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"While the intention of the new regulations is widely welcomed, there is a great deal of unease about the detail. There is still more unease about the speed with which it is hoped to agree them; the Presidency is pressing for their adoption by ECOFIN at the Council on 2 December. We consider that is far too fast: the proposals will set in place a framework which should last for many decades, and there should be proper time for consideration."
I do not know whether the deputy Chairman of the Committee, the hon. Member for Sevenoaks (Mr. Fallon), will speak about that observation further, but it is a reasonable point. The horse has already bolted, so there is not such a degree of urgency to deal with the risk because, I hope, the chances of a similar failure happening in the immediate future are modest. We are trying to deal with the long-term response to the dramatic failure that has already happened, but there is no great pressure on us to act right now. I share the view of the hon. Member for Fareham that it would be better to spend more time on this and get it right than to try to put in place unsatisfactory measures with great, and perhaps excessive, haste.
The Government need to take seriously several issues relating to the proposals that will be considered by the EU tomorrow. My fellow Somerset Member, the right hon. Member for Wells (Mr. Heathcoat-Amory), who is no longer in the Chamber-he clearly lacks my zeal for this subject-asked the Minister about the system for appointing the people who will sit on these regulatory bodies and to whom those people will be accountable. I hope that the Minister will respond to those points. I understood from what she said that while she had some views on accountability, she was less clear about the appointment process.
The right hon. Gentleman's question was legitimate, not least because, as I tried to suggest in my intervention, we all know that member states have different opinions on the way in which the financial services sector should be regulated. There is widespread suspicion in France about the so-called Anglo-Saxon model of capitalism, and those in France feel somewhat vindicated by the events of the past few years. There is, however, a different consensus in Britain. The three main parties sometimes have more in common with each other than we do with the consensus in other EU member states. It is important that there is transparency in the appointment process regarding who gets to occupy a position and to whom they will be accountable.
It is also important that the status of the City of London is recognised and not damaged. The hon. Member for South Derbyshire expressed the view that, given that Britain is so dominant in this regard, it would be weird if that was not reflected in our ability to contribute to the deliberations. However, others in the EU might dispute that principle. On that basis, member states that share land borders with non-member states might say that their input into discussions on border security should be greater than that of the United Kingdom, which is in a different position. The hon. Gentleman cited fisheries as an area in which some countries have a greater stake than others. I imagine that Austria, for example, is less preoccupied with that matter than Britain, Spain or France. There are therefore problems with the hon. Gentleman's proposal, but we nevertheless have a clear national strategic interest that the Minister needs to address.
I agree with those who say that fiscal policy is a matter for member states, in which regard I hope to catch the attention of the hon. Member for Stone (Mr. Cash). He is right that taxpayers in his constituency and mine, not French and German taxpayers, have financed the bail-out of the banks in the United Kingdom. We therefore have to be confident that the taxpayers whom we represent will not be left to pick up the tab without our having the ability to regulate the institutions that they ultimately have to protect. It is right and sensible that fiscal policy is the preserve of member states, and that should be a settled matter.
The Minister needs to give greater clarity, perhaps in her winding-up speech, about the interaction between what is proposed and national systems of regulation. If we in this country are to review the way in which we regulate our financial services sector-for example, the Conservative party has radical and far-reaching proposals in that regard-that process cannot be seen in isolation from what is considered suitable on a European scale.
The Minister needs to satisfy herself on several details during both the European negotiations and her deliberations in London. For example, what are the procedures for data management and security? If the financial services and banking sectors are to be regulated, that will presumably require large amounts of information to be imparted, some of which might be highly sensitive or confidential. It is only right that we should be satisfied that such information will be handled in a suitably discreet and appropriate way. I accept that that point is not the absolute nub of the argument-perhaps it is a secondary issue-but it is important that any system put in place functions effectively. We should not find British institutions, or even British individuals, being put in an unfortunate or undesirable position as a result of malfunctioning European regulation.
