Clause 62 - Memorandum of understanding: international organisations

Financial Services Bill – in a Public Bill Committee at 10:15 pm on 20th March 2012.

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Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We now get to some difficult and complex aspects of the Bill, and there is one issue that hon. Members will know has significantly exercised me and some organisations. Clause 62 relates to how international organisations should co-ordinate and collaborate with domestic UK regulatory players, and a significant number of City firms and financial services practitioners, along with other observers, have raised major concerns about the new structures proposed in the Bill.

The Committee will recall my general thesis that before the general election, when the Chancellor of the Exchequer was looking at how to apportion blame for the global financial crisis in a way that would pin it on a particular previous Administration, he decided that the way to do so would be to pour opprobrium on the Financial Services Authority. Splitting the FSA into conduct and prudential regulators was his approach. The fact that he designed such arrangements in opposition meant that he neglected, perhaps accidentally, to try to integrate the new structures with the European supervisory arrangements, which are motoring ahead in the way they regulate this country’s financial services institutions. Whether it is Commissioner Barnier and his pipeline of directives and regulations affecting the conduct and regulation of our financial services players, or whether it is the European Banking Authority, the European Insurance and Occupational Pensions Authority or the European Securities and Markets Authority, they all have a locus over our domestic regulatory arrangements. In a number of ways, they can overrule many of the decisions of the domestic structures that we are spending so much time constructing. Several organisations have therefore said that that Bill needs to be amended to reflect that situation and to address the mismatch.

The draft Bill was rightly amended by Ministers to require that the international co-ordination MOU should be established with a committee under Treasury chairmanship and reporting to the Chancellor, and with FCA, PRA, and Bank membership, with the aim of agreeing consistent objectives and effective international  engagement. Clause 62 goes some way towards doing that. That proposal was called for by the pre-legislative scrutiny Committee, and it is one of the areas in which the Government have decided to take some action.

The Treasury Committee’s 28th report, which was published on 27 February, also raises concerns. It states:

“A Memorandum of Understanding is unlikely to be the appropriate method to establish the basis of co-ordination between the PRA and FCA in respect of their seats at the EBA, ESMA and EIOPA”— those letters sound like something from Old MacDonald, but I gather that usual pronunciation of the acronym is such as to avoid the titters that might be caused by spelling it out. The report continues:

“We recommend that the Government consult on the appropriate level of co-ordination and set this out in secondary legislation in order to ensure both adequate scrutiny of the basis on which the two regulatory authorities will co-ordinate, and legal clarity about how they should do this. We further recommend that the Treasury take steps to ensure that the impending change to the FSA does not lead to a fragmentation of UK representation in the EU, and that the UK’s market position in the provision of European financial services be given an appropriate level of consideration within each of the ESAs” or supervisory authorities. That is a tremendously important recommendation from the Treasury Committee, which I commend for its prescience. I hope that the members of that Committee agree that secondary legislation needs to set out an appropriate level of co-ordination, and that steps need to be taken to ensure the impending changes at the FSA do not lead to a fragmentation of UK representation in the EU.

Specific queries have been raised about the drafting of clause 62. There are concerns about disparities between subsection (1), subsection (6) and section 3E(3) of the consolidated FSMA, in terms of how the memorandum intends to co-ordinate a number of organisations. Some references are to co-ordination with the European supervisory authorities, EU and other international institutions, while others simply mention the European supervisory authorities. Elsewhere, there is specific reference to the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. For the sake of clarity, will the Minister say which organisations will fall within the ambit of the memorandum of understanding for international organisations, as the Bill is specific in some parts but not others?

The memorandum is relatively thin on detail. The clause states that the memorandum must make provision for

“a committee for the purposes of the co-ordination mentioned in subsection (1)”.

The MOU itself, as set out in “A new approach to financial regulation”, the Command Paper published by the Treasury, states:

“The Committee shall be comprised of officials from the UK authorities and shall be chaired by the representative of Her Majesty’s Treasury. The Committee may invite representatives of other bodies to attend its meetings.”

