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Concerns have been expressed about the speed of reforms, and about the better regulation principles. We must ensure that there is better and more effective regulation, which is based on strong evidence, as well as thorough consultation and impact assessments. It is important to respond swiftly to the crisis and make sure that we can secure harmonised standards and put better regulation in place quickly, but that should certainly not be at the expense of high-quality regulation. It is more important than ever to ensure that our response is evidence-based and achieves the desired end. We continue to encourage the Commission to adhere to best practice and to conduct consultations and impact assessments on regulatory proposals for the regulation of markets and firms. That high-quality evidence base will also maximise the influence of the EU on the international stage with our international partners and better enable it to attain international regulatory convergence. It is crucial that better regulation principles are instilled in the bodies themselves. The Government have been arguing strongly for this in Council, and it continues to be a top priority.
Concerns have been raised about the Commission's role in determining a crisis situation. Alongside other member states, the UK is questioning the Commission's role in some areas of the proposals, including its ability to decide unilaterally where there is an emergency situation. We have already made progress on this issue and there is now broad consensus among member states that the Council should have a strong role in activating any emergency powers.
Christopher Fraser (South-West Norfolk) (Con): Will the Minister draw to the attention of the House precisely what is meant by emergency circumstances? That is not clear from what she said or what we have before us today.
Sarah McCarthy-Fry: I would suggest that emergency circumstances were the sort of situation that we faced last year, with the possibility of the entire global financial system going into meltdown. I will get clarification, however.
I turn to some specific clarifications that the European Scrutiny Committee requested, following the Committee's correspondence with Lord Myners on these issues. With reference to the Government's progress in ensuring a balanced representation of non-eurozone member states on the European systemic risk board steering committee, there is broad consensus in Council that there should be an appropriate representation of non-eurozone member states on the ESRB, and in particular, that there should be five, rather than three, additional members of the steering committee, and that two of those should be from non-eurozone central banks.
The need to ensure an appropriate balance of eurozone and non-eurozone members was one of the key issues stressed by the Chancellor during the discussion of these proposals at the ECOFIN meeting of 2 October. The Government are therefore confident that this position will be reflected in the Council's discussions with the European Parliament as we go forward.
Mr. Hoban: Will the Minister make it clear that balanced representation will be in the legislation, rather than in some side agreement reached in Council?
Sarah McCarthy-Fry: The aim would be for that to be in the legislation, but it will form part of the negotiations. The important thing is that we get the result-the representation of the non-eurozone member states on the steering committee.
Mr. Hoban: But is a decision in Council, but not on the face of the legislative proposal, binding?
Sarah McCarthy-Fry: I cannot answer that question. I do not want to mislead the hon. Gentleman. It is my understanding that if we can get that as a Council decision, that will be what happens, but I will get back to him with the precise legal basis for that.
The improved voting thresholds in the ESRB general board reflect a building consensus in Council that the voting mechanism for decisions taken by the ESRB's general board, as set out in the Commission's draft regulation, is not appropriate in all cases. Instead, there has been considerable support for voting by a two-thirds majority, rather than a simple majority, for adopting a recommendation and for agreeing to make a warning or recommendation public.
As I said, there are outstanding issues and questions, but this is a positive agenda for reform, which the Government-
Mr. Cash: Does the Minister note that one of the questions that we put was whether, in the context of the architecture to which I referred earlier, the Government are satisfied not only with regard to the voting issue, but with regard to the relationship of the European Court of Justice to these bodies? That is crucial, because it is at that point that the question of the exercise of real power is determined. Can the Minister answer that question, please?
Sarah McCarthy-Fry: I can only refer the hon. Gentleman back to my previous answer, which was that we have concerns about the legislative proposals, where the Commission appears to be taking over the role of the courts, because the judgment as to whether member states are following European law must be a matter for the European courts.
We are putting in place a new framework to improve the quality and consistency of supervision and regulation. Such a framework will better protect consumers, help prevent financial crisis and improve efficiency for firms. I look forward to hearing the contributions of hon. Members in the debate.
4.49 pm
Mr. Mark Hoban (Fareham) (Con):
We welcome the chance to debate these important proposals. They will have a significant impact on the regulation of the financial services sector, and they have the potential, notwithstanding the Minister's comments, to impact on our fiscal policy. Let us be clear, however, that we are here only because the European Scrutiny Committee called for a debate on the Floor of the House. The Government have not conceded these proceedings voluntarily. They did not set aside this time because they felt it important to debate these issues; they were required to do so by the Committee. It asked for a three-hour debate on the Floor of the House, and that signal should not be underestimated. The Committee has done so on only a handful of occasions during the lifetime of this Parliament.
The issue is clearly important, and it is right that we have this debate in advance of the ECOFIN meeting tomorrow.