Mr. Browne:
The hon. Gentleman says that we will, but I want to safeguard against that. I do not wish to have a disagreement with him-certainly not on this subject-but if we agree a system, it must be robust, and we must test its ability to do its job properly to at least the same extent as if we put a system in place in this country. We do not want to introduce a system with
undue haste because of a desire to be seen to be co-operating at a European level and acting with a degree of compromise to ensure that other countries' considerations are taken on board, and then to find that those factors lead to structural deficiency in the mechanisms that are put in place. If such a thing happens, we will come to regret it when the systems are tested to destruction as they step into action to try to respond to a future shock.
I observe the paranoia in the Conservative party whenever we discuss anything to do with the European Union. There is a belief among Conservative Members that every negotiation in the EU should involve setting out Britain's fears about co-operating with any other like-minded country before going into the negotiations with a determination to protect our position, rather than trying to engage in a sensible exchange with other EU countries. We have a lot of interesting knowledge and many observations to impart, but we might also have interesting things to learn from other countries, because our country has not covered itself in glory. If the Minister starts tomorrow's negotiations by saying that we have lots of red lines because the way in which Britain has regulated its financial services sector has been so brilliant that everyone else had better learn from us, she might find that that is not the best way to reach the conclusion that is most beneficial for Britain.
Mr. Cash: The hon. Gentleman betrays a remarkable lack of knowledge about the extent to which the French in particular and the Germans, who are also going for the European bank, have set their hearts, minds and political will on doing as much as possible to ensure that the City of London does not survive as the main centre in Europe. The hon. Gentleman is completely and totally off the wall.
Mr. Browne: I do not know if I am grateful for that intervention. When I spoke about paranoia about the European Union, I did not necessarily have the hon. Gentleman in mind, although he may have identified with that feeling. There are many good reasons why London should be the financial services capital of Europe, as it offers entrepreneurial dynamism and labour market flexibility, and the fact that we speak English helps. We should not be burdened by regulation. In fact, I made the point, which no one else has made, that regulation should not be a byword for dumbed-down lowest-common-denominator uniformity. It should allow competition and innovation, and in those circumstances we should be confident that London and Britain can do better than other European countries such as France and Germany. I have also advanced the reasonable argument that it would be a mistake to go into the negotiations patronising other EU countries by telling them that they have everything to learn from our regulation of the financial services sector and we could not conceivably learn anything from them, even though the evidence of the past few years suggests otherwise.
I wish the Minister well, as this is a valid exercise. In a world of global interdependence there is a role for a European dimension. We need to make clear the parameters of that role and where nation states should rightly retain pre-eminence-that has been usefully discussed today. I do not share the somewhat paranoid perspective, in my view, of the hon. Member for Stone and others
that any discussion of a European dimension to regulation is inherently bad. There is a role for it, but we must make sure that it is proportionate and that there are clear lines so that we do not have confusion the next time there is a financial crisis about which regulatory systems have which responsibilities.
6.12 pm
Mr. Michael Fallon (Sevenoaks) (Con): I remind the House of my interests recorded in the register.
It is not at all clear after 21 minutes of oration from the Liberal Democrat spokesman exactly where his party stands on the proposals, and whether in fact it would not just wave them through. The hon. Member for Taunton (Mr. Browne) asked for a little more clarity, for safeguards on data protection and so on, but it is not at all clear where his red lines lie. He accused Conservative Members of paranoia, but I draw to his attention the Treasury Committee report on the proposals, which is lying on the Table and which was signed by the two Liberal Democrat members of the Committee. The criticisms that the Treasury Committee made of the proposals were made by all parties in the House, particularly by the two Liberal Democrat Members who signed up to the report.
The proposals are deeply flawed and damaging to the City of London and Britain, so they must be resisted. In my view, the Commission has gone far beyond the remit that it was originally given by the European Council in June, as the proposals seek to supervise not only the domestic regulators but domestic private financial institutions in member states. They have a dubious legal basis, as our Committee identified and as we have discussed. They would transfer much more supranational authority to the Commission than was originally envisaged, and they remove, in their current form, all the safeguards that the Heads of Government themselves wanted to include to protect their national taxpayers.
