Market Abuse (Amendment) (EU Exit) Regulations 2018
(Limited Text - Ministerial Extracts only)
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Lord Young of Cookham
That the Grand Committee do consider the Market Abuse (Amendment) (EU Exit) Regulations 2018.
Lord Young of Cookham (Con)
My Lords, as this instrument has been grouped I will speak also to the Credit Rating Agencies (Amendment) (EU Exit) Regulations 2019.
The Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the EU withdrawal Act to deliver this and a number of debates on these SIs have already been undertaken in both Houses. The SIs being debated today are part of this programme.
These SIs will fix deficiencies in UK law relating to market abuse and credit rating agencies to ensure that they continue to operate effectively post exit. Both SIs will be critical to ensure good market conduct practices to protect market integrity. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context.
Market abuse involves numerous illegal practices in relation to financial markets. Such practices include insider dealing, market manipulation and the unlawful disclosure of inside information. In 2016, the EU implemented the Market Abuse Regulation which empowered EU regulators and the Financial Conduct Authority in the UK, to prevent and detect market abuse. MAR aims to increase investor protection and market integrity, thereby enhancing the attractiveness of EU securities markets for capital raising.
The regulation applies to financial instruments traded on EU trading venues and worldwide market abuse that concerns these instruments. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The MAR therefore needs to be updated to reflect this and to ensure that the provisions work properly in a no-deal scenario. These draft regulations will amend the MAR to ensure that the UK sustains an ability to prohibit market abuse and to enforce against it effectively post exit.
Firstly, the EU-wide scope of MAR will be retained by this SI, so it will continue to capture financial instruments traded on both UK and EU trading venues and global conduct that impacts these instruments. A UK and EU scope accounts for the deeply integrated relationship between the financial markets in each jurisdiction due to current arrangements in the EU. This is necessary so that the FCA can continue to investigate, prohibit and pursue cases of market abuse that relate to financial instruments in EU markets that impact on UK markets if EU regulators are unable or unwilling to do so. If this provision were not in place, the FCA would not be able to enforce against market abuse on EU trading venues, and would subsequently not be able to protect the integrity and reputation of UK markets.
Lord Deben (Con)
When my noble friend says that the FCA has the necessary resource capacity, does that mean that it could do it if it had the money and resources to do it—in other words, if it were intellectually able to do it—or does he mean that it already has the financial and staffing capacity to do it?
Lord Young of Cookham
The FCA has been consulted about these regulations. If there were a no-deal scenario, I am advised that it has the necessary resource capacity to effectively carry out its new function. Perhaps I can deal in more detail with my noble friend’s question now.
As I hope I said, the FCA has dedicated the necessary resources to account for the additional work through its 2018-19 business plan, and it will ensure that its considerable experience and technical expertise in regulating the financial services sector is reflected in its new supervisory role in relation to the CRAs.
Lord Deben
I am sorry to trouble my noble friend again but who will pay for this? The resources of the FCA are, to a large extent, raised through various kinds of costings. I declare an interest, as set out in the register, as the chairman of PIMFA. Who will pay this bit of its budget?
Lord Young of Cookham
My Lords, the chief executive of the FCA, Andrew Bailey, has said that he expects to hold FCA fees steady for a year or so, assuming that there is an implementation period. However, the FCA is able to increase its fees should it need to increase its income in the event of no deal.
Baroness Bowles of Berkhamsted (LD)
As we have got on to the subject of fees, when the credit rating agencies want to get approval from ESMA, they have to pay a fee. Therefore, will we not have a comparable fee or is it just all part of the steady-state budget?
Lord Young of Cookham
They will continue to have to pay a fee, so to that extent there will be no change, but instead of it going to ESMA, it will go to the FCA.
Furthermore, the SI will require firms to establish a legal entity in the UK to register with the FCA, in accordance with the current policy under CRAR. The SI provides the FCA with pre-exit powers so that it is able to begin registering firms, and the instrument will also establish three regimes to allow for FCA registration to smooth the transition from ESMA supervision to FCA supervision. First, UK-established CRAs will be able to convert their ESMA registration into one with the FCA through the conversion regime. Secondly, newly UK-established legal entities that are part of a group of CRAs that have a registration with ESMA will enter a temporary registration regime if they have submitted an advance application to the FCA which has not yet been processed. Thirdly, certified CRAs established outside the EU will, through the automatic certification process, be able to notify the FCA of their intention to extend certification to the UK.
The SI will also enable credit ratings issued by a CRA established in the UK, with an FCA registration, to be used for regulatory purposes in the UK. The instrument will also enable credit ratings issued before exit day by EU firms that register, or apply for registration, with the FCA to be eligible for regulatory purposes in the UK for up to a year.
In addition, in relation to appeal rights, given the new enforcement rules provided to the FCA, references to EU institutions will be replaced with the appropriate UK bodies. The Upper Tribunal will now be responsible for appeal requests that have been made as a result of an FCA decision, and the FCA’s warning and decision notice will apply to this SI also.
