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«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market: Financial Services and the Free ...»

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3.108 Some evidence argued that the development of the banking union might require Treaty change in order to embed appropriate protections for the UK, for instance through expanding the double majority vote or introducing veto powers for the UK on financial services legislation.137 Evidence from others, for instance the Rt Hon John Redwood MP, argued that the banking union merits a full repatriation to the UK of EU competences that relate to banking, on the basis that UK tax-payers are the backstop to banking failures and that solvency and liquidity issues related to UK banks are matters for the UK authorities.138 The Single Resolution Mechanism and Inter-Governmental Agreement

3.109 Alongside calls from some stakeholders for any future Treaty change to be used as an opportunity to ensure the UK has sufficient protections in terms of the banking union, questions were also raised as to whether the existing Single Market Treaty base is suitable for proposed banking union measures.

See: Bank of America Merrill Lynch, submission of evidence, p5; BBA, submission of evidence, p15; BSA, submission of evidence, p5; CBI, submission of evidence, p24; John Springford CER, submission of evidence, p6; FCA PP, submission of evidence, p10; Lord Flight, submission of evidence, p3; and HSBC, submission of evidence, p11.

Business for Britain, submission of evidence, p6.

Rt Hon John Redwood MP, submission of evidence, p6.

68 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital

3.110 The Regulation for the Single Resolution Mechanism (SRM) part of the banking union, which has now been agreed and establishes a central decision-making framework for the resolution of banks in the participating Member States, has Article 114 TFEU (establishment and functioning of the Single Market) as its Treaty base.139 The SRM Regulation includes provisions establishing a Single Resolution Fund (the ‘Fund’) financed by levies raised from industry in the participating Member States, which could be used in connection with a resolution under the SRM. During negotiations at the end of 2013, significant consideration was given to the question of the suitability of the legal base for certain aspects of the Commission’s original proposal, in particular the pooling of levies raised at the national level for the purposes of financing the Fund.

3.111 On the one hand, Germany argued that Article 114 TFEU could not be used for such provisions, whereas the Commission and the Council Legal Service maintained that Article 114 TFEU could be used. In light of the serious objections from Germany, the participating Member States ultimately agreed that aspects of the financing arrangements should be carved out of the SRM Regulation and set out in an inter-governmental agreement between the Contracting Parties in parallel with the Regulation.140 The inter-governmental agreement includes arrangements for the transfer of national contributions to the ‘Fund’ and their progressive mutualisation over the eight-year transitional phase agreed under the Regulation. This approach to differentiated integration paths presents potential benefits and risks for the UK.

3.112 In terms of benefits, the use of Article 114 TFEU ensured that the interests of the Single Market were taken fully into account in the establishment of the SRM, notwithstanding that its scope relates primarily to the participating Member States. Therefore the interests of the banks, investors and other creditors in the UK were safeguarded, for example, as a result of the inclusion in the regulation of non-discrimination provisions and provisions ensuring the equal treatment as regards the application of the EBA’s tasks and powers within and outside the banking union. The use of an inter-governmental agreement for the financing aspects also meant that it was clear that the UK and non-participating Member States would not be liable to contribute.

3.113 However, in terms of possible risks, the use of the inter-governmental agreement highlights the fact that, where the EU has not yet exercised competence, it may be easier for relevant Member States to agree measures outside the Treaty framework instead of persuading the Commission to change the Treaty base for its proposal or to present a new proposal.141 In such cases the co-legislators and non-contracting Member States, would be denied a formal mandate to shape those measures, notwithstanding that they may be closely associated with EU measures, potentially leading to suboptimal outcomes from the perspective of the EU as a whole and potential risks to the Single Market. So although the use of an inter-governmental agreement in this case was broadly satisfactory from the perspective of the UK, future proposals to use inter-governmental agreements must be viewed with caution.142 The proposals for banking union currently consist of the Single Supervisory Mechanism, a Single Resolution Mechanism and a common deposit guarantee scheme for all euro area Member States and non-euro area Member States who choose to participate. A formal proposal for a common deposit guarantee scheme has, however, yet to be brought forward.

Member States participating in the banking union and other Member States who chose to be Contracting Parties; the UK is not a Contracting Party.

For example, under Article 352 TFEU in the absence of a more suitable Treaty base.

HMG, Review of the Balance of Competences between the UK and the EU: Economic and Monetary Policy,

–  –  –

European Central Bank Location Policy The location policy of the European Central Bank (ECB), which the UK is challenging at the General Court of the European Union is a further example of a proposal related to the euro area that impacts on the Single Market and the interests of all Member States, not just those in the euro area. The location policy specifies that clearing-houses that clear eurodenominated financial instruments above a certain threshold must be located in the euro area. The UK contends that this policy restricts fundamental Treaty freedoms important to the Single Market, relating in particular to freedom of capital, choice of establishment and proportionality.

Evidence from stakeholders highlighted that the ECB location policy could have a detrimental impact on the EU market. For instance, the AFB noted, ‘this could have a significant impact on the location of Euro transactions and restrict business’. In addition, HSBC highlighted that, ‘Mandatory clearing of Euro-denominated contracts with a local central counterparty could fragment the clearing market; make it more expensive (as there would be less competition);

and break netting arrangements, which could increase systemic risk’.

A pan-EU framework for the regulation of clearing-houses already exists via the EMIR Regulation, including College arrangements to enhance cooperative oversight between relevant authorities. The ACT noted that, ‘we still need to ensure that EU rules and the EU approach are pan European, to avoid a disjointed Europe. Geographic bias in the rules or mandating certain activities as permitted only in the Euro area or particular locations are not appropriate’.

