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Session 2008 - 09
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European Standing Committee Debates

The Committee consisted of the following Members:

Chairman: Bob Russell
Browne, Mr. Jeremy (Taunton) (LD)
Byers, Mr. Stephen (North Tyneside) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Crausby, Mr. David (Bolton, North-East) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Fallon, Mr. Michael (Sevenoaks) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Harris, Mr. Tom (Glasgow, South) (Lab)
Heathcoat-Amory, Mr. David (Wells) (Con)
Hepburn, Mr. Stephen (Jarrow) (Lab)
Howarth, Mr. George (Knowsley, North and Sefton, East) (Lab)
McCarthy-Fry, Sarah (Exchequer Secretary to the Treasury)
Spellar, Mr. John (Comptroller of Her Majesty's Household)
Gosia McBride, Committee Clerk
† attended the Committee

European Committee B

Monday 29 June 2009

[Bob Russell in the Chair]

Economic Recovery
[Relevant Documents: 5783/09 and Addendum 1 COM(09) 14: Draft decision establishing a Community programme to support specific activities in the field of financial services, financial reporting and auditing [17th Report of Session 2008-09, HC 19-xv, Chapter 5];
9493/09 and Addenda 1 and 2: Commission Communication on Packaged retail investment products [20th Report of Session 2008-09, HC 19-xviii, Chapter 26];
9494/09 and Addenda 1 and 2: Draft Directive on Alternative investment fund managers [20th Report of Session 2008-09, HC 19-xviii, Chapter 9];
9495/09, 9589/09 and Addenda 1 and 2, and 9590/09: Commission Communication and recommendations on remuneration policies [20th Report of Session 2008-09, HC 19-xviii, Chapter 27].
4.30 pm
The Chairman: As no member of the European Scrutiny Committee wishes to make a statement, I call the Minister.
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): It is a pleasure to serve under your chairmanship, Mr. Russell, and to be back in Committee Room 10 so soon after the scrutiny of the Finance Bill, which reported last Thursday. I am sure that the two Commission documents before us are of particular interest to members of the Committee, touching as they do on European supervision and regulation and on the Commission’s recent proposals on alternative investment fund managers. Members will have heard the evidence Lord Myners gave the Committee on 3 June on European supervision and regulation. Following that, European leaders discussed several of those issues at the European Council on 18 and 19 June.
In general, we welcome the focus on EU arrangements to supervise and regulate firms. It is clear that there are many lessons for the single market to be drawn from the global financial crisis, and it is critical that Europe gets the response right. It is entirely appropriate that the EU should now be looking at hedge funds and private equity, and although neither of those were a direct cause of the global crisis, we must have the right regulation in place for those institutions. However, I share several of the concerns that have been expressed by the industry, and clearly a great deal of work will be needed to make the proposal workable. We will be engaging intensively with industry stakeholders in the UK, with other member states and with the Commission in Brussels to develop the necessary improvements.
On supervision, I welcome the European Council’s conclusions, which give us a clear direction and framework for the legislative negotiations, but London is a global financial centre and it is crucial that the new arrangements are right for London as well as for the rest of the EU. The Government think that it is necessary to establish a macro-prudential early warning system to identify risk in the financial system, and those arrangements should be sufficiently independent and represent the whole of the EU. They should not, for example, simply always be presided over by the president of the European Central Bank.
The arrangements should bring together central banks and national supervisors, so I welcome EU leaders’ agreement to work towards that. We believe that supervision should continue to be undertaken at the national level. Supervision and the arrangements for fiscal support to individual financial institutions in time of crisis have to be aligned. Only Governments can provide that support, so the supervisors must therefore be accountable directly to Governments. We also believe that supervision is likely to be far more effective where it is close to markets and firms, and I welcome EU leaders’ agreement to that, too.
We believe that an important lesson to be learnt from the crisis is that it is necessary to agree much better and more harmonised global standards of regulation. We have pursued that in the G20 and in Europe.
Mr. Michael Fallon (Sevenoaks) (Con): Will the Minister give way?
The Chairman: Order. I am advised that no interventions can be taken during the Minister’s speech, but I will ensure that you, Mr Fallon, are called when we come to the questions.
Sarah McCarthy-Fry: The hon. Gentleman will have ample opportunity to question me in the question and answer session.
We have proposed a new single European rule-making body to set those new, better, more harmonised and more detailed European rules. In the short term we can accept the three Lamfalussy bodies having those powers, but in the longer term we think that they should be merged into one. We have been clear that we would not support binding powers of EU supervision where there might be a fiscal consequence for national Governments. That means that we have opposed central supervision of central counter parties. The potential taxpayer exposure if a CCP collapsed could be significant, so I welcome the fact that the European Council did not agree to that Commission proposal.
We have also opposed binding mediation where it would have a fiscal consequence. It would not be right for UK taxpayers to be asked to fund supervisory mistakes that we have no control over. We welcome the European Council’s assurance on that and expect it to be reflected in the legislation.
Finally, we agree with the European Council that binding mediation should be limited to supervisory co-operation, the application of rules and to home-host disagreements that are over-branching only. Those new powers will help with a single market issue, where there are currently insufficient safeguards for cross-border branches. We expect those powers to be used rarely, if ever, and the European Council has been clear that it should cover only those three issues, and we expect that to be clear in the legislation. There is much to talk about and I look forward to the debate.
The Chairman: We now have until half-past 5 for questions to the Minister. That is not a target to reach, but rather a period that we must not exceed. I remind Members that questions should be brief. It is open to a Member, subject to my discretion, to ask related supplementary questions together.