The Treasury has been working closely with the FCA in the drafting of these instruments. Both bodies have continuously engaged with CRAs and taken on board their views where possible when deciding on the direction of the instrument to ensure that the market is informed of its policy intention. The Treasury published the instruments in draft, along with an Explanatory Note for each, to maximise transparency to Parliament, industry and the public ahead of laying.
In summary, we believe that the proposed legislation is necessary to ensure that market abuse is effectively prohibited and credit rating agencies are appropriately supervised, and that the relevant legislation will continue to function appropriately if the UK leaves the EU without a deal or implementation period. I hope that noble Lords will join me in supporting these regulations.
Baroness Bowles of Berkhamsted
My Lords, the first thing that I noticed on page one of the draft instrument is that it says this is done not just under the EU (Withdrawal) Act but under the European Communities Act, but it does not tell us which bits are which. If you are trying to go through and ask whether this corresponds to the rules laid down in the EU (Withdrawal) Act, you do not know, because the rules under the European Communities Act are not exactly the same. I do not find any difficulty in what has been done here, and I have come across this before in other statutory instruments. But I think it would be good practice when you are doing it with powers in lots of different places if the relevant bit of the instrument were to say which the enabling power was instead of putting it in an anonymous way. But then, I am still learning about how these things are done in the UK.
I accept the points made by the Minister about what I call the symmetry point: that some bits here need to be retained, extending into EU territory, if I can put it that way, so that we know what is going on. Emissions trading is one example of that. Perhaps I should declare an interest on the register—the usual London Stock Exchange Group plc issue. How will we get information back into the UK from, for instance, the trading of UK instruments on exchanges in the EU? This is the other side of the trading obligation. If the EU says that you can trade only on recognised exchanges—there are exchanges that, for example, trade UK-listed shares—that means that, unless there is some kind of deal done, people will theoretically want to trade in the EU rather than the UK, or they will want to cut off trading in the EU so that they own the trade in the UK. We have concentrated on that when talking about trading obligations; we have not talked about what happens to the information from the trading venues that remain in the EU.
I am sorry that I had not thought this out previously; it just occurred to me while the Minister was speaking. This is something for the regulators and, probably, the Government to look at as we move forward and work out what the EU is going to do in respect of exchanging information with us. The exchanges provide data to the FCA so you can see whether there is any funny business going on; it is one of the methods of detection, as you can see spikes and so forth that might indicate something strange.
Another question on symmetry is that I wonder why we have bothered, in new paragraphs 5 and 5A on page 11 of the regulation, to list all the European organisations that still have exemptions. One of the things I did from time to time in the EU, perhaps a little mischievously, was to take out the list of all the bodies that did not have to come under market abuse regulations. As I have said more than once, central banks can do things that, if anybody else did them, would be called market abuse. Generally speaking, we allow central banks to do that.
There is a general provision for certain public bodies and central banks of third countries. If the EU is now a third country, why bother to state that the Treasury can make particular exemptions for member states, the ESCB, members of a federal state, the Commission, the European Investment Bank, the European Financial Stability Facility and the European Stability Mechanism? Why not just treat them as generic public bodies? This gives the EU special treatment. Yes, one might want to prepare a list, but was this just a short cut? If we were going to compact these things down for the long term and if we were going to treat the EU as a third country, why list all EU bodies but not other third-country bodies? I am not sure that I would have put them on the face of the regulations, just for the sake of it. Those are all the issues that I wish to raise at this point.
Lord Young of Cookham
My Lords, I am grateful to all noble Lords who have taken part in this debate and I notice that neither the noble Baroness, Lady Bowles, nor the noble Lord, Lord Tunnicliffe, have any fundamental objections to the detail of the SIs before us. I shall try to deal with the points they have made, along with those made by my noble friend. I was asked why the European Communities Act is mentioned. The answer is that the ECA powers are used to make consequential amendments to the Criminal Justice Act 1993 and the UK Market Abuse Regulation 2016. The European Communities Act is mentioned because it is the parent rather than the withdrawal Act.
My noble friend raised a number of points that go slightly wider of the mark. I would just say to him that it is a consequence of leaving the EU—like him, I campaigned to remain—that we can no longer influence what he described as “over there”. I used the word “equivalence” because what we are trying to do is make sure that if and when we do leave, the regime in this country is as equivalent as it can be to the regime when we were in the EU. Likewise, he talked about discretion. Indeed, we will not have the discretion that we have at the moment to influence what happens in the EU as a direct consequence of us having left.
Both my noble friend and the noble Baroness, Lady Bowles, raised the question of how we get information from the EU. In terms of ESMA and EU regulators co-operating and sharing information with the FCA, it will look to make use of the existing arrangements in the Financial Services and Markets Act 2000 to co-operate and share information which should be in the interests of both parties. We hope that that will continue. I was asked why we have bothered to keep paragraph 5 in the MAR SI, which is the list of EU institutions. We have omitted these exemptions from the UK MAR to achieve symmetry with the EU, but we recognise that after exit we may achieve or negotiate closer links, in which case it would be desirable to reinstate the current position if it was reciprocated or desired. I was also asked why we have exempted EU bodies under MAR. The UK and the EU markets are highly integrated, a point made by the noble Lord, Lord Tunnicliffe, and the relationship between them means that the exemptions may also be necessary for EU institutions interacting in the UK market.
