Examination of Witnesses (Questions 1-19)
LORD MYNERS
CBE AND MR
STEPHEN PICKFORD
3 JUNE 2009
Chairman: Good morning and thank you
for taking the time to come along to the Committee session. It
is a very interesting portfolio that you have and obviously as
the European Scrutiny Committee we are very conscious of what
is going on. We have three other items on our agenda today with
your name on them, which we will be dealing with later in our
normal session, so we have become regular correspondents. I know
you would like to make an opening statement but that is not the
way our Committee functions. If there is anything at the end that
you feel our questions have not covered then we would be happy
to have you fill in any spaces that we leave out; but we would
rather use the question and answer session, which is the way that
we work. You might want to introduce your colleague to us, for
the record.
Lord Myners: For the record, I
am Paul Myners, Financial Services Secretary at the Treasury;
and I am with my colleague Stephen Pickford, who is Managing Director
International in the Treasury.
Q1 Chairman: Welcome, Stephen. Can
I start off, using my Chairman's prerogative: in relation to the
de Larosie"re proposals for a European Systemic Risk Council,
endorsed by the Commission previously and in its latest Communication
European Financial Supervision, the Chancellor, in his
letter to ECOFIN colleagues, implies that this body should be
independent of the European Central Bank. Is it the government's
view that this body should be independent of other Community institutions?
And, if so, to whom should it be accountable? How can political
independence be reconciled with accountability?
Lord Myners: An extraordinarily
good question! Our belief is that the new body that is proposed
for macro prudential risk warning should be independent and should
be capable of independent determination over conclusions rather
than being subordinate to a particular player or group of players
in Europe. That is why we have a particular preference for seeing
that the Chairmanship should not be mooted in the holder of one
particular office. At the same time, whilst it is independent
and able to reach its own conclusions on matters such as the phrase
"leaning against the wind", which is one that is used
here to describe forming a judgment on whether we are into a period
of heightened risk, it nevertheless must be accountable and it
would seem to us that that accountability should primarily be
to ECOFIN.
Q2 Chairman: So you are saying that
the reconciliation between political independence and accountability
will be done by ECOFIN?
Lord Myners: Yes.
Q3 Mr Heathcoat-Amory: Minister,
in addition to that macroeconomic prudential council the Commission
also propose, or de Larosie"re also proposes a European System
of Financial Supervision, which, as I understand it, brings together
the committees of national regulators into a new body. It is again,
I understand, the Chancellor's view that this should be independent
and separate from the Commission. Do you believe that that is
attainable and how can the required independence be reconciled
with some form of accountability?
Lord Myners: I think the required
independence would evidence itself in the capacity to form judgments
of its own rather than on direction of another group, and it would
be accountable for its independence in terms of the clarity with
which it explains the work it is doing, the decisions it is making
and the recommendations for change, for interface with national
regulators. I think transparency and accountability go hand in
hand here.
Q4 Mr Heathcoat-Amory: Excuse me;
I do not think that is very clear. There must be accountability.
Members of this House will want to be able to question ministers
about financial regulation and the FSA is accountable indirectly
to Parliament. How will this new European body be accountable
in that way? And do you believe that in order for that to happen
it should be formally distinct and separate from the Commission?
Lord Myners: I certainly think
that it should be formally separate and distinct from the Commission
but in its rule making capacity it should be accountable to ECOFIN.
Q5 Mr Heathcoat-Amory: It will be
a rule making body, so we are going to have a European body that
makes the rules. Are you happy that the City of London, which
is by far and away the biggest financial centre, will be adequately
represented through the indirect route of ECOFIN when we are one
of 27 countries and they will be rule making for an enormous part
of the British economy—far greater in proportion than any
other Member State?
