The Committee consisted of the following Members:

Chair: Hugh Bayley 

† Brown, Lyn (West Ham) (Lab) 

† Cash, Mr William (Stone) (Con) 

† Cryer, John (Leyton and Wanstead) (Lab) 

† Duddridge, James (Lord Commissioner of Her Majesty's Treasury)  

† Gardiner, Barry (Brent North) (Lab) 

† Glen, John (Salisbury) (Con) 

† Gyimah, Mr Sam (East Surrey) (Con) 

† Hoban, Mr Mark (Financial Secretary to the Treasury)  

† Hopkins, Kelvin (Luton North) (Lab) 

† Leslie, Chris (Nottingham East) (Lab/Co-op) 

Shannon, Jim (Strangford) (DUP) 

† Sharma, Alok (Reading West) (Con) 

† Williams, Stephen (Bristol West) (LD) 

Eliot Wilson, Committee Clerk

† attended the Committee

European Committee B 

Thursday 21 October 2010  

[Hugh Bayley in the Chair] 

Investor Compensation Schemes

2.30 pm 

The Chair:  Before we begin, I remind the Committee that the issue under debate is whether the subsidiarity rule should apply. We are not here to debate the merits of the investor compensation schemes directive or other wider European matters. 

Motion made, and Question proposed,  

That the Committee considers that the draft Directive to amend the Investor Compensation Schemes Directive (European Union Document 12346/10) does not comply with the principle of subsidiarity, for the reasons set out in the Annex to chapter 7 of the Third Report of the European Scrutiny Committee (HC 428-iii); and in accordance with Article 6 of the Protocol on the application of the principles of subsidiarity and proportionality, instructs the Clerk of the House to forward this reasoned opinion to the presidents of the European institutions.—(Mr Hoban.)  

2.31 pm 

Mr William Cash (Stone) (Con):  I am most grateful to you, Mr Bayley. I note that this is the first time that this procedure has been used in the British Parliament. It is extremely important that we have the opportunity—as is provided by protocol 1 of the treaty of Lisbon, on the role of national Parliaments in the European Union—to look at questions of this kind and, under protocol 2, to look at the principles of subsidiarity and proportionality in the directive’s application. I will come back to that in a moment. 

I am grateful to the Minister for facilitating what is essentially a right for national Parliaments; that realism—Euro-realism, if I may so—is extremely important in the present circumstances. The Lisbon treaty’s time scale for national Parliaments to submit a reasoned opinion on a subsidiarity issue is extremely tight. I trust that before too long there will be appropriate procedures in place to allow the House expeditiously to take decisions on such matters. 

The purpose of the investor compensation schemes directive, the merits of which we are not discussing today as we are concentrating on the subsidiarity issue, is to ensure compensation for clients receiving investment services from investment firms, including credit institutions, in specific circumstances where the firm is unable to return money or financial instruments held on the client’s behalf due to its being in default. The directive does not cover investment risk. The draft directive, document (a), seeks to amend the investor compensation schemes directive. 

The European Scrutiny Committee, of which I have the honour of being Chairman, has decided to suspend its consideration of the draft directive pending receipt of further information from the Government on a number of issues. So the debate today is not about the generality of the draft directive, but about a subsidiarity issue identified by the European Scrutiny Committee. 

Document (b) is a draft reasoned opinion of the House on this matter. For the benefit of the Committee, and so that my remarks appear on the transcript, I shall explain the question of subsidiarity, so that the Committee knows to what the reasoned opinion refers. As I have said, the question of subsidiarity arises in part from protocol 1 of the Lisbon treaty. I draw the Committee’s attention to the fact that a protocol has legal effect, unlike later parts of the treaty. The preamble to protocol 1, which addresses the role of national Parliaments in the European Union, states: 

“Recalling that the way in which national Parliaments scrutinise their governments in relation to the activities of the Union is a matter for the particular constitutional organisation and practice of each Member State”. 

It goes on to say: 

“Desiring to encourage greater involvement of national Parliaments in the activities of the European Union and to enhance their ability to express their views on draft legislative acts of the Union as well as on other matters which may be of particular interest to them”. 

It continues by saying that certain provisions have been agreed. 

The treaty then moves on to title 1, which is information for national Parliaments. It refers to various Commission documents that the Commission has to forward on publication, as a matter of compulsion, to national Parliaments. That is how we get the documents that come before my Committee. 

Protocol 2 specifically relates to the question of the application of the principles of subsidiarity and proportionality. I will not read out the whole thing, but what I will read out is that as a consequence of the requirements to provide information, which are set out under article 4, article 5 moves on to the substance of subsidiarity. I am on the record as saying that, by and large, subsidiarity has been something of a con trick. By that I mean that since the Maastricht treaty, which I had the honour of leading the rebellion against in 1990, or thereabouts, subsidiarity has been trailed as the great saving grace of the relationship between national Parliaments and the European Union. 