We recognise the importance of cross-border supervision. We have had arguably the first global regulatory crisis, and we need to learn lessons about the need for greater co-ordination and standards of supervision. However, despite the global nature of the crisis, the bill for failure was picked up by national taxpayers, and we need to bear that in mind as we debate the subject. The UK boasts a leading global financial centre. The importance of global co-ordination should not be understated, but, when considering the issue, we must engage much more vigorously in the debate. That is not about stymieing attempts at reform, but about working towards a more effective and stable system. That will benefit the UK and the wider European Union, and we recognise that some changes are necessary to resolve some issues that the financial crisis threw up.
However, we find the Government's approach passive and complacent. They need to be proactive and strategic, rather than complacent and tactical. Such an approach represents a misunderstanding of the importance of what is at stake, and the consequences of the Government's rather casual approach could be significant.
We have seen the consequences of that approach already. This year, we had the publication of the alternative investment fund managers directive, and there has been widespread criticism of it and its impact not just on hedge funds and private equity, but on other forms of funds affecting other European countries.
Mr. Mark Field: I entirely agree with my hon. Friend on the alternative investment directive. Is not the bigger criticism of it, however, that it simply betrayed, among those in the European Union who are attempting to introduce it, a lack of understanding about the role of asset management and, indeed, its non-role in the credit crunch and financial crisis that we have faced over the past two years? Whatever other problems there may have been, hedge funds and private equity have not been responsible for any systemic problems that that directive and others have tried to address.
Mr. Hoban: That is certainly a factor, and as the directive has proceeded through the European Parliament more and more people have recognised the widespread impact that it could have on a range of funds, whether they are used to fund the building of wind farms in Germany or mortgages in the Baltic states. The directive is wide-ranging, and people have not understood its impact. My particular criticism is that the Government caught on to that rather late in the process. Other Governments were lobbying prior to the publication of the directive earlier this year, whereas our Government seemed to be slow on the uptake. It was only once the industry got its teeth into the directive and considered its impact on London that the Government rode in behind.
We saw the same pattern arise with the appointment of Monsieur Barnier as a European Commissioner. The deal was done some time ago. The French appeared to give way and allowed Baroness Ashton to become the High Representative, but there seems to have been a quid pro quo: a Frenchman would take over as Commissioner for the internal market. The Government
woke up to that quite late in the debate, and there was a flurry of spin and media activity in the days leading up to his appointment, but by that stage it was too late. Again, tactics took priority over the strategic approach that is needed to protect London's financial interests, and the same point applies to the documents that are before us today. The Government must be much more zealous in protecting Britain's interests and those of the financial services sector, which is an asset not just to London but to the wider European economy.
Mr. Cash: My hon. Friend knows that I have the gravest concerns about all this. Does he appreciate that although the trade associations-I mentioned the Association of British Insurers, the British Bankers Association and the Investment Management Association -have effectively endorsed the idea of this supranational authority, there is also a political dimension, because whereas they may have a multinational view about these matters in the global context, in terms of the City of London a political judgment has to be struck? That is why I personally take the view that we ought to resist this all the way down the line. As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) said, people in the trade associations take a globalised view based on multinationalism, whereas when one deals with people in individual firms on the ground, one finds that they frequently take a very different view. Does my hon. Friend have any comment to make on that?
Mr. Hoban: My experience in this role over the past four years is that there is a wide divergence of views in the City about the role that Europe should play in the regulation of financial services. Several trade associations take the view that there should be a harmonised rule book, for example, but they are also concerned about the pace at which the reforms are progressing and whether a proper process is in place. We have seen that in the way in which the alternative investment fund managers directive has been dealt with. The devil is always in the detail. We need proper scrutiny of these proposals, and people need carefully to think through their impact. The problem is that when others seek to use their political agenda to shape regulation in Europe, it is sometimes to the detriment of our own sector based here in London.
Mr. Mark Field: I entirely accept what my hon. Friend says, but does he not agree with the thrust of the point made by my hon. Friend the Member for Stone (Mr. Cash)? If, rather than consulting often self-appointed market bodies notionally representing dozens or hundreds of members, one asks the market practitioners who have to deal day to day with the impact of much of this legislation, which may derive from our own Parliament as well as from Europe, one finds that they are much more concerned and can see the disadvantages. It could almost be said that one of the benefits of being in opposition is being able to talk to market practitioners instead of hearing from on high about the various benefits that such new legislation, directives and regulations may have.
Mr. Hoban:
That reflects the argument that I was making. People support these moves in the abstract, but when it comes to concrete proposals there is a great deal
of opposition to individual aspects. Later, I will discuss some of the areas where there may be greater protection in London than that specified in directives, and that is in our interests. Would that protection be removed as a consequence of harmonisation?
