Single Market for Finance (EUC Report) (Hansard, 2 March 2004)
HL Deb 02 March 2004 vol 658 cc589-607

5.38 p.m.

Lord Woolmer of Leeds rose to move, That this House takes note of the Report of the European Union Committee, Towards a Single Market for Finance: The Financial Services Action Plan (45th Report, HL Paper 192).

The noble Lord said: My Lords, in moving the Motion, I must first extend my thanks to all those who gave oral and/or written evidence to Sub-Committee B; to our Clerk, Patrick Wogan, for his sage advice and counsel; to our advisers, Graham Bishop and Tom Troubridge; to Her Majesty's Ambassador in Paris and his staff; and to the UK Permanent Representative in Brussels and his staff for so efficiently organising our working visits to Paris and Brussels. I also thank members of Sub-Committee B for the enormous amount of time and careful reflection they gave to this important inquiry. Last but not least, I thank the Financial Secretary to the Treasury for the written and oral evidence we received from her and for the positive and helpful government response to our report.

We reported on 18 November 2003. The Minister responded on 13 January. Things have moved on since then, and I trust that the Minister will not mind if, in my remarks, I seek an update on some matters. As he knows, I sought to give him notice of those points.

In May 1999, the Commission first published a financial services action plan aimed at securing a single market in financial services. In 2000, the Lisbon European Council named the FSAP as a key component of broader EU economic reform as a means of making the European Union more competitive in a global economy. We agree with those sentiments. It set a timetable for adopting financial service action plan measures by 2005. In October 2003, the European Council confirmed that deadline.

From the first, the stated objectives of the European Council have been high-level objectives aimed at reducing the cost of capital in the Union and allocating capital more efficiently. The key markets here are wholesale markets, but when the discussion got down to the detail and member state level, focus frequently shifted to the impact of change on the individual consumer investor and to a retail focus. The result has been a degree of confusion between wholesale and retail market objectives.

Quantified estimates of the impact on GDP arising from integration of wholesale and retail markets are quoted in our report in paragraphs 14 to 16. It is disappointing that this theoretical measure of the benefits of a single market has scarcely, if ever, been carried through to justify specific directives. Sadly, directives rarely set out targets for achievement in terms of measurable outcomes.

It was recognised that the target date of 2005 for the adoption and implementation of the action plan would not be met unless a new approach was adopted towards a legislative process in the Union. Baron Lamfalussi chaired the committee charged with addressing that problem. The resultant four-tiered decision-making process for EU legislation affecting the securities market was adopted by the Stockholm Council in March 2001. It is set out and examined in some detail in our report.

When your Lordships' committee examined subsequent progress on these matters, a number of points appeared important in order to understand progress to date and the challenges ahead. First, there is the position of the financial services industry in London within the EU and globally. My noble friend Lady Cohen, who contributed forcefully to the sub-committee's discussions, will no doubt contribute equally powerfully on those important matters today. Therefore, my remarks are brief, but no less strongly held for that.

Far more than 400 foreign companies are listed in London, second only to New York. Around 50 per cent of all global trading in companies with overseas listings takes place through London. Seventy per cent of trading in the international bond market is based in London, reaching 31 trillion dollars in 2002. The City in London employs some 310,000 people. Non-UK European-owned banks operating in London employ nearly 30,000 of those people, managing assets worth more than £1,000 billion from London. Without London as a major financial centre, there would be a net loss of almost 200,000 jobs throughout the European Union, especially in Luxembourg, the Netherlands, Germany, France, Belgium and Italy.

What are the implications for the financial services action plan? At all times and with the greatest of care, proposals for the regulation of financial services in the European Union should reflect on the international dimension. Wholesale, professional global markets are very important. They are critical to the Lisbon agenda. They are not the same as retail markets: the difference is not one of scale, it is a difference of kind. Because of different circumstances, much of the European Union did not—in some cases perhaps still does not—fully understand the position and role of London in global markets. London is a European Union asset. Loose legislation can damage that asset.

Some of the directives passed or proposed to date have failed that test. More damage could be caused in level 2 legislation unless greater understanding and care is taken. Partly because of the global role, the UK was initially slow at fully appreciating the perspective and priorities of many other member states. Typically, they are much more retail-driven. Wholesale markets in most member states are very much smaller. Protection of the consumer is often the defining objective.

The move to get all primary legislation in place by 2005 was driven by a desire to reduce the cost of capital and to make business more competitive. Those are wholesale market issues. Domestically, politicians and business interests have often reflected domestic agendas and culture; hence retail consumer focus, sometimes with protectionist business agendas. Despite the stated intention of the Lamfalussi process, much primary legislation has been too detailed, as bureaucrats and politicians have tried to square the circle of different agendas of wholesale and retail markets.

Some primary legislation has significant defects. Some legislation has been pushed through in haste, perhaps to meet deadlines. Yet, other legislation appears likely to miss the same deadlines. Some member states have occasionally dug in their heels to protect their perceived national interests. There has often been a move too far towards uniform, over-specified primary legislation.

Some of the draft directives causing specific concerns for your Lordships' committee in November had moved on by the time the Government responded in January. Today, it would be helpful if my noble friend could update the House on matters that were still outstanding in January.