It was argued, in a nutshell, that in the case of things that would be better done at the local level under the rubrics of the European Court of Justice, the Commission and the other regulatory agencies of the European Union, there would be arrangements under which subsidiarity would apply as a matter of law. That has not been the case. There have been vast numbers of instances in which things that could be done quite as well by national Parliaments have been done by the hierarchy of the European Union. However, article 5 of protocol 2 of the Lisbon treaty states: 

“Draft legislative acts shall be justified”— 

in other words, they must be justified— 

“with regard to the principles of subsidiarity and proportionality. Any draft legislative act”— 

and that, in this instance, is the investor compensation schemes directive before the Minister and the Committee— 

“should contain a detailed statement making it possible to appraise compliance with the principles of subsidiarity and proportionality.” 

That appraisal is what our Committee has to carry out, and that is what the European Scrutiny Committee did. The article continues: 

“This statement should contain some assessment of the proposal’s financial impact and, in the case of a directive, of its implications for the rules to be put in place by Member States, including, where necessary, the regional legislation. The reasons for concluding that a Union objective”— 

that is, a European Union objective— 

“can be better achieved at Union level shall be”— 

again, there is compulsion; it is mandatory— 

“substantiated by qualitative and, wherever possible, quantitative indicators. Draft legislative acts shall take account of the need for any burden, whether financial or administrative, falling upon the Union, national governments, regional or local authorities, economic operators and citizens, to be minimised and commensurate with the objective to be achieved.” 

Given the existence of the European Union and its legal framework, it is extremely laudable that those objectives are to be met. The pity of it is that they are not met as often as they should be. In this particular case, we have an opportunity, because of the procedures that have been prescribed, to hold this Committee sitting and to look into the question of subsidiarity, as the European Scrutiny Committee has already done. 

Under article 6, the protocol goes on to say: 

“Any national Parliament or any chamber of a national Parliament may, within eight weeks from the date of transmission of a draft legislative act, in the official languages of the Union, send to the Presidents of the European Parliament, the Council and the Commission a reasoned opinion stating why it”— 

that is, the national Parliament— 

“considers that the draft in question does not comply with the principle of subsidiarity. It will be for each national Parliament, or each chamber of a national Parliament, to consult, where appropriate, regional parliaments with legislative powers. 

If the draft legislative act originates from a group of Member States, the President of the Council shall forward the opinion to the governments of those Member States.” 

If the draft legislative Act originates from the European Court of Justice, other procedures apply, but that is not what is happening in this instance. 

In article 7, the treaty goes on to say: 

“The European Parliament, the Council and the Commission, and, where appropriate, the group of Member States, the Court of Justice, the European Central Bank or the European Investment Bank, if the draft legislative act originates from them, shall take account of the reasoned opinions issued by national Parliaments”. 

So there is a requirement, within the framework of this protocol, for us to be listened to. Arrangements are then set out for the number of votes that can be cast in relation to those matters and so on. 

In article 8, the treaty goes on to state: 

“The Court of Justice of the European Union shall have jurisdiction in actions on grounds of infringement of the principle of subsidiarity by legislative act, brought in accordance with the rules laid down in Article 263 of the Treaty on the Functioning of the European Union by Member States, or notified by them in accordance with their legal order on behalf of their national Parliament or a chamber thereof.” 

That is the law under which we, for the first time, are looking at this provision of subsidiarity. 

We stated in our report about subsidiarity that there is concern that the provisions in the draft directive to recast the deposit guarantee schemes directive— document (a)—and the draft directive to amend the investor compensation schemes directive—document (c) —to allow a scheme to require support from schemes in other member states may not accord with the principle of subsidiarity. Such provisions risk introducing moral hazard. That is, a scheme could undertake inappropriate, careless or risky action because it was relying on a fail-safe mechanism. To avoid introducing moral hazard, it would be better—this is the crucial point—not to

have recourse to other member states’ schemes, but to have each member state ensure that members of a scheme take full responsibility for themselves, so that, effectively, each country should do its own thing in its own way. 

The report went on to say that as the draft directives stand, they would not—in relation to this aspect of the proposals—produce a result that was, in the words of article 5 of the treaty on the European Union, 

“better achieved at Union level”, 

so they do not meet the principle of subsidiarity. We understand that Sweden’s Riksdag has taken a similar view of the two draft directives and has submitted reasoned opinions to that effect under protocol 2 of the treaty on European Union, which I have read out, and under the treaty on the functioning of the European Union. We also understand that Germany’s Bundesrat and Bundestag may offer a reasoned opinion on the draft directive to recast the deposit guarantee schemes directive. Our report effectively concluded that the documents remain under scrutiny. 

