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Mr. Cash:
My hon. Friend raises an extremely important point relating to competing sovereignties. The European Court asserts its primacy over not only our laws but our
constitution. I am glad to say that the leader of our party has affirmed that there will be a sovereignty Bill to deal with some of those questions. Does my hon. Friend agree that where there are such competing sovereignties, and it is in our national interests to do so, as it is in the case before us, it is essential that, if we come to power, we justify and carry through the leader of our party's commitment to the repatriation of legislation to ensure our economic competitiveness, using our sovereignty Bill?
Mr. Hoban: I suspect that my hon. Friend is pushing me to go further than I am inclined to go at this point, but I want to explore the legal argument, because there is an issue to do with the basis of the powers. I know that he is an expert on the subject, so he may want to contribute to the debate on that point later.
Article 95 of the treaty, as currently drafted, will be used to create the ESRB. That article usually deals with matters relating to internal markets, and it operates under qualified majority voting, but if any action arising from the provisions requires treaty amendments, there will not be that capacity, and confusion and paralysis will reign. Article 105 will
"confer upon the ECB"-
"specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings",
but of course it has an exception relating to insurance. Article 105 does not use QMV, and so allows for national vetoes. It is not clear where primacy sits, and what voting mechanism is appropriate.
There is an alternative basis for the powers in article 308-a residual power that could be used to set up the bodies. However, that requires unanimous decision making. Using that power would make more sense, if it turned out that decisions made by the ESAs were likely to be ultra vires to the European Community treaty if made under article 95. However, I gather that use of the power under article 308 would require amendments to a treaty, which is something that Governments and the European Commission might be reluctant to undertake at the moment. That gives the impression that article 95 is being used to set up the powers more for convenience than because it would give the documents a proper basis.
Let me turn to the detail. It is important that we tackle the timing and the legality of the arguments. The Minister rather glossed over those points, and in her winding-up speech she should give the House more clarity about the robustness of the arguments on the legal basis on which the new authorities are to be established.
We want measures to be taken to improve the quality of supervision and co-ordination across Europe, but we do not want that to impinge on the regulatory and fiscal sovereignty of individual member states. As the Chancellor wrote of the new regime, in his letter of response to the de Larosière proposals,
"it would not supervise individual banks...leaving that to national authorities...given that arrangements for resolving difficulties in these firms remain a national responsibility."
That is the dilemma that we need to resolve, and that is the principle on which the proposals will be judged in all parts of the House.
Mr. Heathcoat-Amory: My hon. Friend is quite right that we must guard our fiscal sovereignty, but is he not underestimating the confusion that will be caused if there is ambiguity about exactly where these bodies reside in Europe? We got into a terrible muddle in our own country when supervision fell into a black hole between the Treasury, the FSA and the Bank of England. There will be more confusion when it falls into another black hole between the European Parliament, the Commission and the Council of Ministers. We will have a six-sided black hole, if that is not a contradiction, whereas we need certainty and clarity for all market operators. Even if the self-imposed test on fiscal sovereignty is passed, does he not think that we are creating immense confusion and ambiguity about the whole process of supervision of a vital national interest?
Mr. Hoban: Indeed, and that is the point that I was trying to make about the legal basis for the powers that will be used to set up these authorities. It appears to be a matter of some debate whether the appropriate legal basis is being used. If that is not clarified properly, I can foresee a situation in which the moment these authorities seek to make the first difficult decision that an institution or member state does not like, challenges in the European Court will be resorted to. At a moment of crisis, when we want prompt action to be taken, the fact that there is no legal certainty-or no appearance of legal certainty-will lead to chaos. That is why I think that it is vital that legal certainty on these powers is sought before the proposals are approved. We can debate whether the powers are right or wrong, but there must be legal certainty to avoid that chaos. The Government have a responsibility to the financial services sector in London and more widely across Europe to ensure that there is that legal certainty.
Let me go back to fiscal sovereignty. As I said, the proposals create a new European systemic risk board and the June ECOFIN conclusions said that its function would be to
"Define, have access to and/or collect as appropriate, and analyse all the information relevant for identifying, monitoring and assessing potential threats and risks to financial stability in the EU that arise from macro-economic developments and developments within the financial system as a whole".
It has limited powers that follow on from that analysis. It has the power to issue risk warnings to regulators and policy makers, and it can recommend legislative action where appropriate. It cannot insist on those actions being followed up-it purely has the ability to recommend. I do not think that that should cause us any concern at the moment. We are in favour of bodies on a regional or global level analysing and understanding risks and presenting their thoughts on the consequences of those risks.
The three new authorities replace the existing level 3 committees and will cover the same areas of banking, insurance and securities regulation. Whereas the ESRB will lack a legal personality, the ESAs are explicitly given one. Just like the ESRB, the new supervisory authorities will research, collate and comment on relevant micro-prudential issues. They will also be responsible for developing binding, harmonised technical standards. If an individual member state is in breach of those standards, and an issue cannot be resolved, one of the supervisory authorities might make a final decision via binding mediation.