With regard to the Transparency Directive, at that time we were concerned at the proposed requirement for quarterly reporting. We were pleased that that was subsequently dropped. We were also concerned that the directive might significantly extend the liability of directors and auditors beyond that to shareholders. The Government sought to reassure us that they had secured drafting changes to help address their concerns about these matters, but the committee was not entirely convinced. Can the Minister confirm whether the Transparency Directive, as it is now agreed, extends the liability of directors and auditors beyond that to shareholders?

Agreement was reached on the Takeover Directive at the December council. The Minister told us in her response that the eventual compromise that made key articles dealing with barriers to takeovers optional for member states was disappointing because certain genuine liberalising advantages of the directive had been lost. But she felt that improvements had been secured that laid down minimum standards for regulation of takeovers and enhancing minority shareholder protection across the European Union. We agree both with the Minister's pleasure and her disappointment.

I turn briefly to the proposed Risk-Based Regulatory Capital Directive. When does the Minister expect the Commission to bring forward its revised proposals in the light of the Basel II negotiations? Will the directive apply to every firm that falls within the scope of the Investment Services Directive or only to a much smaller number of substantial firms?

Your Lordships' committee regards agreement on international accounting standards or international financial reporting standards as a core objective of the action plan and central to lowering the cost of capital for European business and central to ensuring that the Union is fully integrated into global financial markets. There has continued to be opposition to articles 32 and 39 of the accounting standards, especially from French banking and insurance. What is the Government's current position on the importance of this potential directive and on the issues of articles 32 and 39? When we reported on that, the other unresolved issue was whether non-EU issuers would be allowed to use their own accounting standards to raise capital in the European Union. Can the Minister update your Lordships' House on this important point?

On 7 October, the Council voted to amend Article 25 of the Investment Services Directive, which would have allowed major investment banks to continue to do business direct without having to use local stock exchanges. The amended rules on pre-trade transparency will, in our view, have a negative impact on the willingness of firms to trade with consequential effects on the cost of raising capital in the European Union. It is a spectacular own goal by the Council. Your Lordships' Committee regrets that an issue of this importance was decided uniquely in the Council by qualified majority vote, in the face of opposition from the important financial centres of the United Kingdom and Luxembourg. That is a deeply disturbing precedent and does not bode well for level 2 negotiations or for securing future reviews of ill drafted directives.

In her response to the committee in January, the Minister explained how the Government were seeking to secure changes to the amended directive. We wish the Government well in those efforts. I shall be grateful if the Minister can update your Lordships today on the recent developments and on the remaining timetable and prospects for securing the important and necessary changes.

There will undoubtedly be problems in future with the implementation and enforcement of some ill drafted level 1 legislation. We must hope that between them the Commission and the European Securities Committee, with the advice of CESR, make a better job at level 2 of producing what was intended as detailed regulations to put flesh on the bones of the framework directives. This will all be done under comitology procedures, but will be dealing with issues of major importance beyond that normally associated with comitology.

Can the Minister confirm that should there be votes in the European Securities Committee they will be under qualified majority voting? Does he regard the use of QMV on the Investment Services Directive as an example of good practice when considering how to take forward important financial regulation? How do the Government intend to ensure that the financial community in London is fully engaged in level 2 discussions?

Given the large volume of secondary legislation to be dealt with, is the 2005 deadline for implementation still realistic? What issues in particular do the Government regard as important to achieve in level 2 negotiations? The noble Lord, Lord Williamson of Horton, whom I am delighted to see in his place today, has long reminded us of the importance of keeping a close eye on the use of comitology in Brussels. The House might wish to reflect with care on the way in which it can exercise rigorous scrutiny of level 2 legislation under the financial services action plan.

The Committee of European Securities Regulators (CESR) will have a vital role to play at level 3 in ensuring a consistent, timely and common approach to implementation by regulators of member states. We arc pleased to hear that the process of transparency and consultation with the practitioners in the market place has been formalised, seeking to ensure that the markets themselves are now part of the process of implementation. However, we were concerned by the sheer size of the task of implementing the 42 or more directives and their associated secondary legislation, against a deadline of 2005.

We were concerned about the burden on the industry and on the regulatory authorities at all levels. We agree with the Government's response on this point that there is a careful balance that has to be struck here. We agree that Brussels must bear in mind proportionality and use all the policy levers at its disposal, including competition policy, with a view to avoiding future legislation whenever possible.

In their response, the Government told us that the Treasury was working with industry in identifying, listing and categorising reported problems in cross-border provision of financial services and the establishment of financial services firms throughout the European Union. Is the Minister able to tell us today what arrangements are made for that important work? Will it result in a published report and if so, when?

Today's debate deals with issues of importance to this country and to the European Union. The European Council has been right to aim for a single market in financial services. It has been ambitious in its deadline for implementation by 2005. Much has undoubtedly been achieved in pushing through ELI-wide framework legislation. We hope that our reservations about some of the detail are greatly outweighed by the positive benefits that can be secured in the form of lower costs of capital and more choice and better returns for investors.