I ought to explain that, under the procedure that is available to national Parliaments, they have eight weeks from publication to submit a reasoned opinion, and if such opinions represent one third of all the votes of national Parliaments—the bicameral UK Parliament has two—the Commission has to reconsider its proposal. The deadline in this case—this is the first example of such an occasion—is midnight, Brussels time, on 25 October. The procedure, following our recommendation, is a debate in this Committee on the motion, and if that motion is agreed, the question on the motion will be put forthwith on the Floor of the House of Commons. 

Article 4b of the draft directive provides for an obligatory last-resort borrowing mechanism between national compensation schemes. As I have just indicated, the Committee believes that the mechanism did not fulfil that objective, which is that the matter could be 

“better achieved at Union level”. 

The argument for this is quite complex, but is set out fully in the draft reasoned opinion, which is document (b). 

In brief, the case is that it is likely that the primary objective of the borrowing mechanism, which is to provide greater protection to investors and promote investor confidence in investment services, will not be achieved. That is because such a mechanism could introduce moral hazard in investment services, and there is a higher risk of a national scheme underwriting inappropriate, careless or risky investments when it knows that it can rely on a back-up source of credit. To avoid introducing moral hazard, it would be better not to have recourse to other member states’ schemes but instead, as I just said, for each member state to ensure that members of the investor compensation scheme take full responsibility themselves. 

We argued that we could not see why, by reason of its scale or effects, action by the EU in the form of the compulsory borrowing mechanism, as opposed to separate action by member states, would better fulfil the objective of giving greater protection to investors and promoting confidence in investment services. On the contrary, we believe that the proposed borrowing mechanism may lead to less protection for investors and less confidence in investment services. This aspect of the draft directive would not therefore produce a result that was 

“better achieved at Union level”, 

and it does not, in our opinion, comply with the principle of subsidiarity. 

I commend the motion moved by the Minister to the Committee. 

The Chair:  It is now for the Minister to give the Government’s view on the matter. 

2.47 pm 

The Financial Secretary to the Treasury (Mr Mark Hoban):  It is a pleasure to serve under your chairmanship again, Mr Bayley, and it is also a pleasure to take part in what is for the House of Commons a novel procedure. I should just like to correct my hon. Friend the Member for Stone. The equivalent Committee in the other place exercised its right to issue a reasoned opinion last night, interestingly, not on this matter, but on a different matter. I believe that the House of Lords Committee does not have the same concerns about this directive as the House of Commons European Scrutiny Committee. But it is good that this process is in place to enable the Committee to express its view and for the national Parliaments to submit their views to the Commission. 

My hon. Friend made a point about timing and the eight-week deadline and the need for this to be submitted by 25 October. My understanding, and this point was raised last night in the other place, is that the Commission would wave technicalities to ensure that the voice of national Parliaments was heard. It would not seek to use those technicalities to avoid giving due weight to the views of national Parliaments, which is welcome. I shall say a little bit about the directive and then deal with my hon. Friend’s concerns about subsidiarity. 

The original directive was adopted in 1997. It seeks to ensure compensation for clients receiving investment services from investment firms in specific circumstances where the firm is unable to return money or financial instruments that it holds on the client’s behalf because it is in default. The Government believe that compensation plays a vital role in ensuring ongoing investor confidence, and the events during the financial crisis have highlighted the importance of this. The UK’s Financial Services Compensation Scheme leads the way in Europe and already goes further in many areas than required by the directives, such as covering investor losses resulting from breaches of rules on selling practices and by providing a higher compensation limit. 

Therefore, the Government fully support the principle of improving EU-wide investor protection by raising minimum standards of investor protection across the EU. The Government also support the principle of updating the directive. Nevertheless, alongside the improvement of EU-wide investor protection, the Government are clear that national discretion with regard to compensation limits and the operation of schemes is crucial. Today we are debating a specific point on subsidiarity within the directive, but I would like to take this opportunity to emphasise that the Government are committed to ensuring that the directive does not cause any weakening of consumer protection, place unnecessary burdens on the investment industry, or disproportionately affect investment returns. We believe it is in the interests of investors to have the freedom to

go beyond the minimum level set out in the directive, to maintain existing standards of investor protection in the UK. 

I turn now to my hon. Friend’s specific point about subsidiarity in the directive. The Government are strongly of the view that the principle of subsidiarity is one of the key checks and balances on the Commission’s competence to propose draft EU legislation, and we are committed to ensuring that that principle is respected and adhered to. Officials routinely and rigorously analyse all draft legislative proposals from the Commission and assess them against the subsidiarity test. We challenge the application of subsidiarity whenever we feel that the test has been breached. I value the role played by the European Scrutiny Committee in this area. It is extremely important that the new procedures set out in the Lisbon treaty are used, and are used to good effect, to ensure that the Commission is held to account. 

