that will safeguard the affected
organisations.
Mr.
Gauke: For clarity, may I ask whether the grandfathering
provisions will apply to those institutions that currently have
preference shares—to those preference shares that have already
been issued—or could a UK bank issue further preference shares?
Given that the Government will hold a huge number of preference shares
in some of our banks, I am sure that they, too, will have an interest
in the matter.
Mr.
Timms: I think the answer is that where preference shares
are in place, new ones can be issued.
Mr.
Gauke: I thank the Minister for that answer. May I ask
about timing? Concerns have been expressed by the British Bankers
Association, among others, about why the Commission is considering the
question of preference shares now, when the Basel Committee has
announced a review of regulatory capital rules. It may be necessary for
the banks to make adjustments twice within two or three years. Is this
the right time to be making such changes, given the difficult market
conditions that
exist?
Mr.
Timms: The hon. Gentleman is right about the difficult
conditions. I think those concerns have been adequately addressed, in
the way that I described. The capital requirements directive is an
appropriate place for such issues to be considered. It is not
inappropriate to include those
measures.
Mr.
Gauke: I return to a point that raised a moment ago. The
ability of UK banks to issue preference shares does not necessarily
apply elsewhere in the European Union. Is the Minister concerned that
the UK may be particularly disadvantaged by changes in the capital
treatment of preference
shares?
Mr.
Timms: That certainly was a risk, but the risk was
successfully addressed during the negotiations, with the outcome that I
described.
Mr.
Gauke: On the UCITS directive, the Minister said that he
welcomes the fact that the provisions enable the passporting of
management
companies. Will
he outline the benefits for the United Kingdom and identify the
disadvantages of the proposals, given that the EU Commission was
somewhat sceptical about them and that Ireland and
Luxembourg—two countries that do a great deal of administration
of UCITS funds—were strongly opposed to them? Does the right
hon. Gentleman have any worries in that
area?
Mr.
Timms: In some ways, the concerns of Ireland and
Luxembourg reflect the opportunities arising from the changes for UK
providers. We are confident that, as concluded, the proposal will allow
UCITS management companies to offer their services cross-border without
compromising supervisory oversight, which was a perfectly proper
concern.
For us, the
key points necessary to achieve that were, first, a clear and
comprehensive split of responsibility between the supervisors of the
management company and UCITS itself. Secondly, we wanted effective
provisions for information-sharing between the two supervisors and the
management company. Thirdly, we wanted effective provisions for the
UCITS supervisor to enforce against the management company in cases of
non-compliance and, fourthly, greater harmonisation to ensure that all
UCITS and management companies were operating to the same standards
wherever they were located. Each of those points is addressed
effectively in the proposal, as it stands. It is close to the advice of
the Committee of European Securities Regulators, which was asked to
give a specific opinion on such matters. That adds to our confidence in
the proposal.
Mr.
Gauke: Is a local point of contact necessary? Will the
Minister explain the Government’s view and say how such matters
have been addressed by the
directive?
Mr.
Timms: Yes. The intention is to make it quicker, simpler
and cheaper for UCITS funds to start marketing in new member state
markets. At present, UCITS funds need to send a set of documents to the
supervisor in the country in which they want to market and then allow
two months for that supervisor to raise an objection, before they start
to sell units in the fund. Under the revised process in the presidency
compromise, that will be replaced by a regulator-to-regulator system,
with the obvious benefits of
timeliness. There
will be no need for a local point of contact and the revised proposal
does not require that. The worries that might be dealt with by the
presence of a local point of contact can instead be
addressed—and will be addressed—by supervisory
co-operation.
Mr.
Gauke: Finally, the Financial Secretary referred to the
G20 summit and the fact that the UK would hold the presidency of the
G20 from January. It was trailed last week that an announcement would
be made of the venue for the next G20 summit. Such an announcement has
not yet been made. Will the Minister say whether that is the case? I
declare a constituency interest, as one venue widely trailed in the
press, especially in The Times, was The Grove hotel, which was
reported as being in Watford. Its front gate is in Watford, but the
hotel itself is in Chandlers Cross, which is in my constituency. I am
obviously very keen that The Grove should host the next G20 summit.
Will the right hon. Gentleman enlighten the Committee on the
position?
The
Chairman: Order. Will the right hon. Gentleman avoid being
drawn too much into answering the latter part of the hon.
Gentleman’s question, as issues of scope would
arise?
Mr.
Timms: I am grateful for that guidance, Mr.
Bercow. I feel myself lobbied, but there has not yet been an
announcement about which country that meeting will take place in. It
has been announced that it will be held before the end of April and, of
course, with the UK presidency, there is a good case for it to be in
the
UK.
The
Chairman: If no other hon. Members wish to ask questions,
we will proceed to the debate on the motion.
Motion
made, and Question proposed,
That the
Committee takes note of European Union Document No. 12149/08 and
Addenda 1 and 2, draft Directive on the co-ordination of laws,
regulations and administrative provisions relating to undertakings for
collective investment in transferable securities (UCITS); No. 13713/08
and Addenda 1 and 2, Draft Directive amending Directives 2006/48/EC and
2006/49/EC as regards banks affiliated to central institutions, certain
own funds items, large exposures, supervisory arrangements, and crisis
management; and No. 14317/08, Draft Directive amending Directive
94/19/EC on deposit guarantee schemes as regards coverage level and the
payout delay; and endorses the Government’s approach on all
three draft Directives.—[Mr.