Moved, That this House takes note of the report of the Select Committee on European Union on Towards a Single Market for Finance: The Financial Services Action Plan [45th Report, HL Paper 192].—(Lord Woobner of Leeds.)

5.55 p.m.

Baroness Cohen of Pimlico

My Lords, I should like to thank the noble Lord, Lord Woolmer, for introducing this debate and for his expert chairmanship of the committee's inquiry. I was a member of Sub-Committee B, which produced this report. I must also declare an interest. As set out in the Register, I am a director of LSE plc, the company which owns and operates the London Stock Exchange. For 18 years before I came into your Lordships' House I worked in an investment bank, Charterhouse, and then as an advisory director at HSBC.

So I am parti pris, but indeed such is the importance of the financial services industry to our economy that everybody who lives in the United Kingdom, as well as those who work in the industry, has good reason to be a supporter of this industry and to be interested in the rather difficult and technical provisions of the financial services action plan.

Overall, the financial services industry contributes a net £18 billion to the UK trade balance, making it the world leader, Switzerland, unsurprisingly, ranks second and the mighty USA third in the world. In addition, another net £6 billion comes from the earnings abroad from the likes of Barclays and HSBC even after netting off the payments going out of the country from foreign banks, which gives us a total bottom line contribution to the United Kingdom economy of £24 billion. By comparison, our tourist industry and our airline industry, which get a great deal more publicity than financial services, bring in huge revenues, but have even larger outflows, so that at the net level the balance of payments for these two industries shows a loss.

The other truly remarkable statistic for the financial services industry is that it pays 27 per cent of the UK's corporation tax and the people in it are responsible for 14 per cent of the UK's pay-as-you-earn taxes. Your Lordships will understand therefore the particular enthusiasm with which I participated in this inquiry.

Indeed, it is pleasing that despite the wide variety of evidence from a wide variety of people, there was no real dispute about the importance of the FSAP initiative itself. In principle, it is perfectly easy to support; it is in practice that it becomes much more problematic. But unless we succeed in delivering a more efficient financial market we have no hope of achieving the Lisbon commitment to make the EU the most competitive economy in the world by 2010.

How will we know when we have got there? One key test has to be to compare the cost of capital available to Europe's companies with the cost of capital available to companies from outside the EU and, most important, with the companies in the US. Such measures are important. It is not just enough to complete a market that is internally efficient unless it also makes the whole of the European Union competitive in global terms.

It is this concern with the cost of capital that goes to the heart of some of the UK's reservations about aspects of the financial services action plan. For many years the City of London has been a global financial centre and its success is based in part on its ability to attract international investors and companies as well as on its capacity to serve UK plc.

The City of London is not of course reliant solely on the UK domestic economy. There are 450 non-UK companies from almost 60 countries whose securities are traded on the markets of the London Stock Exchange. Two-thirds of the institutions that issue debt are from outside the EU but 70 per cent of global turnover in internationally traded bonds takes place in London. London is also home to the world's biggest pool of investment funds and liquidity amounting to more than £260 billion, far more than Paris or Frankfurt, and even more than New York. That is a huge vote of confidence in the quality and integrity of London's markets, underpinned by a carefully balanced package of regulation.

It is against that background that we have to assess the FSAP and its emphasis on harmonising standards and creating an integrated market based on a new regulatory framework. It also explains some of the tensions that the project has produced among policy makers and between national governments. I believe that most of those tensions have been founded on a false premise; namely, that we are here in a zero-sum game, and that London's loss will be Frankfurt's or Paris's gain. To believe that is not to understand the nature and mobility of financial markets. Electronic trading and remote access to exchanges make it possible to transfer funds at hardly imaginable speeds. The largest investment banks have access to all the world's financial centres and trade 24 hours. They owe no allegiance other than to seek out the best deals for their customers. That means that markets can move to different centres almost overnight, and when they move they cannot always be lured back.

If Europe cannot meet firms' needs for capital raising and customers' needs for investment products, increasingly business will go elsewhere. A supportive fiscal and regulatory framework is needed to retain and grow international markets. The wrong policy decisions can prove very expensive; for example, the huge Eurobond and Eurodollar markets were first created in the sixties in Europe, principally in London, because the USA imposed a 15 per cent tax that hit overseas issuers. Although the US government repealed the tax shortly afterwards, the damage was done and the market stayed in London, never moving back to New York. There are more recent examples. In 1987, when the German government imposed a 10 per cent withholding tax on domestic interest income, it led to massive sales of German government bonds by foreign investors. The German government were forced into an embarrassing U-turn within four months.

The mistaken belief in some member states that services could somehow be repatriated from London threatens a similar outcome. The most recent Centre For Economic and Business Research report demonstrates that the City of London brings benefits to the whole European economy, as my noble friend Lord Woolmer explained. Without the cluster of global financial services companies in London. 18 per cent of City-type business would be lost, not to the rest of Europe, but to competitors outside the EU—New York, Tokyo or Switzerland—and a further 12 per cent would be lost altogether as higher costs made transactions unviable.