The European Scrutiny Committee has expressed concerns about the mutual borrowing requirement in the directive—specifically, whether that passes the subsidiarity test. The provision in the Commission’s proposal would require member states to make 10% of their scheme’s pre-fund available for lending to other national schemes, where they have exhausted their pre-fund and raised additional industry levies. Loans must be repaid within five years, and will accrue interest at the rate set by the European Central Bank for its marginal lending facility. 

On the issue of mutual borrowing, the Government’s position, as I set out in the explanatory memorandum on the directive, is that we strongly oppose this provision in the Commission’s proposal. We do not believe that it is justified to require national compensation schemes to be made available to subsidise those in other member states. We believe that funds should have access to alternative forms of liquidity, just as the UK’s Financial Services Compensation Scheme has access to loan funding from the Government. Indeed, during the financial crisis, the FSCS accessed money from the national loans fund to deal with the resolution of Bradford and Bingley and the Icelandic banks. We do not believe that the knock-on effects can be justified by the risks that the directive seeks to address. 

I want to make it clear to the Committee that the Government’s position is based on national sovereignty, rather than specifically on subsidiarity. The Commission has justified its proposal on the basis that greater harmonisation of investor compensation rules across the EU is important to improve the functioning of the single market. The Commission contends that investors need to have confidence that, irrespective of the jurisdiction in which they want to invest, they will be compensated for a loss that is covered by the investor compensation schemes directive. 

For such compensation to be effective, the relevant scheme needs access to adequate funds to reimburse investors for all or part of their loss. The Commission’s proposals on mutual funding are designed to manage the risk that national schemes may not have sufficient liquidity to compensate investors. It is that risk, and the impact on the effectiveness of the single market of that risk not being adequately managed, that is central to their justification on grounds of subsidiarity. In other words, without mutual borrowing the single market would work less effectively. 

Therefore, although we would not dispute the Commission’s general position that the directive is consistent with subsidiarity, we believe that the strongest arguments against the Commission’s proposals are those that are grounded in concerns of national sovereignty and proportionality, rather than the legal interpretation of subsidiarity. However, I recognise that subsidiarity does involve a certain amount of judgment and I will be interested to hear other points on that in the debate today. It is important that the UK ensures that the Commission makes a robust case for its judgment on the compliance of future measures with the principle of subsidiarity. 

In particular, I note the European Scrutiny Committee’s specific concern that mutual borrowing may give rise to moral hazards for schemes. The Committee is concerned that the existence of this moral hazard might impair the effective functioning of the investor compensation schemes directive across the EU. In the absence of mutual funding, such moral hazard would not exist. Therefore, the argument follows that since mutual funding creates moral hazard, it cannot be said that this provision is better achieved at an EU level. As it is a condition of the application of subsidiarity that action is better achieved at the EU level, the Committee feels that this test has not been met and that the principle of subsidiarity has therefore been breached. 

As the Committee is aware, moral hazard occurs when a party insulated from risk behaves differently than if it were fully exposed to the risk. Moral hazard would arise in such circumstances if a national compensation scheme, knowing that it has access to funding from compensation schemes of other member states, did not take into account the full consequences and responsibilities of its actions, and thereby acted less cautiously than it would otherwise. 

It is worth noting that the same argument about moral hazard arises whether a compensation scheme is funded by guaranteed loans from the Government or from the mutual borrowing requirement that is set out in the draft directive. The provision of mutual funding does not, therefore, create meaningful additional risks of moral hazard that do not already exist in any compensation scheme that is backed by the Government, as is the case with the UK’s FSCS. It can be argued that investors will be prone to taking greater risks if they can be assured of compensation in the event of a loss. In that case, however, the Government believe that moral hazard risks are far outweighed by the benefits of investor protection and confidence, which come from having a scheme in place. 

In relation to the points raised by the European Scrutiny Committee, on the specific case of borrowing between national schemes, we consider that the risk of moral hazard in the Commission proposal would, in any event, be minimised by the strict conditions imposed on the borrowing scheme. For example, the scheme must have exhausted its pre-fund and must have had recourse to additional emergency funding from its levy payers. Furthermore, a scheme cannot borrow from another scheme while any loan to another scheme remains unpaid in full. Therefore, a sufficient degree of moral hazard does not exist effectively to argue that a breach of subsidiarity has taken place. In our view, it is difficult to demonstrate, on moral hazard grounds, that action would not be better achieved at an EU level. 

