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5.32 pm

Mr. Mark Todd (South Derbyshire) (Lab): I burdened the House with quite a lengthy speech yesterday and I hope not to detain it quite so long today. There are some linkages, as I indicated in my earlier intervention on the Minister. First, we need to be grateful that Her Majesty's Opposition now regard a French banker as a useful resource for advice for their proposals on regulation, instead of an opportunity for rather stereotypical cursing. We can see some evidence of progress in policy formation there.

The hon. Member for Fareham (Mr. Hoban) challenged me on the possible payback that Mr. de Larosière might secure from his endorsement of Conservative policy, but we may have seen it in the hon. Gentleman's speech. Instead of questioning the architecture and philosophy of the regulation that came from the relevant group, the focus of his speech was on process and timing. I am certainly going to touch on those things, but I will also address some philosophical concerns about this approach and the direction in which we are heading.

Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op): I am grateful to my hon. Friend for giving way before he proceeds to the main points in his speech. It appears from the final comments of the hon. Member for Fareham (Mr. Hoban) that the Conservative party not only speaks highly of proposals from a French Minister, but that it wishes a Treasury Minister to take up a more or less permanent residence in Brussels in order to pursue UK interests. It seems like a welcome change that we have seen from the Conservative party today.

Mr. Todd: Let us leave it for the electorate to decide what they make of Conservative policy, its origins and its allies. I certainly listened with attention to the speech of the hon. Member for Fareham. I have to say that Conservative politicians speaking from the Front Bench about Europe always have a somewhat tightrope-like approach, particularly when the hon. Member for Stone (Mr. Cash) is in his place behind them, trying to prod them in other directions. The speech was an interesting attempt to adhere to a tightrope in spite of provocations from time to time.

Let me go to the fundamentals of this issue. The previous model of what constituted not European regulation but advisory frameworks in this policy area was focused on what I would regard as the useful
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purpose of enabling information and practical experience to be exchanged between regulators in the various marketplaces.

Not everyone feels that talking shops have value. For instance, the Governor of the Bank of England has made a number of entertaining and, one might say, dismissive remarks about de Larosière's thoughts on this area of European intervention. When questioned about the future function of the European systemic risk board, he said:

There is certainly evidence that some of the international gatherings that are organised to discuss even the more practical issue of regulation may have relatively little value. However, let us take a slightly more optimistic position than that taken by the Governor of the Bank of England, and suggest that these forums for the exchange of information and experience may have some value. What I have puzzled over is the question of what added value results from an extension of that role of information exchange and experience exchange into an activist regulatory framework. That is what the proposals before us represent, not in their fully evolved form-as I shall explain later, I believe that we are moving along a ramp towards a rather higher level of intervention than we see before us now-but certainly in the early stages of establishing a European regulatory framework in the relevant marketplaces.

I have no principled objection to such an extension as an idea-unlike the hon. Member for Stone, who certainly would-but I should like to see a demonstration of the practical added value that would result from the additional layer of regulatory intervention. I have not seen a case proven which shows that the establishment of some European regulatory framework will cause our consumers to be better protected, our taxpayers to be better protected-from chaos-or the individual trading entities within our nation states to be better protected.

Stewart Hosie: Is it not the case that we will probably end up seeing the European regulatory framework body negotiating with the United States, Japan and others? That, surely, will be the level at which global negotiation will take place, as in the case of trade talks. Is this not an interim step in that direction? Rather than 200 countries negotiating and concluding on a framework global regime, a European body will conduct negotiations on our behalf.

Mr. Todd: That is the model for trade negotiations now, and it would certainly be a possible logical outcome of this approach. My constituency does not contain a financial services community-people make things there, and I am glad of that-but financial services constitute an important part of our economy. I respect that position and would wish to defend it, but I do not think that that would be the best means of defending it.

I am not persuaded that the case has been properly made, but if we accept that the intellectual basis of these changes is a wish to improve market functioning
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to ensure that we have a single market that works more effectively, and to increase the resilience of that marketplace-in other words, if the aim is the protection of the various entities to which I referred earlier-I am not sure that that will result from the actions we are taking in agreeing to the establishment of these agencies. I would like that case to be set out in practical terms-what does this mean, and how will it deliver added protection and added value in this critically important sector of our economy?

There is also the issue of deciding both how we are to proceed and how these bodies will operate once they have been decided on and set up. The decision-making process is somewhat strange. I devoted some time to this issue in Treasury Committee discussions. We have by far the largest financial services sector in Europe, yet in the decision-making framework and processes of these bodies-and they will be making decisions-our voice appears to have no greater weight than any other member state. We therefore face some risk of having to spend a significant amount of our time seeking to persuade regulators and their representatives from member states with tiny financial services sectors of the merits of our arguments in horse-trading discussions on technical matters that are largely irrelevant to them, but which they nevertheless have a say in and a vote on. One has to wonder about the merits of that.