Lord Myners: I think the particular
circumstances of the City of London and indeed the UK and financial
circumstances does need to be recognised. We are the host nation
for a far broader range and depth of financial institutional activity
than would be the case for anywhere else in Europe because of
London's central position in financial services in Europe. So
we must clearly work with our colleagues in Europe to recognise
that that is the case and to secure the authority and voice that
stems from the importance of financial services in the UK. I think
it is also important, Mr Heathcoat-Amory, to be clear on the distinction,
which I am sure you are, between regulation and supervision. The
government's view is that there is a strong case for a European-wide
regulatory oversight in order to harmonise standards; but very
clear that supervision of individual institutions and of markets
should remain with national authorities and be specifically linked
both to local knowledge and to fiscal accountability. So it would
be our clear intention to argue persuasively in support of a European
regulatory structure but with supervision held at national level.
Q6 Chairman: Can I clarify one thing,
Lord Myners? You said that in the first instance the Systemic
Risk Council would be accountable to ECOFIN. You have then said
that for the European System of Financial Supervision. My understanding,
certainly from the notes I have, is that it is answerable to the
Council and I presumed that that Council was in fact the Council
of Prime Ministers—the European Council normally referred
to as "Council" when they are talking about all the
Prime Ministers meeting—not ECOFIN.
Lord Myners: Yes.
Q7 Chairman: So which one is it?
Is it ECOFIN or the European Council?
Lord Myners: Thank you for giving
me the opportunity to clarify that. I think I was looking at the
first of accountability being to ECOFIN; then ECOFIN to the Council.
Q8 Chairman: It would be to the Council
eventually?
Lord Myners: Yes.
Q9 Mr Hands: I think you have probably
answered much of this but you will be aware, Lord Myners, in the
Chancellor's letter to Miroslav Kalousek of 3 March that the Chancellor
was envisaging a distinction between supranational regulation—rule
making by the merged authorities on the one hand—and national
supervision on the other, which we have covered. But is there
not a danger of "mission creep" in the idea of the European
Systemic Risk Council proposed merged authorities being a forum
for dialogue, cooperation and peer review for national supervisors?
So is there not a danger over time that our European Systemic
Risk Council will effectively take over a lot of the functions
that you, in my view, have quite properly said should remain within
the national authorities?
Lord Myners: I think we would
look for that risk to be appropriately managed. We certainly see
a strong case for harmonisation of European regulation to consistent
high standards of effectiveness and we see in that an important
role for peer review of supervisory agency performance, which
we think built on very much the same sort of thinking that lies
behind the colleges that have been established to oversee complex
trans-border organisations. But I think there is a point at which
peer review should raise questions—and there is a reference
to the concept of comply or explain, a very British concept, which
Europe is expecting here; but that there should not be direction
in terms of individual decisions taken by national supervisors.
I think, Mr Hands, that that is the critical point.
Q10 Mr Hands: You say there is a
case—or I think you said a strong case—for harmonising
European regulations. Could you point out anything in the financial
crisis over the last two years that might have been avoided had
we had these harmonised European regulations?
Lord Myners: I think the processes
of enhanced communication would have been important; that this
is the case not only within Europe but also globally, so that
the creation of new entities which would bring together the supervisors
from individual national countries would be very helpful. As one
looks at the core of the crisis, Mr Hands, one of the issues that
has been in play here is a degree or regulatory arbitrage, and
to the extent that one can avoid what some have described as a
"race to the bottom" in terms of regulation that must
be helpful.
Q11 Mr Hands: Can you give us an
example of regulatory arbitrage or a race to the bottom that has
happened so far, within the EU?
Lord Myners: Questions have been
asked about the activities in Europe of AIG and where the supervisory
responsibility lay for some of the AIG subsidiaries. I think that
also suggests that there were issues relating to the Icelandic
Banks and their operation under passporting, which highlighted
some deficiencies in terms of cooperation between EEA and European
nations.
Q12 Mr Hands: We already have national
bodies considering systemic risk issues and soon we are going
to have international bodies, such as the IMF and the Financial
Stability Forum taking on this task. Justification for the European
Systemic Risk Council appears to assume either that certain systemic
risks occur at a continental, rather than global or national level
or, alternatively, that national or global problems are best solved
at a continental level. Which of those two is it?
