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

Examination of Witnesses (Questions 100-119)



  Q100  Nick Ainger: But is there not a judgment to be made about what is a great risk?

  Mr Gleeson: Yes.

  Q101  Nick Ainger: An individual state may well find it difficult for a given period but, if you like, in terms of the overall global economy being in depression as an alternative to an individual country being in recession, presumably the judgment will be best stay out of a global depression?

  Ms Ridpath: In the UK over half the banking assets are not by UK institutions so there is only so much effect that changing FSA capital requirements would have on lending in the United Kingdom.

  Q102  Mr Plaskitt: Mr Gleeson, you have given the impression so far that you think there is not a lot in these proposals that fundamentally changes from the status quo, but in your view are there any meaningful new emergency powers being proposed here?

  Mr Gleeson: That comes to the issue that the Chairman was raising a little earlier. We have this power to give individual decisions to individual financial institutions but it is immensely unclear how that would work and what the consequences would be either for that institution or for the government concerned. What we have here is a hook on which the appropriate procedures could be used to build a meaningful sanction, but at the moment in the draft we have nothing more than a hook.

  Q103  Mr Plaskitt: Do you think it is satisfactory to proceed with a draft that has only that?

  Mr Gleeson: I certainly do not.

  Q104  Mr Plaskitt: What would you like to see it have instead?

  Mr Gleeson: It seems to me that what this draft seeks to do is complete the establishment of these bodies and then to leave it to themselves to decide what they will do and how. My personal view is that that determination should be made by the Member States and not by the bodies once they have been established, and I think that that discussion should precede the finalisation of these documents.

  Q105  Mr Plaskitt: In the case of identifying emergency circumstances or, as the current draft says, "adverse developments", is it safe to leave that to a bunch of Member States who might all disagree whether it is adverse or not, whereas this envisages one power determining that? I think that this discussion illustrates that there should at least be dialogue, if not agreement, on what we mean by "adverse developments" before we put it into the directive and then proceed.

  Q106  Mr Plaskitt: You will have heard the previous witnesses suggest that there was not a lot of improvement in these proposals in respect of having effective early warning mechanisms. Do all of you share that view or do any of you dissent from that view?

  Ms Ridpath: I do not know if we share so much the early warning mechanisms which are in here rather than whether they have the teeth to take any actions about those mechanisms. There are recommendations to go to the national level but where the teeth lie to apply changes in interest rates, quantitative credit restrictions, things like that, is not clear at all.

  Q107  Mr Plaskitt: I am getting the impression that some of you think all of this is saying what the Union thinks needs to be said rather than changing things in fundamental ways. Is that what you are telling us?

  Mr Gleeson: It is fair to say that to make any significant fundamental change in the way that this is done you would need a change in the treaty. Since that is completely out of court then you can see very clearly on the drafting that what is happening here is an attempt to work within the constraints of what can be done under the existing arrangements.

  Q108  Mr Plaskitt: So is this a window-dressing exercise?

  Mr Gleeson: I can see how it could be called that.

  Mr Popham: We normally charge a lot for that!

  Q109  Chairman: What do you change in the treaty? You said you need to change something.

  Mr Gleeson: It is not possible to give these entities under the current institutional arrangement the power either to make rules or to exercise discretion, and in order to achieve the European regulatory bodies which were the original objective of this exercise that would need to change.

  Q110  Chairman: But that is what the draft before us proposed to do, to give them the powers.

  Mr Gleeson: If that is the case then there is a risk.

  Q111  Chairman: The regulations say they can.

  Mr Gleeson: If that is the case then the risk is that the European Court of Justice will take the view that these directives are effectively ultra vires to the treaty.

  Mr Popham: And at that stage they will cease to exist.

  Q112  Mr Plaskitt: If that were the case then all we would have done here was a piece of window-dressing in your view, because it is still subject to a potential ECJ test; is that right?

  Mr Gleeson: Absolutely.

  Q113  Mr Plaskitt: Is that not true of any development that takes place within existing treaties, so there is nothing novel about this, is there?

  Mr Gleeson: What is novel about this is that analytically it exists on the outer edge of the possible. The vast majority of what the Commission does is so clearly within the treaty that these issues do not arise.

  Q114  Mr Plaskitt: All right. I am not sure we are going to get much further with this.

  Mr Popham: Can I come back with an alternative for you, which is that if the intention is to ensure an easier means of co-ordinating a forum in which people can get together and decide whether a whistle should be blown, a mechanism by which best standards can be adopted and encouraged, then all of that is well within the treaty power, all of that is desirable. If, however, you think it is going to go further and the intention is to go further, to issue a central diktat or to overrule continuously national rights, that is where there probably is not the treaty authority and it runs the risk of going astray, and then you are into the conspiracy theory.

  Q115  Mr Plaskitt: I think it is very important to establish that. Can I finally come back to this global question? Given the discussion we are having, would you say that, as currently constituted and, given what we established about whether this alters powers within existing treaties, adoption of this poses no risk to the European Union losing out as a result of regulatory arbitrage?

  Mr Villeneuve: It is extremely important that anything that is done in the EU is synchronised with what the US in particular does but also Asian countries do. If we front-run the US, that is very bad for the EU and for London. In this particular instance there are a lot of discussions going on with the US and I am more encouraged than I was a few months ago that there is a serious attempt being made to engage with the US authorities on how we might not have exactly the same system but we might have similar systems but at least work together. There are other aspects of EU legislation for financial services where I cannot be so positive, but we are talking about this now.

  Q116  Mr Plaskitt: Do you think any of this is running ahead of where the US is and therefore posing a risk?

  Mr Villeneuve: I think it risked looking like that at one time but I think now there is a serious attempt to synchronise with the US. It would be very bad indeed if, as I said earlier, we forged ahead of the international standard setters as well. Very important in this is Basel, so if we try and front-run Basel that is bad news. There are some people in Europe who might want us to take a more aggressive view and show the lead to the rest of the world, but that is just nonsense.

  Mr Plaskitt: And there is a whole separate question on whether Basel itself is adequate, but we have not got time to go into that, I suspect.

  Q117  Chairman: Thank you. Richard Portes told us that it was politically inconceivable that the FSA would be overruled in the Supervisory Authorities. Are you confident that that is the case?

  Mr Gleeson: We have seen at least one case of the FSA being effectively overruled, albeit on a technical matter, in CESR, the committee which is the predecessor of one of these, so not only is it not inconceivable; there is at least one precedent.

  Q118  Chairman: Any supporters of Portes?

  Mr Villeneuve: I would say yes, it is conceivable, and I would also say that the FSA needs to play a very active role, and as a committee I would also be concerned to make sure that they have enough people ready to play that active role.

  Q119  Chairman: You say here the Supervisory Authorities have no powers or, if they do have powers, they will be operating at the far edge of legality. Do you agree with that?

  Mr Gleeson: Yes.

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Prepared 16 November 2009