EU: Financial Regulation (EUC Report) — House of Lords, 2015-07-07
Topic: Domestic Commerce
Lyndon Henry Arthur Harrison (Labour, Centre-left): My Lords, in the welcome presence of the noble Lord, Lord Boswell, I am delighted to introduce the EU Committee report, The Post-crisis EU Financial Regulatory Framework: Do the Pieces Fit. The report was the product of the work of the EU Economic and Financial Affairs Sub-Committee, which I had the honour of chairing for five years, up until the general election. I now speak as a former chair, having been succeeded by the noble Baroness, Lady Falkner of Margravine, who I am also very pleased to see here today. I wish her every success in her new role, in particular given the interesting times we continue to live in Indeed, it was precisely those interesting times that prompted the sub-committee to undertake this inquiry. Following the outbreak of the financial crisis, the European Commission introduced no fewer than 41 legislative proposals—and the alphabet soup of acronyms that followed—resulting in a radical transformation of the European Union financial sector regulatory framework. Rules, supervision and institutional structures have all been affected and EU law has significantly increased, both in breadth and depth. The sub-committee decided to launch an overview of these significant reforms. Were they necessary and proportionate? What went right and wrong in responding to the crisis? How did the European Union institutions perform and did the reforms have the desired effect? We took evidence over a period of several months from key witnesses, including: our own Government; Michel Barnier, the then Commission vice-president responsible for the internal market and services; two deputy governors of the Bank of England; the Financial Conduct Authority and the PRA; and two of the new European supervisory bodies, known as ESAs—the European Banking Authority and the European Securities and Markets Authority, or ESMA. We were ably assisted in our work by Professor Niamh Moloney, Professor of Law at the London School of Economics, who acted as specialist adviser for the inquiry. We are grateful to Professor Moloney and to all our witnesses. I am also personally grateful to Katie Kochmann, our policy adviser, and Stuart Stoner, our clerk whose sharp intelligence and unstinting industry have been rewarded with a deserved promotion to the Select Committee We began by assessing the objectives behind the proposals. These included: restoring and deepening the single market in financial services; establishing a banking union; building a more resilient and stable financial system; enhancing transparency, responsibility and consumer protection; and improving the efficiency of the European Union financial system We assessed the performance of the European Union institutions. We found that they were placed under considerable strain by the crisis. However, given the magnitude of the task they faced in responding to a once-in-a-generation crisis, we found that they performed well. Nevertheless, the sheer scale of the legislative reforms inevitably meant that the resulting framework contained passing weaknesses. In particular, the expected high standards of consultation and impact assessments were not always maintained. Can the Minister ensure that these will be restored to the premier position they deserve when discussing any of the new financial changes that will happen A principal focus of our work was an assessment of the new European supervisory authorities. They have endured a baptism of fire since their inception in 2011. I was very pleased that, six months later, we produced our first report—I think we were the first institution to do any analysis of their role. They have been responsible for much good work yet they are hampered by several fundamental weaknesses, including a lack of authority, insufficient independence, marginal influence over the shaping of primary legislation and insufficient flexibility in the correction and tidying up of the legislative errors that inevitably happen. Above all, they suffer from inadequate funding and resources—something we found in our 2011 report. In our view, the powers and authority of these agencies needed to be enhanced. I would be interested in the Minister’s view on how that can be achieved There are some oft-cited cases of flawed legislative reforms, including the alternative investment fund managers directive—the AIFMD—and the bank remuneration provisions in the capital requirements directive IV as well as the contentious plans for a financial transaction tax. The sub-committee expressed grave concerns about the latter proposal throughout my time in the chair, which included two sharp and critical reports, yet discussions continue on this doubtful project. They rumble on. Will the Minister update the House on what is happening with the financial transaction tax Yet these cases were exceptions. We found that the bulk of the new regulatory framework was necessary and proportionate and, significantly, would have been introduced and implemented by the United Kingdom in some form, even if action had not been taken at European Union level. This was particularly so because so much legislation derived from G20-driven international standards on financial sector regulation, where the then Prime Minister Mr Brown must be given his proper credit That being said, we found that not enough consideration was given to the general, overall effect on the financial sector of such a huge programme of reform. In short, the cumulative impact of the reforms was not always fully calibrated or appreciated. Many of the reforms were understandably designed to strengthen the resilience and transparency of the financial sector, yet a by-product of this focus was a belated recognition of the importance of the growth agenda. In this important discussion, I hope the Minister will fully take on board the importance not just of completing the financial services single market agenda but of the single market as a whole. Will he update us on President Juncker’s €300 billion financial injection, much of it private money, in order to get the economy of the European Union going again In the light of our concerns, I am pleased at the approach taken by the new Commission. First Vice-President Frans Timmermans has placed great store by the Commission’s better regulation agenda, including enhanced impact assessments, better stakeholder consultation and a recognition that the Commission should be judged by the quality of its output, not its sheer quantity. Likewise, the new Commissioner for Financial Stability, Financial Services and Capital Markets Union, the noble Lord, Lord Hill of Oareford, has made a commitment to review the cumulative effect of these various reforms. In addition, his commitment to such proposals as capital markets union as a tool for growth and investment also bodes well. We were very pleased to complete our capital markets union report before the end of my chairmanship. I hope that it will be discussed in this Chamber at a later date Our report was entitled The Post-Crisis EU Financial Regulatory Framework but, as noble Lords are well aware, the crisis continues to deepen in Greece. The robustness of the new framework, including key measures such as the single supervisory mechanism and the single resolution mechanism for EU credit institutions, is likely to be tested like never before, and the first few weeks seem to have done so Meanwhile, we have our own concerns here in the United Kingdom. Our report stressed that the implications of these reforms for the United Kingdom are immense, given that we have the largest financial sector in the European Union. We expressed concern that the UK’s influence over the European Union financial services agenda had diminished, despite the appointment of the noble Lord, Lord Hill, and stressed that the Government and other UK authorities, including the City of London, needed to take urgent steps to correct this, and to enhance the UK’s engagement with our European partners We also stressed the need to convey the message to all in Europe that the prosperity of the City of London, and the financial services industry that it hosts, is in the interests not only of the United Kingdom but of the European Union as a whole. Again, I hope that the Minister can give us an assurance that these points will be borne in mind as negotiations on the question of UK membership of the EU progress in the coming months I was very pleased to attend, again with our clerk Stuart Stoner, the parliamentary conference of the IMF in April, and Madame Lagarde was very pleased to receive from my hot sweaty hands a copy of this report, which she promised to read. This again demonstrates that we can have an influence by doing the studied work that is typical of this House, and I thank colleagues not just of the committee that I have left but those over the five years that I sat on it and had the pleasure of chairing it. I thank them for all their help and hope that the noble Baroness, Lady Falkner of Margravine, will enjoy her period in the chair in the coming five years, which will be testing indeed.