Uncertificated Securities (Amendment and EU Exit) Regulations 2019
(Limited Text - Ministerial Extracts only)
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Lord Young of Cookham
That the draft Regulations laid before the House on 17 January be approved.
Lord Young of Cookham (Con)
On behalf of my noble friend Lord Bates, I beg to move the regulations. As the instrument is grouped with the draft Investment Exchanges, Clearing Houses and Central Securities Depositories (Amendment) (EU Exit) Regulations 2019, also laid before the House on 17 January, I shall speak also to that.
The Uncertificated Securities (Amendment and EU Exit) Regulations 2019 amend UK law as necessary in order to ensure that the directly applicable EU central securities depositories regulation, or CSDR, operates effectively in the UK. The instrument uses the powers in Section 2(2) of the European Communities Act 1972 to do this. Both instruments also use the powers in Section 8 of the European Union (Withdrawal) Act 2018 to prepare for a scenario in which the UK leaves the EU without a deal or an implementation period. The approach being taken in this legislation aligns with that of previous SIs that we have just debated.
First, I will cover the uncertificated securities regulations SI, which amends the uncertificated securities regulations 2001—or the USRs. This instrument concerns the electronic registering and transfer of securities such as bonds or shares, specifically on computer-based systems. Certain requirements within the USRs are also subject to the CSDR, which creates a common authorisation, supervision and regulatory framework for central securities depositories, or CSDs, across the EU. This SI makes the necessary changes to UK legislation to ensure that the EU regime operates effectively in the UK. In addition, the instrument contains provisions that address deficiencies in UK law and retained EU law that arise due to the UK’s withdrawal from the European Union.
The changes made to implement the CSDR will come into effect on the day after the instrument has been made in Parliament in any scenario. However, the changes made under the EU withdrawal Act to fix deficiencies in the legislation arising as a result of the UK’s withdrawal from the EU will come into effect on exit day only in the event that the UK leaves without a deal or an implementation period.
First, the SI makes amendments to ensure that the USRs align with both the EU regulation and the UK implementing legislation concerning the CSDR. This includes authorisation and recognition of CSDs and Article 49 of the CSDR. Article 49 of the CSDR allows issuers the right to issue securities into a CSD in any EU member state. Accordingly, amendments have been made to ensure that no provisions in the USR are incompatible with this right. By removing the duplication between CSDR and USR requirements for operators of relevant systems, the instrument provides clarity to the industry in this area. Further, USR operators can now gain operator status by virtue of gaining recognised CSD, EEA, CSD, or third-country CSD status for CSDR and FSMA purposes, not via the USR recognition regime, which is revoked by this SI.
Secondly, the SI provides transitional provisions to ensure that operators of systems approved as operators under the USR can continue to operate under the amended version of the USR, pending their authorisation or recognition as a CSD under the CSDR regime. The USR SI also inserts a provision into the CSDR 2014 regulations which grants the Bank of England the power to charge fees to third-country CSDs. This is considered necessary in relation to its new role in recognising third-country CSDs following exit day under the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, which were agreed in this place.
Finally, the SI amends Article 15 of the short-selling regulation to change its current scope from the EU to the UK. This change is to ensure legal certainty about the scope of this provision in the regulation after exit day.
The investment exchanges, clearing houses and central securities depositories instrument addresses legal deficiencies in parts of the domestic legislation that outlines certain regulatory requirements for recognised investment exchanges—RIEs—EEA market operators, central counterparties, or CCPs, and CSDs operating in the UK. RIEs include firms such as the London Stock Exchange and the London Metal Exchange; EEA market operators include firms such as Deutsche Börse and Euronext Paris, which also provide services in the UK; CCPs include firms such as LCH, LME Clear and ICE Clear Europe; and the UK CSD is Euroclear UK & Ireland. These entities form the backbone of UK markets, facilitating the trading, clearing and settlement of financial instruments. Amendments introduced through this instrument are generally technical in nature and are not intended to make policy changes, other than where appropriate to reflect the UK’s new position outside the EU and to ensure a smooth transition to this situation.
I will now outline briefly the key amendments that this instrument makes to the Financial Services and Markets Act 2000, or FSMA. First, in a no-deal scenario the UK would be a third country outside the EU financial services framework and therefore outside the current passporting system, meaning any references to EEA passport rights would become deficient at the point of exit. The instrument therefore removes the FSMA provisions relating to the exercise of EEA passporting rights by EEA market operators into the UK and the provisions that allow recognised investment exchanges to make passporting arrangements into EEA states. This would mean that any EEA market operators currently operating in the UK via a passport would no longer be able to do so from exit day, just as UK recognised investment exchanges would no longer be able to passport into other EEA states.
Instead, EEA market operators who currently make use of passport rights can, if they wish, make use of the existing third-country regimes for investment exchanges that are provided for in UK law to carry on their activities in the UK. For instance, they can apply to the Financial Conduct Authority to become a recognised overseas investment exchange. The FCA published information outlining how firms should go about doing this on its website on 14 September 2018.