The Government will continue to argue strongly against mutual borrowing on policy grounds. Rather than introduce mutual borrowing schemes, member states should have access to liquidity through reliable sources of short-term funding, just as the FSCS can access loan funding in the event of major failures. We have been vocal on that issue in working groups and there has been little support for the Commission’s provisions from other member states. We will continue to push those arguments in Brussels. 

That should not detract from the importance of careful scrutiny of the proposal. I re-emphasise my support for the European Scrutiny Committee’s exercising its role in the examination of the directive, despite the fact that the Government do not agree with the grounds on which the motion has been put forward. I encourage the Committee to use the new provisions in the Lisbon treaty to support the Government’s efforts to ensure that EU institutions are held to strict account for their interpretations of the subsidiarity principle. 

2.57 pm 

Chris Leslie (Nottingham East) (Lab/Co-op):  As the Minister has said, it is noteworthy that we are embarking on new and perhaps historic procedures regarding reasoned opinion. I have a number of points to make and questions to ask him on procedural matters, as well as on subsidiarity. 

As a novice in European scrutiny, the first thing that strikes me is that the motion in the name of the Minister appears in a form that suggests that he felt that the directive did not comply with the principle of subsidiarity. The Minister’s speech, however, has essentially rebutted the subsidiarity argument, which suggests that he had policy disagreements—touching on the national sovereignty point—for genuine reasons. We are here to discuss subsidiarity, so it strikes me—perhaps because of the novelty of the procedure that we are embarking on—that it would have been more useful to have had a motion in the name of the Member who is heading up the Committee concerned. Perhaps there is some rationale that I am missing. It would be useful for the ordinary Member who reads the motion to get a clear sense of the Government’s position. There is always justification for the way in which such things are set out, but I find it difficult to understand that, so perhaps the Minister will explain. 

Mr Cash:  I will deal with that shortly, because what the Minister said is inconsistent with the way that the motion is set out—I agree with the hon. Member for Nottingham East on that. I do not resile for one minute from the fact that it is a matter of subsidiarity, and I am the Chairman of the European Scrutiny Committee. I will explain in my concluding remarks why the question of national sovereignty is somewhat presumptive in this case. I will come to the reasons in a moment, because we have not yet got to the sovereignty issue. This is merely a draft directive, which has not even gone to the Council of Ministers. 

Chris Leslie:  I am sure that Members on both sides would flock to the Committee, either in their own right or as observers, were the motion in the name of the hon. Gentleman. However, we have a motion in the Minister’s name, yet the arguments put were to the contrary. 

In respect of the position taken by Her Majesty’s loyal Opposition, I feel that we have a duty to look at the question from the perspective of consumers and customers. They will be making the deposit and the investment, and we need to ask ourselves what is in their best interests. From there, questions arise about the level at which policy is best made. The hon. Member for Stone has talked about the way that the subsidiarity protocols were framed. Can such issues be sufficiently dealt with at member state level? By and large, we believe that they can. As a large country and a sovereign nation, we can deal relatively adequately with such issues, and the Financial Services Compensation Scheme has been leading the way across many parts of the world. 

There are aspects, however, where I can see the benefit of cross-border co-operation, particularly across the European Union. The mutual borrowing argument raises such questions. I can see the merit in having some safeguard to prevent an uneven playing field, where we would end up with a hotch-potch of different protection schemes, from one border through to another. There is some virtue in being able to iron out anti-competitive arrangements. That opens up the whole pre and post-funding argument about how to provide such compensation schemes, and the extent to which companies would shop around from country to country—where they set up would depend on such arrangements. 

The issue rests more in policy than in the issue of subsidiarity. On page 21 of the bundle, the Commission has tried to justify why the subsidiarity point does not necessarily apply. The cynic in me would ask if this is a way for the Government, with a nod and a wink, to say to venerable Back Benchers such as the hon. Gentleman, “We understand that you object to this sort of pro-European activity, and we will try to resist the measures by going along with the subsidiarity argument”, rather than fronting up disagreements on policy at the European level and rebutting the case for the directive there, which may upset international relationships. That is my cynical view. I may be wrong; but on the other hand, I may be right. 

Mr Cash:  I absolutely assure the hon. Gentleman 100% that I have had no communication whatever from the Minister, or from any other member of the Government on that question. We based the decision on our judgment, because we have to take account of the legal or political importance of documents from which flow the application of the protocols that I mentioned earlier, relating to subsidiarity. We have expressed our view and we are not resiling from it. We are glad that the Government consider that the draft directive does not comply with the principle of subsidiarity, and we will rest at that. 