Lord Myners: I am working with
colleagues at the moment on the finalisation of the paper that
we propose to produce from the Treasury in the not too distant
future on the future of financial markets, and looking at macro
prudential regulation there is clearly a case that could be made
here that we have gone from potentially a situation where there
was inadequate awareness of macro prudential issues to now operating
a multiplicity of structures on a national, regional, international,
global basis. But I think to the extent that there is multiple
focus on risks around macro prudential areas and also around regulation
that can only be helpful.
Q13 Mr Hands: If you have a situation
where you have a set of global markets—and I think we all
agree that they are global markets—and on the other hand
that the taxpayer, who might be expected or at least be relied
upon in the last resort, to bail out a financial institution as
essentially a national taxpayer, then I think you really have
your work cut out in trying to justify there being some kind of
a continental role in any of this, and I think you have to make
a positive case for that. So what is the case for there being
a continental role in this? Should there be a North American Systemic
Risk Council like the European one?
Lord Myners: North America, United
States, Canada and Mexico are clearly less formally structured
than through the European Union; so using the agencies of the
European Union to identify factors which are particularly European
in nature is I think entirely helpful. Remember that there are
a number of major cross-border European banks that do not have
a global presence but are particularly strong in Europe, and that
would seem to naturally rest with a European grouping to focus
on understanding the particular issues that those organisations
might face.
Q14 Mr Hands: But surely the amount
of banking that goes on just within Europe—an institution
like Dexia Bank might be something that you have in mind, a cross-border
Franco-Belgian operation—those are trivial in size compared
to the big global operators. I am going to press you again: what
is the argument for the European role here compared to national
and global?
Lord Myners: The triviality point
in size is an interesting one. What we have come to appreciate
during this crisis is that organisations which we may have believed
to have been trivial in normal circumstances become non trivial
in a situation of crisis and the dominoes that need to fall in
order to create the crisis can actually be quite small in terms
of contribution to anxiety. To your second and substantive point,
here we are talking about supervision of regulation within the
single market and that is why this is naturally vested within
European agencies.
Q15 Mr Hands: So are global flows
of this nature really a single market issue or are they a system
risk issue?
Lord Myners: They can be both.
Q16 Mr Heathcoat-Amory: Picking up
on Mr Hands' point, by common consent the British economy is different
in structure and behaviour to many continental economies—we
have a different trade pattern, we rely more on financial services,
we are partly an oil-based economy, we have different pension
provision and housing finance is unusual in European terms—and
the Prime Minister always tells us that the crisis came across
the Atlantic so the systemic risk was actually transatlantic rather
than continental. I am not sure that that is quite true but that
is what the Prime Minister tells us. So it is rather odd that
we are now going to set up a European Systemic Risk Council when
our economy behaved rather differently to the average European
one—we are not even in the eurozone. So I am rather puzzled
to know what this brings to the party. What is the added value
here? I understand that it might become a world council of great
men and women, although of course it would largely be staffed
by people who did not see the last crisis, so I am not completely
confident that they will see the next one, but let us give them
the gift of foresight; so surely there is an argument for looking
globally rather than this obsession with a European solution.
I understand it from the Commission's point of view that they
always want a European response, but to us, part way between a
global and a European economy, I really do not see that this is
a solution and surely that you and your global banking background
can see that.
Lord Myners: I am not suggesting
it is the solution; I think it is a part of a solution. And in
supporting the proposals that have come from the Commission and
from de Larosie"re to establish a European systemic risk
entity, we are not also denying the importance of global institutions
in this respect, and I would in particular draw the Committee's
attention to the strong support expressed by Britain at the G20
Financial Ministers' meeting in Horsham in March and then at the
Leaders' meeting in April for the enhanced role of the Financial
Stability Forum as being an entity which has this global responsibility.
I see a series of—it may be like Russian dolls—you
have a global focus through entities such as the IMF and the Financial
Stability Board, regional through a European body and then national
through the new enhanced responsibilities that we have given to
the Bank of England and the FSA.
Q17 Mr Hands: Systemic risk we have
already determined is an absolutely vital aspect—nobody
could deny that over the last two years—but is there not
a risk that nobody at end of the day is really going to be in
charge of it if we have duplicated institutions on a European
level and on a global level. It is starting to sound slightly
like the tripartite regime when no one was quite sure who was
in charge. We are in danger of going down the road of a tripartite
regime on this global risk supervision, are we not?