Secondly, the SI removes obligations relating to information sharing and co-operation with EU authorities, again to reflect the UK’s position outside the EU in a no-deal scenario. The Government took the same approach in a number of other financial services SIs previously approved by Parliament. As stated with those SIs, and as I said a few moments ago, this change does not preclude UK authorities co-operating with their EU counterparts in future through existing third-country frameworks, as they currently do with non-EEA regulators.
Specifically, the instrument removes the obligation on the FCA to inform the European Securities and Markets Authority—ESMA—and the competent authorities of EEA member states when it suspends or removes a financial instrument from trading on a venue that falls under its jurisdiction. However, the FCA will still be required to make such decisions public. In addition, the FCA will no longer be obliged to require venues under its jurisdiction to suspend or remove a financial instrument from trading if the FCA becomes aware that the same instrument has been suspended or removed from trading in an EEA member state.
Thirdly, a provision in FSMA that currently applies to the Prudential Regulation Authority is being extended to the Bank of England. The relevant provision places a duty on the Bank to take such steps as it feels are appropriate to co-operate with other persons, whether in the UK or elsewhere, with similar regulatory or financial stability functions. This provision is being extended to the Bank of England to ensure that co-operation can continue in relation to the new functions it is taking on as part of this legislation.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for introducing these two SIs. I particularly thank the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. They were off the point but, nevertheless, they hit an important issue. Legislation, particularly financial services regulation, is impossible to understand because of its constant revision and the failure to have a process for regular consolidation. There are two problems: the sheer understanding of it and, because of its complexity, one cannot see whether there are interrelationships between the various activities that are being regulated, such that you end up with a systemic catastrophe.
Before the financial crisis many people—I assume genuinely—believed from the way in which the markets were structured that they were robust. In practice, they turned out to be far from robust. I particularly note the concern of the noble Baroness, Lady Kramer, about CCPs—we debated them several months ago, which probably means about a year ago—and, once again, although they seem to be institutions to reduce risk, there is a worrying possibility that they may concentrate risk.
Turning to the statutory instruments, the first seems to tidy up regulations to be compatible with the introduction of the CSDR and the subsuming of the uncertificated securities regulations role. It does that in the same way as most of these SIs by a series of regulations which touch on referencing, transfer, transition and information. I have two small points on these regulations. I have to concede that I rarely get beyond the Explanatory Memorandum but I study that with some care. On Page 4, paragraph 7.4 has unnumbered bullet points; the fourth states:
“Creating transitional provisions, to ensure that operators of systems that were approved as operators under the USR prior to 30 March 2017 can continue to operate under the current version of the USR, pending their authorisation as a CSD under the CSDR regime”.
Why was 30 March 2017 chosen? Most of these transitional things are on exit day and I can see no logic in 30 March. How long does this transitional waiver last before they must receive authorisation as a CSD under the CSDR regime?
At the bottom of the page is the eighth unnumbered bullet point. I think the Minister touched on this point. In the middle it says:
“This is necessary in connection with the Bank of England’s role after exit under the SCDR regime, which will include recognising and supervising CSDs in third countries”.
I have some difficulty grasping what,
“recognising and supervising CSDs in third countries”,
means. Does this mean that this law is extraterritorial? I am not sure I have got the word right, but I am sure the Minister has a sense of what I am concerned about. Or does it simply relate to their rules in so far as how they operate in this country?
The second statutory instrument seems to be picking up the usual format of references, transfers, information and so on. I was looking for transition. Most of these SIs provide for passive transition—that is people, institutions and entities doing certain things after exit day carry on for a period to allow them to register and adjust—but, unusually, this one does not. As the noble Lord pointed out, to operate in the UK one has to become a recognised overseas investment exchange. The FCA document on that published on 14 September and updated on 30 January 2019 states:
“The Treasury is not planning to put in place a temporary recognition procedure for EEA market operators in the event the UK leaves the EU without a deal and without entering an implementation period”.
Why did the Treasury exceptionally make that decision with this SI? Clearly it is important. Later under “How to make an application” the document states: “Market operators should contact”—then there is an email address,
“as soon as possible to make us aware of their plans in relation to any arrangements they intend to maintain in the UK”.
There is a sense that the FCA is worried about whether it has enough time to sort these things out.
Lord Young of Cookham
I am grateful to all noble Lords who have taken part in this debate and, again, I notice that there is no fundamental objection to the purpose of the two SIs. I shall try to deal with the issues that were raised.
On equivalence, the noble Lord, Lord Sharkey, asked about the Bank of England’s powers to recognise CSDs from overseas countries and, particularly, whether the waivers were intended primarily for EEA CSDs. These waiver provisions are in fact an existing feature of the FSMA, so they are not introduced primarily to assist the EEA CSDs, although of course they will welcome having them at their disposal. The waivers are subject to statutory conditions and are published. I hope that that answers the noble Lord’s point.
The noble Lord also raised a very good point about the distinction between engagement and consultation, expressing the hope that the results of engagement might be made public in the same way that the results of consultation are. As he recognised, we are reaching the end of the road on Treasury SIs, but it is a valid point that we could take on board if in future we decided not to go down the statutory consultation road but instead to go down the engagement road. It would be useful to bear in mind that we could do a little more to explain in what respect the engagement resulted in changes to the draft SI.