My noble friend raised the issue of FCA fees. He will understand that those are not within the scope of the EU withdrawal Act powers or indeed within this statutory instrument. However, I hope that he was reassured by what I quoted from the chief executive, Andrew Bailey. He expects FCA fees to remain steady for a year or two, assuming that there is an implementation period.
The noble Lord, Lord Tunnicliffe, asked why the scope of this SI covers financial instruments in both UK and EU trading venues. I think the answer is that there is a very close relationship between the UK and EU markets and the scope provided by this SI ensures that the FCA will continue to have the ability to investigate and pursue cases of market abuse related to financial instruments which affect UK markets. UK companies may have instruments that are quoted not in London, but in Europe. If there were abuse there, it could affect the integrity of the UK market. This means that the FCA could take action where activity in a financial instrument, which was traded on an EU venue, impacted on UK markets. We want to maintain the current levels of integrity and confidence that UK markets currently hold. The impact assessment—
Lord Tunnicliffe
There seems to be an extraterritorial competence here, which is pretty unusual in English law.
Lord Young of Cookham
We would expect the EU regulators to intervene and investigate market abuse in an EU trading venue of a UK-related instrument. We would expect it to take the lead. The provision in the SI is for what I hope is the unlikely event that they decide for whatever reason not to intervene, but that we feel there is a need to investigate market abuse because it is having an impact on UK markets. That is why that particular power is as I have said.
To return to the lack of an impact assessment, we did ship a bit of water yesterday. We recognise the importance of having impact assessments available to inform these debates. Treasury Ministers are doing everything they can to make these available as soon as possible. They are in discussions with the Regulatory Policy Committee to improve the impact assessments and enable them to complete their review of them. We hope to publish the relevant impact assessment next week.
Lord Tunnicliffe
I omitted to congratulate the noble Lord on getting out an impact assessment on the final SI—the credit rating business. Because it came out, I was foolish enough to read it; it is interesting that the numbers showed a cost to the industry of £11.4 million. I did not really understand what that meant—whether the figure was big or little. It is obviously £11.4 million, but do these people make hundreds and thousands of millions of pounds such that it is nothing or will it be a significant cost to them?
Lord Young of Cookham
It is a very good question, and the answer is that we do not have the exact information as to the exact turnover or number of people employed in the CRAs. I will make further inquiries and see if I can shed some light on that. I might get some in-flight refuelling.
Lord Deben
When my noble friend sheds some light on that, would he be kind enough to explain something which is often hidden in this? I do not quite understand why there is an additional cost if we are to do the same thing, only locally, because they must have been paying somewhere else. Could my noble friend make sure that we have an answer that shows which bits are, if you like, real additions and which are a replacement for somewhere else? That is all I want to know.
Lord Young of Cookham
Seeing whether one can net it off is a very good question, and I will see whether we can do that—I probably cannot do it on my feet.
To revert to the point made by the noble Lord, Lord Tunnicliffe, about how the £11.4 million cost to the credit rating agencies relates to the size of the industry, we expect credit rating agencies to incur an estimated £10,000 per firm for changes to IT systems and £60,000 per firm for reporting requirements. This is for the five firms that the FCA expects to enter the regime. On top of that, there are familiarisation costs. Perhaps I could write to the noble Lord with more information, seeing whether we can net it off, as my noble friend has just said, by looking at what they have to pay at the moment.
The answer to the noble Lord, Lord Tunnicliffe, about the status of this SI, if there is an agreement, is the same as in the last debate. The SIs would be delayed and may then be repealed or amended as appropriate, depending on what deal we actually do.
The noble Lord asked for an explanation of the third option of paragraph 7.12 of the Explanatory Memorandum. This relates to credit rating agencies’ pre-exit applications to the FCA. All credit rating agencies will need to register with the FCA in order to establish legal entities in the UK following exit. Firms can complete this registration through the automatic certification process. Basically, if you have a credit rating agency which is located outside the EU but which has registered with an EU credit rating agency, it can apply to have that certification extended to the UK in a sort of passporting arrangement.
The noble Lord, Lord Tunnicliffe, asked about the senior management structure of credit rating agencies and whether individuals could be held responsible. It is a good question. The senior managers and certification regime does not currently apply to credit rating agencies; I think that one of the reasons is that they do not actually handle customers’ money, which of course banks and other agencies do. Regulation 22 of the SI applies Section 400 of the FiSMA, which provides that if an offence committed was with the consent or connivance of an officer of the body corporate, or due to neglect on its part, the individual as well as the corporate is guilty of an offence.
Finally, on international co-operation, the MAR SI amends Part 8 of the FiSMA to facilitate international co-operation between EU and non-EU regulators and the FCA. There are existing co-operation provisions for cases of market abuse that we will seek to rely on. Related to that, both the Treasury and the FCA will continue to co-operate internationally with the EU to facilitate identification and enforcement of market abuse, and we are confident that the FCA and HMT can continue this co-operation despite no longer being part of the EU.