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First, I should like to thank the European Scrutiny Committee for calling this debate on these extremely important issues. As several hon. Members present will remember, I took part in another of the Committee's debates back in June, when we had a very useful discussion of the European Commission's initial proposals for European Union regulatory reform. Since then, however, things have moved on somewhat. In September, the
Commission published its draft legislative proposals to establish a new supervisory architecture, and I look forward to discussing the issues again today.
It might be helpful if I first set out the proposals contained in the documents that we shall be debating this afternoon. The Commission's legislative package establishes at the macro-prudential level a European systemic risk board, comprised of EU central banks, to identify risks in the financial system. The body will issue warnings where these risks are deemed significant, and will, where appropriate, issue recommendations on how to mitigate these risks.
Mr. William Cash (Stone) (Con): As I am a member of the ESC, I am sure the Minister will understand my wishing to draw attention to the fact that in our most recent report we have, effectively, condemned the idea that we should rush forward with these proposals. There are many good reasons for that, which are set out in our report. Furthermore, does the Minister accept the following point, which I have repeatedly made to the Prime Minister and the Chancellor of the Exchequer-this is, effectively, a sell-out to the process of majority voting, and it will do immense damage to the City of London, which accounts for an enormous percentage of our GDP? Does she also agree that there is no justification for the speed with which this is being done, or for handing over the whole of this ramshackle structure to the European Court of Justice?
Sarah McCarthy-Fry: The hon. Gentleman will not be surprised to learn that I disagree with him on this and that I think it is important that we have a European harmonisation of regulation. That was agreed at not only the European level, but the global level. I think we would all agree that we are looking for a harmonisation of regulation at a global level, and the EU process can move forward on that.
Mr. Mark Todd (South Derbyshire) (Lab): Will the Minister give way?
Sarah McCarthy-Fry: I shall finish answering the original intervention before I give way to my hon. Friend. We still need to refine some pieces of the proposals before us today. I shall go on to discuss where we are disappointed and where the legislative proposals did not follow the agreement reached at the ECOFIN June negotiations; however, the negotiations are ongoing.
Mr. Todd: Am I right in thinking that the author of the origins of these proposals is Monsieur de Larosière, who, as we heard yesterday, is apparently the patron saint of Conservative regulatory policy? [Interruption.] We can see the gestures being made by the hon. Member for Stone (Mr. Cash), who presumably feels as uncomfortable on this as I do. Could the Minister throw light on the authorship?
Sarah McCarthy-Fry: Certainly the original proposals came from Jacques de Larosière in order to replace the Lamfalussy level 3 committees in respect of the European supervisory authorities. [Interruption.]
Mr. Speaker: Order. The hon. Member for Stone (Mr. Cash) does not have to make sedentary references to the number or identity of Frenchmen.
Sarah McCarthy-Fry: Thank you, Mr. Speaker. I was talking about the first part of this package of proposals, which is the European systemic risk board. The body will issue warnings where the risks are deemed significant and recommendations on how to mitigate these risks. The Government strongly support the establishment of the ESRB. We believe it can act as an effective early-warning system, usefully identifying risks in the financial system and complementing the work of the Financial Stability Board and the International Monetary Fund at the international level.
Stewart Hosie (Dundee, East) (SNP): I am happy with the idea of a new architecture and a global system, and I am happy with the ESRB and with the fact that it will issue warnings and take actions. However, one bit is missing from all this, and that makes it difficult to agree whether or not it makes sense. The regulatory framework for the derivatives, the default swaps and the counter-party risk-the technical regulation on the financial weapons of mass destruction-is not yet in place. Will the Minister explain how that will work within the context of the ESRB and the other bits of the architecture that she is describing? That is the missing piece; we do not yet have it.
Sarah McCarthy-Fry: The hon. Gentleman is right to say that we do not have all the other directives in today. Today, we are examining the framework that will be discussed at the ECOFIN meeting tomorrow. There will be opportunity to discuss further-if the European Scrutiny Committee so wishes-those other directives that are still going through.
Stewart Hosie: I appreciate what the Minister is saying and that ECOFIN will meet tomorrow, but it is difficult to see how to agree on a proposal for a board that will, rightly, issue recommendations and take actions-presumably they will tighten up, weaken, amend or adjust regulation-when we do not yet have it. Can she not give us some kind of clue as to the regulatory framework that will sit alongside this new architecture?
Sarah McCarthy-Fry: I am sorry to say that at this stage I cannot. This is still a matter for negotiation among the other member states; this is about the overarching framework.
Mr. Michael Fallon (Sevenoaks) (Con): I am sorry to interrupt the Minister, as she is clearly getting into her stride. Before she leaves the subject of the ESRB, a proposal with which she says she is happy, will she say whether or not she is happy that there is no requirement that the non-eurozone countries should be represented on it?
