The
Chairman: Will the hon. Gentleman ask the
question?
John
Hemming: Moving on to the key question for the Government,
I am pleased to hear from the Minister that the directive is not as
phrased here because that would cause a load of problems. Do the
Government believe the directive should be modified to facilitate a
global regulation of credit rating agencies? The danger is in creating
a fortress Europe which will not necessarily help
Europeans.
Angela
Eagle: I understand the point the hon. Gentleman is
making. Our financial system is global and interconnected. Given the
list of experiences and interests he has rightly shared with the
Committee, he knows how rapidly transactions can be made. Given how
fast the IT and software for which he is responsible can communicate
round the world, it is important to have global responses, but that
does not mean that there is no role for European regulation. The US
regulates credit rating agencies by law, so there is no reason why the
European Union should not pursue regulation of this sort.
It is right
for the Committee to be worried, which is perhaps why we are here this
afternoon. It is important that national and EU regulations are not
completely at odds with what is going to happen internationally. There
has to be synergy between national or EU regulations and what the
internationally agreed codes of conduct will be once the Financial
Stability Forum has finished its work. It would be highly undesirable
if the ranges of national regulations were at odds with each other, as
that would make it difficult for credit rating agencies to register and
be active in particular jurisdictions. In the process in which we are
involved with the Commission on its proposed regulations, we are trying
to make certain that what the EU suggests is consistent with what will
happen
internationally.
Mr.
Gauke: I am grateful for the Minister’s answer to
my previous question on article 4 and for her confirmation that the
second element of it has been taken out. However, I seek further
clarification on the first part of article 4, which says that
“Credit institutions, investments firms” and various
other regulated
entities “may
only use for regulatory purposes credit ratings which are issued by
credit rating agencies established in the Community and registered in
accordance with this Regulation.”
We also know from page 4
of the draft regulations, paragraph 1.2
that: “The
Capital Requirements Directive...provides for the use of external
credit assessments to determine risk weights and the resulting capital
requirements applied to a bank or investment firm’s
exposure.” In
the circumstances where a credit institution or investment firm that
falls within the capital requirements directive has exposure to an
investment that is rated, but rated by a credit rating agency not
established in the European Community, is there not a potential
difficulty? The interrelationship between the capital requirements
directive and the draft regulation might create some difficulties. Will
the Minister update the Committee on where we are on that part of
article 4? The problem is not as acute as it is with the second
paragraph, but there is still an issue. Does the Minister
agree?
Angela
Eagle: I hope that I made it clear in my answers to the
hon. Gentleman’s reasonable spotting of the difficulty with the
original drafting that the worst has gone. The process whereby we look
at the rest is actively continuing as we
speak. The
hon. Gentleman is asking is how the European Union legislation fits if
a particular credit rating agency is not established in the EU. I
emphasise that the vast majority of agencies are so established, so
this is an almost hypothetical situation. The order is that the
regulation would apply, as currently written; the requirements of
particular directives would come after. As the regulation is currently
written, a rating agency not being established in Europe would
disadvantage the agency enormously in terms of its ability to have
coverage in the jurisdiction of the EU. However, custom and practice as
it has developed in the credit rating agency world is such that very
small credit rating agencies and the ratings that they may give to
certain instruments do not carry a lot of weight with investors at the
moment. They look to ratings produced by the major players in the
credit rating agencies’ oligopoly.
It is
important to ensure that ratings that are used for capital purposes
remain valid, and if in future we need a rating, because the existing
rating is a non-EU rating, there will have to be time to adapt to that
particular security. At the moment our view is that the regulation is
not written clearly enough. We are still working with the Commission to
try to get clarification on the implications of capital adequacy
requirements and regulations in the EU in the small number of
cases—almost certainly hypothetical—where a credit agency
is not registered in Europe. The draft regulation is written in a way
that seeks to have all credit rating agencies that wish to do business
established within EU jurisdiction. That is absolutely the
case.
Mr.
