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

Earl of Kinnoull Excerpts

Monday 18th February 2019 Lords Chamber

In my submission, the appropriate consultation for this sort of enterprise is one that looks at the detail in the way that has been described, and a full public consultation would be an absolute waste of time. I feel pretty certain that the number in this House who are very familiar with the details of this particular situation is not very large—certainly, the proportion in the country as a whole is not large. Surely the right thing to do is to speak to those who know about it and have an interest in it, and find out how they think that it should be developed. That is what has happened. At the moment, it is not only in a no-deal situation that this would work. Of course, it may be that, if there is a deal, there will be consequential legislation, which would affect the present statutory position.

[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.

[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.