Open Europe1 has also noted that the proposed policy ‘risks not only undermining the City of London, home to more clearing houses than any other EU capital, but also blatantly undercuts the single market [...] Market participants also warn that the ECB’s policy would spell the end for multi-currency clearing in general, fragmenting CCPs among national jurisdictions and raising costs for users, as they would lose the benefits of clearing in a central venue.2 Some believe the policy could actually increase systemic risk, with a wide array of institutions in different countries setting up clearing services without the required risk management expertise’.3 Open Europe, Continental Shift Safeguarding the UK’s Financial Trade in a Changing Europe, (2011).

In negotiations on new EU regulation, known as EMIR, for OTC derivatives, the UK won a concession which inserted language that refers to not discriminating on the grounds of location or currency.

Risk.net, Risk.net Poll – UK Treasury is Right Over ECB lawsuit (28 September 2011). Available at:

www.risk.net/risk-magazine/news/2112350/risknet-poll-uk-treasury-ecb-lawsuit, accessed on 30 June 2014.

70 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital The European System of Financial Supervision

3.114 Following the financial crisis, it was argued that the quality of supervision across the EU needed to be improved, and that this would be best achieved by giving the European level powers over national supervisors. As a result, three EU supervisory committees were transformed into EU agencies, under the collective name of the European Supervisory Authorities (ESAs) – the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA). Along with the European Systemic Risk Board (ESRB), the ESAs were given an enhanced role that focused on the management of the European supervisory system as a whole.143

3.115 Overall, evidence was broadly positive about the ESAs and the ESRB and specifically considered the introduction of the ESAs to be a necessary step to improve supervision and confidence.144 For instance, evidence from Standard Life emphasised the positive role

that supervisors at the EU-level can play:

The ESAs provide an excellent forum for sharing information, developing a single rulebook and harmonising application of directives. Because they are empowered to look across different countries, they are better positioned to be able to examine issues that may arise [...] They play a central role in ensuring that the wide range of regulation that has come from the EU in the last five years is applied accurately and consistently.

(Standard Life)

3.116 However, almost all stakeholders emphasised that, having only been operational since 2011, it was relatively early to judge their success or their impact on the UK’s national interest.145 A small minority of views, however, considered the ESAs to be a less welcome addition to the EU financial services landscape – for instance, the WMBA considered their start to be ‘inauspicious’.

The overarching objective of the ESAs is to improve the functioning of the Single Market by ensuring appropriate, efficient and harmonised European regulation and supervision, while the role of the ESRB is to undertake EU-wide macro-prudential analysis, issue risk warnings and make recommendations. The ESRB does not have binding powers over Member States, and derives its authority from the fact that it comprises the President of the ECB and the central bank governors and the lead supervisors of the 28 Member States.

See: AFME, submission of evidence, p3; AIG, submission of evidence, p5; AILO, submission of evidence, p2;

BATS Chi-X, submission of evidence, p3; BBA, submission of evidence, p13; Sharon Bowles MEP, submission of evidence, p8; CBI, submission of evidence, p14; IUA, submission of evidence, p2; Lloyd’s of London, submission of evidence, p7; RBS, submission of evidence, p4; RSA, submission of evidence, p8; and Standard Life, submission of evidence, p6.

See: ABI, submission of evidence, p3; AFME, submission of evidence, p3; BVCA, submission of evidence,

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3.117 Some stakeholders noted that the ESAs have, perhaps unsurprisingly given the volume of legislation that has been developed since their establishment, been focused on the drafting of rules rather than other activities, which may have come at the expense of other objectives such as convergence of supervisory practices, mediation, participation in supervisory colleges, and addressing breaches of EU law.146

3.118 There was strong support for the ESAs to focus on their collective role as a system manager to raise the standards of supervision across the EU and identify EU-wide risks, with some stakeholders highlighting the importance of the ESAs in helping to raise and enforce consistent standards in regulation and supervision, while others cautioned against the ESAs duplicating the activities of national day-to-day supervisors.147 Our greatest concern about the powers granted to the ESAs has always been that they might have the power to apply a decision directly to an individual institution if they feel that a national supervisor is failing to implement an EU decision. We are pleased to note that the principle that day to day supervision of financial institutions should remain at a national level has now been firmly established. This principle should be reflected in any new legislation proposed at an EU level. There are, however, a number of situations in which ESAs could overrule national supervisors.

(House of Lords European Union Committee)

3.119 In terms of the role of the ESAs in the rule-making process, there was concern that the detailed Level 2 rule-making should not go beyond or reopen the higher, more political Level 1 agreements,148 although some evidence noted the tension between the amount of detail and specificity that takes place at Level 1 and Level 2.149 There were also calls for the ESAs to have sufficient time to consult on and draft Level 2 texts, and not to be inappropriately rushed due to international or EU-level deadlines.150 Some respondents also emphasised the importance of the Commission setting out more transparently the reasons for any deviation from ESA advice.151 Some of these issues are considered further in Chapter Four.

See: AFME, submission of evidence, p5; and Baillie Gifford, submission of evidence, p3.

See: Bank of America Merrill Lynch, submission of evidence, p4; the Law Societies, submission of evidence, pp2-3; Barclays, submission of evidence, p8; BATS Chi-X, submission of evidence, p4; BSA, submission of evidence, p4; BVCA, submission of evidence, p13; FCA PP, submission of evidence, p9; IMA, submission of evidence, p6; IUA, submission of evidence, p2; and RSA, submission of evidence, p9.

For instance, CLLS, submission of evidence, p19; HSBC, submission of evidence, pp.7-8; and JP Morgan, submission of evidence, p4.

Sharon Bowles MEP, submission of evidence, p12.

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