Lord Myners: I have had no doubt
in my mind as to who was in charge within the tripartite, and
I know that the Governor in answer to the Treasury Select Committee
answered, I think quite correctly, "What do you mean by `in
charge'?" and I think what he was getting to was that you
had to be precise as to what aspect of a particular situation
you were seeking to find the answer to—who is in charge
of that. I think the clear and distinct responsibilities of the
Bank of England and the Financial Services Authority and the Treasury
are entirely appropriate and have proved to be largely effective.
I think the advisory role of the European Systemic Council will
enhance understanding and not at the risk of causing confusion.
I make one other observation—and this does come from Members
who have been kind enough to refer to my previous life in the
world of business—I would absolutely emphasise, if I may,
that the responsibility for the failure of banking institutions
must rest with the owners of their banks, their boards and their
managers; and when we talk about the risk of regulatory or supervisory
complexity of course we are right to be alert to the risk that
there is an absence of clarity; but the primary focus for institutional
robustness must rest with the directors and owners of individual
financial institutions. Sometimes that gets lost and the focus
of de Larosie"re's report perhaps did not emphasise that
in my view sufficiently.
Q18 Mr Heathcoat-Amory: On the question
of accountability, I think it is agreed that one of the weaknesses
of the regulatory system to date has been that as a result of
the Bank of England Act it was not clear who exactly was responsible—was
it the Bank of England, was it the Treasury or was it the FSA?
I remember during the passage of the Bank of England Bill being
told that it was all right; that there was a memorandum of understanding.
When the credit crunch hit nobody could find the memorandum of
understanding. It was essentially a problem of who is responsible
and who can act. Are we not going to make it much worse when,
as well as national tripartite supervision or its replacement,
we are now going to have a rule setting body in Brussels somewhere,
of which we are a part but certainly do not control—I suppose
the rules are set by qualified majority voting, I do not know.
But, again, everyone in a crisis will say, "It is not us;
it is the Bank of England" or the European Central Bank,
or the Systemic Risk Council, or this new body of bringing together
the national supervisors into a new rule making body. We are going
to create tremendous confusion here because what we want is clear
lines of accountability and control. Are you really happy that
we are going in the right direction here?
Lord Myners: I believe that those
clear lines of accountability lie at the heart of our very strong
preference, supported by Lord Turner in his review of the FSA
and by the recent report chaired by Sir Win Bischoff, that supervision
must lie in the hands of national authorities.
Q19 Mr Heathcoat-Amory: I am talking
about rule making. The rules are going to be made for our financial
services industry by an enormous body of 27 countries represented,
most of which have no financial services—I have been to
Malta and Cyprus—and we are handing over—this is a
big transfer of responsibility—to another body far removed
from this House or indeed much further from the Treasury or the
FSA or the Bank of England. Is this not a further recipe for confusion,
particularly if they harmonise—and you used the word harmonisation
earlier on—on a continental model that may be completely
inappropriate for our own requirements, particularly in a crisis?
Lord Myners: I do not think that
the rule making body would actually have a prominent position
in a crisis. The rule-making body is designed to create the structure
within which the supervisory bodies and the agencies that will
become engaged in a situation which requires resolution will work.
So I do not think that Larosie"re or the Commission are in
any way of the view that the new systemic entity or the elevated
three bodies that they describe in their most recent proposal
are going to be part of specific crisis management.
Mr Heathcoat-Amory: In a crisis you need
clear rules and you need to know who has made them and who can
adopt or change them. We have a rule-based system and I am just
concerned here that the rules are going to be made by people who
have no particular connection or affection for the City of London.
We all remember what happened to the art market when they got
going on the artist resale levy. The Labour Government tried very
hard to stop that because they knew the unique position of the
British art market but they got overwhelmed by majority voting
and it all went against them despite their votes, and I think
the same could happen to the City and the British financial services
industry if that rule setting—which is tested in a crisis
but is important at other times too—is set by a body the
accountability for which is extremely unfair.
Chairman: Can I interrupt? I think in
there was a question.
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