There is a current and worrying example in the Investment Services Directive, on which negotiations have reached a very delicate stage. The main issue is the extent to which investment firms are permitted to conduct business off-exchange and how transparent they should be in disclosing that business prior to trades taking place—the extent to which they are obliged to disclose the price before trade—or so-called pre-trade transparency. Since internalisation is already a feature of the London market, we do not believe that the pre-trade transparency requirements should be made too onerous. Liquidity providers will be deterred if the quote obligation—the level at which they must guarantee to conduct business—is set too high. The London position is that investors should have more choice about the execution services that they want.

As I understand it, the current text of the Investment Services Directive, as approved recently by the Parliament's Economic and Monetary Affairs Committee, offers a much better balance than the alternative text, preferred by the Council of Ministers, which was approved despite the strong opposition of the UK and four other member states. Our view is that unless the European Parliament's text—or something pretty close to it—is approved, serious damage will be done as business moves elsewhere, with substantial financial loss not only to London but to the whole of the EU. Like my noble friend Lord Woolmer, I should be very glad to hear the Government's understanding of the current position during the winding-up speech.

So let us be clear: damaging London does not mean that Frankfurt or Paris will gain. Put in wider economic terms, almost 200,000 European jobs could disappear and seven member states would see a fall in GDP. Perhaps that is the real problem with the financial services action plan. Certainly the UK Government and UK-based financial services providers must communicate more effectively the benefits that the City of London delivers to Europe as a whole. As Dr Ruben Lee said to us in his evidence, what is good for the UK is good for Europe. I must say that, on the whole, Europe hates being told that sort of thing. It is difficult for Europe to face up to people who tend to say, "We have been there before, we did that and it proved a disaster". We are often, justly, accused of arrogance in those negotiations. However, the fact is that we have been there before; we must just find a more careful way of saying it.

In that sense, the City must be seen more as a European asset to be prized and valued. That does not mean that we should expect the EU as a whole to agree to adopt UK standards. It means, however, that the leaders of Europe's member states should be focused on the bigger prize to Europe's economy of an efficient and competitive financial services market. That is not an easy concept. In areas more familiar to European negotiators, such as the common agricultural policy, it is a zero-sum game, where one European nation's gain really is another European nation's loss. We hope that in the end our expertise can serve the whole EU.

There is also a strategic choice facing the accession countries, particularly those from central and eastern Europe, which are, to put it kindly, newly embracing the demands of competition and the market economy. Their companies need access to the low cost of capital that only an efficient financial market can provide. The Centre for Economic and Business Research report also shows that in the EU now the costs of doing financial services business in other member states are on average almost 25 per cent more than they would be if the equivalent business were done in the City. Given that the accession countries tend to be smaller, the costs of doing that business in those states may be even higher, which should give all policy-makers pause for thought.

As my noble friend Lord Woolmer outlined, the other major problem dogging the implementation of the FSAP is the question of distinguishing between retail markets—to you and me, the sale of financial services products such as pensions and life insurance and savings products—and the EU's wholesale markets, which are largely centred in London. There is a tendency among some of our European partners to feel that the same regulation should apply to the sale of products to individuals as to dealings between the likes of HSBC, Citibank and Deutsche Bank, to name but three.

The UK's record on regulation of sales of financial products to individuals is not unblemished, and our difficulties have been made very public, as with the mis-selling of personal pensions that surfaced in the 1990s. But we have successfully managed to avoid measures that damage wholesale business, and we recognise the concept of the sophisticated private investor who may be able to opt out of investor protection legislation. We have also recognised that without a successful wholesale market there will be no retail business to regulate. It must be right that different standards can and should be applied to protection of the individual consumer from the standards that obtain in dealings between the global investment banks that we hope and expect will want to go on doing business in the European Community.

Some difficulties are being experienced because some countries have not acknowledged fully the distinctions between individuals and financial institutions, or because historically they have different regimes. French opposition to the internalisation provisions of the Investment Services Directive, which enable institutions to deal off-market, partly stems from their objection that individual investors might be disadvantaged if all prices are not fully transparent before any deal took place. There is no evidence that individuals are so disadvantaged. If the theoretical needs of the investor consumer were to be given primacy in that way, internalisation of orders would have to cease in European markets, only to re-appear, with the same players acting on behalf of the same individuals, in an offshore centre.

I wish to comment briefly on the Lamfalussy process, led by the eponymous Baron Lamfalussy. The problems of the FSAP do not end when the principles of the various directives have been agreed at Community level. The difficulties of getting through the huge amounts of material contained in the various directives were understood almost from the beginning, which is why the Lamfalussy process was set up. In evidence we had various predictions about the success or otherwise of the process. The concern is that probably still too much detail appears in level 1 of the directive because nobody really trusts each other to fix the problems at level 2, the implementation stage. Levels 3 and 4 simply remain unknown. Level 4, on enforcement, is particularly worrying. The omens are not good. The Commission's latest report on infraction proceedings shows that the incidence of failure to implement or weak implementation of internal market directives is worsening. That does not auger well for the future of the FSAP. On the other hand, this group of directives is new, and we must all hope that, as the benefits become more evident, enforcement will follow.