Chris Leslie:  Yes, but direct communication is not always necessary between Government Members. I expect the osmosis school of understanding to apply sometimes, but Labour Members are always of a like mind without our necessarily having to speak to one another. [ Interruption. ] At least, that is my understanding. As the motion will come before the House, although without a substantive debate, for the time being I would like to reserve our position on the question—not necessarily opposing the motion, but not necessarily supporting

it—and take further soundings about whether the reasoned opinion holds water legally. We would also like to inquire further into whether the measures are in the best interests of the consumer, because there are arguments on both sides. We need to take more steps, rather than fewer, in the best interests of the consumer. 

Kelvin Hopkins (Luton North) (Lab):  On a point of order, Mr Bayley. Are we making speeches or asking questions of the Minister? 

The Chair:  We are making speeches. Although there is normally a one-hour question session in European Committees, I am advised by the Clerk that under the procedure that we are using for the first time today there is no question session. All the available time is for debate. 

3.7 pm 

Kelvin Hopkins:  Thank you, Mr Bayley, and it is a pleasure to serve under your chairmanship. I had not intended to make a speech, but it is clear that there is a slight difference of view between the Chair of the European Scrutiny Committee—of which I have the great honour of being a member—and the Minister. 

I have always been concerned about subsidiarity. The hon. Member for Stone has called it a con trick, but perhaps it was a political device to get through a particularly difficult time in the development of the European Union. Anything that can give subsidiarity some definition is good, and occasional challenges under the subsidiarity rule give it some meaning. If it is simply on the European statute book as a decoration that is never used, that suggests that it was only a device to get through a difficult political time for the European Union. I hope that it was not and that it is meaningful. 

The Minister suggests, as I understand it, that the Government do not really want to press the subsidiarity argument; they say that it is a matter of national sovereignty and policy. My fear, however, is that if the motion is not carried—I will certainly vote in support of it—once Ministers have got rid of the technicality, they will be able to negotiate in the Council of Ministers and give away whatever they want, whereas a subsidiarity decision is more tricky for the Government to deal with. In the end, an agreement may be reached, but I want to put in place a significant hurdle that the Government and the European Union must clear in making their case. I do not want to see this brushed to one side and Ministers doing a deal at the Council of Ministers and returning with it all washed up. 

Mr Cash:  This matter has not been referred to since we began debating, but as I have pointed out, the Swedish Riksdag has also taken exactly the same position. There is reason to believe that politicians in Germany are also concerned about subsidiarity, because they have also put in reasoned opinions. 

Kelvin Hopkins:  I thank the hon. Gentleman for those points. As at least one other member state has already made a decision on those grounds, there can certainly be no harm in the British doing the same thing. I want subsidiarity to be tested to ensure that it is politically meaningful and not just for decoration. There are historical precedents of authoritarian regimes that were essentially dictatorial, but they had all sorts of elaborate democratic niceties that were pretty meaningless.

The Soviet Union is a classic example. I remember studying the Russian constitution when I was a student. Created in Stalin’s time, it had wonderful, elaborate democratic provisions for local authorities and elections and for people to speak their mind and so on, but the real decisions were made in Moscow by Stalin and his people. 

I want to see democracy that is meaningful. I want the participation of member states in the European Union to mean democratic consent by the member states and not be simply political decoration, with decisions made behind closed doors in the Council of Ministers. The measure is a good way of perhaps testing subsidiarity, to give it meaning, focus and definition. That is one good reason for going ahead with it. However, I trust the Chair of the European Scrutiny Committee and what he said. It is not an area in which I have expertise. I have the average layperson’s intelligent observations, but that is not expertise. I wish to support the motion, and I hope that other members of the Committee will support it, too. 

Mr Cash  rose—  

The Chair:  Does anyone else wish to speak? 

3.12 pm 

John Cryer (Leyton and Wanstead) (Lab):  I was not going to, but I think I will, Mr Bayley. It is always a pleasure to serve under your chairmanship. I want to echo what my hon. Friend said. I have always felt that the European Union specialised in window dressing, of which subsidiarity is an outstanding example. In all the years that I have attended public meetings, held surgeries and knocked on doors—things that we all do in our constituencies—I have never on any occasion had anyone say to me, “What I really want to talk about is subsidiarity.” The reason for that is the obscure way in which the EU works—it is byzantine. There are not clear lines of accountability. 

We are all held to account at election time when we must go to our electorates and say, as we all do, “That is my record. If you think I have done a good job, re-elect me. If not, don’t.” When Tony Benn was an MP, he said there were five tests that we should ask anyone with political power. I will try to remember them: “What power have you got? Who gave it to you? On whose behalf do you exercise it? To whom are you accountable?” The final question is the most important one: “How do we get rid of you?” When I was previously the MP for Hornchurch, I went round saying that a bit too much, and people took me at my word and kicked me out in 2005. But there we go—we go through such experiences. However, the key test is that Members can be removed from Westminster. The Chancellor of the Exchequer, a Minister or any us can be removed. In the European Union, it is not like that. The real decisions are made by the European Court of Justice and by people in the Commission. They are not people who are accountable. 