Will the Minister shed some light on how many authorities are likely to be on that committee and how many officials are likely to be involved? He has already expressed concern about committees becoming unwieldy,  large and difficult to co-ordinate. We need clarity: are we talking about five, 10 officials? What scale of committee are we talking about? Surely the Minister would agree that that should be more precisely detailed in the MOU? More importantly, should not all of these adjunct details about membership of the committee also be outlined? For example, how will it be decided which officials should sit on the committee? Who will decide which officials are included and how long they will sit? How will the committee decide which other representatives attend meetings and so on? I do not feel we have a sense of who is in the room for this committee and how it will operate. We need more clarity on how it will work.

Subsection (5)(e) states that the memorandum must make provision

“about how the UK authorities will consult each other about the discharge of their relevant functions relating to international organisations.”

The MOU highlights the principles of openness, co-operation and coherence and lists seven high-level methods, describing what should be done around sharing information, keeping other authorities informed, consulting other authorities and so on. However, there are no concrete terms explaining how that would be done. At least two organisations, TheCityUK and the CBI, in their September briefings on the Bill, suggested that the international co-ordination committee would benefit from a joint secretariat, staffed by members from different regulatory bodies. In evidence submitted to the Treasury Committee, Aviva said:

“We believe that there may be merit in setting up a forum or secretariat in relation to EU and international engagement. A forum or secretariat could help co-ordinate strategy and support activity by the regulatory actors (but should not be a barrier to action).”

In support, Aviva quoted the recommendations by the IMF in its Financial System Stability Assessment of the UK, published on 1 August. It recommended that the UK ought to

“establish a forum for ensuring good governance and coordination among organizations in the new regulatory structure.”

I am sure the Minister will want to agree with the IMF. Even it has spotted that there is a potential problem with co-ordination issues and the mismatch among the European arrangements.

Generally, the Minister will know—we have discussed this on many occasions in European Scrutiny Committee B —the importance of exerting a strong British voice when it comes to European regulations and taking the opportunity to steer and shape where the regulatory agenda goes at a European level. I am honestly growing tired of reacting post hoc to a whole series of regulations as they flow from Europe, with Ministers saying, “We are going to try and fix this particular issue; we will go and negotiate for a concession here or there,” rather than getting in the driving seat and making sure that we are promoting the British model of regulation, which we ought to believe is superior. If the Minister feels that we have the superior system, he needs to show leadership and make sure that the European arrangements follow suit.

I have anxieties, as we have discussed previously, about various circumstances. I have heard that the PRA and FCA players will have to swap seats in certain meetings, in certain circumstances, to voice various views. That can cause great difficulty, so it would be  useful for the Minister to address those issues. Does he agree that it would be of immeasurable value if we could also co-ordinate and facilitate a flow of information between the members of the committee, the UK authorities and other interested parties? Can he explain who will undertake the co-ordination function and how co-ordination will happen if we do not have the establishment of a secretariat for international co-ordination in clause 62 or in the MOU? There is a strong set of arguments in favour of a secretariat to undertake that. We need to have a standing set of characters who will co-ordinate that particular function rather than expecting everything to happen voluntarily at committee level. Will the Minister comment on that?

In its March 2012 briefing on clause 62, the ABI made the following comments:

“The Treasury has published a draft of the MoU. We are concerned that this focuses entirely on the interaction between the UK authorities.”

I know that my hon. Friends are also concerned about that.

“We believe that it should also cover consultation with stakeholders. Given the importance of international (particularly EU) rules it is vital that stakeholders are involved as early as possible in discussions”.

People are concerned about that. It is not just about co-ordination between the regulators themselves, but ensuring that there is some insight for the organisations that will be affected by the regulation—the practitioners, consumer organisations and so on. We have very complicated lobbying arrangements for European decisions. Currently we have great costs that are borne by practitioners in the sector and by industry bodies in making representations to the European Parliament or to the European Commission. It would be far better to have a sort of clearing house for those views. We could have our regulators making sure that they are doing the right thing. We would get a little more unity and a bit more co-ordination here in the UK, and we would punch our weight properly in those important forums. Will the Minister comment on that co-ordination?

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East 10:30 pm, 20th March 2012

I want to add something that is quite important to what my hon. Friend has been saying. The ABI made the point that,

“we have found in the past, for example in the Solvency II negotiations, that the best results are obtained where the UK authorities and stakeholders are able to agree a common UK line”.