Not only have the proposals been drawn up in great haste, as hon. Members on both sides of the House have pointed out, but they ignore the work under way in other international forums. Proposals have emerged from the G20, and new work is under way to produce proposals in the Basel committee. Proposals have emerged from Congress with which these proposals, in the end, have to sit, otherwise we may well find that we are once again in the midst of the kind of regulatory arbitrage that got us into difficulty before, as we are dealing with finance houses that are increasingly global in operation.
In my intervention on the Minister, I pointed out that in the draft as it stands there is absolutely no guarantee that the non-eurozone countries will be properly represented on the proposed European systemic risk board. To me, and I think to my hon. Friend the Member for Fareham (Mr. Hoban), that should be a red line that applies not simply to the United Kingdom but to other important financial countries such as Sweden that are outside the eurozone. It is essential that the non-eurozone countries are represented on the board, and I hope that when the Minister makes her winding-up speech, she will make it clear that that is in fact one of the Government's red lines and is not simply an aspiration. We should not agree to a proposal to set up the board if it does not include proper representation as a requirement for the non-eurozone countries.
Another problem is the kind of powers that the ESRB will have. Some witnesses who appeared before the Treasury Committee thought that it would be something of a talking shop, but that is no bad thing. Across the European architecture, there should be some way for the ECB governors and others to meet to discuss the issues collectively-that was the bit that was missing between the ECB and the national supervisory authorities before, and I do not oppose it. Equally, however, our conclusion was that the board may well be more effective than simply being a forum for discussion, and we said that
"it would be a mistake to underestimate the extent of the ESRB's potential to trigger real effects".
Again, I should like to hear from the Minister whether it is the Government's position that the board should be more than a discussion group, and that she is prepared to concede that it should have some real influence. After all, as we pointed out, if the three so-called ESAs are set up, their chairmen will serve on the ESRB and I suspect that in time it will become an important forum.
The Treasury Committee was unsure of the proper basis for the powers that will be delegated to the supervisory authorities. If they have powers to ensure compliance with EU law, that takes them to the very edge of European law. If the powers that are granted to them are new, they are outside the existing powers in the treaties, so the legal basis for those supervisory authorities is extremely tenuous. However, the powers that they are giving themselves are not tenuous-they are very clear. In articles 9, 10 and 11, the supervisory authorities will have direct power to give instructions or directions to individual financial institutions. In other words, the European banking authority could issue an instruction to Barclays bank in the UK, to HSBC, or even to the Royal Bank of Scotland, which is taxpayer-owned. An instruction may be received from the authority that would override other interests, including those of shareholders and taxpayers.
We need to be much clearer which directives the banking and other supervisory authorities are supervising. We were told in evidence to the Committee that various directives might have to be amended to enable the supervisory authorities to supervise the bodies concerned. Again, before we set up these authorities to supervise other bodies, we should be clear exactly what is being supervised.
There is also the issue of an emergency situation. It is wrong that the definition of what constitutes an emergency situation should be left to the Commission, of all people. Indeed, as the proposal is drafted, it would simply be for the Commission to decide that there are some "adverse developments" somewhere across the European Union. It can then declare an emergency situation, which triggers a series of new executive powers. That is not the Commission's job, nor is the Commission the right body to do this. The Commission does not have a balance sheet or a direct relationship with the European Central Bank, and it has no interest in protecting the interests of national taxpayers.
Mr. Cash:
Does my hon. Friend agree that the European Commission, being the ultimate bureaucratic executive and the responsible body-these regulations are about regulatory arrangements and are the highest of legal instruments that must be implemented by member states-is
acting in a manner that will inevitably lead to a non-competitive environment, because the Commission itself is basically undemocratic? It is bureaucratic, and all the fears that my hon. Friend has expressed will come about because of the failure of the culture within the European Union to understand that that is the basis on which the Commission operates, and it should not be allowed to do so. The Government are seriously in error and should be condemned for allowing such a situation to come about.
Mr. Fallon: My hon. Friend makes his point, again, extremely powerfully.
I still think that the Commission is the wrong body for the task, and I am somewhat encouraged that in evidence to us, Lord Myners said:
"I cannot conceive of a situation in which the Commission would be the natural body to be able to formulate a view on what constituted an emergency situation."
