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10 Nov 2009 : Column 13WH—continued
What will be the size and composition of the European systemic risk boards and ESAs, and who will appoint them? Their structure might be right, but the detail is absolutely vital. What will happen if we simply sign up to having a series of authorities without really understanding who will be in them? We must bear in mind that, as the right hon. Gentleman said, the UK interest is by far the largest within the European context. If we enter a situation in which we can be significantly outvoted on things that will have a direct effect on our industry and our country, we will need much better safeguards. What discretionary powers will the ESAs have? Will they really have the power to override the decisions of our national regulators? I am certainly not clear about that
vital issue, even at this stage. The whole idea of impinging on the responsibility of member states to look after their own sectors is fraught with danger.
Finally, I think that the proposals go far beyond what we understood to be the agreements at ECOFIN. The whole package seems not to be within the basic bounds of those agreements, but to go beyond them. The proposals cannot be hurried through, without proper consideration, on the basis that if we do not do something, another great disaster will happen immediately.
In some ways, we are coping adequately with the current financial crisis. We are trying to ameliorate the situation or to avoid similar circumstances arising in future. Those circumstances would not arise next year or the year after, but would, I hope, be some time away. We have time to deal with this matter, and we need to consider the proposals before we meekly sign up to a whole framework of regulation that could have real unintended ramifications, which we would have to address again in a short while.
In the meantime, markets would be affected because they would be insecure about what the new regulation would be, and people would be only too willing to exploit the weaknesses of the situation, and any unintended aspects of it, for their own benefit. I urge the Government to be very cautious about this matter. If we move too fast, it will be disastrous.
10.26 am
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship again, Mr. Olner. May I, too, congratulate my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) on securing the debate and on speaking so eloquently on this subject? The debate is well-timed for two reasons. First, we are clearly still living with the consequences of the turmoil of the past two years within the financial markets and financial services sector. It is easy to underestimate the importance of financial services regulation in this area and how the failure of such regulation has contributed to the problems we have faced. Secondly, the debate is well-timed given the rush to create a new architecture of regulation for financial services at the European level. All those who have spoken have raised concerns about that rush, and I shall make several comments on that. This is a good opportunity to raise this issue, and I am sure the Minister will set out the Government's position on a number of the concerns that have been raised.
Several speakers have made the point that financial services are extremely important to our economy-perhaps too important. None the less, it is vital that we get the regulation of those services right. There has been regulatory failure. The tripartite system that the Prime Minister established in 1997 failed to spot the debt boom and the fragility within our banking system. An age of irresponsibility was allowed to occur in which UK banks became more leveraged than their US competitors, a credit boom built up and the Bank of England-the monetary authority-recognised some of the difficulties but had no powers to address them. Meanwhile, the Financial Services Authority, as the banking regulator, had no remit to monitor the entire picture. In addition, the FSA took a narrow approach to its responsibilities, focusing on conduct of business rules rather than prudential supervision.
The difficulties that we saw in 2007 and 2008 continue to live with us partly because nobody called time on the explosion of debt. When the problems occurred we saw a failure of co-ordination, and the question of who is in charge has never been adequately addressed. It is right that political parties think seriously about how to rectify that, and my party have set out detailed proposals on how to reform our financial services regulatory regime to ensure that there is no repeat of the problems of recent years, and we will do that by giving greater powers to the Bank of England, which must be in charge.
Several Members have referred to banks being too big to fail, and we have an ongoing debate on the divide within banks between utility functions and investment banking functions. The Governor of the Bank of England stated in Edinburgh on 20 October, only a few days ago, that there had been little real reform on that and that the system remains inadequate.
I turn specifically to European regulation, which was the essence of my right hon. Friend's remarks. As we have heard, on 23 September 2009 the European Commission adopted legislative proposals aimed at addressing the regulatory weaknesses at the micro and macro-prudential level through the creation of a European system of financial supervisors and a European systemic risk board. The European system of financial supervisors will comprise a college of national supervisors and three entities collectively referred to as the European supervisory authorities: the European Banking Authority, The European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.
I debated many of those matters with the Minister in European Committee B on 29 June 2009. At the heart of the Government's approach is an acceptance of a greater European role at a regulatory level, but not a supervisory level, and the Minister rather helpfully set out the distinction between the two:
"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...The main thrust of our argument in negotiation was that supervision should be at nation state level."-[Official Report, European Committee B, 29 June 2009; c. 5-8]
I will explore further the distinction between the rule-maker and the supervisor. One concern that has been raised with us relates to the legal powers of the ESAs, a point my right hon. Friend touched on. Having received advice from a leading lawyer in that area, I understand that the ESAs will not have the power to take decisions or make rules because European law requires that those powers are reserved to the Commission, but they can issue guidelines based on their interpretation of the rules. Competent authorities will be obliged to make every effort to comply with those guidelines. The ESAs can also take action against national regulators that do not currently apply relevant EU legislation correctly. I would be grateful for the Minister's view on whether that interpretation of the ESAs' powers is broadly correct.
