Mr.
Gauke: It was the impact of the AIFM directive on the
FSA.
Sarah
McCarthy-Fry: We have asked the FSA to give us that data
as soon as possible, so that we can use the information on the likely
impact in our
negotiations.
Mr.
Gauke: I am grateful for that answer, but the directive
will impose more duties on the FSA—to regulate private funds
generally, and specifically hedge funds. The FSA’s resources are
not limitless. How is it going to cope? Are the Government going to
resource it more significantly? What is going to happen? Are fees going
to go up? How will it work?
Sarah
McCarthy-Fry: As I said, the FSA is already increasing its
data-collection capability, but we will be arguing for more discretion
for supervisors to forgo unnecessary data collection and we are working
very closely with the FSA to achieve
that.
The
Chairman: No more Members have indicated that they wish to
ask questions, so we will now proceed to the debate on the
motion.
Motion
made, and Question proposed,
That the
Committee takes note of European Union Documents No. 7084/09 and
Addendum 1, Commission Communication for the Spring European Council on
Driving European Recovery, and No. 10511/09 and Addenda 1 and 2,
Commission Communication on European financial supervision; and
endorses the Government's approach to the next stages of discussions on
how to restore and maintain a stable and reliable financial system.
[13th Report of Session 2008-09, HC 19-xii, Chapter 1 and 20th
Report of Session 2008-09, HC 19-xviii, Chapter
3].—(Sarah
McCarthy-Fry.) 5.21
pm
Mr.
Gauke: I thank the Minister for her answers to the
questions put by me and other hon. Members. I appreciate that she is
new to her Department and that she has spent the first weeks in her new
post coping with the Finance Bill. At times, such matters are
technical, but they are also hugely important, as I am sure we all
agree. Getting financial services regulation right must be a priority
for any Government.
I shall
address my remarks to the proposed structure of regulation before
turning more specifically to the alternative investment fund managers
directive. I note the Minister’s comments this afternoon and
those of the noble Lord Myners in evidence to the European Scrutiny
Committee. Essentially, they have argued that the key red
line—if I can use that terminology for the Government—is
that supervision is performed at member
state level. That should be clear, and we agree with it. Supervision
should be performed at a level that is close to those who are
regulated. Given that we have a large, developed and, some might say,
sophisticated financial services sector in the UK, it is right that the
FSA and the Bank of England have a predominant role in supervision,
although we can debate where the line is drawn between those
institutions. The
Government’s position on regulations is somewhat different. I
acknowledge that there are matters on which the EU can act as a
liberalising force to the advantage of businesses and consumers within
the EU. It can enable, for example, a firm to open another branch
within the EU. For such things to happen, there is a need for a
structure, rules and regulations at EU level.
I am not
arguing that the EU should have no role in such things, but I remain
concerned that the Government are allowing EU regulators to become much
more important players. I am concerned about mission creep. I welcome
the Minister’s comments on the European Systemic Risk Council,
and the line appears to be drawn on the basis of supervision, but we
need to focus on where it is appropriate for EU institutions to
regulate and where it is appropriate for the UK authorities
to do so.
How big a
distraction will the European Systemic Risk Council be? How many of the
best and the brightest in the Treasury, the FSA or Bank of England will
find themselves attending meetings with 26 other regulators that end up
being little more than talking shops? How much of the essential work
that has to be performed in the UK will not be the priority that it
should be?
I am
concerned about accountability at two levels, the first of which
relates to a point made by the hon. Member for Taunton. First, what
accountability is there to public opinion and Members of Parliament?
Secondly, I am concerned that so many bodies and organisations will
have a role in financial regulation that no one will be able to answer
the question, “Who’s in charge?” Will it be the
G20, the International Monetary Fund, the Financial Stability Forum,
the European Systemic Risk Council, the European system of financial
supervisors, the Bank of England, the FSA or the Treasury? We do not
want the confusion in the UK between the FSA, the Bank of England and
the Treasury to be multiplied. Such financial regulation will never be
a simple issue; there will never be one body dealing with everything.
