Clause 4 - Further amendments relating to Bank of England

Financial Services Bill – in a Public Bill Committee at 6:00 pm on 28th February 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 6:00 pm, 28th February 2012

I beg to move amendment 23, in clause 4, page 14, line 36, at end add—

‘Within a year of commencement of this Act the Bank of England shall publish a review of the effectiveness of coordination by the regulators of the exercise of their functions relating to membership of, and their relations with, the European Supervisory Authorities (namely, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority), and their relations with other regulatory bodies outside the United Kingdom.’.

Clause 4, which is small and perfectly formed in many ways, seeks to enact schedule 2 of the Bill, which is slightly longer. The amendment we seek to add to the one line of clause 4 is simple and straightforward. The draft Bill, as it first appeared, was rightly changed by the Minister to require in clause 62 that an international co-ordination memorandum of understanding should establish a committee under the Treasury’s chairmanship to report to the Chancellor, with members to include the FCA, the PRA and the Bank, all with the aim of agreeing consistent objectives and effective international engagement. That was called for by the pre-legislative scrutiny Committee and is one area where the Government decided to move in response. I welcome to an extent the changes made.

There are still concerns about the Government’s understanding of the importance of integration with the regulatory structures of the EU and beyond. Again, I think this is an important part of the Bill. I suspect that the Chancellor of the Exchequer when in Opposition had a cunning plan for redrawing the regulatory systems of the UK, pouring a considerable amount of opprobrium, not just on the previous Administration but on the Financial Services Authority. He chose to divvy up the task between the PRA and the FCA in this particular way. I suspect he forgot at the time the overriding—in many cases—and senior powers of the EU in financial services regulation.

We are labouring under the pretence that the regulators that we are creating domestically are sovereign, when in fact they are subject not only to directives from the EU but can be overridden by EU regulations emanating from Commissioner Barnier or other directors general in the Commission. That is a crucial point; I know hon. Members of all parties have concerns about it. We have expressed our concerns about the Bill not properly appreciating the impact that macro-prudential measures have on growth and jobs. We have expressed our concerns about parliamentary accountability and so forth.

Another big, glaring problem with this piece of legislation is the mismatch between how these structures are being formed and the regulatory superstructure with which they will have to engage at the European level. As we can see, the European supervisory authorities have decided to split their regulatory approach in a distinct and different manner. They have gone for a thematic approach—banking, insurance, securities and markets—whereas that is not the case in the UK. We can argue about whether that is right or wrong, but the British Government are not doing a massive amount to change the European arrangements as they are set out.

We know from the pipeline of directives and regulations coming from Commissioner Barnier and others that much, if not the majority, of the regulatory agenda is being set by the European Commission. There are also significant concerns that the domestic regulators—the Bank, the PRA and FCA—can simply have their concerns washed away by the flick of a series of pens in the European Commission and have their views overridden.

It is crucial therefore that we have mechanisms in the Bill to not just adequately interface with the European arrangements, but to steer and shape those decisions. So far, I have not been convinced by anything that the Minister has said that the regulatory arrangements that we are putting in place domestically are going to be influencing or steering the decisions at European level. In fact, I am worried that they will constantly be playing catch-up and that there will be confusion and muddle about which of the domestic regulators will be attending the various councils and meetings of the European supervisory bodies. I know for a fact that Government Members will secretly share some of my concerns.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

May I just be clear about what the hon. Gentleman is arguing? Rather than the set of reforms that we have in front of us, is he arguing that we should introduce three regulators: one to match EIOPA, one for ESMA and one for the EBA?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

No, I am arguing in favour of amendment 23, which states that there should be

“Within a year…a review of the effectiveness of coordination” of the regulatory arrangements with the European Union. That is the argument that I am making. I thought I was making it in a pretty modest way so that I could try to entice the Minister to support our amendment. Ultimately, that is my objective. Given his willingness to consult parliamentary counsel on an earlier amendment, perhaps we are on a roll here. Perhaps the Minister will concede this particular point. I would be grateful if he did.

I am not simply voicing my concerns; others have voiced them as well. For example, in its briefing on Second Reading, the British Bankers Association stated:

“We believe that it is in the interests of the UK to act in partnership with other Member States through the European Banking Authority and the European Systemic Risk Board to make the case for flexibility in specific areas of the rule book”.