There remains also a key missing piece of the jigsaw which is not even part of the FSAP. As our report notes, for a market to function effectively there needs to be an unimpeded system for cross-border clearance and settlement. There are, as I speak, around 20 separate systems for 15 domestic markets in the European Union, compared effectively with one in the United States for a market of about the same size. Domestic settlement in the EU is cheap and efficient, while cross-border settlement, unsurprisingly, is expensive and inefficient. This is a barrier to a single market in financial services and, vitally, a barrier to getting a low cost of capital into Europe. It may even be that legislation is the only way to force reform in this area, but the jury is out and at the moment we rest our confidence in the Giovannini Group and a joint working party of central bankers and security regulators. It is a vital step and it will be quicker and better if market players could resolve the problem.

I fear that this speech has sounded a little pessimistic about what has been achieved already by the financial services action plan and what can still be achieved. Harmonisation of financial services was always going to be difficult given the different stages of development of the European countries' markets, but the great prize of a cost of capital as low as anywhere in the developed world is there for the taking, and I remain encouraged.

6.11 p.m.

Lord Shutt of Greetland

My Lords, after half an hour or so, the wind-up starts. I am also a member of Sub-Committee B and therefore have been associated with the production of this report. I am glad to be associated with giving thanks to the Clerk, the advisers, the givers of evidence and fellow members of the committee.

This subject is complicated. Therefore, I have tried to reduce it to its simplicity. First, we are talking about a genuine, single, European market for those who want to borrow money or raise equity funds. Secondly, we are talking about an open market in what we call retail; that is, the man or woman in the street achieving their savings and other people being able to promote the ways in which they may save. Thirdly, within all this there is a level playing field, lightly refereed, because the rules are understood and accepted.

That is what this is about, but then the complications start. It is called an action plan, but this is the plan, and the action is to follow. The noble Lord, Lord Woolmer, has given a very proper abridged account of the report, as I knew he would. He set out in some brevity that which is available for everybody to read.

On the other hand, the noble Baroness, Lady Cohen, with her own expertise and knowledge of London and the markets in London, has made it clear that London equals Europe in a world context. It was very helpful for us to glean the fact of UK-Switzerland-USA; it is a batting order that I have never seen before and I am grateful to have that. I understand how that can well be the case. Even more importantly, came the knowledge of how important this whole area is to the economy in terms of the 27 per cent corporation tax take and the 14 per cent pay-as-you-earn take. She also stressed the importance of the Lamfalussy process and that we are supposed to be talking about the framework, yet much has to follow in these other areas of what might be called lower-degree decision making.

It is interesting in responding to only two speakers that there is no entrant from what we have come to see in this House as the "octopus tendency". One could have expected that we would have had entrants from that tendency today. However, the issue is about an open market and in this instance what is a clear opportunity here in the United Kingdom. The committee's work is but a small cog in the European-wide debate, but our Government are involved and the Minister is here to respond. I hope that he will let us know where we are now. The committee is a piece of history; we have the document; yet the debate still goes on. Where are we with clearance and settlement procedures? Where are we with accounting standards? Will there be a reversal of the ISD? Where are we in terms of deadlines? We were told about the deadlines when we took evidence and went to Paris, yet we are also keen that this issue is got right. What is there that is still outstanding? Can quality overcome speed?

Overall in Britain over the past few years we have not been very good at raising the flag for Europe; we have been far keener to moan; but I would commend the point made about the benefits of the single market being worth 130 billion euros over 10 years. That amount is very important, as was indicated earlier; it is very important for the UK. There can be a tremendous benefit for both the UK and Europe, and even if benefits are only half as good as this, it is a very good catch.

6.17 p.m.

Baroness Wilcox

My Lords, I thank the noble Lord, Lord Woolmer, and the European Union Sub-Committee B for their terrific work. It made me feel very nostalgic. The first six years that I was in this House I served on Select Committees and particularly on the European Union Select Committee Sub-Committees D and C. Terrific work is done for this House and for the other place because there is no level of scrutiny like this in the other place on European directives. Tonight it was evident that it is important that we have such knowledge here in this House, so I thank the noble Lord, Lord Woolmer, and the committee very much indeed.

As the noble Lord said, a single market in financial services has been a key part of the moves towards the single market which began with the Treaty of Rome nearly half a century ago, and was cemented by the Single European Act 1986. In the Conservative Party we support these moves. While we do not believe that a single market requires a single social or industrial policy or a common taxation policy, we strongly support the four basic freedoms of the single market—free movement of goods, services, people and, most relevant to today's debate, capital.

In 1999 the European Commission put together a financial services action plan, with its plans for improving the single market in financial services. Your Lordships will know that the plan has three strategic objectives—the single market for wholesale financial services; open and secure retail markets, and state-of-the-art prudential rules and supervision.

The plan also has a tight deadline, as we have heard. In Lisbon in March 2000, the European Council affirmed that the FSAP should be adopted by the end of 2005. For this to be achieved, the measures must be fully adopted at the European level by next month.

The report states that at present there are three outstanding measures under negotiation. As we have heard, those are the take-over directive, the investment services directive and the transparency directive—in addition to the 10th and 14th company law directives which have yet to be brought forward by the Commission. Can the Minister tell the House what progress has been made on these issues? So far as I am aware, in the case of the transparency and investment services directives, the co-decision process is still ongoing. Is that the case? What of the takeover directive? Moreover, what progress has been made on the company law directives?