However, the risk of further confusion is
considerable. I
am also concerned about the quality of regulations produced at European
level. I think that there is consensus in this Committee that the
quality of the alternative investment fund managers directive is deeply
concerning. That brings me to a concern widely held within the City of
London: the UK Government have been unsuccessful as an advocate of UK
interests in that particular area. An argument could be made for being
robust with European institutions and other member states, but one
could also be made for engaging with them—the two are not
mutually exclusive. However, the Government do not appear to have done
either successfully.
The Minister
has been unable to provide the Committee with any evidence that the UK
was engaged, early on, in drawing up the alternative investment fund
managers directive. There is no evidence that the draft was seen or
that there was much engagement before publication. Given that the UK is
the only country with an important
role in this area—it is the only jurisdiction in which large
numbers of hedge fund managers operate—it is extraordinary that
the UK did not play a prominent role in drawing up the directive. The
Government’s policy might have been to engage with the EU, but I
am afraid that we have seen precious little evidence of their success.
We need to be engaged, but also robust. We have not seen much of
either. The
alternative investment fund managers directive is a clear example of
very poor regulations emanating from the European Commission. It cannot
be excused on the grounds that it needed to be produced in a hurry. The
failures within the financial services sector do not emanate from
failures within hedge or private equity funds, yet there has been a
headlong rush to produce something that will cause enormous harm to the
hedge fund industry. One must question whether that was the intention
behind elements of the directive. It is clearly unacceptable that a
directive should take us down a protectionist route, making it
impossible for EU resident investors, such as pension funds, to invest
in the vast majority of alternative investment funds. It would clearly
run the risk of provoking reciprocal action and creating barriers to
the free movement of global capital in a way that would damage the
world economy.
The specific
proposals on restrictions on depositories are entirely without
justification. As Dan Walters of the FSA said, they have a number of
damaging and unjustified consequences.
We welcome
the Government’s opposition to the proposals on leverage, which
are, again, wholly damaging and disproportionate. There does not appear
to be a great understanding of how hedge funds or private equity funds
work. There is a one-size-fits-all approach to these different types of
fund, which is clearly inappropriate.
The
directive’s scope also creates a number of anomalies. One is the
treatment of credit institutions, which are excluded from the
directive, although they were the cause of the systemic failure.
Sovereign wealth funds are also excluded, although one wonders for how
much longer. As I said, family offices are also excluded.
The directive
is a strong demonstration of why we should be wary of allowing European
institutions to perform too great a role in the formation of
regulations. Hedge funds are essentially only a UK issue, and it should
surely be for the FSA and the Bank of England to use their expertise to
regulate funds’ products when they are based in the
UK.
Ill-thought
out proposals surely damage the EU’s reputation in this area.
The Government did not engage successfully at an early stage to prevent
these proposals, so we must be critical of Ministers. We welcome some
of the remarks that the Minister has made today, although we would
welcome greater clarity on one or two points. None the less, we are not
satisfied that the Government have adopted a sufficiently robust and
engaged approach and, notwithstanding her remarks, we remain
concerned.
5.33
pm
Mr.
Browne: I want to make only a few brief points because we
have had a reasonable opportunity to scrutinise the
proposals.
For the
avoidance of doubt, let me say at the outset that there is a role for
the EU in trying to regulate the financial services sector. There is
also a role—or scope at least—for the global regulation
of financial services. Few of the big international institutions we are
discussing, many of which are based in London, exist solely within the
remit of a nation state. One obvious feature of the difficulties over
the past year or so is that, although many of these institutions have
liabilities and obligations stretching across the continent and around
the world, they are regulated and treated as if they still existed
exclusively in the country in which they were originally set up. That
has implications. If one sees the world in terms not of nation states,
but of the big trading blocs—the EU, north America and
Asia—one will inevitably have to put in place a framework that
exists at a level higher than the nation state.
In that
respect, the differences between the three parties represented in this
debate are quite small, although it might suit some of us to pretend
that they are bigger. All three parties represented in the debate
accept that there is scope for international regulation, including at
European Union level, and that that is a reasonable response to the
global nature of financial institutions and the flow of
capital.
