Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019

Baroness Kramer Excerpts

Monday 18th February 2019 Lords Chamber

[Lord Adonis (Lab)]

My Lords, the same issues basically apply on this regulation as on the last and I am not going to repeat the arguments. However, I would like to ask the noble Lord a question about the impact assessment which is published alongside the instrument. The costs in respect of this benchmark regulation, although considerable for each individual firm at £520, are less considerable overall because it is a much smaller number of firms. However, the footnotes to the impact assessment say:

“This refers to the current number of approved benchmark administrators. Given the regime is not yet fully in force, we expect this number may increase”.


Can the Minister give some indication of what level the number is expected to increase to? Again, I am not familiar with this sector and I do not know whether we are talking about it increasing by dozens or hundreds. However, I would like to get some sense of whether the total burden which this regulation alone is going to impose on the sector is in the thousands of pounds or the millions of pounds. It would be useful to have the figures. I would be grateful if the noble Lord could tell us what the estimate is, as the new benchmarks regime comes into place, of how these numbers will increase, so that we can put on the record a more accurate sense of what the actual burden is going to be.

[Baroness Kramer (LD)]

My Lords, I have a really serious question that I want to put to the Minister. I am concerned that one of the effects of this SI—I am not going to oppose it because I think that we have no choice but to allow it through—is to separate ESMA from the UK regulators of benchmarks administered in the UK. In this House and elsewhere, and I am sure that I have said it myself, we frequently talk about the excellence of UK regulators, but I am afraid that the history of the UK regulation of benchmarks is one where we frankly have to hang our heads in shame. The Libor scandal, which was finally exposed six or seven years ago, had clearly been a scandal in play for at least a decade. It represented a prolonged period in which Libor particularly, but other benchmarks as well, was being manipulated by the banks to achieve particular outcomes.

The regulator did not identify the problem and, when the regulators decided that they must act after much of this was exposed—primarily by US regulators and in the US media—found that at the time it was not even illegal to manipulate a benchmark in the UK. Consequently, the regulators were pretty powerless. I think that a couple of people have been brought to account, but very few of those who were engaged in or knew about this process—and certainly not the raft of senior management that benefited from the exceptional profits that led to higher pay for chief executives and others, year after year. It was a huge scandal.

Immediately after the scandal was exposed, the United States took the view that the UK regulators were so weak and so essentially complicit in this area that the US itself, particular for any dollar-denominated transactions, should become the locus of benchmarks. Obviously the UK fought back, because it is an iconic role seen as significant to underpinning the UK’s status as a global player in financial services. While I do not know many of the details, I believe that the link to ESMA—the reassurance that there is more than one set of regulator eyes covering the way in which benchmarks have been administrated—has been important in keeping the primary benchmarks in play in London.

I understand that the role of this SI is to say that benchmarks administered in the EU can still be used in the UK—that is almost the sole purpose. But, as I say, I am concerned that the future standing of the UK as the locus of most of the benchmarks used across the globe in nearly every transaction, no matter where that transaction takes place, is potentially undermined by the kind of separation that the Minister has just described. Is he aware of any aggressive moves by the United States to say that the situation is changing? We now have the UK regulator standing alone once again. We certainly hear from the UK a great deal of language about how regulation needs to become lighter touch and should not be so heavy-handed, and how we should be much more inclined to allow greater risk taking and greater profit taking. Will this become the occasion where the United States acts to use its weight, its authority and its legislative force to try to undermine London as a locus? Should there be something in the whole language that surrounds this of an ongoing co-operation and element of supervision that continues to involve ESMA to provide a defence for London in this arena?

[Lord Mackay of Clashfern (Con)]

My Lords, I have a great respect for the noble Lord, Lord Adonis, as I heard him many times answering questions as a Minister. The answers were always clear and a full answer to what he was asked. I also remember his difficult time as a Minister of State in the Department for Education, struggling with the impediments being placed to the implementation of his policy by judicial reviews, which he described in one of his books. But I have listened to a good number of these debates we have been having recently, and I regret to say that I cannot agree with the way in which he approaches this matter. I think that this is all part of the decision to leave the EU that the electorate took, advising Parliament that they wished that to happen.

Industry generally, and the financial industry in particular, is well aware of the situations that may arise as a result of that. Therefore, I would expect representatives to get in touch with the Treasury, for example, if they had any concerns in relation to these instruments. I wonder whether the noble Lord, Lord Adonis, has had any communication from any financial services people as to whether or not they would like him to succeed in his amendment to decline to approve these regulations.

--- Later in debate ---

[The Earl of Kinnoull (CB)]

It is a pleasure to follow that stream of logic, with which I agree entirely.

I wish to say two things. The Explanatory Memorandum was published initially on 23 November, so we are now in the 87th day after that. It generated a great deal of comment, which was widely circulated to people who were interested. Again I rang round various people in the course of the past few days and no one has raised any objection to this. In fact, everyone has said how important it is.

In answer partly to what the noble Baroness, Lady Kramer, said, I notice that paragraph 2.6 of the Explanatory Memorandum states:

“Without these provisions, the FCA would not have an effective framework designed to prevent benchmark manipulation in the UK, affecting the integrity and attractiveness of the UK’s financial markets”.


The Explanatory Memorandum is right behind the noble Baroness in her point about the necessity of having the benchmarks properly looked after.

I have looked at a list of all the benchmarks and it is worth saying that many of them have been invented here in London—they are British—and so it is unsurprising that the naughty behaviour took place here and that the skills lie with our own regulators to prevent misbehaviour.

[Baroness Kramer]

Part of the problem is that it was not our regulators that identified years of benchmark manipulation but the US regulator and the US media. We need to be clear about that. Our regulators came in late in the day and only after a huge amount of pressure and exposure.

Secondly, while banks were manipulating Libor and some of the foreign currency exchange rates in order to increase their profits to suit certain circumstances, they were doing it, they thought, quite openly. People were shouting at each other across various trading floors that X would like the benchmark set here and Y bank would prefer it to be set there and whether they could do them a favour. The Bank of England was then implicated in instructing various banks to manipulate the rate at the time of the financial crisis in order to disguise from the wider market how difficult banks were finding it to raise financing. So, rather than reporting the actual rate they were being offered in the market, they were reporting a lower rate to suggest that they were being looked at more favourably; and because the Bank of England saw this as necessary for financial stability, it is itself implicated in some of the manipulation.

One of the concerns that I have that underlies this is that the FCA will be in a position with this SI to be the administrator, but it now becomes the sole administrator rather than one working in partnership with other EU administrators. That could lead to a vulnerability, with the challenge coming not from the EU but from the United States.

[The Earl of Kinnoull]

Thank you for that. I do not want to be the defence attorney for the regulators but the FCA would argue that it did not have the relevant powers beforehand. However, I shall not go there.

Again, this will be the effective framework to enable the FCA to do that work. Without this SI there is no framework.

At the end of the paragraph in the Explanatory Memorandum headed “Why is it being changed?” it states:

“If this instrument were not made, there would be significant market uncertainty among UK and third country providers over whether they would still need to be compliant by 2020, and among users over which benchmark they could lawfully use”.


In other words, it is a complete mess. The size of the markets that are affected by these benchmarks is vast. I am not sure that I quite understand the reasoning behind the amendment moved by the noble Lord, Lord Adonis, to decline these regulations. It seems he is trying to take aim at a government process and is actually clobbering the City. I feel that is wrong and I very much hope he will not press his amendment.