The noble Lord also asked whether we could clarify the nature of the consultation on the USRs. In December 2015, the Treasury published the consultation on implementing the EU CSDR. It closed in 2016 and it was then decided to implement it in stages: first, the Central Securities Depositories Regulations 2014; and, secondly, the Central Securities Depositories Regulations 2017. This is the third SI. We engaged with industry by sharing a draft of it on 24 October 2018 and we published a draft on 17 January this year.
The noble Baroness, Lady Kramer, raised a valid point about information sharing. Simply removing the legal obligation to share information does not necessarily mean that there will be any change in the quantity or quality of information that is subsequently shared. It would not be appropriate for the FCA to be obliged to follow the existing information-sharing arrangements with the EU authorities where there is no guarantee of reciprocity, or to be obliged to match suspensions—another feature that I mentioned. However, it will be able to co-operate with relevant EU authorities on a discretionary basis to share information, as it currently does with non-EEA countries. Therefore, the FCA will still be required to publish decisions—for example, when it suspends or removes a financial instrument from trading at a venue that falls under its jurisdiction—in a manner that it considers appropriate, and that information will then be available to the ESMA.
The noble Baroness also asked about requirements for the Bank of England to co-operate with other authorities when it does not have to do so now. The Bank of England will have a general duty, rather than a specific obligation, to co-operate with other authorities. That is introduced so that the Bank of England is subject to a duty under the FSMA to co-operate with other bodies that undertake similar functions in connection with the Bank’s functions.
The noble Baroness, Lady Bowles, asked whether the USR drafting had changed and whether the first draft was gold-plated. The Treasury has sought to take a proportionate approach to ensuring that issuers can exercise their rights under Article 49 of the CSDR. It was considered appropriate, first, to remove any provisions that were subject to both the USR and the CSDR, and, secondly, to remove those provisions in the USR that were incompatible with the Article 49 right. The current version is less extensive than the one published in 2015, while achieving those aims.
The noble Baroness, Lady Bowles, also asked about the accessibility of FSMA amendments. I know that this is a subject that she has raised before. If one looks at Schedule 5 to the EU withdrawal Act, it sets out that the Queen’s printer—as part of the National Archives—must make arrangements for the publication of “relevant instruments”, including regulations, decisions and tertiary legislation. These instruments will form the retained EU law from exit day and the National Archives is working to ensure that they are visible and accessible to ensure legal certainty and clarity post exit.
All pieces of EU legislation, as well as treaties, international agreements and case law, are currently being archived and will be made available to the public at the appropriate time. The noble Baroness may remember that on 19 April last year, during the passage of the EUWA, my noble friend Lady Goldie wrote to her setting out more detail about how the public would be able to access this EU law and the features that would be in place to ensure legal certainty and clarity post exit; a copy was deposited in the Libraries.
The noble Lord, Lord Tunnicliffe, asked about CSDs. I think it means CSDs from, rather than in, third countries, but I will write to him to confirm that. He asked also why there is no transitional passporting regime—such as the TPR that we have introduced in other parts of the post-Brexit scenario—for EEA market operators. The reason there is no temporary recognition for EEA market operators is that we have an already long-established and well-understood domestic regime for overseas exchanges. EEA market operators which currently make use of passport rights may wish to apply under this regime to become a recognised overseas investment exchange—ROIE. The FCA published a direction on 14 September clarifying how an EEA market operator can make an application to become an ROIE.
The noble Lord also asked about supervising third-country CSDs. Recognition is the process by which the Bank of England allows third-country CSDs to offer CSD services to the UK; supervising third-country CSDs refers to the Bank of England’s ongoing regulatory supervision to make sure the CSD continues to comply with its obligations.
The noble Baroness, Lady Kramer, raised a point about CCPs—an important point, which she has raised in earlier discussions. She is worried about the stability of CCPs and their possible vulnerability to total collapse. She will know that the current structure was put in place post the 2008 crash precisely to protect against the scenario that she outlined. CCPs are financial market infrastructures that take on counterparty credit risk between parties to a transaction. They do this by sitting between trades, as a seller to every buyer and a buyer to every seller. If the noble Baroness agrees, perhaps I could write to her in slightly more detail, setting out why we feel that the present position is robust and why we believe that the scenario she referred to may be unlikely to come about.
Finally, the noble Lord, Lord Tunnicliffe, asked about the transition provision for operators in uncertificated securities. Part of the SI is backward-looking to what has already happened and part is forward-looking. The 2017 reference is to operators approved under the USR 2001 prior to 30 March 2015, which will benefit from a transitional provision under this SI. These operators will retain such approval until they become recognised as a CSD for CSDR and FSMA purposes. I apologise for the acronyms; perhaps I could write to the noble Lord, Lord Tunnicliffe, explaining all this without using them.
Lord Tunnicliffe
That would be good. Perhaps the Minister could copy the letter to everybody who has taken part in the debate.
Lord Young of Cookham
Yes, I generously accept the suggestion made by the noble Lord, and I beg to move.