Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

Debate between John Glen and Debbie Abrahams

Monday 17th December 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018.

May I say what a pleasure it is to serve under your chairmanship, Mr Sharma? 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 before Parliament statutory instruments under the European Union (Withdrawal) Act 2018 to deliver that, and several of them have already been debated in this place, and in the House of Lords. The SI being debated today is part of that programme. It was debated in the House of Lords on 28 November.

The regulations address legal deficiencies in the EU markets in financial instruments regulation and its accompanying directive; in the UK legislation implementing the directive; in other related domestic financial services legislation; and in EU delegated regulations. I will refer to those collectively as MiFID II. The instrument is extremely important for the financial services sector, as without it, essential components of financial services legislation would become inoperable, should the UK leave the EU without a deal. The approach taken in the legislation aligns with that of other SIs being laid before Parliament under the European Union (Withdrawal) Act 2018: it provides continuity by maintaining existing legislation at the point of exit, but amending deficiencies where necessary and introducing transitional provisions to ensure that it works effectively in a no-deal context.

MiFID II is a significant set of EU legislation that regulates the buying, selling and organised trading of shares, bonds and more complex financial instruments. It governs the practices of investment firms, exchanges and portfolio managers among others, and came into effect across the EU on 3 January 2018. One feature of MiFID II is that it requires buyers and sellers on financial markets to disclose data, such as price and volume information for their trades, to bring transparency to the process of price formation in financial markets.

Exemptions from those requirements are available in several cases, and formulae are used to calculate whether a trade may fall under an exemption. They are generally specified by reference to a proportion of pan-EU trading data. However, in a no-deal scenario, the UK may no longer have access to the pan-EU data that the European Securities and Markets Authority uses to calculate the appropriate thresholds. Calculating those thresholds at a UK-only level may create different thresholds in the UK and the EU. That may create opportunities for regulatory arbitrage and market disruption.

The instrument therefore grants the Financial Conduct Authority new flexibilities and a set of temporary powers, which will last for a period of up to a maximum of four years from exit day, to address certain operational difficulties that the FCA may face after exit. The powers will allow the FCA some controlled flexibility over how the MiFID II transparency regime is operated. The FCA’s temporary powers are required because the FCA will not be immediately ready on exit day to operate the transparency regime independently. One challenge facing the FCA is that it does not at present collect all the data that it will require to operate the transparency system on exit day. The FCA will need time to build appropriate IT systems to collect the data required to operate the transparency regime.

The FCA will also need to consider market movements in the immediate aftermath of the UK’s exit from the EU before it can estimate an equilibrium on which to base certain adjustments to the UK’s transparency regime. Accordingly, the FCA’s powers will include the ability to freeze certain pre-exit-day transparency calibrations, so that they have continued binding effect on exit day and for a period thereafter, until such time as the FCA can collect and produce its own data.

The FCA will also have temporary powers to suspend certain transparency provisions during the transitional period. For instance, it will have the power to stop the dark trading of shares, to ensure that such dark trading does not unduly harm price formation in UK markets. To be clear, the intention in granting the temporary powers is to enable the FCA to operate the transparency regime in the UK from exit day and beyond.

[Debbie Abrahams (Oldham East and Saddleworth) (Lab)]

I am sorry, but I have not read the regulations, so the Minister may be able to help me. Do they also provide the FCA with the additional skills and resources it will need to undertake that rigorous and important role?

[John Glen]

The hon. Lady is absolutely right to draw attention to the significant resources that will be required. The FCA has been in conversation with my officials in the Treasury, and we are reassured that it is in a position to do the work, and that it can do so under the provisions of the levy that it has.

--- Later in debate ---

[Debbie Abrahams]

I extend my earlier question to the capability in the Treasury. Are there sufficient skills and resources in the Treasury to undertake its new and additional roles?

[John Glen]

Absolutely. I can confirm that those skills exist. New equivalence decisions issued by the Treasury will be laid before Parliament and will be scrutinisable.

To provide as much certainty to business as possible, the Government have introduced a temporary permissions regime, as set out in the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which were made on 6 November. That will enable relevant EEA firms operating in the UK through a passport to continue their activities in the UK for a limited period after exit day, and will allow them to apply for UK authorisation, or transfer business to a UK entity, as necessary.

This instrument makes special provisions for EEA firms that intend to operate in the UK under the temporary permissions regime by ensuring that they will not be deemed in breach of the UK’s MiFID II rules if they can demonstrate that they comply with corresponding provisions in the EU’s MiFID II rules. This is necessary because, in the absence of such provisions, legal conflicts could arise that may impede the activities of firms operating under the temporary permissions regime in the UK in certain areas, and that may require them to comply with duplicative regulations.

This provision will apply only to certain provisions of MiFID II during the temporary permissions regime, and only where the EEA MiFID II requirement has equivalent effect to the UK MiFID II requirement. This instrument will also put in place transitional arrangements for data reporting service providers, which are entities that report details of transactions to regulators and publish information under the transparency regime.

Finally, under the transaction reporting regime in MiFID II, investment firms are required to submit a report to their national regulatory authorities following the execution of a trade. Those transaction reports are used by regulators to detect and prevent market abuse. UK branches of EEA firms do not send reports to the FCA, but rather send them to their home regulator, which can then share them between EU regulators. As we will no longer be part of that system, the draft regulations will require UK branches of EEA firms to report to the FCA, in the same way that UK branches of non-EEA firms are required to do. In addition, this instrument provides that firms must continue to report on trades in financial instruments admitted to trading, or traded, on trading venues in the UK and in the EU. That will maintain the existing scope for the monitoring of markets by the FCA and will minimise disruption and adjustment costs for firms.

The Treasury has been working closely with the FCA, the Bank of England and industry bodies—representing large and small firms—in the drafting of these regulations. The Treasury published the instrument in draft, along with an explanatory policy note, on 5 October 2018 to maximise transparency to Parliament, industry and the public, ahead of laying it before Parliament. Regulators and industry bodies have generally been supportive of the provisions in this SI.

To conclude, the Government believe that it is necessary to ensure that MiFID II continues to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting the draft regulations. I commend them to the Committee.