It is envisaged that the capital requirements regulations

“in relation to the risk-weightings attached to residential mortgage lending” will need attention. In its briefing, the City of London stated:

“the PRA/FCA judgement-based approach may conflict with the move to a single rule book and supervisory convergence at the level of the European Supervisory Authorities, which the industry broadly supports.”

So the industry itself is trying to ensure that there is some harmony and consistency in the rule-making approach. The Corporation of London says that it has concerns about conflict.

The CBI stated:

“There must be a joined up approach between the new regulatory bodies (FPC, PRA and FCA) and between the UK regulators and their EU counterparts... it is also vital that the regulators are able to influence the European regulatory regime. To do this, they must actively engage with the European debate.”

Barclays bank stated:

“The PRA and FCA must be mindful of European law and must ensure the UK maintains sufficient influence with global and EU developments. Whilst we are supportive of the principle of ‘judgement based’ regulation, care must be taken to ensure that decisions do not clash or overlap international rules and that firms face consistent and predictable decisions.”

I accept that the Minister has moved to a degree by trying to clarify the spaghetti—is there now a quartet of various players?—of regulators and players that he is creating.

The multiple layers of European regulation add even more complication. Which member of which UK regulator attends which European supervisory arrangement? There was some discussion, which I think related to ESMA, of the FCA having a representative in the chair. As soon as prudential issues arise, the FCA representative has to leave the room, or at least vacate the chair, and allow a different UK representative to sit in their seat to make the case on prudential matters. What sort of signal does that send to other European partners, who are trying to forge relationships with 27 other countries, if the UK representative is not a consistent player in those circumstances?

I am pointing out only one anomaly that might exist, and the Minister should acknowledge that there are deficiencies that must be addressed. He has done so implicitly with the concession in clause 62, but it would be complacent of him to feel that there were no lessons to be learned from this new spaghetti of public bodies that he is creating. A year down the line, it might be advisable to consider whether we can improve the co-ordination of the arrangements.

This issue is particularly pertinent now because there are rumours, which the Minister may wish to confirm or deny, that the Government are going soft on the implementation of the Vickers independent banking commission recommendations, particularly with respect to the 10% core tier 1 recommendation, which the Government had, I thought, accepted. I may be wrong, but the rumours are that the harmonisation efforts led by the French, and by Commissioner Barnier in particular, to ensure that there is not regulatory arbitrage between different countries may mean that 10% is too high a capital buffer and that the arrangements need to be rounded down. It would be helpful if the Minister confirmed whether the Government still believe in the 10% threshold, and whether they still believe that that is achievable through negotiations. As it stands, the consensus of opinion across the 27 other countries and the European regulators may be against him. We need that important clarification, so I would be grateful if the Minister addressed that point, said why he does not think we should reveal the effectiveness of these arrangements within a year, and clarified which members of the PRA or the FCA will sit on each one of the European bodies. This is an important amendment and crucial to whether the Bill will succeed.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I appreciate the vigour with which the hon. Gentleman wanted to attack this matter, but it is a pity that he has not read to the end of the policy paper we published in January. On page 119, it states who is in the voting chair when it comes to the EBA, ESMA and EIOPA. It is there for everyone to see. It does not require much work to get there. For example, on EBA it is PRA, on ESMA it is the FCA, and on EIOPA it is the PRA. The reality is that there is not a perfect match between European regulators, even as it is now. For example, on EIOPA, yes, the FCA is represented, but it has to talk to the pensions regulator. On ESMA, the FCA has to talk to the FRC and the takeover panel—just as it was under the previous Government. There is  nothing novel about this. The reality is that different member states have different configurations. We are adopting what is casually referred to as a twin peaks approach to regulation. The same happens to be the case in the Netherlands as well, for example. People will configure their own domestic arrangements to reflect what they think are their priorities and will work on their interrelationship with other European bodies as is appropriate.

The other point I would make is this. We have listened to the pre-legislative scrutiny Committee. The international co-operation MOU is in the back of the policy paper published in January. It is important that those who have a voice in the European regulatory process are able to exercise it. That is why we will have a committee set up under the chairmanship of the Treasury and reporting to the Chancellor. It is that committee that will undertake any reviews, as it will do on an ongoing basis, rather than the Bank of England undertaking its own review. I am not quite sure what the role of the Bank of England is in what the hon. Gentleman proposes. It is best that the committee we are establishing works on the effective co-ordination.

