My Lords, I declare an interest in that I chair the think tank, Policy Network, which has written a report for the City of London Corporation on the challenges of managing European financial regulation.
This has been an interesting debate, as most debates on the report of your Lordships' European Select Committee are. The noble Lord, Lord Harrison, has produced an excellent report. It shows an admirable balance and expresses sensible and proportionate views on financial regulation. If I might use an F word in this Chamber, I think the system being developed is one of pragmatic federalism. I agree with the noble Baroness, Lady Wheatcroft, that the national bodies which are closest to the financial institutions should remain in day-to-day control. However, if we are going to have a single financial market at EU level, we need a single rulebook and a power for the European agencies to override national agencies in circumstances of crisis.
I rather agree with the noble Lord, Lord Harrison, and from this side of the House share his concern that the institutional upheaval which our domestic financial regulatory system is going through may lead to some loss of influence in Brussels. I know that the noble Lord, Lord Newby, has put in much effort on the Joint Committee on domestic financial regulation. On the basis of the little work that I have done in this area, I believe that how we manage the Brussels relationship will be as important as, if not far more important than, the structure of British domestic regulation. There is a risk that we will become obsessed with the question of how we shift the furniture around at home when the real issues affecting financial regulation will be to do with what happens in Brussels.
There are grounds for concern about the way in which this relationship with Brussels is being addressed. I agree with the many noble Lords in this debate who have taken issue with the stance taken by the Prime Minister at the Brussels summit in December. It seems to us that, in place of the sensible, proportionate and balanced approach that the Select Committee here has adopted, the Prime Minister has portrayed what is happening in Europe as a torrent of EU regulation which threatens the City of London. This position is both exaggerated in substance and profoundly unhelpful to the City's ability to secure its interests in Brussels. It is a profound mistake for the British Government to define the City of London as primarily a British interest that we need to protect against the European hordes. Rather, the way to win the argument in Brussels is to point out, accurately, that the City of London is a great global financial centre, the financial centre of the biggest single market in the world, and is an asset to the whole European Union. That should be the starting point of our attitude to Brussels.
The need for these European regulatory agencies has not just come out of the blue; it is not just some Brussels plot. It is due to our having had the most enormous banking crisis since the 1930s. I think that all sides of the House recognise that financial services need reregulation. There was colossal market failure. This involved a massive cost to the taxpayer. Frankly, our public finances are now in such a fragile state that we cannot afford to see it happen again, so we have to have much tighter regulation of the financial sector. It was obvious that that reregulation had to be done at European level because so much had been done to advance the integration of the European financial market. Indeed the much derided Lisbon strategy had a financial services action plan which greatly took forward the liberalisation of wholesale markets, so that when we got to the crisis and in its aftermath, the chairman of the FSA, the noble Lord, Lord Turner, was quite right to pose the choice that either we renationalised financial markets and abandoned integration across Europe or we accepted the need for reregulation at EU level. We must stick firm to that principle.
It is also what the majority of the City of London thinks. Of course there are people who will be quite happy in the City to see London as some kind of offshore centre from the rest of Europe. There would be people who would like to see that, but I think the majority view is that one wants to see sensible European reregulation of financial services. That would be particularly true of the American banks which have come to London because it is the route into the European single market. The fact that we are part of an integrated financial market in Europe is crucial to the presence of a number of European banks that have located here. We need to be part of a European market that is properly regulated and we need to secure a level playing field across the EU.
The attitude of mind towards the new agencies and structures has to be positive. We have to stop trying to fight old battles about retaining the national independence of our agencies. We have to make the new system work in all our interests. The City of London recognises that we have to make this new system work. However, there are bound to be concerns. The track record of the European Commission in the way it has put forward financial services regulations in the past has not always been the best. In a way, the existence of these new agencies is a source of strength, because they should be a source of expertise which understands the markets better than the European Commission might. This should be seen as an opportunity for London to influence regulation in a sensible way.
Many noble Lords, such as my noble friend Lord Woolmer and the noble Baroness, Lady Valentine, made the point that we need to bolster the capacities of the new agencies. That is evident from the story of the bank stress tests. The problem with the tests has been that national regulators have been too defensive about their own banks and too unwilling to share information about them with the EBA. We need to break out of that mentality. There needs to be more information sharing. That is an important UK interest.
There is a real problem for the UK in deciding on regulation. Sixty per cent to 70 per cent of the business in Europe is done in London but we have fewer than 10 per cent of the votes in the Council on issues that are decided by majority voting. There is a real asymmetry. We have to recognise that, in the aftermath of the banking crisis, there is a rise in hostility to the financial sector across Europe. I was recently at a seminar in Sweden where a former Minister said to me, "I always used to support you lot in Britain when you argued for light-touch regulation, but don't think we are ever going to be taken in by all that load of baloney again", or in some similar words in Swedish. We have to understand that the mood of the times is difficult. But the way to overcome this is to stress that just as the German car and capital goods industries are there because they specialise in the single market and are a great asset to Europe, and Italian shoes and French luxury goods are part of the specialisation of the European single market, so is the City of London. It is an asset for the whole of Europe.
In conclusion, I will just say two things about how we can be successful in ensuring that the regulation of the City is sensible. First, I agree so much with what the noble Lord, Lord Hannay, said about not putting a union jack all over the City. That is not the way to defend it. Jo Johnson MP was absolutely right about that. Secondly, as the noble Lord, Lord Kerr said, let us make sure that we are in the room. We look forward to the Government's reply in due course about the points he made on Article 136.
This has been an excellent debate. It is of vital national interest that the new arrangements work well from a UK point of view. The risk is that we mishandle this and, in doing so, destroy one of our great national assets.