Sarah McCarthy-Fry: I will come to that later in my speech, but just to satisfy the hon. Gentleman I should say that we do think that there should be sufficient input from the non-eurozone member states. I shall discuss that, because it was a specific question asked by the European Scrutiny Committee.
The European supervisory authorities will replace the current so-called "Lamfalussy level 3 committees" in banking, securities, insurance and occupational pensions. The new authorities will have enhanced roles and tasks, with the aim of improving the quality and consistency of regulation and supervision in the EU.
Mr. David Heathcoat-Amory (Wells) (Con): Will the Minister confirm that these micro regulatory authorities will not have supervisory powers over national authorities? That assurance was given by Lord Myners in evidence to the European Scrutiny Committee, but it has been slightly altered-or certainly weakened and diluted-notably when the Minister responded to my debate in Westminster Hall. Can she get back to the original position and give an unconditional undertaking that the new authorities will not have supervisory authority over national supervisors or individual firms?
Sarah McCarthy-Fry: Our negotiating position is that the supervisory authorities will have absolutely no authority over individual firms, and that their only power over supervisory authorities will be in cross-border disputes. That will be our position going into the negotiations tomorrow.
Mr. Mark Hoban (Fareham) (Con): As I understand it, a representative of one of the supervisory authorities can sit on the college of supervisors. Does the Minister think that that is appropriate, given that that could also lead to the ESAs having some impact on the supervision of individual firms?
Sarah McCarthy-Fry: We are clear that none of the bodies being set up under this legislation should be able to impact on the supervision of individual firms. Credit rating agencies are the only exception, as we did not consider that they posed a fiscal risk.
Mr. Hoban: But, as I understand it, the European securities market authority will have jurisdiction over clearing houses. Will the Minister bring that up at ECOFIN tomorrow?
Sarah McCarthy-Fry: I do not want to pre-empt or second-guess the ECOFIN negotiations that begin tomorrow. Our line is that the authorities will have no direct powers over firms in emergencies and that there will be no direct EU supervision of Community-wide entities. The authorities will certainly not be able to conduct day-to-day supervision of individual firms. That is the line with which the Chancellor will go to ECOFIN tomorrow.
Stewart Hosie: The European Scrutiny Committee report says on page 34 that the purpose of establishing a system of financial supervision is, among other things, to "raise supervisory standards" and to impose "binding mediation". Will the Minister confirm that that "binding mediation" will apply not to single firms but to national systems?
Sarah McCarthy-Fry: The binding mediation will apply to national supervisors in cross-border disputes, not to individual firms.
Mr. Fallon: Will the Minister give way?
Sarah McCarthy-Fry: May I get a little further with my speech? I shall give way to the hon. Gentleman then.
We think it is important to have more effective rule-making and enforcement, as that will increase the efficiency of cross-border firms operating in the EU. The authorities will be required to conduct supervisory peer review to
ensure consistently high standards. As I have said, they will also have powers to mediate in disputes between supervisory authorities. The Government support the authorities having those roles, as a way of improving the quality and consistency of supervision and enhancing stability.
I give way to the hon. Member for Sevenoaks (Mr. Fallon).
Mr. Fallon: I am most grateful to the Minister. She is handling a range of questions, but what is her red line in this matter? Articles 9, 10 and 11 of the European banking authority proposal would give it direct power over individual financial institutions, with the result that it could issue an instruction to Barclays or HSBC. Is that a red line for the British Government, or not?
Sarah McCarthy-Fry: The red line for the British Government is that these authorities should not have direct powers over the day-to-day supervision of national firms, and that is the approach on which we are going forward.
The Commission has also published an amending directive, which amends 10 existing financial services directives to enable the new authorities to carry out their tasks effectively. Most significantly, these amendments will clarify the areas in which the new authorities can develop technical standards and many of the areas in which they can mediate in cases of disagreement between national supervisors. We believe that those moves will improve the quality and consistency of regulation and supervision in the EU, and they were agreed to by Heads of State and Government at the European Council meeting in June. The ambitions are also supported by the City and, in particular, by cross-border institutions operating from London.
Mr. Cash: The Minister speaks about red lines. Will she exercise a veto when the whole matter is going to be decided by a majority vote?
Sarah McCarthy-Fry: This is a package of five legislative proposals. The hon. Gentleman is quite right that four of them are down to qualified majority voting, but one of the items in the package is subject to unanimity. We are going into the negotiations with our red lines and I am sure that the Chancellor will stick to them. Within the negotiations, I am sure that we will get not only what is good for the UK, but what is good for the EU.
Mr. Jeremy Browne (Taunton) (LD): Against which countries does the Minister expect that Britain will have to defend its red lines? I am interested to know who is likely to line up with us and who she feels might imperil Britain's interests.
Sarah McCarthy-Fry: I am sure that the hon. Gentleman would not expect me to answer that question on the Floor of the House when the Chancellor is going into negotiations tomorrow. I will not second-guess or pre-empt those negotiations.
