The Committee's Opinion on proposals for European financial supervision - Treasury Contents

Examination of Witnesses (Questions 60-79)



  Q60  Chairman: Actually, we did. In this Committee we were told by witnesses that they did blow the whistle. Maybe it was not a loud enough whistle, so maybe the volume was down in Europe just as it was here.

  Ms Ridpath: Yes. Without the tools to action it it does not make a dramatic difference.

  Q61  Mr Fallon: Could you clarify an issue on appeals? Perhaps I could ask Clifford Chance for some cost-free advice on this. Article 46, as drafted, of the Banking Regulation, specifies that the appeals only apply to Articles 9, 10, 11 and under Article 1, so they do not actually cover Article 23. Is that right?

  Mr Gleeson: That is correct.

  Q62  Mr Fallon: Is that a serious gap?

  Mr Gleeson: That depends on how useful you think the appeal power is likely to be.

  Q63  Mr Fallon: What do you think?

  Mr Gleeson: This system was in existence, at least its bare bones were in existence, during the previous crisis and the actions that were taken at the Brussels level were completed well after the crisis had concluded. The appeal process is a long-drawn out process.

  Mr Popham: The simple answer must be that there does not seem to be any particular reason why it is excluded from the appeals process so it should be included. Whether it would make a great deal of difference in practice is a debatable point.

  Q64  Mr Fallon: But the European Banking Authority could take a decision that directly impinged on the fiscal responsibilities of a British Chancellor without appeal under Article 23. That is the position, is it not?

  Mr Popham: It does look that way, yes.

  Q65  Mr Fallon: Is it also the case that the European Banking Authority's decisions can apply directly to individual financial institutions in this country?

  Mr Popham: Again, potentially so. Through a direction to the applicable national regulator, which then does not implement it, it is possible in certain circumstances, and Simon will give you the specifics, to address an individual institution in a national country.

  Mr Gleeson: What is strange about this is that there is a power to address requests directly to individual financial institutions but what the request is to do is to comply with the directives that already exist, so in theory, although the power exists, it is a power to do nothing more than to say, "Comply with the law as it already stands". It is mysterious as to what use that power could be.

  Q66  Mr Fallon: But the power could be addressed to a British bank?

  Mr Gleeson: It could, yes.

  Q67  Mr Fallon: And the British bank would then have to comply?

  Mr Popham: Yes.

  Q68  Chairman: Are you determined not to give us free advice, Mr Gleeson?

  Mr Popham: It is just the normal advice you are getting.

  Q69  Peter Viggers: Do you have any concerns about the Commission's powers to delegate authority to the Supervisory Authorities?

  Mr Gleeson: Yes. The technical issue here is that the Commission has no such power. It is clear as a matter of European law that the European Court of Justice will not permit the Commission, or, for that matter, the Council, to grant to any subsidiary body the power to exercise its discretion. Consequently, what this draft does is attempt to draft around that to create a regulator without the power to make rules or the power to exercise discretion. This is why we find it so hard to work out what a regulator thus constituted can actually do.

  Q70  Peter Viggers: So what are the risks in agreeing to these proposals if there are doubts about their legal validity?

  Mr Gleeson: What the proposals do is create a framework which will enable the secretariat thus created to decide what it is going to do, subject to a European law constraint that it will not be allowed to do very much. It is arguable that these proposals create no risk because actually the institutions thus created cannot legally do anything, but that takes us to the point mentioned earlier, which is that they will have strong persuasive power just by reason of their existence.

  Q71  Peter Viggers: Moving to more general issues, do you think that members of the European Economic Area will be content to be subject to bodies on which they have no representation, Mr Villeneuve?

  Mr Villeneuve: I think it is important that it embraces the whole of the European Union members. You are talking about EU members or EEA members?

  Q72  Peter Viggers: Members of the European Economic Area.

  Mr Villeneuve: The proposals address the EU at the moment and I think it is important that certainly all EU members, whether in or out of the Eurozone, should be represented. On the EEA, I do not have a strong view on that. Could I add one thing to that? It is very important that the views taken by the ESRB, among other things, take also a global perspective so it is not just an EU-centric perspective. It must take a global perspective. There are lots of non-EU banks in the EU, and anyway we are talking about a global economy here, so it is important that they take into account what the US might be thinking, what Switzerland might be thinking and other areas such as those. I would just clarify that.

  Q73  Peter Viggers: Referring back to earlier evidence we received, the role of the Steering Committee may evolve, but as it is currently constituted there is nothing in the draft regulations to ensure representation of the non-Eurozone countries on that committee. Should that be rectified?

  Mr Villeneuve: Given the importance of the City of London, it would be crazy not to have the Bank of England playing a very strong role in that committee in my view. I cannot imagine that they would want the Bank of England not to play a strong role.

  Ms Ridpath: There is a three-year review period which gives you some time to consider how it has worked in the original set-up and whether it needs to be legislated to improve the workings after the first three-year period.

  Mr Popham: The balance is between trying to include everybody making it an unmanageable or unworkable group or so trimming it down that you exclude the very people you should be including, and that is the risk.

  Q74  Peter Viggers: How concerned should we be? Should we try to legislate at this point to try to cover the point or do you think the situation will evolve satisfactorily?

  Mr Popham: I think it would certainly be worth trying to ensure that there is recognition of the necessity of appointing appropriate people and to keep that more perpetually under review than three years. The real test of this organisation is going to come when there is a crisis and unfortunately it is going to be rather late in the day then to discover that it is not the right body. If I can pick up André's point, it does seem to me that the critical point here is that it is part of a process of joining up the global array of financial regulators so that in a future crisis there is some capability of communicating. If, alternatively, this is seen as some kind of hurdle over which you have to climb in order to co-ordinate then it is not going to serve good purpose at all.

  Q75  Mr Todd: You have referred to the fact that this is a global market place. I have some difficulty in defining what specific value an EU level engagement adds to this framework of regulation and risk management. Can you help me to fill that space in my mind?

  Mr Villeneuve: The EU is 27 different countries and it would be helpful as a process, I would imagine, to get more global agreement on what the issues are and how they need to be addressed if there were some co-ordination amongst at least the 27 European countries as to what the problem is.

  Q76  Mr Todd: There already are a number of committees on which knowledge is exchanged, best practice is discussed, information is shared. That would appear a valuable function. I just wonder what value is brought by having a regulatory framework which brings together nations of very different scale in terms of financial sector engagement to provide an attempt at what appears to be second-guessing the regulatory activities of individual states.

  Mr Villeneuve: It is clear that these proposals have grown out of the fact that the current structure did not help prevent this crisis.

  Q77  Mr Todd: Indeed, but that does not mean that another one developed from it is going to be better.

  Mr Villeneuve: All the people who have studied this, including Lord Turner, would suggest that we needed more attention on the macro issues that were arising out of this and this is one mechanism that the European Union can put forward on this. You raise a very important question about the relative size of financial services. I would link that to the question about qualified majority voting. I know you will probably come on to that but I would imagine that the system of qualified majority voting should also recognise the size and importance of financial services relative to each country's GDP, and certainly from a practitioner point of view I would like to see that. It does not at the moment.

  Q78  Mr Todd: Indeed it does not, but do you think that is at all likely to be an outcome?

  Mr Villeneuve: Unfortunately not.

  Q79  Mr Todd: It is an intriguing suggestion, though not obviously realisable.

  Mr Villeneuve: In the interests of compromise, unfortunately not, but that would be a desirable outcome.

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Prepared 16 November 2009