Given that those are the words of the Financial Services Secretary in evidence to the Committee, I assume that that must be a red line for the Chancellor tomorrow. We need to remove any suggestion that the Commission should declare an emergency situation, and ensure that our interests are properly protected.
My final point is one that has been touched on by hon. Members on both sides of the House-the fiscal safeguard. In the conclusions of the European Council in June, the Council was emphatic, and the Prime Minister repeated the exact wording here in the House, that these arrangements
"should not impinge in any way on the fiscal responsibilities of Member States."-[ Official Report, 23 June 2009; Vol. 494, c. 661.]
However, we now see in the drafts for all three authorities that if a member state feels that its fiscal responsibilities may be impinged by the powers that are exercised, under articles 10 or 11 it can appeal only to a majority vote of the Council. That is no safeguard at all, when the United Kingdom or another member state can be outvoted after a discussion as to what constitutes an impingement. That is not satisfactory.
We know that the proposal is not satisfactory because in its justification of the power, the Commission argues that the appeal power should be exercised sparingly. It may be that the Commission does not want any dispute to arise and hopes that such a dispute will never arise. It does not want the power of appeal to a majority vote to be exercised under normal circumstances.
The other great weakness of the fiscal safeguard is that it extends only to action under articles 10 and 11. It does not extend to article 21 powers, after a warning by the systemic risk board, which may follow from the declaration of an emergency situation by the Commission. All parties in the Select Committee were very clear, as has already been read out to the House, that the veto must be available and must be absolute. I appeal to the Minister to reassure the House that standing behind that veto and ensuring that we are not put in the position of relying on a majority vote will be one of the red lines in Brussels tomorrow.
I fear for the consequences of these proposals if they go through in anything like their current form. I see a recipe either for endless conflict between the new European
supervisors and our own domestic supervisor, the Financial Services Authority, or for the Financial Services Authority to be treated simply as a consultative body-one of the parish councils of Europe, its opinion asked for and then ignored.
It is bad enough that, through the neglect of its European policy, we have ended up with the future regulation of the City of London now in the hands of a French Commissioner. That will be extended by these proposals so that we are in the hands not only of a French Commissioner, but of a band of supranational authorities. That will be very damaging to London, to the United Kingdom and to the European Union, of which London is such an important financial centre.
I am depressed by the attitude of the Minister and the Government. Throughout the evolution of these proposals, they have been silent, lackadaisical and complacent. The red lines have kept shifting. The Minister did not mention red lines today. She had to be challenged each time to get out of her what the red lines might be. It was an ill omen that the Government have conceded all three of the top economic jobs to non-British nationals. We need, above all, a Minister who will stand up for British interests in Brussels. If this Minister cannot and this Government will not, they should make way for somebody who will.
6.27 pm
Christopher Fraser (South-West Norfolk) (Con): It gives me great pleasure to speak after my hon. Friend the Member for Sevenoaks (Mr. Fallon), a person who has proved time and again that he understands the issues and is a wise and sage voice in this debate.
There is no question but that our financial institutions and the City are undergoing a difficult and challenging time, and there is no doubt that reform of our financial system is necessary. We need better and more effective oversight of the financial services sector, a banking system that properly supports small business, and recognition that the current tripartite system needs replacing. However, any changes made must not come at the expense of the City's competitiveness and ability to innovate.
Last month the World Economic Forum announced that the City of London had overtaken New York as the world's leading financial centre. That is excellent news. The City's long-term success will play a key role in boosting our economy at home and the wider European economy. Given that the Government have given away the vital role of Commissioner for the Internal Market and Services to France, as my hon. Friend pointed out, and to a politician who has a reputation for stringent protectionism, can the Minister tell the House what assessment has been made of the direct implications of this new appointment for the City of London? It is an extremely important point, which I hope the hon. Lady addresses when she winds up the debate shortly. Does she accept that future growth in this country could be undermined as a result? Why was not the Government's priority to ensure that that Commissioner's job came to the UK, for the reasons that I have just described?
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