As I said, it was agreed at the June meeting that day-to-day supervision and crisis management arrangements had to remain national, as only national Governments can provide any fiscal support to firms. In the case of credit rating agencies, which cannot have a
fiscal impact if they fail, there could be central supervision. As a result, it is clear that there can be no direct European crisis management powers over firms, or other powers that undermine national supervision. Furthermore, it has been made clear that the new framework should not impinge on member states' fiscal responsibilities. We must ensure that member states stick to that agreement.
I am sure that hon. Members will have noticed that, in some areas, the Commission's legislative proposals go further than what was agreed in June. For example, it is proposed that the new EU supervisory authorities could later directly supervise Community-wide entities. That clearly does not respect the June agreement, and the Government are absolutely clear that we cannot accept it, as it could fundamentally undermine national supervision. Furthermore, the Commission's proposals include direct European powers over firms, in particular in crisis management. Such a role could confuse and undermine national crisis management, and it is clearly critical to ensure that Governments can respond quickly and effectively in times of crisis, so that needs to change.
Mr. Heathcoat-Amory: I asked the hon. Lady last month who would appoint the members of these supervisory authorities and to whom they would be accountable-is it the Council of Ministers, the European Parliament, the Commission, or all three? Given that clarity and certainty are absolutely essential-if there is a credit crunch, we will otherwise get into a huge muddle all over again-will she tell us the exact position regarding reporting and appointment to these bodies?
Sarah McCarthy-Fry: The ESAs will be accountable to national Governments through the European Council. It is likely that they will also be accountable to the European Parliament. In the United Kingdom, the Financial Services Authority-our nominee-will be accountable in the normal way through its annual report and the Treasury Committee.
Mr. Heathcoat-Amory: And appointments?
Sarah McCarthy-Fry: I will have to get back to the right hon. Gentleman about appointments. I imagine that that would be a matter for member states, but I hope to be able to get back to him on that before the end of the debate.
There has already been a lot of discussion and debate about the proposals. Lord Myners has given evidence to the Treasury Committee and to the House of Lords European Union Committee. He also took part in a debate in the Chamber of the House of Lords on 10 November. In addition, the Treasury Committee published a report on the proposals on 16 November, for which I thank it. That insightful report raises a number of issues that are also of great importance to the Government. In particular, the report highlights the Committee's concerns about the legality of the Commission's proposals; the fiscal impact on member states; the Commission's role in crisis situations; and the composition of the European systemic risk board.
There is widespread interest in the legal issues surrounding these proposals, and the Government are well aware of the complex legal matters involved. Regardless of the technicalities, the Government's overriding objective
is to ensure that the new framework can withstand legal challenge. We cannot have legal uncertainty and challenges before the courts, as that could undermine financial stability. We are therefore working closely with other member states and the Council legal service to ensure that the bodies are on a sound legal footing. I know there are questions about the legal basis of the proposals, but let me assure the House that we believe that article 95 is an appropriate legal basis for the regulations. However, we have concerns about matters in which the supervisory authorities can exercise discretion, and in which the Commission is seemingly playing the role of the courts. Both those issues are problematic, but we believe they can be resolved so that the authorities can exercise the useful roles assigned to them.
Mr. Mark Field (Cities of London and Westminster) (Con): The Minister has referred to the legal and practical difficulties, but can she tell us how much experience she has had of speaking to practitioners in the field about the precise nature of those problems? Has she spoken to them, or has she just read briefings from the trade body?
Sarah McCarthy-Fry: I think that the hon. Gentleman probably knows the answer. I have not had discussions with legal practitioners, but my noble Friend Lord Myners, who leads on this policy matter in the other place, certainly has done so, and I have read all the briefings.
Many members of the European Scrutiny Committee have raised concerns about the fiscal safeguard clause in the proposals. I would like to stress that this is a mechanism that in practice should never be used. The legislation clearly states that ESAs are required to ensure that their decisions do not impinge on member states' fiscal responsibilities. However, alongside that, a process has been set out in the legislation for member states to opt out of a decision made by an ESA, if they believe that it would have a fiscal consequence. We need to ensure that that process is not open to abuse, and that it provides the right protections. The Commission's proposal requires a member state to secure a qualified majority vote in support in Council, in cases in which the ESA decides to uphold its decision, despite the member state raising a fiscal case against it. We are not convinced that the balance is right, or that it provides sufficient assurance to member states. We are therefore working with EU member states, many of which share our concerns, to improve the safeguard clause.
Mr. Fallon: Again, I want to be clear that that is a red line for the United Kingdom, and that the fiscal safeguard will not be subject to majority voting.
Sarah McCarthy-Fry: For us, the red line applies to the fact that none of those authorities should have the power to make any impact on national Governments' fiscal responsibility. We do not believe that the fiscal safeguard should be used, because there is an overriding legal principle that the decision should not impinge on member states' fiscal responsibilities. Again, that will be part of the negotiations, and as I have said, many other member states share our concern, so we hope to be able to make progress.
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