Financial Services

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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.
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
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