Gauke: I am grateful for that answer. May I seek just a
little more clarification? Am I correct in assuming that if an EU
investment firm has exposure to a stock that has been rated, but only
by a credit rating agency that is based outside the EU and does not
have a subsidiary in the EU, its capital adequacy would need to be
reassessed as a consequence of the regulation? Currently the exposure
might take into account the credit rating of that stock, but because
that rating is coming from a non-EU ratings agency it would no longer
be possible under the capital requirements directive to take it into
account.
Angela
Eagle: It is precisely those types of very specific
example on which we are seeking clarification as part of the ongoing
work to hone and refine the text. As I said earlier, the draft is not
ideal, but it is changing even as we speak. All I can say is that, as
things stand, this is likely to happen in a small number of instances.
We are seeking clarification on precisely how, for example, an agency
in those circumstances might respond to its rating not being taken into
account. I suspect that it would have to establish some kind of a
presence in the EU, but I emphasise that this is a very minor issue in
the context of the vast numbers of ratings that go on within the EU at
the moment. We are in the middle of discussing, as part of the
co-decision process, how the regulations might be refined before they
are politically agreed and then carried. It is precisely that sort of
detailed work that goes on in the EU working groups. That work is
ongoing.
John
Hemming: Much more will emerge later, but are there any
proposals to have intermediate steps? One of the difficulties with
article 4 as it stands is that if there are no transitional
arrangements, institutions under article 2 that hold debt that is
regulated only outside the EU would have to sell it straight away
because it is not counted as part of their capital adequacy. Are the
Government proposing any transitional
arrangements?
Angela
Eagle: Clearly, the idea of the regulation is not to cause
disruption to the institutions—investment institutions or
others—that exist and work in the European Union by the sudden
introduction of a law that requires financial re-engineering of that
sort. As I said earlier, the issue is in practice a minor one, and will
be so for most entities that are currently registered and doing
business in the EU. I cannot think of a law that does not include a
transition period in which requirements can be met, and it would not be
reasonable to pass legislation within the EU that required global
businesses to have an office, for example, without understanding that
one cannot wave a magic wand and get one. By definition there has to be
transitional
time. It
is clear from today’s debate that certain people in the market
have recognised that the regulation exists and is being discussed, and
I certainly hope that they are taking account of the requirements that
might be put upon then in the next period. I said earlier that the
Czech presidency is hoping to bring the regulation to a full conclusion
and agreement at Council in May, after a preliminary political
agreement that is being sought at the February ECOFIN meeting. That is
a timetable of its own. Hon. Members have made an important point about
financial stability and the sudden, perhaps unforeseen, consequences of
having to sell securities that might not have been subject to that
requirement to sell had it not been for the regulation. I assure the
Committee that in our ongoing dialogue to refine the text, we are
discussing these practical examples of behaviours that were perhaps not
envisaged by the Commission when drafting the proposal. I am sure that
the European Parliament will take up similar
points.
Mr.
Gauke: In the context of article 4, the hon. Member for
Birmingham, Yardley a moment or so ago rightly used the expression
“fortress Europe”. The Minister has outlined how the
Government are looking to make
improvements and to seek clarification with regard to that article,
which appears to be a somewhat protectionist measure. The requirement
on credit rating agencies to establish subsidiaries within the European
Union may not be a big issue on a practical level—most of them
may already have done so. However, does the Minister share my concerns,
as a matter of principle—she referred to the principle
earlier—that what motivated at least the first draft of the
regulation seems to be somewhat protectionist? When the Prime Minister
is rightly warning about the dangers of more protectionism at this
time, is the Minister concerned about what motivated the Commission to
produce the original draft of article
4?
Angela
Eagle: I am afraid that I do not have any insight into the
inner workings of the mind of the Commission when it drafts
regulations. We could be here all day if we wanted to speculate about
that. Looking down the list of credit rating agencies, I can spot only
two that are not already established in the European Union. We must put
into perspective the current landscape and the organisations, almost
all of which are already established.
Is the
article protectionist? It is more than possible to argue that such
global international institutions, which are privately run, are not as
transparent as perhaps they should be, and I think that many hon.
