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10 Nov 2009 : Column 19WH—continued
Sarah McCarthy-Fry: We do not support direct powers over individual firms. We expect the powers of mediation to be used where there are cross-border situations, but the overriding thing is that there are no powers where there are any fiscal consequences for Governments. That is the overriding principle here.
We know that there are outstanding issues and questions. However, this is a positive agenda for reform. The new framework will better protect consumers, help prevent financial crisis and improve efficiency for firms.
A question was asked about accountability. We believe that the ESAs will be accountable to national Governments through the European Council, but it is likely that they will also be accountable to the European Parliament. The Financial Services Authority will sit on the ESAs, so we will have a powerful UK voice there.
Members spoke about whether the EU response has been too hasty. It is important that we respond swiftly to the crisis, but I agree that such action should not be taken at the expense of high-quality regulation. That is why we are encouraging the Commission to adhere to best practice and conduct consultations and impact assessments on regulatory proposals for regulation of markets and firms. At the June European Council, the EC leaders gave a mandate for the proposals to be adopted swiftly so that the new framework could be fully in place in 2010, which is why the legislative proposals were produced at the end of September. As I have said, we intend that our Parliament should have a full opportunity to debate this matter.
At times the Commission may have been too hasty in issuing a proposal. For example, it was too hasty in respect of the alternative investment fund manager directive, which we debated earlier at the European Scrutiny Committee. We agree that the Commission did not conduct a proper consultation or a robust impact assessment on that directive with stakeholders. We have made it clear that this is not an acceptable approach to drafting legislation, because it has resulted in a poorer-quality proposal that has led to more difficult Council negotiations. The European Parliament has said that it will carry out its own impact assessment on the proposal. I confirm once again that there is nothing to suggest that hedge funds or any other type of fund were a major contributor to recent market events.
Having a high-quality evidence base will also maximise the influence of the EU on the international stage with our international partners and will better enable the EU to attain international regulatory convergence.
Mr. Mark Field: I am glad that the Minister has confirmed what I said earlier: hedge funds and alternative assets played no fundamental part in the credit crunch and the financial problems. But the suggestion that the EU will now have much more international influence surely is undermined by what has happened, because it is clear that it was not economic or financial issues at stake, but the raw politics, particularly in respect of one or two of our continental partners who saw this as an opportunity to clip the wings of the City of London, rather than to focus on what would be good for consumers, both in the EU and globally.
Sarah McCarthy-Fry:
Our position is that any regulation, as well as managing systemic risk, has to be good for consumers. There are aspects of the proposal as drafted
that could impose large costs and restrictions on fund managers, which is why we are engaging actively with stakeholders in the UK industry, with the Commission and with other member states to develop and make the case for amendments to the directive.
Based on discussions so far in Council, we believe that many member states are keen to make the improvements. My noble Friend Lord Myners has personally committed a substantial part of his time to achieving a good outcome for the UK on the directive. He has had useful discussions with many of the stakeholders, including Members of the European Parliament, the Swedish presidency and his Spanish counterpart. Our overall impression is that most member states are approaching these negotiations with a positive attitude and a desire to avoid unnecessary regulatory burdens. We expect the presidency to aim for a general consensus in Council for a redraft of its directive by the middle of December, so that negotiations with the European Parliament can start.
On the UK and systemically significant firms, in our July 2009 paper, "Reforming financial markets", we set out a number of measures for dealing with systemically significant and often complex financial institutions whose failure could represent a significant threat to financial stability. These measures include strengthened market discipline, better corporate governance, policies on remuneration to ensure that risk is better understood, and enhanced prudential supervision by the FSA. Those measures should go some way towards reducing the probability of firm failure. But we are not proposing to pursue a zero-failure regime, which would be neither realistic nor desirable. It is equally important that, where firms reach the point of failure, the authorities can intervene and, if necessary, resolve the situation with a firm in a way that does not damage the wider financial system and put the public finances at risk.
First, we propose improvements to the overall framework, including enhancements to market infrastructure in key markets to reduce the likelihood of contagion effects. This is crucial where a systemically important firm is allowed to fail. Secondly, we propose stronger resolution arrangements. Improvements have already been made to the regulatory toolkit for winding down failed firms, for example, through the Banking Act 2009. We will legislate, in the forthcoming financial services Bill, to ensure that firms themselves must make recovery and resolution plans to manage their own failure. Those plans will reduce moral hazard. The aim is to reduce the
possibility of firm failure, which is the recovery element, and then reduce the impact of firm failure, if it occurs, on the wider financial system, the economy and the public finances, which is the resolution element.
Questions were asked about the proportionality of the FSA's regulation of firms. The FSA supervises firms according to the risks they present to its statutory objectives. As in any risk management, risks are assessed in terms of their impact and their probability. The nature and extent of the FSA's supervisory relationship with a firm depends on how much of a risk it could pose to the FSA's statutory objectives.