Timms]
5.55
pm
Mr.
Gauke: We have had a productive questioning session this
afternoon and I thank the Minister for his responses. He endeavoured to
provide the Committee with as much information as possible and we are
grateful for
that. In
his opening remarks, the Minister referred to the need for co-operation
among regulators of different jurisdictions in these difficult times,
and I endorse that. National regulators, such as the Financial Services
Authority, have an important role, given that they are closest to those
that are being regulated and that there are different national
traditions, cultures and business models. There is a place for European
regulation and we have had some examples today. In particular, I
highlight the UCITS 4 directive, which enables greater choice for
consumers in the European Union, or the European economic area, and
reduces the bureaucracy that would have to apply to a company to
prevent prudential supervision in various jurisdictions, which would
impose a greater burden upon those companies and reduce choice for
consumers.
There is also
a role for international co-operation. As the Financial Secretary
mentioned earlier, we live in a time of cross-continental flows of
capital. There needs to be greater co-operation among regulators to
address global difficulties. Sometimes there is tension between
European and international
regulation.
5.57
pm Sitting
suspended for a Division in the
House.
6.13
pm
On
resuming—
Mr.
Gauke: The point I was about to make before we were
interrupted was that there is a place for national regulation, European
regulation and international regulation but there can be occasions when
the desire to co-ordinate at a European level may get in the way of
proper co-operation at an international level. That would be
unfortunate. I know that the Government would oppose the idea of having
one European financial services regulator, as would we. It would fail
to address some of the international challenges that we face at the
moment and would also create difficulties for our financial services
market and our consumers.
I turn now to
some of the points that have been raised on the directives. The key one
is the capital requirements directive. During questions we touched on
some of the potential problems such as the quantitative retention
requirement. Clearly concerns have been raised about that. We have been
told that it may cause serious difficulties for the securitisation
process and it may have a particular impact on UK investment banks. I
appreciate the concern driving the measures. The concern is that the
originator and distribution model creates risks in the sense that the
originator may not necessarily perform due diligence in the underlying
investment because it can distribute risk elsewhere. Somewhere along
the line, someone needs to do due diligence, and the originate and
distribute model involves a risk that it will not be done. I recognise
that risk. Legitimate concerns have been raised. The Minister has tried
to address them and might do so further in his remarks.
Hybrid
capital was touched on. There is a particular concern about the timing
and whether it is really necessary to be considering the issue now.
There might also be something in the documents that makes it difficult
to use preference shares, particularly non-cumulative preference
shares, as tier 1 capital. I appreciate the Minister’s remarks
on grandfathering, but that might make fundraising difficult in the
long term for banks. That is a concern, so it was right for the
European Scrutiny Committee to refer that directive to
us. I
do not think that the UCITS directive is controversial. We welcome its
proposals. We touched on some of the practical issues with regard to
the deposit guarantee schemes: for example, how to deal with a country,
such as the UK, that is outside the eurozone and does not use the euro
as currency, and where the number that applies to the guarantee will be
unmemorable, to paraphrase the Minister. That is not particularly
ideal, and there may well be difficulties with currency fluctuations.
They happen from time to time, and they are certainly happening at the
moment. There are still concerns about
that. One
issue is not addressed in the capital requirements directive, as I
understand it and as the Minister mentioned in his opening remarks: the
important issue of counter
-cyclical capital adequacy rules. Clearly, one of the difficulties
contributing to the financial crisis of recent months is the fact that
a debt bubble has experienced great growth and the existing capital
adequacy rules have proven inadequate. The rules have been largely
pro-cyclical, so that in good times, banks are not required to hold the
level of assets and reserves that they should. Then, as asset prices
start to fall, banks find themselves in difficult circumstances. Their
reserves fall and they are required to hold more, yet their assets are
falling. They are forced to sell assets, they find that assets fall
further and they encounter some of the difficulties that are
occurring at the moment. That is clearly far from ideal. There is
broad consensus on the need to address the pro-cyclical nature of the
existing rules and make them much more counter-cyclical. I understand
that the Governor of the Bank of England made that point earlier today;
my right hon. Friend the Leader of the Opposition and my hon. Friend
the shadow Chancellor have been making it for some months. They have
been leading the debate on the matter. I am sure that we all want to
move forward on it as quickly as possible. I do not see that addressed
in the documents, but the sooner we address it the better.
One proposal
that we have considered is a debt responsibility mechanism whereby the
Bank of England can assess the level of debt in the economy as a whole
and notify the Financial Services Authority of any concerns. The FSA
would then take them into account in determining the tier 1 capital of
a banking institution. Certainly, changes along those lines to capital
adequacy requirements for banks need to be made at a European
level—and to a large extent it has to be done at that
level—or in some other form. The sooner that can be done the
better because it is a matter of some urgency. I, of course, accept
that a time of crisis is never the best time to make such changes, and
it might well be that we will need to address the matter in the years
ahead. Given
the time and the various delays we have had—I know the Committee
will want to hear from my hon. Friend the Member for Sevenoaks and
perhaps others—I shall draw my remarks to an end. However, I
shall make a further recommendation for the Grove hotel in my
constituency to be a venue for the G20 summit, which I hope will take
place in the UK in the coming
months. 6.21
pm
| 
