MONDAY 25 JUNE 2007

Ms Verena Ross, Sir John Mogg and Mr Alex Blowers

  Q60  Lord St John of Bletso: You have mentioned about the successes of broadband roll-out across the European Union. How effective has the single market been in addressing the digital divide?

  Mr Blowers: It is important to recognise that there will always be a likely gap or shortfall in the delivery of advanced services. We face the traditional problem in telecoms that it was not economic to serve everybody. Some consumers were simply too remote to be served economically; some consumers actually could not reach the baseline level of service as it was unaffordable to them. We have always had a system of intervention designed to protect both those groups of consumers: consumers in remote areas and consumers who would find services unaffordable. The debate going forward would be about whether that universal service approach needs to be extended into these new services. Does it need to be extended, for instance, into broadband? This has proven very controversial and I think one of the reasons for that is that there has been a sense if you intervene too early in that market actually you present yourself with a very large bill and you have a relatively small taxation base, if I can put it that way, to recover the cost of supply from. Putting it very simply, if only 20% of people have broadband connections and you are trying to push that out to a hundred per cent, there is a big gap there to try and fill. One of the things that the UK has consistently argued for is the right in the fullness of time, and if the circumstances dictate that it would be sensible, to at least allow such a universal service role. At the moment that is ruled out by the European framework. The European framework is very clear that you cannot impose broadband universal service obligations. The UK Government and Ofcom have said that we believe that, certainly as part of this review of the framework, is an issue which should be looked at. Not because there is a case for doing this today, but if, as we always say, we want this legislation to last for ten years, who knows where we will be in ten years' time? That would be the way that I would say we have thought about that issue.

  Chairman: We need to move on to the last specific area of financial services. After dealing with the financial services issue, I will invite my colleagues to ask any final questions and perhaps if there are any final points our witnesses would like to make, we will give you an opportunity.

  Q61  Lord St John of Bletso: You spoke in your introductory remarks about the three specific objectives of the Financial Services Action Plan. What in your view has been the impact of the implementation of the Financial Services Action Plan on the financial sector and to what degree is it contributing to the integration of the EU financial services market?

  Ms Ross: The honest answer today is probably that it is too early to tell, which I appreciate is not a very good answer, but given that not all of the legislation has been fully implemented, let alone been operating for a few years, it is very hard to tell what the overall impact has been. The Commission itself has started some fundamental work to look at what the impact might have been in two phases (which we have described briefly in our memorandum) by first consulting on how the implementation has worked, so how legislative measures have actually been adopted and has that created additional burdens and what the effect is, and they are going to move on in the second phase to a much more economic measurement of can you actually measure the costs and benefits and therefore is there an overall positive impact of the FSAP measures? It is probably too early to say that at the moment. In the UK, on all the rules which we have made in the regulations under the FSAP legislation we have consulted on extensively, including impact assessment and cost/benefit analysis. We have also published in November 2006 an overall view of what the impact of the Markets in Financial Instruments Directive (MiFID) might have been. That is very much at this stage guesswork because the problem is that it is always, at least upfront, easier to identify the costs while it is very difficult to actually quantify the benefits exactly.

  Q62  Lord St John of Bletso: You mentioned earlier on as well about the need for more effective co-operation between the national regulators. Can you be more specific on the efficacy of the Lamfalussy committees?

  Ms Ross: To our mind the committees have largely worked very well, although it has to be said that many of them have been occupied extensively with trying to provide advice to the legislative levels above, to the ministries of finance and the Commission, in terms of helping to make this legislation become effective by adding additional guidelines and rules underneath the high level principles in the directives, which has occupied certainly CESR's time. On the insurance side, it has largely been preparing the ground for the legislation the Commission is likely to propose in the next few weeks in terms of the draft legislation. So to our mind the committees had really done a pretty good job in dealing with the issues that had been put to them under quite severe time pressures and demands on what they were supposed to do, imagining that there are 27 Member States around the table trying to get everyone to agree on what a particular line in a directive means and how it should be implemented is not an easy task. What is important, however, and where there clearly can be improvements, is in how this is now taken forward once a lot of the legislative burden falls away in terms of actually making sure that these committees deliver the regulatory co-ordination and co-operation which they have not had as much time to spend on. This is really the next step to deliver because, as in other fields, there is clearly some unease about whether the committees are currently delivering effectively in these areas and whether therefore there is a need to move to a single regulator for the EU in the financial services which we believe is not necessary because we think the Lamfalussy committees can be made to work.