I have no idea where the hon. Gentleman’s point about the FCA having to vacate the chair at ESMA comes from. It is not the case. I also have no idea where these rumours have come from about watering down the 10% additional capital required by John Vickers. The hon. Gentleman should perhaps be careful to whom he listens in future. I am happy to offer clarification on that matter for him today.

Co-operation is as vital now as it will be in the future. We are collectively playing a strong role in shaping European regulation. The MOU and the committee will help that. The amendment is not particularly necessary or helpful. However, I assure the Committee that one area that the new committee will keep under review is how well people work together in this area.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 6:15 pm, 28th February 2012

I am delighted that the Minister has said so categorically that the Government stick solidly behind their commitment to the implementation of the Vickers commission—the independent commission on banking. That is a very clear commitment from the Minister. I am sorry for even doubting that that might be the case, but rumours abound with such things. It is good that they have been scotched by the Minister today.

I am also grateful to the Minister for pointing out that I was wrong in my impression that there needed to be a bit of musical chairs between the PRA and the FCA when attending various European regulatory meetings. I had been under the impression that there were circumstances in which FCA representatives would need to stand up and move out of the chair they were sitting in and PRA representatives would need to come along and take their particular point of view. We now know that the FCA is able to take a lead on any prudential matters that come up at the European Securities and Markets Authority. That was a very helpful clarification from the Minister. I am sure that the chief executive of the FCA will be delighted to hear that statement.

The Minister says that it is not currently a perfect match. I can see that that is the case, but we are creating a multiplicity of regulatory bodies. We are even creating another new committee to co-ordinate those regulatory bodies. Let us consider the situation. We start at the top with the supervisory authority. There is then a banking authority, a separate securities and markets authority, and a separate insurance and pensions authority. There is then a Prudential Regulation Authority, a Financial Conduct Authority and a co-ordinating committee between all those—the FPC. And let us not forget the Treasury, the MPC and so on. The list is not exactly an inspiring, clear set of decision-making arrangements. I can see this being a recipe for chaos.

All I am saying is that we want a review. I do not necessarily think that a further committee will always help with these things. However, the Minister has made that concession in relation to clause 62. It was not asking the earth for the Government at least to have a review of whether we can improve these arrangements after a year. These are serious issues that are happening. What did we see yesterday? The insurance company Prudential voicing its worries about the solvency II arrangements. To what extent will the Minister do what is necessary to stand up for British interests in those European forums where he needs to be negotiating the conclusions of the solvency II arrangements? These are crucial issues, including the capital requirements directives and so on. These are areas of policy where European writ in many ways overrules the domestic arrangements, so it is important that we get that interface right.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire

Since the hon. Gentleman has been relying on rumours and media tattle about Prudential for his evidence, he might consider that solvency II will apply wherever Prudential locates itself. Can we please stick to the point?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am sorry if the hon. Gentleman finds this debate a little tiresome. If he wants to just leave his seat, nothing is stopping him from doing so. He is perfectly able to leave the Room and go wash his hair or powder his face—whatever he wishes to do. If he is here and he wants to take part in the debate, I would welcome a more substantive contribution than, “Please can you shut up.”

The warnings from Prudential are serious and need to be listened to. I hope that it does not leave the UK and relocate to Hong Kong. In many ways, however, the test will be whether the British Government and, by extension, the British regulators, succeed in getting the right balance of decisions at those European forums. If they cannot do that, we have to transpose and even implement those regulations straight away. These are not my concerns; I am simply voicing those of others: the British Bankers Association, the Corporation of London, the CBI and Barclays bank. There are concerns across the financial services sector. It would have been perfectly possibly for the Minister—even voluntarily, without writing it into the Bill—to say, “We will concede and review within a year.” The Minister, however, cannot even bring himself to do that. We will press the amendment to a vote, to put this point to the test.

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 10.

Division number 11 Decision Time — Clause 4 - Further amendments relating to Bank of England

Aye: 8 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 4 ordered to stand part of the Bill.