Members would agree with that. I do not want to over-egg the pudding,
because the situation that we have experienced in global markets in the
past year is not all the fault of credit rating agencies, but when
contemplating their role in destabilising the global financial system,
there are legitimate questions that we should ask about how they do
their business and their models for payment, which include the issuer
of securities paying, and whether there are conflicts of
interest. I
suspect, although I do not know, that the Commission wanted these
organisations to have a presence in the European Union so that they
could be regulated. Indeed, the USA has a regulatory regime whereby
credit rating agencies—the big three are all based
there—are subject to a registration process, so I suspect that
the Commission was seeking to emulate that approach, which was
legislated for by the US Congress in 2006. I do not see the article as
protectionist in that way. I agree that in a globalised environment it
is a bit surprising, but its practical effect, as I have said, will be
minimal, given that the vast majority of credit rating agencies,
including the big three that dominate the entire landscape, are already
here. Many of them have offices in multiple member states, rather than
in just London or
Frankfurt.
Mr.
Gauke: Of course the requirement is for subsidiaries, and
it may well be that some credit rating agencies would prefer to
structure themselves with branches, as opposed to subsidiaries. My
final question on article 4 relates to the potential barrier to entry.
The Minister referred to an oligopoly in this area, and perhaps, given
its nature, we will never see a huge number of competitors. Is she
concerned that by essentially requiring a credit rating agency always
to have a subsidiary within the European Union in order to be
effective, which is the essence of what article 4 establishes, the
measure will make things difficult for new
entrants?
Angela
Eagle: There is certainly a theoretical problem of a
barrier to entry, if one looks at the economic theory. However, as I
have said, in practical terms we already have an industry that has very
high barriers to entry, or else it would not be dominated, as it has
been, by three entities that take the vast bulk of the market share of
credit rating. Although I might not know what they are, I would say
that there are already high barriers to entry to the industry, and I
know that some commentators have discussed what might be done to open
up this kind of business to much more competition. If one looks at the
practical way in which the industry operates, with the dominant big
three, it is possible to argue, using economic theory, that barriers to
entry are already extremely high.
Mr.
Gauke: I turn to the application process for credit rating
agencies. Under article 13, applications for registration have to be
made to CESR, yet the home state regulators—the FSA and its
equivalents—will actually determine an application and have the
role of supervising those credit rating agencies. Will the Minister
outline why it is necessary for applications to be made to CESR, given
that it will have 10 days from the receipt of the application to pass
it on to the regular competent authority? Surely it would be easier and
time would be saved if applications could be made directly to the
competent authorities and they subsequently notified
CESR.
Angela
Eagle: The nature of the process forms part of the ongoing
discussions on the text itself. I suspect that the article is written
in that way simply because it allows there to be a central look at what
is going on and then a farming of the basic work required to member
state regulators, thereby maintaining a central pool of information
about what is happening. The process could be done either way, but the
Commission has suggested that it should be done that way, and I see no
particular reason why not. The point of having such regulation in the
first place is to build confidence in credit rating agencies, which has
been quite badly shaken by recent events. All member states’
markets rely on ratings, as indeed do all markets in a local context,
so it is important to maintain some confidence in them. The hon.
Gentleman says that he would prefer the process to work the other way.
That is possibly a matter of opinion, but we see no particular reason
to worry about the process outlined in article
13.
Mr.
George: On a point or order, Mr. Williams. I
was very polite in asking one question, but had I known that this would
be a duopoly, I would have come in with my own 10. May the rest of us
join in by not only asking questions, but making
comments?
The
Chairman: As I said at the start of the debate, Members
may ask supplementary questions under my discretion. Had you indicated
that you wished to ask a question, I would certainly have called you,
so I will bear in mind your
point.
Mr.
George: I thought that we were making presentations, not
asking questions.
The
Chairman: I call Mr.
Gauke.
Mr.
Gauke: My understanding is that we can ask questions until
5.30
pm. I
am grateful for the Minister’s answer on that last point, but
speaking as someone who used to work as a lawyer in the regulatory area
and who was involved in regulatory applications, I would have though
that, from the point of view of an applicant, it is somewhat strange
that the entity to which the applicant applies is not the entity that
determines the application. Given that there is a delay of up to 10
days from the application being made to it being passed on to the home
state regulator, does not the Minister think that that rather
unnecessarily gives a role to CESR that need not really
exist?
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