Does my hon. Friend agree with that?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Yes. Indeed, that is the point that we need to make. It would be useful to involve stakeholders and ensure that those players felt that they knew what was going on. That common UK line is quite an important point to stress. If it were possible to get that more clearly it would be of great value.

The British Banking Association has also voiced its concerns about this issue. It says:

“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”.

Again, that is something that is not necessarily mentioned in other parts of the clause. The ESRB is obviously quite an important layer in this set of very complicated European supervisory structures. The BBA says that is needed

“to make the case for flexibility in specific areas of the rule book—as it is envisaged by the CRR in relation to risk-weightings attached to residential mortgage lending.”

The City of London voices concerns, as do the CBI, Barclays and others. I will not read out all those quotes. Given the changes within the memorandum of understanding and given the concessions that the Government have already made on this, it seems that they are beginning to recognise the deficiencies in the Bill and this particular architectural arrangement. Surely we should have a review and consider the effectiveness of this approach at some point. What does the Minister envisage will be the opportunities to take stock of the effectiveness of this international co-ordination arrangement? Will we be able to have a stocktake of these arrangements? Those are my general thoughts on clause 62 and I look forward to hearing what the Minister has to say.

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

This is one of those moments where one rather feels that most of the arguments have been made in earlier debates. Let me therefore restrict myself to some of the things that the hon. Gentleman said that are new.

Photo of Edward Leigh Edward Leigh Chair, Public Accounts Commission

Yes. I would not want the Minister to indulge in tedious repetition.

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

No, and that is not my objective. The hon. Gentleman asked about musical chairs and rotating votes. It is clear from the MOU which of the UK regulators is represented on the European regulatory bodies. We have drawn the hon. Gentleman’s attention to that before. He asked about membership of the Committee, including representatives of the Bank, the PRA, FCA and the Treasury. We cannot set out in advance exactly who will attend various committees and from which organisations. That will depend on the agenda. So we will have the right person in the room at the right time. Which bodies is covered by the MOU. Paragraph 6 sets out the scope and annexe A provides the current list.

The hon. Gentleman asked why ESAs are spelled out in subsection (2) but not in subsection (6). It is quite straightforward. Subsection (2) defines the term “European supervisory authorities” for the purpose of clause 61 as meaning EBA, EIOPA and ESMA. Subsection (6) uses the term “European supervisory authorities”, which is defined in subsection (2). That is all fairly clear. The bodies other than the ESAs are dealt with in subsection (5)(a), which refers to other international organisations of which it is a member or with which it has relations and which are concerned with matters related to its relevant function.

The hon. Gentleman talked about engagement. He was absolutely right: there is a need for engagement with industry. So, for example, I met the executives of insurance companies together and singly to talk about solvency II. We convene industry groups on a dossier-by-dossier basis. So we engage with the industry and we talk through their concerns.

I think that stipulating in an MOU who should be consulted and when is not necessarily appropriate given the diversity of matters raised through European dossiers. The reality is that the European Union has decided to set up three bodies on a sectoral basis. The UK has decided to do it on a conduct-of-business and prudential basis. Other member states have different arrangements. There is no single model across Europe. The key thing is to ensure that we engage, as we do, effectively not just with the ESAs but with the Commission and the European Parliament.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 10:45 pm, 20th March 2012

I am sorry that the Minister did not address some of my concerns about the nature of the officials taking part and adjunct details about the membership of the relevant organisations. He did not really flesh out where we were with the secretariat recommendation and how that would be taken forward, or state whether he would concede that a review of how that will work is necessary. I had assumed that he would say, “We will keep all those questions under review as best we can,” but he did not. I am concerned about how effective the clause will be.

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

I hope that the hon. Gentleman has read the memorandum of understanding. It states that that will be reviewed annually, or more frequently if needed.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is very helpful to have on the record. I apologise, because I must have missed that section—[ Interruption. ] The Government Whip had spotted it; he is obviously on top of the Bill’s detail in a far more effective way than am I—[ Interruption. ] I can tell that that idea has a measure of support from his colleagues, but I doubt that that is actually the case.

I have my misgivings about the clause, and I suspect we will want to return to it at another time. I am not convinced that it fully addresses our concerns, but I will not press the point at this late hour, because we have had a good opportunity to voice some of our concerns.

Question put and agreed to.

Clause 62 accordingly ordered to stand part of the Bill.