Prospectus (Amendment etc.) (EU Exit) Regulations 2019

Lord Bethell Excerpts

Wednesday 16th October 2019 Grand Committee

Moved by

[Lord Bethell]

That the Grand Committee do consider the Prospectus (Amendment etc.) (EU Exit) Regulations 2019.

[Lord Bethell (Con)]

My Lords, the Government have previously made all necessary legislation under the EU withdrawal Act to ensure that, in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the Article 50 process, new EU legislation has become applicable. Under the EU withdrawal Act, this legislation will form part of UK law at exit. Additional deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit.

This instrument amends the EU prospectus regulation and related legislation, including a previous EU exit instrument—the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, or the official listing instrument. That instrument, which was debated back in February, fixed deficiencies in the EU prospectus regime prior to 29 March 2019. However, on 21 July 2019, the new EU prospectus regulation applied in full across the EU, replacing the existing regime.

The EU prospectus regulation contains the standardised rules that govern the format, content, approval and distribution of the prospectus that issuers may need to produce when securities are offered to the public or admitted to trading on a regulated market in an EEA state. Deficiency fixes to the new EU prospectus regulation are necessary to reflect that, after exit, the UK will be outside the EU single market and the EU’s regulatory and supervisory framework for financial services. Where appropriate, the amendments in the instrument follow the same approach as the prior amendments made in the official listing instrument to the UK prospectus regime. Overall, this instrument will ensure that the UK will continue to have an effective prospectus regime after exit.

First, after exit, EEA issuers wishing to access the UK market will be required to have their prospectus, or their registration document, approved directly by the Financial Conduct Authority, as any other third-country issuer would. Currently, an EEA issuer’s prospectus or registration document can be passported for use in the UK once it has been approved by an EEA regulator. To provide continuity, this instrument introduces transitional arrangements that will allow a prospectus approved by an EEA regulator and passported into the UK before exit to continue to be used and to be supplemented with additional information until the end of its normal period of validity.

Similarly, the instrument permits registration documents—the part of the prospectus that contains information on the issuer—that are passported into the UK before exit to continue to be used as a constituent part of a full prospectus in the UK. However, the full prospectus will still require FCA approval after exit. For both a full prospectus and a registration document, the period of validity is usually 12 months after it was originally approved. I should stress that the Government have worked very closely with the FCA in preparing this instrument. The FCA is confident that it has the appropriate level of resource to manage its responsibilities, including the approval of prospectuses as of exit day.

Secondly, the exemption for certain public bodies from the obligation to produce a prospectus under the EU prospectus regulation is maintained but is extended to the same set of public sector bodies of all third parties after exit. This exemption is limited to certain types of securities issued principally by Governments, central banks, local or regional authorities of a third country and public international bodies of which a third country is a member, such as the Nordic Investment Bank. This approach is in line with the approach previously taken in the official listing instrument. Noble Lords will remember that this issue was deliberated during the debate on that instrument in February and, as then, while this is a change from the current limitation to EEA states only, I believe it makes sense to extend this exemption more broadly. This will ensure UK capital markets continue to be attractive to public body issuers, which have historically raised substantial volumes of capital in the UK. We estimate that in 2016 and 2017 at least $84 billion was raised by public bodies making use of this exemption.

It is also important to remember that the EU prospectus regulation is not the only protection in place for those looking to invest in securities. Most significantly, the marketing and promotion of securities will remain subject to the financial promotion restrictions set out in the Financial Services and Markets Act and overseen by the FCA. The EU prospectus regulation allows issuers to incorporate information from certain documents that are available electronically elsewhere by making reference to them in a prospectus. This includes documents approved by the regulator of another EEA state. To provide continuity for market participants, this instrument sets out that information contained in the relevant documents approved by an EEA regulator before exit day can continue to be incorporated by reference in a UK prospectus going forward. However, the FCA will still need to approve any prospectus that incorporates information in this way before it can be used in the UK.

Lastly, this instrument ensures that matters in relation to the UK prospectus regime and transparency framework will continue to apply to Gibraltar, as they did prior to the UK’s departure from the EU. This is in line with the approach taken in other EU exit instruments.

As with all our EU exit legislation on financial services, the usual consultation process has not been used. It would have been unfeasible in the time available to prepare for exit. Nevertheless, the Treasury has engaged extensively with the financial services industry, particularly through TheCityUK, to develop our exit legislation, including this instrument. TheCityUK was supportive of the approach taken and helped to improve the clarity of the instrument.