The question
then is what the framework and the nature of that response will be. We
have had some opportunity to explore that this afternoon. It has been
widely reported that the measures are a success for the French and for
those who share the French view on the future development of the
European Union, over those such as the United Kingdom that take a
different approach. As the Minister becomes more familiar with her new
role, she will need to satisfy herself that the form of banking
regulation emerging and evolving in the European Union not only meets
the needs and requirements of British financial institutions, but
accords with the overall political philosophy of this Government and,
in so far as there is consensus, British Governments of different
persuasions. We would not wish the British view not to be heard at an
appropriate level and volume within the European
Union. The
hon. Member for South-West Hertfordshire discussed two issues. One is
complication, which is a legitimate concern. At the moment, we have a
tripartite arrangement, which has been widely criticised—at
least, concerns have been expressed in some areas—in terms of
accountability, effectiveness, buck passing and the potential for
people to shirk their responsibilities. A quadripartite system could
multiply those problems even further, as well as the pressures being
put on the European Union regulator by the different interests
manifesting themselves in nation states. It is a concern, as he pointed
out. Where does the buck stop? Who is in charge if something goes
wrong? There is a danger that in the attempt to cover more bases,
responsibility will be
diluted. A
related point is the pre-eminence of responsibility. Who overrules
whom? Ultimately, if there are disagreements between organisations,
there must be a hierarchy of authority. If there is no hierarchy of
authority, the scope for everybody to evade responsibility is all the
greater. An issue that concerns enthusiasts for the European Union as
well as those who are sceptical about what
shape it will take is ensuring that people—whether politicians in
the House or members of the public—know where responsibility
lies. That is why I
return to this point. Suppose a constituent of mine, or anybody living
in this country, has a job in the financial services sector, for
example, and loses it not necessarily as a result of a lack of custom
but because regulations change in a way that makes it hard for them to
keep their job. Of whom should that person be critical? Who will have
made the decision on regulation that so influenced their livelihood?
That is a legitimate question. One could make the case that it should
be done at European Union level, even though some might feel that that
meant a democratic deficit. One could say that it should be done by the
FSA, another quango without direct political control, or the Treasury,
which is closer to being influenced by Members of this House, who are
directly elected by the public. There is a legitimate point that must
be answered. We need a system that is clearly
understood.
Mr.
Howarth: I should not be so easily stirred, but the hon.
Gentleman referred to the FSA in somewhat disparaging terms as a
quango. Surely its strength is that it is considered to be independent.
In these matters, that carries some weight.
Mr.
Browne: This is a broad debate and I will not test your
patience, Mr. Russell, but, with some exceptions, the hon.
Member for Luton, North (Kelvin Hopkins) being one of them, people
welcomed, for example, the independence of the Bank of England to set
interest rates. However, we must accept at the same time that as soon
as we place responsibility for making decisions of that type, which
directly influence people’s lives, with people who are not
elected, there are questions about accountability. That is the only
point that I am seeking to make with regard to the FSA or, for that
matter, the European
Union. Kelvin
Hopkins (Luton, North) (Lab): Does the hon. Gentleman not
think that there are some dangers with independent central banks and
particularly with the European Central Bank, which, just before we were
plunged into recession, was talking about raising interest
rates?
Mr.
Browne: Yes, I think that there are dangers. Quite a lot
of people were saying things just before we were plunged into
recession, as the hon. Gentleman put it, that they may regret in
retrospect, because quite a lot of assumptions that had grown up over
the years were turned on their head. The point that I am making comes
back to being a fairly simple one. Most hon. Members accept that the
nation state, in its normal form, cannot regulate international
institutions effectively in an era of globalisation. However, if those
powers and responsibilities are given to organisations that are not
elected and, in some cases, apply not at a nation state level but at a
higher level, that raises questions about the link between the
individual whose life is affected by the decisions taken and the power
of that individual to influence in any way those decisions. I raise
that issue as a wider and even slightly philosophical point that is
directly related to what we are discussing. It remains to be seen
whether the apparatus being put in place by the
European Union is effective and what price is paid in terms of the
ability of either politicians or the public in the United Kingdom to
influence the decisions that are
made. 5.42
pm
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