We can see already that we are in danger of breaching the red lines that the Chancellor initially laid out. This is another example of the rather laidback approach that the Government have adopted to their policies. Back in June, before ECOFIN, Lord Myners said that
"the Government does not agree with the Commission's proposals to give a European body powers to change national supervisory decisions, or powers over individual firms".
That is exactly where we are in danger of heading. The ESAs will be able to act on both areas through binding mediation, in the case of disputes between national authorities under article 12, and the binding power to ensure that firms and national authorities comply with EU law when the Commission declares an emergency situation under article 10.
Mr. Cash: I agree with my hon. Friend's analysis, but the danger is that, because of mission creep, there will be increasing control-the practitioners instinctively feel that that is coming. Those who are promoting this whole superstructure, including the Government and Lord Myners himself, would hand over the City of London, lock, stock and barrel to a supervisory authority that will insist that it has its way. That is the problem and it is completely contrary to proper market conditions. That is where the problem lies for the City, and it will end up in competition with New York instead of working across the Atlantic as we should do.
Mr. Hoban: My hon. Friend makes an important point about mission creep when it comes to these authorities, and he has been very critical of trade associations so far. However, the Association for Financial Markets in Europe has identified that as a potential issue. It is concerned that ESAs will go beyond technical issues and stray into policy. It said:
"It will be important to ensure, in the context of the 'Omnibus' Proposal, that technical standards do indeed respect the 'technical'/'policy' distinction, and in particular that they do not inappropriately constrain supervisory judgements by national authorities that are provided for in the sectoral Directives."
It also argued that checks and balances would be necessary to prevent such mission creep. There is therefore widespread recognition of the risk of mission creep, and delay is important so that we can work through the issues and say exactly what these new bodies can do, what constraints there will be on their activities in practice, and what their modus operandi and their approach to their mission will be. We also need to know what resources they will have to enable them to meddle in the activities of individual national supervisors. We are in danger of reaching a political agreement at ECOFIN and the Council without really thinking through the practical implications for London as a financial services centre. That is the challenge for the Government. Will they sign up to this tomorrow, or will they argue that the consequences have not been properly thought through? I hope that the Minister will respond to that challenge in this debate,
The Minister adopted a contradictory approach. She said that the final proposal must respect the red lines agreed at ECOFIN in June, but at the same time she seemed to accept that the supervisory authorities could make a decision that had an impact on our fiscal responsibilities. She was content that a safeguard mechanism would be in place to allow us to appeal if we thought that that was happening. However, we cannot on the one hand say that there must be no fiscal impact and on
the other argue for improving the safeguard clause in article 23 by tightening up the wording. We either have red lines or we do not. The Minister needs to be much clearer about that. Lord Myners, when considering the disparity between the legislative proposals and the Council's recommendations, said:
"the legislative proposals appear to go further than what was agreed by heads of state at June European Council".
We are now being promised improvements to the fiscal safeguards, but can the Minister tell us what forms these might take?
There is also a challenge to the Government red line in dealing with emergencies. At the moment, the document is drafted so that it is the Commission that decides what constitutes an emergency and the ESA can override the national supervisor subject to the appeal mechanism set out in article 23. We know from our recent experience in the financial crisis that it is at moments of crisis and emergency that the interests of national Governments and taxpayers are paramount, but we seem to be allowing a situation in which the ESA, in a crisis determined by the Commission, could overrule the judgments of national supervisors and have an impact on fiscal responsibility.
We want the Government to maintain the red line and stick to their principle that there should be no impact on the UK's fiscal position. However, yesterday in the Financial Services Bill debate, when the Chancellor made his opening remarks, it sounded as though he was watering down the red line. He seemed to be going for a situation in which not the Commission but the Council declares a crisis. However, that still allows the European supervisory agencies potentially to override national supervisors, which I do not think respects the red lines agreed in June.
Mr. Mark Field: I agree entirely with the last passage of my hon. Friend's speech. I also agree, with foreboding, that the red lines to which the Exchequer Secretary referred are likely to be largely illusory. Does my hon. Friend agree that a more sensible approach to constructing red lines-if we are to go down that path-would be to say that regulation should be dealt with at the European level and the supervisory element entirely at a national level? The overlap is obvious between a European and national supervisor. The supervision element should be entirely in national hands. That would be a sensible red line, if one is to be fought over tomorrow and in the negotiations in the months and, potentially, years ahead.
Mr. Hoban: My hon. Friend makes an interesting point. If regulation is dealt with at a European level, there is the risk that in the process of the binding mediation outlined in the documents, in a conflict between how supervisory authorities interpret the regulations, the ESAs could intervene, through that mediation, and create another fiscal impact. This is a complex area. I do not think that the Government have got their red lines in the right place, and they are certainly not defending them as vigorously as we would have hoped, given the conclusions reached in the June Council.
The Labour-dominated-as Opposition politicians like to refer to it-Treasury Select Committee report made itself very clear. Paragraph 84 stated:
"We recommend that the Regulations provide proper protection for the fiscal position of Member States. It needs to be far stronger than the current provisions. We do not understand why
the Commission has departed so far from the ECOFIN conclusions of June this year and we insist that UK Ministers do not agree to any of these provisions until the fiscal sovereignty of the UK is protected by a veto."