I am also aware that the Commission is currently preparing legislation on Basel capital adequacy rules for financial institutions, Solvency 2, cross-border payments and reinsurance. Do these measures form part of the FSAP and what progress has so far been made?

The purpose of the sub-committee's report was to investigate the effect on the quality of legislation of the tight deadline for the FSAP. In particular the report raised the issue of the "retrogressive" vote in ECOFIN to amend Article 25. That would have allowed major investment banks to do business direct without having to use local stock exchanges. The Chief Secretary to the Treasury estimated the potential cost of the amendment to be as much as £300 million, and the Government have stated their wish to see the decision reversed. What steps are being taken to alter the investment services directive before it is adopted? I understand that compromise on the ISD was accepted in committee last week, but can the Minister tell us what is his assessment of the chance of a satisfactory outcome in ECOFIN?

This is a key item of legislation which will impact on the whole framework of financial services regulation in Europe. It has been described by many as the constitution for the European capital market. Getting the ISD right will be crucial for the UK's financial industry. It is important to ensure that a proper distinction is made between professional and retail investors, and that it does not burden wholesale markets with regulation designed to protect consumers. That point was also made by the noble Baroness, Lady Cohen. Rules relating to the conduct of business and marketing should not be used to protect markets. In addition, it is important to ensure that the ISD is not used to create more complication and costs for investors, for example by adding further costs and bureaucracy to execution-only services, nor should it impose unnecessary burdens on independent financial advisers and small firms involved in financial services business.

I return to the FSAP. The sub-committee claims that the Lisbon European Council in March 2000, gave new impetus to the Financial Services Action Plan as a key component of broader EU economic reform". It would be interesting to hear the Minister's comments on this statement. In the four years since the Lisbon summit, the Government have published annual progress reports. In the first, in 2001, the Prime Minister wrote: Reform, while underway within the European Union, must move forward with speed In the second, the Prime Minister commented that, progress has not always been smooth. Much more remains to be done". In 2003, the Prime Minister said: There remains a daunting amount to be done". This year, the Prime Minister said that progress "is not good enough" and added, we need to go further to meet the standards being set by our competitors elsewhere in the world". How much progress does the Minister believe is still necessary in order to create a single market in financial services?

As we have heard tonight, while I shall not cite such superb figures as the noble Baroness, Lady Cohen, financial services form a hugely important part of the UK economy, accounting for 5 per cent of UK gross domestic product. So it is vital that we get the single market and the financial services action plan right. Opening up access to European markets will provide huge opportunities for the City but, at the same time, an overly prescriptive and bureaucratic approach from the European Union poses severe dangers. It is therefore important that we heed the warnings given by the noble Lord, Lord Woolmer, and the sub-committee regarding, the balance to be achieved between speed of implementing legislation and the quality of that legislation". I would welcome the Minister's comments on how the Government intend to use their influence to achieve such a balance.

I want to raise one remaining issue, again vouched on by the noble Baroness, Lady Cohen. European Union enlargement begins on 1 May with 10 new member states joining the European Union. What discussions have the Government had with the European Commission regarding the extension of the single market for financial services to the enlarged European Union? What steps does the Minister believe are necessary?

I close for these Benches by welcoming the detailed and painstaking work of the members of Sub-Committee B under the wise guidance of its chairman, the noble Lord, Lord Woolmer. We have listened with great interest to two members of the sub-committee. The noble Baroness, Lady Cohen, set out a wonderful range of figures, drawing on her great experience as a banker in the City of London. The noble Lord, Lord Shutt, addressed the House with the clarity one would expect of a chartered accountant of his standing.

I thank all the members of the sub-committee for the report. We look forward to the Minister's response.

6.26 p.m.

Lord Davies of Oldham

My Lords, I join all noble Lords in expressing my thanks to my noble friend for chairing the sub-committee. Its members have all played their part, but my noble friend's chairmanship certainly ensured that we have the benefit of cogent and relevant reports which raise all the crucial issues. As my noble friend indicated in opening the debate, what he really wants is not answers to the report which has already been presented, but an update on our progress on these issues since its delivery. I shall do my best to respond to those questions. However, I want to put on the record the gratitude of the House to the members of the sub-committee.

I was grateful for the rather pessimistic stance adopted by my noble friend Lady Cohen, to which she herself admitted. It was enlivened at the end of her remarks by one or two moments of encouragement and appreciation of progress being made. I am sure that she will forgive me if the general tone of my remarks is almost the exact opposite. I shall be buoyant about areas in which we are making some degree of progress while not being so unrealistic as not to recognise that there are very real reasons for concern and areas in which a great deal of work still needs to be done.

The project, achieving the ambitious strategy of the financial services action plan, will produce very significant gains both for us and for other member states in the Community. But we cannot fulfil those ambitions at any cost. Although it is important to make progress, we must also recognise that we cannot rush into legislation. It is crucial to focus on the principles of better regulation and proper consultation to ensure that the quality of financial services legislation is not compromised, in particular given the high standards we maintain in our own country.

