The more extreme elements of the Eurosceptic press are worried about whether the new European Agencies for financial supervision take away control of the City of London from the UK and hand it to Brussels. They are right to be on their guard but not necessarily about this particular agreement.
The first European Parliament votes on the "Supervisory Architecture" package were back on May 10th, just as the new Coalition government was being formed. The previous Westminster government had already signed up to an agreement with other National governments to establish the Agencies – but the European Parliament seemed intent on giving them yet more powers.
So on the eve of poll and UK election day itself, my colleagues and I were multi-tasking – helping to get-out-the-vote in the marginal seats, whilst poring over the detail of the draft legislation to demand of various parts of the proposal. Back in May the Conservative Party promised voters that we would defend the voice of the UK in Europe. We have not broken that promise – we have been a thorn in the side of the European Parliament on this issue.
After months of negotiation, we have finally found a solution that I believe can strengthen both the UK’s domestic role in supervising cross border financial markets and protect the UK taxpayer from cross border risks without handing over significant powers to Brussels. This is why I will vote for the package next week. But it is only the first battle – more will come.
In a former life I spent nearly 14 years putting together syndicates of banks to find financing for risks too big for one bank to take alone. I helped to raise money for companies, governments, oil and gas projects, roads, railways, phone networks, car makers, banks – even central banks. Our economy has always needed lenders that are prepared to send money across borders – we need different banks prepared to take different assessments of risks. Yet the crisis has made it painfully apparent that misunderstood risks can spiral out of control.
During the financial crisis it became very clear that we needed new international rules to strengthen banks and financial market players. Taxpayers became unwilling shareholders in major banks – we, the taxpayers, must be better protected in the future. The UK can’t pretend it can opt out of global financial markets without having a long term impact on our domestic economy so we need to make sure that globally agreed rules work for the UK.
So in the aftermath of the financial crash, the world’s leaders convened at G20 meetings to agree, in general terms, what actions to take on bank capital, liquidity, derivatives etc, etc. Putting those headline agreements into law let alone action is a frustratingly long and extremely complex process.
One of the constant gripes we have in the UK is that we agree common rules internationally but have no means to ensure that other countries implement them, particularly within the EU. This is where the “Supervisory Architecture” package fits in.
The EU proposed a new system of three Supervisory Authorities: for banking, markets and insurance/pensions. Readers should realise that there already exist forums at a European level in each of these areas with the responsibility for recommending market standards across Europe. The new Authorities formalise their work, and crucially, provide a robust process to enforce the implementation of these standards.
However, in its May vote the European Parliament called much more. For example all cross-border banks to be directly supervised by an army of regulators sent out by Brussels. Barclays, RBS, Lloyds, HSBC, as well as, Deutsche, BNP-Paribas, Santander would be at the beck and call of a European Supervisor. A Supervisor that, remember, had no staff, no expertise and no track record! This was both unrealistic and unacceptable – the Conservatives did not support it. Later negotiations re-focussed the package such that national regulators remain the front-line, cooperating via a system of "colleges" of relevant supervisors, for institutions operating cross-border. For example, if the Bank of England thinks that the overseas regulator of a bank operating in the UK is not correctly monitoring risk they can appeal to the European Agency to arbitrate – but only if there is a specific breach of the underlying internationally agreed rules.
Other proposals cover the need for rapid action in the event of an emergency, allowing the Agency to force firms themselves to rectify breeches of rules, not just national regulators. As the declaration of an emergency activates new powers, debate raged over which institution should have the ability to declare an emergency. The original Parliament position (which we opposed) was to give the unelected European Commission the right to declare emergencies. The final text returns the decision to National Governments through the Council of Ministers. There is a protection, written into the text that ensures that national taxpayers' interests cannot be overridden. Admittedly this protection is limited to "material" amounts of money – but no one could possibly argue that the amounts of tax-payers money being thrown around during the crisis were anything less than material.
Some people have worried that the new Agencies have a one-man-one-vote mechanism giving smaller countries greater weight, but in fact this is the same as in the existing structures. Furthermore they themselves cannot singlehandedly write the rule book. They can make suggestions, recommendations and suggest technical details, but at every level there is the facility for both the European Parliament and the Council of Ministers (i.e. our National Governments) to call back the work of the Agency.
In May the Parliament called for all the Agencies to be located in Frankfurt. Now they stay where they are – with the Banking Authority critically located in London.
This has been a complex process – and given what we were offered back in May a negotiation result the UK should be pleased with. But it is not the end of the discussion, the supervisory package sets the framework for a level playing field – now the “rule making” programme itself commences.
Draft legislation on derivatives and short-selling was released by the Commission this week, not unsurprisingly there is an attempt to re-open some of the same discussions again. On the thorny issue of bank restructuring, the global “Basel” committee of experts made its final recommendations just last weekend but by Monday evening various Euro-zone MEPs were already trying to find special excuses for national exemptions. Heated debates continue on economic governance (stronger solidarity within the Eurozone), corporate governance, market abuse, consumer protection, let alone how to deal with dark-pools and high-frequency trading.
On many of these issues the UK has led the debate. This is right – we are home to a major financial centre – therefore we have more to lose from bad international agreements and, conversely, more to gain from good international agreements than our neighbours. We do need to be on our guard and ensure our voice and expertise is heard. Furthermore, we need to ensure that rules are agreed not just within Europe but across the Atlantic and globally. It is going to be a long journey.