In the whole legislative process that has emerged as a response to the financial crisis, it seems that a great deal is happening in haste and not much has been well thought through. There is a danger that we are being pushed to sign up to directives and proposals very quickly without people fully thinking through their impact. The particular concern about this set of proposals is that there seems to be pressure from the Swedish presidency to agree the package at tomorrow's ECOFIN meeting and at the Council meeting later this month. Even trade bodies are concerned about the haste with which this process has been dealt with and they fear that not enough time is being spent on working through the detail.
We should recognise that if we want to get this legislation right, we need to spend more time working through the details instead of being forced to comply with artificially imposed deadlines that relate to whoever is in or out of the presidency at any point in time. Indeed, the Treasury Committee said in its report that
"it is better to be right than quick",
"even on a cursory examination there are serious problems with the Commission's proposals which need to be dealt with before the Council agrees to the draft legislation and it moves on to the next stage."
The European Scrutiny Committee stated that
"we are disappointed that Member States, in the ECOFIN Council and in the European Council, intend to continue to press on precipitately with this legislation and that the Government seems content to acquiesce in this haste."
Will the Exchequer Secretary indicate whether the Government are content, if no agreement is reached tomorrow, to push the conclusion of this debate into next year in the interests of better scrutiny? The ESC continued:
"As we have already said, rushed legislation proves all too often to be poor legislation and we would expect the Government to insist that these proposals are properly negotiated to a sensible timetable."
We must ask why we have been pushed to respond so quickly to the reforms. If the proposals were straightforward and uncontroversial that would be one thing, but as the comments that have been made both by the Minister and in interventions have demonstrated, they are neither. It is not just people in the House who believe that. The Association for Financial Markets in Europe has stated:
"The rapid timetable is driven by the political commitment to have the ESRB and ESAs in operation by the end of 2010. It does however, particularly at a time when an unusually large number of policy proposals are under development in a range of areas in the wake of the financial turmoil, place great strain on the ability of policy-makers and interested parties to give the Proposals proper technical scrutiny. The time pressure is intensified by the fact that a series of Proposals whose content interlocks have been made, and are being scrutinised by the Council and the European Parliament, on a staggered timetable."
There is a strong message from inside and outside the House that proper time should be spent scrutinising the measures, rather than their being rushed through to meet an artificial deadline.
Mr. Jeremy Browne: I understand and agree with the hon. Gentleman's point that it is better to get the right solution and take time over arriving at that conclusion than to react in haste and potentially reach the wrong conclusion. However, he seems to be slightly at odds with some of his Back Benchers who, I get the sense, do not wish us to arrive at any conclusion at all. In other words, they reject the entire process, whether it is arrived at in haste or at great leisure. Is that his interpretation? It is worth exploring the real difference between those who wish to reach the end point after sufficient consideration and those who do not wish to reach the end point at all.
Mr. Hoban: The hon. Gentleman is being a little hasty in reaching any conclusions about a discrepancy in views between myself and my hon. Friends. I have just talked about the timetable, but there are other matters that I want to discuss that are related to the substance of the proposals, on which we have a great deal in common. It is not just about the time scale and process, it is about substance as well.
I wish to touch on a point that the Exchequer Secretary glossed over, but which has caused a great deal of concern for both the ESC and the Treasury Committee-the constitutional nature of the powers in question. There was a debate in the Treasury Committee about whether the powers to be granted in the proposals before us have a legal basis. In written evidence to the Committee, Stuart Popham and Simon Gleeson of Clifford Chance wrote:
"The ESAs will not have power to take decisions or to make rules-European law requires that these powers are reserved to the Commission, and we believe that this could not be changed without an amendment to the EU treaty. The attempt to give the committees the power to review the issue of whether individual national regulators have correctly implemented EU legislation appears to be an attempt to stretch this point."
As we have seen, though, the ESAs will issue binding directions on compliance with EU law and on mediation between two regulators. If the power is to ensure compliance with the law that already exists, it is hard to see of what use it is. Is it a discretionary power or not? As it is presented, it is not clear, and the Commission itself seemed to allude to the same issue in the context of potential interference with the fiscal responsibility of member states when it stated:
"Incorrect application of Community law cannot be justified by financial grounds. The remainder of the Authorities decisions are either not directed to individual supervisors, or non-binding, and therefore by definition cannot have fiscal implications."
In other words, member states must surely already be compliant with EU law, even on fiscal grounds, so no decision made by the ESAs could have fiscal consequences. Once again, therefore, we must ask what the power is for exactly.
The confusion does not end there. Mr. Gleeson pointed out in his evidence to the Treasury Committee that if the power was found to be discretionary and was subsequently deployed, the European Court of Justice would be likely to consider any such directives
"ultra vires to the treaty",
and they would, as Stuart Popham put it, "cease to exist."
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