Let me relate an exchange I had on this subject with Lord Myners in the Treasury Committee. I pointed out the rather different degrees of importance of the financial sector for various member states, and he said:

I hinted to him that I had heard a suggestion that one of those things was the venture into hedge fund regulation, and he said, "Absolutely." I asked whether that exemplified the problem of constructing European responses in sectors where one nation state has virtually no industry at all and another has a very large industry. He replied:

I have spent a considerable chunk of my parliamentary life debating fisheries and agriculture, and I do not find great reassurance in such a reference to the decision-making processes on those matters within Europe. What we have, therefore, is a hope-or an expectation, to refer to the word used by the Minister-that Britain's voice on these matters will be heard loud and clear. I must admit, however, that I would like more than a hope, and even more than an expectation, that we will be able to protect our interests when decisions are made.

I had expected to hear some of the points I am making from official Opposition Members, but such is their new love-in with Mr. de Larosière that perhaps they have tempered their thinking in this area. We shall see.

Mr. Hoban: This is exactly why we have said in our paper on financial regulation that we want to have more engagement-so we can lead that debate in Europe. The
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problem at present is that the Treasury is absent from leading the debate, which is why we have ill-thought- through proposals such as the one to which the hon. Gentleman referred: the alternative investment fund directive.

Mr. Todd: That is a slightly slippery response, because that is not the point I was making. I agree that the physical presence of Ministers and their activist role in negotiation is important, but I was addressing the outcomes of such negotiation, even in cases where they are there arguing their case. The hon. Gentleman chose not to comment on that.

We seem to be heading down a path, and I can see where its origins lie. There was an understandable reaction to financial collapse-I sense a lack of confidence, to some extent, in the Anglo-Saxon models of financial services-and a space opened up for activism at the European level. I can well understand how that arose, but I am concerned to ensure that we limit this progress as far as possible. Some red lines can be drawn, but my worry is whether the lines are really red, or pink. Given the decision-making process, about which we have had much more informed discussion, I am not utterly persuaded as to how hard we will be able to hold to those red lines if others do not endorse our positions, however rationally we put them.

I want to set out what these red lines should be, although most of them have been mentioned. First, there should clearly be no intrusion into the fiscal responsibility of individual member states. The hon. Member for Fareham quoted from the Select Committee report. Hon. Members may contradict me if I am wrong, but I believe that I strengthened some of that report through our debates, and, thus, I endorse its sentiments. Secondly, there should be no ability-I stress the word "no"-for any of these agencies to intervene over the heads of the national regulator; they should not be able to intervene individually with companies or to direct the role and actions of the national regulator. Neither of those activities is an appropriate function for the individual European agencies.

Thirdly, I can see no value in setting aside a particular function in an "emergency"-quite how one defines that is another matter-to any of the European agencies. Such an approach appears likely not only to raise the issue of legality, which has been touched on, but, more practically, to get in the way of the urgent action that will be required in many instances. I dread to think what would have happened if we had felt that the most appropriate response to the collapse of the Icelandic banking system and its consequences in the UK was to ask some European agencies how best we should deal with that. Criticisms of how the Government acted in that instance have been made, but I am much more comfortable with having those decisions made by a UK authority in the interests of UK taxpayers and account holders, than with passing the task to a European agency.

Christopher Fraser: The hon. Gentleman therefore surely agrees with me that the word "emergency" is so ambiguous that the Government need to define better its meaning and applications.

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Mr. Todd: Probably, but I might be even more absolutist, in that I cannot conceive of an "emergency" in which passing the task to a European agency would genuinely add value in dealing with a crisis. The task is to act with urgency in many of these circumstances, and to consult as fast as we reasonably can with others.

We all recognise that the financial services sector crosses borders, and entertaining one-liners have been thrown into the debate about financial services businesses being global in life but national in death. That is obviously true but, in practical terms, it is individual nation states that must make the rapid responses.

For all those reasons, I hope that the Government will act with firmness and a clearer philosophical determination about what is in the best interests not only of our financial services sector, important as it is, but of our taxpayers and our nation as a whole. We have conceded some ground already and, although I have doubts about how far we should have gone, I accept what has been done. We should now make sure that any regulatory framework that emerges from this process clearly adds value to the sector. In addition, it must not intrude on the nation state's role in the regulatory operation of the financial services sector, or on a Government's fiscal responsibility to secure the successful rescue of any business.