That is a very robust statement and recommendation by the Select Committee. Two distinguished Committee members are here this afternoon, and I am sure that they will stand by it. It is difficult to see, however, how the Government can say that their red line has been recognised in the architecture if they do not achieve that veto.
Stewart Hosie: The hon. Gentleman said earlier that it is necessary to move quickly during a crisis, and that is absolutely right-this is not just a fiscal protection. Is it part of his argument that changes to the prospectus directive, for example, could hinder the issuing of shares and raising of cash in an emergency? The capital requirements directive, for example, is split between the European banking authority, in relation to the implementation of Basel II, and the European securities and markets authority, in relation to non-prudential issues. Is that the kind of confusion that he thinks might delay quick action in an emergency?
Mr. Hoban: Actually, my point goes back to the exchange between me and some of my hon. Friends about the legal basis of the powers, which is not clear and about which there is some doubt. That could create confusion as people seek to test whether the pronouncements of the ESAs are valid in the context of European law. That is where some of the confusion will potentially emerge.
Let me move on to another aspect on which I am not entirely sure that the safeguards in article 3 are sufficiently robust. As I mentioned earlier, the ESRB has the power to propose changes in response to risks that it identifies in the European economy. It can propose actions, but it does not have a mechanism for enforcing those recommendations. The problem that I see in how the various bodies interlock is that although the ESAs have the power to ensure that supervisory authorities follow the recommendations of the ESRB, that is not covered by the safeguards in article 23. I wonder whether the Minister could assure the House that the safeguards set out in article 23 will be extended to cover situations in which the ESAs seek to implement the recommendations of the ESRB.
I intervened on the Minister about the composition of the steering committee of the ESRB. I made it clear then that we want to ensure that the final document contains some recognition of the fact that there should be two bank governors on the steering committee who come from non-eurozone countries. The Minister said that she would find out how any conclusions reached in the Council could be made binding.
There are a number of other issues that we could touch on in this afternoon's debate. I have already raised a couple in interventions on the Minister, such as who will be responsible for supervising the central clearing houses. There is also concern about the scope of the European securities and markets authority. There have been a number of representations from institutions in the City of London that are concerned that the authority's remit could impact on the takeover directive, on which there has been a hard-fought campaign to reach consensus
across Europe. It appears that the takeover directive falls within the scope of the European securities and markets authority. There is concern that the authority might seek to move away from the consensus that has been achieved on the directive in respect of takeovers in the UK and undermine the work that the Panel on Takeovers and Mergers does. I wonder whether the Minister could clarify whether she expects the Government to call for the European securities and markets authority's remit to be restricted to exclude the work on the takeover directive.
I have talked about the concern in the City about whether the European securities and markets authority's role in fleshing out some of the technical detail on directives might be extended to cover policy issues, but there are other areas of concern. For example, shareholders in the UK receive greater protection when making substantial transactions here than they do elsewhere in Europe under existing directives. Will there be sufficient flexibility in the new regime for shareholders to continue to benefit from that additional protection?
Let us look at what happened in Spain in this financial crisis. Spain consciously diverged from the capital requirements directive by allowing dynamic provisioning in its banking sector, which many would argue safeguarded it against some of the problems seen elsewhere in the European financial sector. Would the European banking authority's powers prevent a central bank from imposing those additional requirements on banks in its country? If it did, the Spanish banks would have been in a detrimental position compared with the current status that they enjoy, and central banks would have less discretion to protect depositors and taxpayers.
In conclusion, there are a range of issues in the proposals before us that require further scrutiny. They also require the Government to adopt a tougher negotiating position at ECOFIN tomorrow and at the Council meeting later this month. I have to say that I am not optimistic about the Government's chances of insisting on their red lines, because they have repeatedly left debating these matters until too late in the process. They have too often been slow in getting involved in discussions about how these directives should be shaped when they are going through the processes in the Commission, leaving it until the directives have been published before engaging in the debate.
These legislative proposals have gone beyond the position agreed in the ECOFIN meeting in June and the later Council meeting, which I believe has happened because the Government have not been sufficiently proactive in engaging in the European debate. That is why Conservative Members say it is important for a senior Treasury Minister to spend as much time as necessary in Brussels and other European capitals to strengthen our opportunities to engage on these matters earlier and more effectively. We would have Ministers engage in the debate in ECOFIN, making sure that Britain's case is strongly and clearly made. We need to bolster our operations in Brussels and ensure that more Treasury civil servants are working on European matters. We also need to ensure that the regulator continues to engage vigorously in the debate. As these new European authorities are set up, it will become even more important
that we are part of that set-up and arguing for the interests of London as a global financial services centre.
I think the stakes are high. The Government appear to be disengaged from the European process until the very end. Rather than engaging throughout that process, they come to life only then, trying to change already drafted documents rather than influencing the drafting. The Government's approach always appears to be about tactics, not about strategy. The financial services sector in London is a global success story, but I think the Government, through their cavalier and insouciant approach, are in danger of putting that success at risk. By opposing the motion today, we are sending out a very clear signal that that approach needs to change and will do so only with a change of Government.
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