Capital Markets Union: A Welcome Start (EUC Report) — House of Lords, 2016-02-04
Topic: Domestic Commerce
Kishwer Falkner (Liberal Democrats, Centre to centre-left): My Lords, it is a great pleasure to follow the two senior members of the committee, the noble Lord, Lord Davies of Stamford, and the noble Earl, Lord Caithness, who I am delighted to see is on the road to recovery after his recent illness Listening to what the committee says about the noble Lord, Lord Harrison, it feels, sitting in the chair as I do now, as if he is a very hard act to follow. However, it is a stellar committee served by a stellar secretariat, and I have great pleasure to be leading it at this point in time The noble Lord has covered the main elements of the proposals that foreshadowed the subsequent action plan launched by the noble Lord, Lord Hill, in late September last year to bring about an improvement in capital markets in the EU. Given the wide spread of issues that other noble Lords have spoken about, I shall confine my remarks to one or two current issues that have come to light since the report was published In commenting on the publication of the committee’s report, I express the committee’s frustration that the business managers of this House do not seem able to schedule business in any sort of timely manner. I am sorry that the noble Lord, Lord Boswell, is not here to hear this. That is a widely repeated refrain across the sub-committees yet just the other night we rose at 7 pm, and there have been many similar previous occasions. So we come to a situation where, by the time we finally discuss matters covered by a report as long ago as 20 March 2015, a lot of water has passed under the bridge regarding things that are of huge import to this country’s financial sector I should add that the UK’s financial sector does not hold back. On the Commission’s Green Paper consultation on capital markets union, which is the subject of this report, 95% of the responses came from the United Kingdom, with 65% from Belgium—presumably because organisations based there have an interest in it—and 57% from France. This demonstrates that the UK not only engaged actively but did so because it will be a huge beneficiary of the proposed changes, as we were told across the board when we visited Brussels last week To quote the noble Lord, Lord Hill, in the Financial Times last September when he launched the Action Plan on Building a Capital Markets Union: "This is a good example of the practical benefits that membership of the single market can bring. But to make the most of it, and to help influence the rules which will set the terms of engagement for years to come, the UK needs to be shaping the system—not looking on while others set the rules" These are very wise words in the now excitable atmosphere of the UK renegotiation We have seen over 40 legislative and non-legislative measures in the area of financial regulation since the crisis of 2008. Many of them have been necessary, but it has taken some time for the scale of the problem of illiquidity in capital markets to become apparent, for the rigidity of national insolvency laws regarding capital markets—something commented upon a moment ago by the noble Lord, Lord Davies—to be overcome, and for the retail financial services sector to be kick-started across the EU, which is sorely needed. The EU economy is roughly the same size as that of the US but its equity markets are less than half the size. I think that the noble Lord, Lord Hill, estimated that if European venture capital markets were as deep as those in the US, over the past five years EU companies could have raised an extra €90 billion of badly needed investment I said I would update the House on one or two of the measures, and the House has already heard from noble Lords on both of them. One of them concerns securitisation, the first major piece of work undertaken under this heading. It is intended to create a simple, transparent and standardised framework for the regulation of securities in order that a prudent and diligent investor in asset-backed securities will be better able to analyse and price the risk involved. This should considerably reduce the capital charges imposed on banks and insurers when they invest. It will also bring much-needed transparency to the pricing of risk through standard templates and require originators, sponsors and original lenders to retain risk of not less than 5%. In other words, it will ensure that those investors and insurers have a dog in the fight, albeit a very small dog at 5%. That shortcoming was exposed during the sub-prime mortgage crisis in the US in 2008 The UK has a significant interest here: it accounted for 22% of European securitisation issuance in 2014 and 46% of the investor base. However, the proposals have come under fire as they do not envisage an overarching regulator determining whether a securitisation meets the criteria required. This criticism is mainly from France, I should add, where the concern is that only the biggest investors would have the expertise and resources to enter the market, but this remains a valid concern, as the urgent need is also to enable SMEs to access capital markets more readily. I hope that in due course, as the proposals bed down, the secretariat of the noble Lord, Lord Hill, will have another look at this A further change has come about with agreement on Solvency II, which came into force on 1 January and will impact the insurance industry hugely as it revises and updates the current solvency framework in the EU. It does this through reducing the risk of insolvency, reduces losses to policyholders and gives an early warning to supervisors so that they can intervene promptly if capital falls below the required level. It intends to promote confidence in the financial stability of the insurance sector though creating a more level playing field. It has taken a long time to get here—its origins go back to 2002—and its effects will undoubtedly take some time to work through, but overall, despite the reservations of some parts of the UK insurance industry, I argue that it can only be a good thing to level the playing field We are in the middle of scrutiny of the Prospectus Regulation and it is too early to say where this will end up. However, since the Minister is here, I hope that he will take on board the following thoughts: that we as a committee find it a little frustrating that we do not receive more feedback from relevant Ministers as to their consultation with stakeholders. This regulation will considerably impact on the SME sector raising the threshold definition of an SME from €100 million to €200 million in market capitalisation. It would be important for us—particularly in the case of regulations where we are the backstop of scrutiny—to hear what industry voices have said and what their discussions with the Treasury have revealed in terms of our scrutiny function Finally, let me turn to the issue of economic governance as set out in President Tusk’s detailed proposals on Tuesday. The section on economic governance says that eurozone members should respect the rights and competences of non-participating member states. He goes on to argue that facilitating the coexistence between different perspectives within a single institutional framework is important and that the equality of member states before the treaties should be upheld. I accept that it is still early days but there is a need for clarification on a number of fronts. Mr Tusk refers to discrimination in the text but goes on to say that different treatment must be based on objective reasons. The question arises as to how we define objective reasons and whether it is to be left to the court to adjudicate between objective reasons on the one hand and action arising on the basis of financial stability on the other, an area where differential treatment is allowable. I suspect that differential treatment will be allowable but only up to a point, and the question will be: which point? I hope the Minister will be able to relate these concerns back to the negotiating team Today’s Financial Times says in its headline that the safeguards’ impact on the City remains unknown. This is not a party political point; it is imperative that we gain clarity on this before the European Council and its final conclusions on the negotiation on 18 and 19 February To conclude, the sub-committee’s report is titled Capital Markets Union: A Welcome Start. The noble Lord, Lord Hill, has started on this exercise. We wish him all success in delivering the capital markets that Europe so badly needs.