There is a possible concern about the distinction between regulation and supervision. The ESAs have the power to settle disagreements between national regulators, which leads to a point that is similar to the issue of action being taken against national regulators that do not currently apply relevant EU legislation: whether ESAs will in effect make individual decisions on individual market participants. One can imagine a dispute on a particular matter between two regulators or between an ESA and a national regulator. When decisions are made on an individual market participant, that looks an awful lot like supervision of an individual institution, rather than regulation. The Government's position on that is clear, and ECOFIN agreed that decisions that are specific to individual firms should remain the exclusive preserve of national regulators. There is a degree of uncertainty on the powers the ESAs will have, and uncertainty in that area is a real cause for concern.
Perhaps the most important red line the Government have identified is that the ESAs should not be able to take decisions that impinge upon the fiscal responsibilities of a nation state. The Governor of the Bank of England has said that banks are global when alive but national in death, because it is the national taxpayer who has to step in to bail out those banks. There is a concern that there would be no democratic accountability if an ESA took a decision that effectively required national taxpayers to step in, and the Government have rightly said that that should be resisted.
However, article 10 of the Commission's proposals allows the ESAs to step in in an emergency, and article 11 allows them to step in when there is a dispute between regulators. The measures proposed by an ESA in such circumstances might have a fiscal impact for a nation state. Article 23 sets out an appeal mechanism, although it is not clear how that would work. That might take too much time, and we know from recent history how quickly we must step in when a bank is failing. If we are to step in, we must do so quickly, as we saw during the events of 14 months ago.
Also, the appeal mechanism set out in article 23 does not apply to article 21, which follows up on a recommendation made by the Economic and Social Research Council. The Government have said that it has been accepted all along that the fiscal position will be protected. If so, why has the Commission come up with proposals that seem simply to ignore what the Government claim has already been achieved in negotiation?
Regarding the Commission's ability to declare an emergency, thus giving the ESAs greater powers, on what criteria may an emergency be declared and how would the ESAs use that authority? With financial services we are in a global situation, not just a European situation, so it could be important for the UK supervisors to co-ordinate not only within the EU, but with US regulators such as the Securities and Exchange Commission or the Federal Reserve. Could the emergency powers, if declared, prevent the FSA or the Bank of England from taking immediate steps to co-ordinate with other countries? The restrictions on communications, for example, could be significant. Could it prevent the FSA or the Bank of England from taking immediate steps with regard to a UK entity? Inevitably, European institutions are likely to move more slowly than national institutions, as is the nature of things, so if that happens the Commission's
proposals might slow down the ability of UK institutions to react and of UK financial regulators to co-ordinate with other institutions. The hon. Member for South-East Cornwall (Mr. Breed) spoke about unintended consequences, and there is a concern that an unintended consequence may arise here: in an attempt to strengthen prudential macro and micro-supervision, we may in fact inhibit regulators from taking effective action.
My hon. Friend the Member for Cities of London and Westminster (Mr. Field), as ever, spoke eloquently about the concerns of his constituents and of businesses located in his constituency. I am pleased that he discussed in some detail the alternative investment fund managers directive-again, I debated that point with the Minister in June. The proposals were poorly drafted and protectionist in nature, and they demonstrated a lack of understanding of hedge funds and private equity funds, and their significance. My hon. Friend was absolutely right to state that such funds were not the cause of the difficulties earlier this year. I would be grateful if the Minister discussed what progress has been made in addressing the concerns she outlined to the European Scrutiny Committee in June.
Finally, it is right that we explore the issue of the wider cost to the economy of the banking system's failure in the past few years and its fiscal consequences. At the weekend, the Prime Minister set out four proposals to address that concern, one of which was a transactions tax, or a Tobin tax, about which we have heard nothing in Parliament. Over the years, the Prime Minister himself and the Treasury have been extremely sceptical about such a tax, but the Financial Times reported yesterday that, of the four options that the Prime Minister set out on Saturday,
"UK officials had initially suggested the transactions tax was the prime minister's preferred mechanism out of the four options he had raised".
The proposals were widely condemned by the US, the Canadians and the International Monetary Fund-I believe that all but the French condemned them. Indeed, the Treasury has recently been briefing against the proposal, and the Financial Times reported that, before the end of the weekend, officials had stated:
"We're not that massively wedded to a transactions tax. We're not saying 'it's this or nothing' - we're saying we need a deal".
Never has a Government proposal been withdrawn so quickly. I would be grateful if the Minister took this opportunity to clarify the Government's position. Was the Treasury even aware that the Prime Minister would come up with the proposal? I ask that because the Financial Times stated that the Chancellor was understood to be frustrated by the Prime Minister's promotion of a proposal that he knew the US would have no choice but publicly to oppose.
This is an important area. This is not the place for short-term stunts that will get headlines, as the Prime Minister attempted to do at the weekend, yet further damaging his credibility. It is important that we have a Government who take a long-term view as to what is necessary for the financial services sector. It is also right that they fight our corner and ensure that European Union proposals are right for the UK. I hope the Minister can provide some reassurance that the Government have at least some of those attributes.