The hon. Member for Cities of London and Westminster asked about the regulation of savings and investment products and the worry about over-regulating small firms. The FSA's retail distribution review is addressing structural problems in the distribution of savings and investment products. We have welcomed the FSA's comprehensive review and its positive engagement with stakeholders. The aim of that review is not to over-regulate small firms that do not pose any systemic risk, but rather to address structural problems in the distribution of savings and investment products.
On the suggestions that some have made about a Glass-Steagall-type split between retail banking and investment banking activities, we do not believe that the case has been made for that. First, it is difficult to do. Secondly, if it were feasible it probably would not be enough. Separating investment and commercial banks would not insulate pure deposit-taking institutions from the failure of a large investment bank: Lehman Brothers showed that that was so. Thirdly, it implies that all the risk lies in investment banking. However, we know that it is not just investment banks that involve risk. The recovery and resolution plans or the living wills are key tools with which to mitigate the risk and promote long-term financial stability.
In my introduction I mentioned the importance of getting the balance right. We have already seen the dangers of too little regulation, but in these times there is not enough confidence, and confidence can only build if the regulatory framework is sound. Too much regulation brings its own risks, not just of stifling the recovery, but of penalising some financial services that allow firms to manage their own risk. Only if we get this balance right will we succeed in our goal of making the single market the most competitive, efficient and stable financial market in the world.
Cyprus
11 am
Mr. Andrew Dismore (Hendon) (Lab): A debate on Cyprus after a Friends of Cyprus visit to the island now seems to be a part of the House's annual calendar. I draw attention to my entry in the Register of Members' Interests for the visit.
The fact that we are here, year after year, could imply that there has been no progress, but that would be wrong. However, such progress as there is is painfully slow, and the clock is ticking ever more quickly against the prospect of a settlement. During our visit, we saw more than 50 people and held almost 40 meetings. Those visits were to both sides of the green line, and we saw elected politicians, officials and civil society.
There is a clear lack of a pro-solution culture throughout the island, perhaps reflecting the media coverage, and pessimism abounds. Neither side has a strategy to prepare their people for a solution or to support the talks, but there are many initiatives, contacts and co-operative ventures, which are encouraging. We need more events such as the recent bi-communal evening in Pyla. There is a dangerous belief in the south that if the negotiations fail, another United Nations initiative will come along in due course, albeit starting from a worse position, rather than seeing this as the last sketo in the kafenio, which it certainly is, and may well be for many years if there is no success. We are already half a decade on from the failure of the Annan plan.
There are "nevers" on both sides with very loud voices. Although they do not represent the majority view of either population, their influence is persuasive and in many instances malign. Although the talks do not have a timetable, there are natural deadlines in the immediate future, including the European Union review of Turkish accession and, more importantly, elections in the north in April 2010 when Turkish Cypriot leader Mehmet Ali Talat will be up for re-election.
Bob Spink (Castle Point) (Ind): The presidential election in the Turkish-occupied north in April clearly shows that an artificial deadline would probably not be helpful. Does the hon. Gentleman accept, nevertheless, the imperative to get a fair settlement as soon as possible, because the massive movement of Turkish people from Turkey to settle in Cyprus without the language or Cypriot affiliations will make a settlement increasingly more difficult as time goes on? In that event, the main losers will be the Turkish Cypriots.
Mr. Dismore: The hon. Gentleman makes an important point, but the deadline is not artificial; it is a natural deadline that comes with the normal electoral process.
Both sides have been issuing unhelpful statements that provoke each other, and rhetoric from the north can only magnify as the April elections approach. Positive statements from either side receive little coverage. There is a general decline in optimism throughout. Of those involved in the negotiations, the most optimistic person was Turkish Cypriot negotiator Ozdil Nami, but that was not saying a great deal. There is a general and accurate view from every independent commentator that if these two leaders cannot do it, no one can.
The negotiations received a boost following PASOK's election results in Greece and George Papandreou, in his Foreign Minister role, paying his first overseas visit to Turkey, closely followed by his visit to Cyprus as Prime Minister. Although Greece's fundamental policy of supporting the Republic of Cyprus's negotiating position will not change, we will see a more active foreign policy approach from Greece, including improving relations with Turkey, which is all to the good.
During his visit to Turkey, Mr. Papandreou said to Mr. Erdogan, the Turkish Prime Minister, that
"we must free Cyprus of dependencies and its motherlands, occupation troops, divisions and walls which have no place in the European Union".
That view resonates with Nicosia, the last divided city, during this week of the anniversary of the fall of the Berlin wall.
Mr. Andrew Love (Edmonton) (Lab/Co-op): Does my hon. Friend agree that the guarantor powers, particularly Greece and Turkey, have a critical role, not just because of the history of the conflicts in Cyprus, but because both communities look to the guarantor powers for succour? It is critical that they take a more active engagement in the current negotiations.