I want to reassure my noble friend on what was probably the easiest question he put to me: the extent to which the Government are involved in consultation with crucial players in the industry. The Government make strenuous efforts to ensure that not only do they take those crucial players with them, but also that they benefit from the wisdom they can provide by warning us of the implicit dangers of taking inappropriate action. All noble Lords have stressed that point, and no one better than the chairman of the sub-committee, my noble friend Lord Woolmer. These issues are vitally important for the City of London, given the role it plays not only in terms of enhancing the prosperity of our own people, but in its crucial role in the global context.

One of the crucial issues that we have to face in a rather more dramatic way than several of our partners in Europe is that our financial services industry has a global reach, a global importance and a global significance. This means that we must have strategies which are not only entirely relevant for the Community but are also appropriate for enhancing London and the City in its role across a whole range of world services.

Great benefits can flow from an enhanced market. A recent report from the London School of Economics on behalf of the European Commission calculated that the creation of a single EU market in financial services would by itself reduce the real cost of capital by 50 basis points for European businesses and result in a one-off 1.1 per cent increase in GDP over 10 years for the European Union as a whole. Those are very significant figures indeed. In a sense, it is a measure of the prize for which we are striving in regard to the development of a single market in this area.

Such benefits will not of course be forthcoming in terms of better regulation without accompanying economic reform across the EU. The issues will be made that much more complex by enlargement, a subject introduced late in the debate by the noble Baroness, Lady Wilcox. She asked what discussions the Government have had with the Commission about enlargement and this project. We are seeking to develop relations with the accession countries to ensure that they play a full part in developing this single market. They, too, have their contribution to make. However, it is important that they should appreciate fully how important this development is for the whole of the European market they are about to join.

The Government believe that the process of economic reform is necessary if Europe is to meet the strategic goal agreed at the Lisbon European Council and confirmed at Stockholm and Barcelona. Moreover, as the committee's report identifies and as the Government have previously agreed, we need to improve the quality of regulation at European as well as at national level. Better regulation disciplines are beginning to develop in Brussels. The better regulation action plan introduces extended impact assessments for all new significant legislation; an eight-week consultation period for new legislation; and a programme of simplification of existing legislation. It is early days but it is clear that this is a genuinely welcome initiative.

However, as we have found in the UK, we need to maintain constant pressure to keep driving forward regulatory reform. That is why the theme of my noble friend's opening speech was, "How much momentum do we have in terms of this development at the present time?" The Government are working with the Irish, Netherlands and Luxembourg Governments to implement a further programme of regulatory reform over their presidencies to further strengthen impact assessments—including through a specific test of the effect on competitiveness—and we are looking at alternatives to regulation. This initiative has been welcomed also by the President of France and the German Chancellor. So initiatives in which we have played a full part and taken key steps are being buttressed by support elsewhere.

My noble friend Lady Cohen emphasised the global dimension. It is essential that the global characteristics of financial services are taken into account when developing and implementing the EU's strategy for them. The EU's policy must encourage further liberalisation of the EU market and greater integration generally. The EU and the US are the world's leading financial services markets. More efficient and integrated EU-US financial markets would benefit everyone. We can of course improve our relationships with the United States by having clarity, consistency and effectiveness across the European Community.

There remains, however—this reflects the element of pessimism in the speech of my noble friend Lady Cohen—a great deal to be done. In following up the financial services action plan we intend to ensure that any official action is carefully targeted to address specific market failures and barriers; that when community action is necessary the Commission should use all the policy levers at its disposal and avoid legislation whenever possible; to encourage all those participating in the decision-making process to act to improve the quality of legislation with rigorous cost-benefit analysis, better regulation principles and consultation with all stakeholders; to ensure that there is effective implementation of FSAP measures by member states and effective and consistent enforcement of these measures by the Commission; and to ensure that the global dimension features prominently in our thinking.

Considerable effort is being put into the identification of barriers to financial market integration. The Treasury is working closely with the industry in attempting to list and categorise reported problems in the cross-border provision of financial services and the establishment of financial services firms throughout the EU.

The Government have encouraged the Commission to tackle its task of completing the single market by using all available policy tools. In the 2003 Budget Statement, the Chancellor encouraged the Commission to make more proactive use of its competition powers to investigate financial services markets that appear uncompetitive.

I have been asked about a number of points, which I shall address in the remainder of my speech. I can assure my noble friends Lord Woolmer and Lady Cohen that we are trying to reach the April 2004 deadline. After that date, we foresee that issues such as enlargement will create greater difficulties, which will have to be overcome.

But we cannot do this at any cost. This is shown in our firm opposition to the services directive compromise proposed at the last ECOFIN council. We shall continue to encourage sustained progress towards the completion of this plan but remain wary of the attempt to rush legislation. We cannot, as my noble friend Lord Woolmer indicated in his opening speech, do anything except seek to guarantee that the City, in its crucial role, does not lose out as a result of these developments.

My noble friend asked about the transparency directive. It is too early for me to give a definitive response. The noble Baroness, Lady Wilcox, referred to the co-decision aspect of the work in this area. Negotiations are ongoing between the Council and the European Parliament and I am unable to give a definitive reply on that front.