Like my hon. Friend the Member for Luton North, I will support the motion, but I feel that the direction of the European Union is generally towards centralisation. Federalism is a misnomer—it is centralisation. I hope that the motion will have some effect, but I suspect that in the broad scheme of things it will not. 

The Chair:  I was about to remind the hon. Gentleman of the matter under discussion, but that was a good contribution. Mr. Bill Cash? 

3.14. pm 

Mr Cash:  I am grateful to you, Mr Bayley. I am fascinated by the Minister’s remarks. No doubt I will have an opportunity to talk to him about it later, but I certainly did not talk about it with him before, as the hon. Member for Nottingham East implied. He did not necessarily dispute that I had not had direct words, but implied that somehow or other the message had got through. It is simply not the case. Our Committee has taken this view based on advice from our legal advisers. We have weighed up the situation and come to a conclusion. Indeed, the Minister states, unequivocally, in his name, 

“That the Committee considers that the draft Directive to amend the Investor Compensation Schemes Directive…does not comply with the principle of subsidiarity”. 

Well, there we are. We have an unusual circumstance, but that does not alter the fact that our Committee is charged by Parliament with arriving at what is of political or legal importance. It is not for the Government to make that assessment—it is for us to do that. The Government can have a view on that, but it does not follow that this Committee would take a contrary view on the issue. The Government seem uncertain about whether the motion they have put their name to is the direction in which they want to go in the Committee. 

I have no doubt at all that we will resolve that as we move along, but I want to make one important point—we have already got certain directives which are in effect. I will not—you will be sure to constrain me, Mr Bayley, if I do—go into the merits of the deposit guarantee schemes directive, as amended, because it will take up the time of the Committee unnecessarily. The Committee is considering the draft directive, which recasts the deposit guarantee schemes directive. That is before us and is currently not in law. The reason that it is not in law is that it has not been agreed in the Council of Ministers. It is still pending scrutiny by our Committee. 

In fact, the Minister—not that I am suggesting that he would do so—would have no right to go to the Council of Ministers while the directive is still pending scrutiny by the European Scrutiny Committee, because of the scrutiny reserve arrangements. Had he gone to the Council of Ministers—I do not suggest for one moment that he would have—and voted for, and agreed, this directive in its draft form, he would have to answer to the European Scrutiny Committee, if our Committee still held the draft directive under reserve. That is why we are having these proceedings. That is based not only on our assessment of what is politically or legally important, which the House has charged us to do and on which we have made a report, carefully and over a period of time, but on advice from our legal adviser and the Committee’s judgment and conclusion that there is a subsidiarity issue. As we commenced these proceedings, that appeared to be a view shared by the Government. However, I want to move off that point. 

Chris Leslie:  I would like to hear the hon. Gentleman’s view on the anomaly whereby the motion appears in the name of the Minister, who made a series of points that were contrary to what the motion says. 

The Chair:  Order. There is an anomaly there. I have been discussing with the Clerk whether there is an anomaly, because under Standing Orders the motion

must be in the Minister’s name, rather than the Committee Chairman’s name. That is required by Standing Orders. It would not be right for the Committee to discuss Standing Orders, but if the two Front Benchers could stay behind for a couple of minutes after the Committee, I would welcome their views, whether they are similar or different, so that I can report to the Chairmen’s Panel on how the first of this type of European Committee went. 

Chris Leslie:  I am grateful; that would be extremely welcome. It is an important point, because the Minister’s troops rally to the Committee and take their lead from the fact that his name is on the motion. 

Mr Cash:  While we are having this discussion—this will be interesting, and no doubt the Procedure Committee and others can look at it—there is a potential answer to the anomaly described: the treaty does not say only “national Parliaments”, but 

“chamber of a national Parliament”. 

My spontaneous reaction is that for the purposes of these proceedings, with regard to the application and construction of protocol 2 and the reasoned opinion procedure—as seen through the eyes of the European institutions and the treaty of Lisbon, which made the amendment—for “chamber of a national Parliament” we can read “European Scrutiny Committee”. That is possible; I am not saying it is the answer, but it may be. 

The Chair:  Order. Let us get back to the issue. 

Mr Cash:  This is a draft directive for the reasons I have given. I have tabled early-day motion 871 with some very distinguished people—the chairman of the 1922 committee, former Cabinet Ministers and others—relating to European competencies. It is a powerful motion about the whole question of economic governance and the sovereignty of the UK Parliament. 