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship, Mr. Russell. The Government have previously stated, and the Minister has reiterated the point this afternoon, that we are very reluctant for—in fact, strongly oppose—supervision at a European level. However, the Government have some sympathy towards regulations being made at a European level. Can the Minister expand on the reasons why the Government take a different approach to the two questions?
Sarah McCarthy-Fry: We think that it is important that the distinction between the two roles is clear. Regulation refers to the making of rules. Supervision relates to the processes that implement the rules and how they are applied to individual firms and markets. While it is important that we have a harmonisation of the rules across Europe, we stick to our point that the supervision and application of those rules, and how they apply in different countries, is down to national Governments. That is why we did not support EU supervision.
Mr. Gauke: As the Minister said earlier, if something goes wrong the fiscal cost is paid for by the nation states. That is an argument that the Government use for nation state supervision. Why does that argument not also apply for regulations being made at a nation state level, because if there is something wrong with the regulations the national taxpayer will still have to pick up the bill?
Sarah McCarthy-Fry: That is why it is very important that we get the regulations right; that we have a strong voice on the EU body that ensures that we have the regulations right; that everybody is happy with them and agrees that they will be there for the protection of the European taxpayer and the British taxpayer. It is important that the rules can be applied to local markets and to local countries, which is why we think that the supervision part is so important and must be left to national Government.
Mr. George Howarth (Knowsley, North and Sefton, East) (Lab): I refer my hon. Friend to section 2, article 45 of the papers before us. Article 45 refers to an obligation to co-operate and lists five obligations that competent authorities in member states should comply with. Could my hon. Friend say what, if any, penalties are available in cases where incompetent authorities in a member state do not co-operate?
Sarah McCarthy-Fry: I am afraid I will have to come back to my right hon. Friend on that, hopefully before the end of the debate. I would hate to give him incorrect information, but before we finish the debate I hope to be able to say what penalties are available, if any, in a case of non-compliance in those competences.
Mr. Fallon: I apologise for presumptuously interrupting earlier on, Mr. Russell; you can tell that I am not a habituĂ(c) of these salons. The question I wish to pursue is that of binding mediation. The Minister began by saying that supervision was to be confined to the national level. However, she then admitted that there will be binding mediation in certain circumstances, provided that there are no fiscal consequences. I want to be clear about the exact circumstances in which the Financial Services Authority, for example, could be overruled by Brussels in favour of, say, the Romanian regulator. Will she sketch out the circumstances in which that overruling might take place?
Sarah McCarthy-Fry: We envisage that the binding mediation without fiscal consequence would help with single market issues where we have sometimes seen that there are insufficient safeguards for cross-border branches. Host member states can be required to provide fiscal support to firms not supervised there. Binding mediation would be useful in that case, but it should apply only to branches and not to supervisory decisions over subsidiaries supervised in each member state. We have said that we expect that this new role would be rarely, if ever, actually used. We have also ensured general agreement that any such decisions could never require the use of national funds.
Mr. Fallon: I understand the comfort on national funds. Of course, most of those decisions might well be in London’s interests because, for example, there are more foreign banks registered in London than British banks in Bucharest. However, I want to be clear that what was conceded over the European Council weekend was, in effect, the possibility that Europe could overrule the FSA. Is that right?
Sarah McCarthy-Fry: At this stage, I cannot envisage in what circumstances that would happen, unless it was over a particular cross-border branching issue. I hope that when we come to the legislation we can thrash such things out and ensure that the issue is clear and that the rules governing it are more clearly laid out. We will have another opportunity in this Committee and at other stages to probe further when the draft legislation comes out for consultation.
Mr. Jeremy Browne (Taunton) (LD): It is a pleasure to serve under your chairmanship, Mr. Russell. My question is further to those that we have already had in the Committee. I hear two criticisms of the European Union made routinely: first, that it is very prescriptive and uniform in its application of top-down directives, which we are forced to comply with even though there are differences among nation states, and, secondly, that every country is allowed to opt out and only Britain gold-plates these initiatives, so we meet standards that others in the EU exempt themselves from. Which of those is likely to characterise the approach to these proposals?
Sarah McCarthy-Fry: I have to go back to the point that I made in the beginning: while we accept that we should harmonise the rules and the rule-making, we are clear that the supervision and the application of those rules are matters for our regulatory bodies. We have made that clear and it was agreed at the meeting.
Mr. Browne: I am still unclear. My question is further to the comments from the hon. Member for Sevenoaks. If we, in the United Kingdom, behave in a way detrimental to the financial interests of both this country and the European Union as a whole, will the European Union hold powers to prevent us from inflicting further damage or will we be able to ignore it and carry on behaving independently, as we have done hitherto?
Sarah McCarthy-Fry: The application of the rules that the new body will agree will be a matter for our FSA and for institutions based in this country. I will stand corrected if I am wrong, but I assume that the normal procedures will be there if someone wishes to challenge the rights of our regulatory body to do something. Given that we have given our regulatory body power to supervise the broad framework of agreed rules, we are leaving it to take account of the market factors in our country and other issues that may be particularly relevant to doing business in this country.
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