Mr. Dismore: I shall speak about the treaty of guarantee, but it is correct that both sides look to what they consider to be their motherland. I also believe that George Papandreou is right to say that Cyprus must be freed from the influence of the motherland, which has not been entirely beneficial throughout Cyprus's independence.
Among Cypriots on the island, there is a generational problem. Research a few years ago showed that two thirds of Cypriots who are alive today were not alive in 1974, and know no bi-communal way of living. One of our visits was to the English school, which now admits Turkish Cypriot pupils, who account for about 15 per cent. of the total. It was rather depressing to talk to Greek Cypriot teenagers, who generally seem to be satisfied with the status quo, and not particularly enthusiastic for a solution. Although Turkish Cypriot students at the school are learning Greek, there is no take-up whatever of Turkish lessons by Greek Cypriot students. Turkish Cypriot students seem to be isolated. The school is working very hard to break that down, but there is a xenophobic undercurrent on both sides of the green line. There are no school exchange programmes across the green line because of recognition and passport issues. Heads could deal directly with schools across the line, but there is a likelihood of a parents' backlash.
Friends of Turkey are wrongly perceived as Greek Cypriot enemies. Greek Cypriots must influence Turkey's friends positively to influence Turkey in turn. The object should be not to punish Turkey in the EU, but to press the EU to assist Turkey to help herself.
David Lepper (Brighton, Pavilion) (Lab/Co-op): I declare an interest, which is in the Register of Members' Interests. Does my hon. Friend agree that the December assessment of Turkey's progress towards EU accession offers an excellent opportunity for the other guarantor power-the United Kingdom-to make it clearer exactly what it expects of Turkey on, for example, Famagusta and the ports?
Mr. Dismore: My hon. Friend makes an important point, and I hope to say a little about the EU accession process.
There is a real need to create a pro-solution culture, and to talk not of "the other side" but of "another side" of the debate. America has a key role in persuading Turkey of the need to pave the way for a Cyprus settlement to fulfil her EU aspirations. President Obama's Nobel prize for peace could be well earned on the island.
Regrettably, there is continuing lack of confidence-building measures. The two military exercises-Nikiforos and Tavros-were both cancelled this year, as they were last year, and those decisions by both sides were extremely important and welcome, but there is little else to show. The constructive work of the technical committees has not been taken forward through confidence-building measures by either side, and I commented on that during last year's debate.
Many of the practical agreements that could ease day-to-day life for all concerned could be implemented, but neither side is keen to do so for different reasons, except on heritage, where good work is being done. There has been slow progress on the new crossing points, with contracts for joint work now being let to build the road and crossings for Limnitis, funded by the United States and the EU.
Mrs. Theresa Villiers (Chipping Barnet) (Con): Does the hon. Gentleman agree that there is an urgent need to press ahead with locating the remains of missing people, to give their families the truth about what happened to their loved ones?
Mr. Dismore: The hon. Lady is correct, and I hope to speak about that.
There has been little to show on the ground at Ledra street towards the essential building restoration or withdrawal of the Turkish army, but we were told that the next phase to make safe the buildings and their facades at least will go ahead from about now. Although not strictly a confidence-building measure, Stelios Haji-Ioannou of easyJet has offered €1 million in grants for joint bi-communal business ventures. The Association for Historical Dialogue and Research has developed material for schools on both sides of the green line to discover old Nicosia.
At the same time as moves are being made towards multicultural education and a new history syllabus in the Greek-medium state schools in the south, steps are being taken in the north, such as replacing text books, promoting the teaching of Islam in schools that were secular, a change of terminology from "Turkish Cypriots" to "Turks of Cyprus", and a ban on the Cypriot Turkish dialect in the media in the north. The joint proposal of the two mayors of Famagusta for restoration of the old city and the surveying of Varosha, which would be a welcome confidence-building measure, has fallen on deaf Turkish ears. However, work on missing persons is going ahead, and I will speak about that later.
Progress on the negotiations has been slow until now, and has pretty well avoided the difficult issues. President Christofias is circumscribed and is not supported in the negotiation by EDEK and DIKO, his coalition partners. There has been considerable development on governance
issues, with constructive proposals for a rotating presidency, but with disagreement as to the method of election, although there are prospects for further progress.
Differences remain substantial. The Turkish Cypriots say, for example, that the federation should not have a foreign policy function. They want a veto throughout decision making, not just at the end. They also want separate institutions. There has been progress on matters relating to the economy and the EU, but on the most difficult issues-property and territory, which are clearly interlinked-there has been little progress.
President Christofias has attempted to move the settler issue on by restating that 50,000 Turkish settlers in the north should receive Cypriot citizenship in a settlement. That is not a new concession, having been proposed in previous negotiations, but it is not accepted by DIKO. Mr. Erdogan did not help by denying that there were any settlers, saying that
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