If I may say so, I was fascinated by the speed with which the Minister brought forward the idea of national sovereignty. I was delighted to hear him, because my Committee is holding an inquiry into the compatibility of the assertions of the EU in the context of the sovereignty of the UK Parliament. We hope to have a full, deep and wide-ranging inquiry into the compatibility, and I say that for a reason. That is not a diversion, because the Minister has said that, as far as he is concerned, the issue raises the question of national sovereignty. When the House deals with matters relating to legislation emanating from the EU, there are always questions of national sovereignty. However, the question of declaration 17 of the treaty of Lisbon is highly important, because the Government are bringing forward proposals for a reaffirmation, statement or declaration—we have not seen the wording—relating to parliamentary sovereignty in an EU Bill. I will not go down that route by any means, but I wish to make an important point: declaration 17 of the treaty of Lisbon declares that so-called “well settled case law” of the European Court of Justice, including cases such as Costa v. ENEL, Handelsgesellschaft, Simmenthal and a range of others, in which the EU— 

The Chair:  Order. I must steer the hon. Gentleman. It is a question of whether the subsidiarity rule, as proposed by the Committee, should apply to the directive; wider issues of UK policy in relation to the EU are not open to discussion in the Committee. 

Mr Cash:  Perhaps policy is not for discussion, but the Minister referred to national sovereignty. Declaration 17 clearly states that the European Court and its jurisdiction supersedes the constitution of the UK, and, therefore, until a decision is taken turning a directive, through majority voting by the Council of Ministers, into a legislative Act, the question of national sovereignty does not arise in relation to the draft directive. That is all I need to say. 

The Chair:  As the motion stands in the Minister’s name, I invite him to reply. 

3.24 pm 

Mr Hoban:  I find it very odd to have moved a motion when I disagree with the arguments underpinning it, so I will happily take up your offer, Mr Bayley. What makes the situation more bizarre is that my hon. Friend the Member for Stone and I agree that the mutual funds borrowing provisions are wrong, albeit for different reasons. That is another peculiarity of the process. 

I urge my hon. Friends on the Committee to vote in favour of the motion. It is important that Parliament expresses its view on it. It does not in any way contradict the position that the Government have taken, which is another odd situation, but the Government can have one view and the Committee can have a different one. We want to encourage a pluralist Parliament in which different views can be expressed, and this is a good way of achieving that. I am sure that when we improve the procedure, we will get to a point where we can get away from this slightly odd challenge of holding two separate views at the same time and in the same position. We will deal with that in due course. It is important that Parliament’s view and that of the European Scrutiny Committee are expressed, using the options that there are in the Lisbon treaty. 

My hon. Friend the Member for Stone said that the German Parliament is sending reasoned opinions on the investor compensation schemes directive. I understand that the reasoned opinions issued by the Bundestag and the Bundesrat relate to the deposit guarantee schemes. However, the federal chamber has written to the Commission in response to this directive to ensure that schemes across the EU are adequately funded, and not on the grounds of subsidiarity. To reassure my hon. Friend, when officials and I debate these directives, we make it very clear that we cannot take a decision on them until the European Scrutiny Committee has completed its work. We respect the parliamentary process in full. 

I can assure the hon. Member for Nottingham East that my hon. Friend the Member for Stone and I have not had any discussions about the matter. The hon. Gentleman will know from his previous experience in Parliament that my hon. Friend is known for his robust, independent views and is not easily swayed by Ministers, so I am not sure that I would bother trying, even if I wanted to. 

In conclusion, I encourage hon. Members to support the motion. I do not agree with the arguments made by the European Scrutiny Committee. Indeed, my own explanatory memorandum submitted to the European Scrutiny Committee says that we believe that the directive is consistent with subsidiarity, but I am happy for the Committee to ensure that the views of the European Scrutiny Committee are made known to the relevant European institutions. 

Question put and agreed to.  

Resolved,  

That the Committee considers that the draft Directive to amend the Investor Compensation Schemes Directive (European Union Document 12346/10) does not comply with the principle of subsidiarity, for the reasons set out in the Annex to chapter 7

of the Third Report of the European Scrutiny Committee (HC 428-iii); and in accordance with Article 6 of the Protocol on the application of the principles of subsidiarity and proportionality, instructs the Clerk of the House to forward this reasoned opinion to the presidents of the European institutions. 

The Chair:  Before we close the proceedings, I would just say that, as we have been told by the hon. Member for Stone, this is the first time a Commons Committee has used this procedure. I thought the debate was remarkably good—one of the best I have ever heard in a Committee. I congratulate everybody on the manner in which they have proved the way. 

3.27 pm 

Committee rose.