10.44 am
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): It is a pleasure to serve under your chairmanship, Mr. Olner. I congratulate the right hon. Member for Wells (Mr. Heathcoat-Amory) on securing this debate. There could hardly be a better moment to discuss financial services regulation. I listened with interest to his speech and to those of the other hon. Members who contributed to this short debate: the hon. Members for Cities of London and Westminster (Mr. Field), for South-East Cornwall (Mr. Breed) and for South-West Hertfordshire (Mr. Gauke).
As the hon. Member for South-West Hertfordshire said, this debate follows on from European Committee B on 29 June. The Transport Committee took evidence last week from my noble Friend Lord Myners, and on 10 November there will be a Lords evidence session and debate on the matter. I believe that a debate is timetabled on the Floor of the Commons on the subject, so there will be an opportunity for further scrutiny.
I do not believe that anyone would suggest that more regulation of financial services is not needed. We need action to produce national and global solutions, and most of that will be delivered through the European Union and international forums. We have begun to raise the quality of financial supervision and regulation globally, but we are not there yet. There is more work to do, and a need for more regulation. We support EU regulation in new areas, more harmonised standards and a greater role for EU authorities in enforcing regulation and improving the effectiveness of supervision.
However, the need for more regulation cannot be met by just any regulation-it must be right. If we have regulation for the sake of it, we will suffer twice: from failing to remove systemic risk, and from increasing the costs to those who use the services, from small businesses to pensioners. We have to have high-quality decision making, and it is more important than ever to have an excellent evidence base, meaningful consultation and high-quality assessments of the impact on stakeholders.
The crisis has also taught us that regulatory arbitrage can introduce its own risks, so we must ensure that, wherever possible, there is global convergence of standards. We encourage the EU to play a greater leadership role in setting global standards. Many of the speeches and interventions by hon. Members have been concerned with the search for the right regulation-that is, regulation that is necessary, sufficient and effective. That is why I am glad that we are having this debate. A part of it has focused on EU regulation, so I shall start with that and then move on to national regulation. I shall try to answer as many points as I can in the time available.
The hon. Member for South-West Hertfordshire made a point about transaction taxes. In fact, the Prime Minister had raised the issue earlier, so I beg to differ with the hon. Gentleman. It was not a short-term stunt. The Prime Minister had previously raised an interest in such taxes and said that he was looking with interest at the French working party.
The Treasury's position has always been that imposing such a tax cannot be done by one country alone-we all accept that-and the US has said that it is willing to work with the International Monetary Fund as well. Nobody is saying that there would be an immediate solution, or that we will be able to come up with
something straight away, but it is something that is worth looking at. The Treasury's position is that this cannot be done by one country alone. It would have to be global, and that is why a great deal more work must be done on it.
On European supervision, the Government strongly support moves to improve the quality and consistency of supervision, to ensure more effective rule-making and enforcement, and better to identify risks in the financial system. We strongly support proposals to establish the new European supervisory authorities, and to give them a strong rule-making role, a role in enforcing rules, a role in peer review to ensure high standards and an ability to settle disagreements between supervisors. We believe that such moves would improve the quality and consistency of supervision in the EU, and they are supported by the City and, in particular, cross-border institutions operating from London.
However, I am happy to reiterate that day-to-day supervision and crisis management arrangements must remain national, as it is only national Governments who can provide fiscal support to firms. That is why the Heads of Government agreed at the June European Council that the new framework should not impinge on member states' fiscal responsibilities, and that day-to-day supervision should remain national. As a result, it is clear that there can be no direct European powers over firms.
Mr. Gauke: I am grateful to the Minister for reiterating that point. Can she explain why the Commission came up with proposals in September that do not appear to respect the agreement made by ECOFIN earlier in the year?
Sarah McCarthy-Fry: I absolutely agree with the hon. Gentleman that in some areas the Commission's proposals do not respect the agreement that was made in June, particularly where they propose European powers over firms, and European crisis management powers. We need to bring the proposals back in line with what was agreed by the European Council in June.
There is interest in the legal issues in these proposals and the Government are well aware of the complex legal matters here. I do not want to go into the detail, but I will be clear: regardless of the technicalities, the Government's overriding objective is that the new framework must be able to withstand legal challenge. We cannot have legal uncertainty and challenges before the courts; that could undermine financial stability. So we are working closely with other member states and the Council legal service to ensure that the bodies are on a sound legal footing. In particular, we are looking at areas where the supervisory authorities can exercise discretion and where the Commission is seemingly playing the role of the courts. Both those areas are problematic, but in both the issues can be resolved.
Mr. Heathcoat-Amory: Clarity is essential here. Can the Minister assure us that the new supervisory authorities will not have powers of binding mediation over national authorities and, separate to that, that they will not have powers, even in an emergency, to tell national regulators and authorities what to do?
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