5.51 pm

Mr. Jeremy Browne (Taunton) (LD): I begin by congratulating the hon. Member for South Derbyshire (Mr. Todd) on his speech, in which he appeared to be auditioning for the role, in the event of the Conservatives winning the next general election, of the new banger-together-of-heads in Brussels. Whereas the hon. Member for Fareham (Mr. Hoban) made a rather equivocal speech from the Conservative Front Bench, the hon. Gentleman gave us something a bit more robust in respect of defending the national interest. I look forward to his being a GOAT after the next general election, if indeed there is a change of Government, and to watching him enjoy a suitable lifestyle in Brussels while he defends our national interest, with zeal and on a daily basis.

The backdrop to our deliberations this afternoon-and, indeed, yesterday and for many months-is the huge regulatory and systematic failure of our financial system. That failure has had huge and ongoing consequences and ramifications for our economy, our banking sector and our tax burden. It also led to the enormous deficit that we as a country are continuing to finance, so those who would like to wish away the circumstances surrounding this debate must face up to the fact that we are living now in a situation that is very different from the one that existed a year or two ago. We have to ask some fundamental questions about how we got into this position, and how we respond to it.

The fact that the UK has the largest financial sector is the main, but not the only, reason why we found ourselves particularly exposed when the system failed. That is why many people in Europe might observe that our representatives around the table in Brussels tomorrow will have as much reason to listen as they have to talk, and that there may be aspects of our performance that could be improved on.

The widespread enthusiasm for greater regulation is an instinctive and natural response to failure of the type that took place. People feel that we must regulate with
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more zeal and a greater desire to intervene: I believe that the Conservative spokesman, the hon. Member for Fareham, used the expression "proactivity", and I am sure it is true that we need to be more proactive in that regard, although people mean different things when they talk about regulation. Some want banks to be split up, others want an end to the tripartite arrangement in the UK, while still others fixate particularly on the bonuses paid to people operating in the financial services sector.

There is a tendency to lump all those concerns together and to demand greater regulatory intervention in the financial services sector, but how we regulate and how fast we should do it remain open questions. The debate in this country is obviously very much alive, as we saw when we discussed the Financial Services Bill yesterday, but the global circumstances of the collapse that we have just experienced are without precedent. The effects of recessions in the past have of course moved from one country to another, but the consequences of failure are more profound now thanks to the greater interconnectivity and inter-reliance of the financial services sector.

Many people have observed that our status as such a big financial centre proved to be a mixed blessing. As the hon. Member for South Derbyshire noted, the banks located in London were global institutions yet the burden of picking up the bill when things went wrong was national. The problem was that those institutions were so big that it was difficult even for a national economy as large as the UK's to deal with picking up the bill without huge implications for Government borrowing and indebtedness, and the Government's exposure in that regard has had many ramifications.

Mr. Cash: Does the hon. Gentleman agree that it is totally crass for the Government to hand over the running of financial services to the EU, and then to saddle themselves with the responsibility for bailing people out when things go wrong? How stupid can you get?

Mr. Browne: I am not aware that anyone in this debate has proposed that course of action-

Mr. Cash: It is what this is all about.

Mr. Browne: The hon. Gentleman says, from a sedentary position, that that is what this motion is all about, but the nub of the debate is whether that is the case. I shall deal with that in a moment, but we all acknowledge that these enormous financial institutions have tentacles that reach into many different markets. That is why it is appropriate for us to ask ourselves whether the regulatory regime that monitors them should have a similar scope, and a dimension to its activities that reflects the scale and nature of the organisations being regulated.

Because we have the most advanced financial services sector in Europe and are the dominant players in the market, the proposals before us today could have some benefits for the UK. A market whose general regulation applies the same rules to all European countries could present opportunities for us to achieve greater profitability and wider expansion, as long as there is no improper restriction of our financial services sector. That is important, because regulation must not restrict legitimate competition.

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I believe that people sometimes reach for regulation-in financial services or any other sector-as a way to try and bring about a lowest-common-denominator uniformity. There should be robust competition between institutions, as that will ensure that they are profitable and successful and offer value for money to their customers. There need to be safeguards, and we have to learn the lessons of the massive failure that has taken place, but we must not restrict financial services institutions to the extent that they are unable to compete and develop in a meaningful and beneficial way.

The point has been made by others, including the hon. Member for Fareham, that the system being proposed has been advanced with great haste. Of course, that is also the view of the Treasury Committee. Its initial report, which was published on 11 November-although that was only a few weeks ago, the report has already been overtaken by subsequent publications-said:

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