  Sir John Mogg: Having been involved at the early stages, my impression is that these committees have worked rather well in doing part of the job. The reason the Lamfalussy investigation was set up was to deal with the EU legislative arrangements. We have, as I mentioned, a lumbering legislative process. Directives can take three years, if you are lucky, with at least 18 months implementation time, so you are talking in years four in financial services and probably more in energy. In energy it is the pace of legislation and the extent of the detail of the legislation, both of which can be more readily tackled by the CESR/ERGEG type of regulation. There is an active discussion in the Union about the use of agencies at the moment when your Committee is looking at this aspect. There are broadly two sorts of agencies: an executive agency where the Commission outsources it, and the regulatory agency. In energy the Commission is now developing a framework for a regulatory agency potentially giving powers that could reflect those of national authorities, Unfortunately, and I cannot say this less brutally, but what I can only describe as the ayatollahs of the legal constitutional powers in the Commission in Brussels, have major concerns about potential change to the balance of power between the Institutions (Parliament, Council and Commission). Those legal arguments are very destructive to the need to create an effective mechanism at European level this is a very important aspect for all three sectors. We would be happy to produce a short paper on agencies including why for energy it is so important to stop the institutional balance of power creating an obstacle between effectiveness, powers of regulators to deliver what the legislator wants and the disappearance of democratic control which the Parliament usually brings to account. The debate often masks the true concerns—to guard the institutional balance and the powers of individual players. The result is minimal change. It was why the Lamfalussy process was introduced to try and get around such rigidity. Agency arrangements are of real importance. And it may well be a key aspect your Lordships could explore on your visit to Brussels.

  Q63  Lord St John of Bletso: How effective has the Financial Services Action Plan been in improving competitiveness in the European Union financial services sector?

  Ms Ross: It is quite hard to say this at the moment, for the reasons I stated earlier. I think what you can see is some increased competitiveness, certainly in some of the wholesale sectors. If you look, for example, at the market for exchange traded equities or derivatives or something like that, where certainly in the equities market what you are seeing happening is that new little companies with the new technology that is now available can set up to do trading outside of the London Stock Exchange, Euronext or Deutsche Börse and that is something which is certainly much more catered for in the new legislation which is coming through and you see already that kind of bubbling up, that competition spirit, and there is also more cross-border competition on some of the wholesale markets, whether it is bond markets or whatever. I think you see some examples of it. It is too early to tell how that will develop over time and also whether that will extend in any significant way to the more retail based markets.

  Q64  Lord Whitty: This question arises both in part response to the recent remarks and also in the discussion we had earlier about whether a USB kind of concept is appropriate at the European level. The independence of the regulator, whether it be the national regulator or the EU regulator, is an important part of all this, but there will be other pressures institutionally within the Member States and at the European level to alter the perspective of the regulator or possibly differentially to impose wider requirements on the national regulator. To take the USB example, in all of your areas there are arguments about whether the economic regulation primarily should be geared to a more inclusive operation, whether you are talking energy or a traditional USB in the new telecoms area, or whether you are talking about things like access to credit and basic bank accounts. 27 different Member States all have different social policies in relation to this. If it is all banged up to the European level then are you not bound to get caught up in the institutional infighting which can cause delay, which Sir John was just referring to. Is there a way in which those political pressures can be dealt with more easily at the European level, or do you think there are always going to be somewhat differential pressures within the individual jurisdiction? I know that is a slightly rambling question.

  Mr Blowers: One of the other key features of the current regulatory package in our 2003 package was a significant tightening of the nuts on the regime around universal service. The reason for that was that there were serious concerns that universal service was not being properly costed, not being properly quantified in terms of the benefits that it would deliver in different Member States, and critically that the costs were being imposed around the entirety of the industry in a way that was disproportionate and unfair. What we ended up with was a system which exercised quite tight control over how universal service obligations can be defined, how they are then costed to determine whether there is a net cost that has to be met from some kind of industry funding and then how an industry fund to meet that net cost should be set up and operated. All of that is defined at European level essentially because the conclusion was that Member States could not entirely be trusted to get those things right themselves. Rightly or wrongly, that is the structure that we ended up with. The concern that we would have about that is not that that structure is wrong, but the nature of the things that can be caught by it now. For example, it defines Internet access in relation to a functioning connection to the Internet of something like 27 Kilobits per second which, for those of you who are technologically minded, you will know is some way off where the market would be today. Clearly that aspect of it needs to be updated but there is something to be said for a degree of control and oversight of the universal service and other social policy interventions precisely because at national level they can sometimes be used quite crudely. In the US, universal service is much fought over and is a classic example of "pork barrel" politics in action. We would have the same concern about the operation of the system potentially in Europe.

  Ms Ross: In the financial services field I suspect it is quite similar. The issue in financial services is to my mind very much that on the retail side retail consumers, whether it is consumer credit or mortgages or something like that, is something where the closeness of the regulator and the whole system that goes with it, whether it is compensation or complaints-handling, is extremely important. I think, on the other hand, if you were going to go down the route of addressing all of those things at a European level, then there might be more ability to look more broadly, but I think that is so far down the road because of the legislative implications and the kind of fundamental issues of property rights and other things which are then implied that it actually gets quite tricky.

  Chairman: We are just about to come up to a vote, so this is a convenient moment, unless anyone has a pressing question to ask, to close. First of all, may I thank you but, secondly, we will send you the transcript hopefully within a week. Perhaps you would be kind enough to correct the transcript if necessary but also if there are other points which we have missed or which you wish to draw to our attention, we would be very happy to have a written submission. I think this session in particular has been extraordinarily helpful to us, you have refocused us on where we need to get to.