As to the issue of international accounting standards, we are strongly supportive of their adoption—including IAS 32 and 39, although we recognise their contentious aspects. The standards are not perfect but their adoption will bring great benefits. We welcome the continuing dialogue between the International Accounting Standards Board and other stakeholders.

I am afraid that I have to say to my noble friend that in regard to non-EU issues countries will be able to use their own accounting standards until 2007. We cannot see that we can make progress faster than that. In the meantime, agreement will have to be reached within the EU as to which accounting standards are considered of sufficiently high quality to be acceptable as international accounting standards. A great deal of work has been carried out but all noble Lords who have participated in the debate will recognise the challenges represented by that work.

My noble friend also asked whether CAD 3, the capital directive, will apply to every firm that falls within the scope of the investment services directive. The answer is broadly "Yes". I can reply affirmatively on that.

He asked about the takeovers directive. Again, I lapse into a slightly pessimistic stance. I cannot pretend that the current directive is anything other than a disappointment. It does little to address harriers to takeovers in the EU. We have concluded that at present we have no other basis on which agreement can be reached. It is this or nothing. We shall bring benefits to the single market. There will be better protection for minority shareholders, which will result from minimum standards being laid down, and there will be greater transparency, which will enable the markets to identify unaddressed defensive corporate strategies across the EU. But I cannot help but indicate to the House that this directive is not what we would wish. I think that my noble friend is all too well aware of that, but it is right that the Government's response should be put on the record.

On the question of the investment services directive in general, we were encouraged by the strong vote last week—my noble friend asked for an update and I cannot do much better than to quote last week—by the European Parliament's Committee on Economic and Monetary Affairs in favour of positive amendments to the directive. As I indicated earlier, we are urging fellow council members to reach a compromise with the Parliament to allow the ISD to be agreed in April. Progress is being made. The European Parliament is on the side of the angels. There is a negotiating position that can be exploited and we hope to see it exploited along the lines that we have been pursuing. We hope for an early conclusion.

Four directives are caught by level 2 of the Lamfalussy process. Work on three has commenced. The Government's priority is to ensure that, in general, level 2 work achieves proportionate, consistent and timely legislation with better regulation outcomes so that changes in technology and market practice can easily be accommodated in a way hat is consistent with protecting the consumer. My noble friend will recognise that in that area I have to be slightly elliptical in my response. I can tell him one other fact. It is the case that European Securities Commission votes on level 2 are undertaken by qualified majority voting, which gives some flexibility.

Both my noble friend Lady Cohen and the noble Lord, Lord Shutt, raised points about cross-border clearing issues and settlement in the EU. We believe that the Giovanni reports were helpful and we are looking forward to the commissioner's forthcoming communication on this subject. The Government do not have a view on whether clearing and settlement services are best provided by a single provider or by multiple providers. We believe that market structure is best determined by the market participants and we will be pursuing the discussions along those lines.

I was also asked whether the Government supported a directive on clearing and settlement. We can see some possible benefits in a directive, in terms of creating certainty about the regulatory environment and ensuring open access to providers and markets, but also potential risks. There is not yet a common view among member states about the scope and content of any possible directive. This may result in overly complex, rigid legalisation that stifles innovation. Suffice it to say that we have distinct reservations in this area at present.

On the company law directive, the noble Baroness, Lady Wilcox, asked me a specific question about the cross-border mergers directive proposal launched by the Commission in November 2003. This is now under discussion in the Council and Parliament.

She asked another question to which I can reply directly. There is no proposal as yet from the Commission on Basle 2 or Solvency 2. These measures are not formally part of the FSAP. She asked an interesting question and I can say only that at this stage no proposals have emerged.

I have been asked a series of interesting questions, born out of a report that was clarity itself. But in being clear, it did what I think my noble friend and all the other noble Lords who contributed to this debate expected. There are areas in which we can see the potential for significant progress, but there are causes for real anxiety where barriers exist. We are all aware of the fact that issues in the European Community do not become easier against a background of enlargement. We all recognise that and that is why it is important that the established part of the Community, with economies that have been functioning against many of these parameters for a considerable period of time, makes progress on integration and the creation of the single market in the period immediately prior to enlargement.

As I hope noble Lords will recognise, I have been as open and frank as possible about the areas where the Government share elements of pessimism. I am able to confirm to the House that we are making significant progress. The committee identified some areas of that progress and it is something that we can take pride in, while redoubling our efforts to raise the pace and to make additional progress.

6.46 p.m.

Lord Woolmer of Leeds

My Lords, this has been a brief but important debate. I thank most warmly all those who contributed. It is invidious to pick out my noble friend the Minister to thank him, but I know that he stood in for my noble friend Lord McIntosh of Haringey. I am grateful to him for producing some answers, notwithstanding the fact that a few days ago he could not have been expecting to have to respond. He has responded with his usual mixture of well judged gloom and considerable optimism. I thank him for that. Occasionally, what he thought was welcome news to me was not, and in other places he thought that the news would be unwelcome, and I was actually quite pleased. So between us we shall go away from this debate extremely pleased. I thank everyone for contributing.

On Question, Motion agreed to.

GLOBAL ISLES COURT OF RECORD