Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019
(Limited Text - Ministerial Extracts only)
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Lord Bates
That the draft Regulations laid before the House on 24 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, this instrument, laid under the EU withdrawal Act, will fix deficiencies in UK law relating to the regulation of financial benchmarks to ensure that it continues to operate effectively post exit if the UK leaves the EU with neither a deal nor an implementation period. This legislation is important for the regulation and integrity of financial markets in the UK.
The SI makes amendments to retained EU law on financial benchmarks, known as the EU Benchmarks Regulation—BMR—to ensure that the UK continues to have an effective framework to regulate financial benchmarks. Benchmarks are publicly available indices used in a wide range of markets to help set prices, measure the performance of investment funds or work out amounts payable under financial contracts. They play a key role in the financial system’s core functions of allocating capital and risk, and impact on huge volumes of credit products and derivatives. The EU BMR sets requirements on benchmark methodology, transparency and governance.
Benchmarks must be approved to be used in the EU after the conclusion of the EU BMR’s transitional period at the end of 2019. To provide benchmarks for use in the EU after this, benchmark administrators located in the EU may apply for authorisation or registration. Third-country administrators or benchmarks may be approved through equivalence, recognition or endorsement. Approved administrators and benchmarks are placed on to the public register maintained by the European Securities and Markets Authority.
In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The UK legislation implementing the BMR and related legislation therefore needs to be updated to reflect this and to ensure that the UK’s benchmarks regulation operates properly in a no-deal scenario. These draft regulations therefore make the necessary amendments to the retained EU legislation to ensure that these regimes are operable in a wholly domestic context.
First, this instrument amends the scope of the BMR to apply in the UK only. From exit day, benchmarks and administrators outside the UK will be subject to the onshored third-country regime and must be approved via recognition, endorsement or equivalence for use in the UK. Secondly, this instrument establishes a requirement for the Financial Conduct Authority to create a UK benchmarks register, which it will maintain from exit day. Following the transitional window in the BMR, supervised entities may use benchmarks in the UK only if either the relevant administrator or benchmark is on the FCA register. This instrument ensures that benchmark administrators that the FCA has already authorised or registered ahead of exit day are automatically migrated from the ESMA register to the FCA register on exit day. It does the same for third-country benchmarks or administrators that the FCA has already recognised or which UK firms have endorsed.
Thirdly, this instrument includes a new transitional provision to take EU and third-country administrators and benchmarks that appear on the ESMA register at exit day—as the result of an approval under the BMR outside of the UK—and temporarily migrate them on to the FCA register for 24 months, beginning with exit day. This will enable continued use of these benchmarks in the UK for a 24-month period, unless and until an application for approval in the UK is refused or unless they are removed from the ESMA register during this time. This will provide continuity for administrators and users, and minimise market disruption. Administrators or benchmarks subject to the transitional provision must be approved by the FCA under the third-country regime to enable their continued use in new contracts in the UK after this period.
Fourthly, under the BMR certain regulatory functions are carried out by EU authorities, primarily the European Commission and the European supervisory authorities, including ESMA. Once the UK leaves the EU, EU bodies will no longer have a mandate to carry out these functions, and therefore this SI transfers the functions of the Commission to the Treasury, including the power to adopt delegated Acts based on the underlying legislation. The SI also transfers the functions of ESMA to the FCA. This includes the power to make binding technical standards. This SI also removes obligations within retained EU law for the FCA to co-operate and share information with EU regulators as this obligation, with no guarantee of reciprocity, would not be appropriate as of exit day. However, the FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act as they are currently able to do with other third countries. The SI makes further minor amendments to retained EU legislation to ensure that the UK’s benchmark regimes operate effectively once we leave the EU.
These measures, when taken together, will ensure that the UK retains an effective framework to regulate financial benchmarks. The Treasury has been working closely with the Financial Conduct Authority in the drafting of this instrument. It has also engaged with the financial services industry on this SI and will continue to do so. The Treasury published the instrument in draft form on 8 January to enhance transparency to Parliament, industry and the public ahead of laying. In summary, this SI is needed to ensure that UK benchmarks regulation can continue to operate effectively post exit and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting these regulations and I commend them to the House. I beg to move.
Amendment to the Motion
Lord Tunnicliffe (Lab)
My Lords, I am afraid that despite my efforts I can find nothing wrong with this statutory instrument. It seems to be perfectly straightforward and necessary to manage the situation. I thank the noble Baroness, Lady Kramer, for reminding us of the Libor scandal. It was a dreadful period in British financial services history, and we forget it too easily, I fear.
If my noble friend intends to divide the House on his amendment I make it absolutely clear that he will not be supported by the Opposition Front Bench. We would support a fatal amendment on a statutory instrument only in exceptional circumstances and only after very careful consideration of the reasons and widespread consultation. We will therefore be sitting on our hands if my noble friend divides the House.
Lord Bates
I again thank the noble Lord, Lord Tunnicliffe, for his responsible approach to these regulations. It is quite right that there should be scrutiny, but the amendment which we are now debating would effectively be fatal. It would prevent these regulations appearing on the statute book when their purpose is, as the noble Earl, Lord Kinnoull, and my noble and learned friend said, to avoid the type of abuse of market power and benchmarks that was sadly the case in the past. To avoid all the progress we have made in that in the event of no deal would be regretted.
However a number of points were made, including by the noble Lord, which should be responded to as part of the scrutiny, so I shall launch into them, if I may. The noble Earl, Lord Kinnoull, asked why it is important to have this SI in place. If it were not it would cause significant legal uncertainty and disruption for firms about how they were able to provide benchmarks for use in the UK and for other users about which benchmarks they could legally use. Many of them have already submitted applications or created business models on the basis of market compliance with the regime. That is why the noble Earl was right to cite paragraph 2.6 of the Explanatory Memorandum and my noble and learned friend was right to raise the importance of these regulations.
The noble Baroness, Lady Kramer, questioned the ability of the FCA to enforce these regulations given the previous situation with the Libor scandal. We do not accept that EU regulators are better regulators than ESMA. The EU regulation was created after the Libor scandal and introduced a comprehensive framework to ensure that the business integrity of benchmarks is maintained. We are confident that the FCA will enforce these regulations. She also asked about how EU and UK regulators will co-operate going forward. The FCA will use the information to ensure that on exit day any administrators or benchmarks which are on the ESMA register at 5 pm on the day exit occurs are copied over to the FCA register. FCA-approved benchmarks or administrators will be copied over permanently and those approved by other EU national competent authorities will be copied over for a temporary period of 24 months. This SI removes obligations in retained EU law for the FCA to co-operate and share information with regulators. The FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act.
The noble Lord, Lord Adonis, asked how we arrived at the number of firms affected by this SI. The number is the current number of approved benchmark administrators. The regulators that we are working with are seeking to understand the full range of administrators that will seek approval, but it is difficult to provide a final figure for the number located in the UK and the EU.
I think that that covers most of the points raised. Again, I thank noble Lords for their contributions on this SI. On behalf of the Government and the Opposition—and I am sure that on this occasion I speak for the Liberal Democrat Benches and perhaps the Cross Benches too—I express the hope that, despite the scrutiny that, rightly, is called for in the amendment, the noble Lord will not press it and will accept the regulations. It is necessary to put them in place in order to protect investors in this country.