Before I conclude, I want to address the procedure under which this instrument has been made. It, along with three other financial services exit instruments, were made and laid before Parliament on 5 September under the made-affirmative procedure provided for in the EU withdrawal Act. As described earlier, this is an urgent procedure which brings an affirmative instrument into law immediately, before Parliament has considered the legislation, but the procedure also requires that Parliament must consider and approve a made-affirmative instrument if it is to remain law. The Government have not used this procedure lightly but, as we draw near to exit day, it is vital that we have critical exit legislation in place. It would have been inappropriate to leave this until the last minute. Industry and our financial regulators want legal certainty on the regime that will apply from exit.

In summary, this Government believe that the proposed legislation is necessary to ensure that the UK’s prospectus regime can continue to function appropriately post-exit if the UK leaves the EU without a deal. I hope that noble Lords will join me in supporting these regulations, which I commend to the Committee.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for his introduction to the statutory instrument and also for his previous email contacts. As has been said, the delay to Brexit has brought another EU regulation into scope and, given that it is a regulation, it is already directly applicable. As usual I must declare my interests as in the register and especially as a director of the London Stock Exchange. I think that prospectuses are slightly relevant there.

All the usual concerns that have been voiced previously, often by the noble Lord, Lord Tunnicliffe, and my noble friend Lady Kramer, as well as me, about the complexity of following the state of play of our UK legislation apply. In statutory instruments such as this, which is a second round of amendments, they seem to bear more heavily than usual. It is rather unfortunate that the word “regulation” applies at so many different levels. It is easy, even for someone like me, to wonder which regulation it is: is it the EU regulation, is it one of the regulations that we have done for Brexit, or is it an individual regulation within a set of regulations? That is not helpful, but there is not a lot we can do about it, other than choose a new name.

--- Later in debate ---

The other thing that is consistent through many of the SIs is the creation of a transition arrangement, but these transition arrangements are all asymmetric. They allow EU firms to carry on trading in the UK under one set of rules or another, but they do not preserve any rights for UK firms trading in the EU. It is perfectly clear why—we can only influence what we influence—but it is a sorry state of affairs. It points to a future where the UK is a second-class participant in the European financial services industry. Leaving the EU without a deal will have a catastrophic effect on the City of London’s financial sector. It would be an irresponsible act of gross self-harm. We, the Labour Party and the Lib Dems, have slogged our way through 58 SIs and have co-operated in passing them because we accept the fact that, without them, the effect would be even worse, but it is with a heavy heart that we have done so. As we say goodbye to these SIs, I pray that they are never used.

[Lord Bethell]

I thank noble Lords again for an incredibly detailed analysis of a complex but very important SI. I share the small prayer made by the noble Lord, Lord Tunnicliffe, at the end there. I look forward to the end of this debate to find out whether his prayer has been answered in the ongoing negotiations. In the meantime, we will put prayer to one side and focus on trying to secure this SI. I will talk about some of the very detailed things that were raised but also some of the larger things.

On equivalence, I completely understand what the noble Baronesses, Lady Bowles and Lady Kramer, and the noble Lord, Lord Tunnicliffe, are talking about in terms of the ongoing regime. The strategy is very much that, under a no-deal scenario, which would be hugely regrettable and is not government policy, there is the largest amount of alignment possible with the current situation to provide market security and avoid any kind of cliff edge or calamity. That is very much the view supported by regulators, by industry, by government and by our partners in the EU. What kind of regime the City will have after that will be a matter for a debate that will occur here in Parliament, principally. There remains on the statute book a huge amount of protections for the City. They are not addressed in this or any of the other SIs, but I reassure noble Lords that the debate will be lively and will engage everyone involved in the financial services industry. This SI is simply trying to protect the industry in a no-deal scenario. That is its intention; it does not seek to creep further than that.

For those who wish to engage in the technical debate on equivalence, can I share a little advertisement from my Treasury colleagues for an important consultation that they are undertaking? They are issuing a call for evidence on a long-term review of the regulatory framework and the key issues which we will need to consider for a regime which operates outside of the EU. For those who wish to engage in a formal review, this is a wonderful platform and opportunity. We should be very happy and thankful to hear noble Lords’ views on the future of equivalence as part of that process.

I emphasise that it is very much the intention of the Government, in a deal or no-deal scenario, to work closely with EU member states. There is nothing in this SI, or in the strategy that it is part of, that precludes or in any way diminishes the determination of the Government to work with other EU states to have the best possible regulatory framework for the financial services industry.

Moving on to one of the detailed questions raised by the noble Baroness, Lady Bowles, she asked what would happen when there were flaws in a prospectus that has been passported into the UK prior to the UK’s departure, given that the recourse to the original approving regulator would be different or gone. The answer to a seemingly short and straightforward question is a little long; I have two or three of these, for which I apologise, but let me give noble Lords the full answer.

Under the EU prospectus regulation, if a significant new factor, material mistake or material inaccuracy which may impact on the investors’ assessment of the securities being offered arises, the issuer must produce a supplement to the prospectus or the registration document to address this. Currently this supplement must be approved by the relevant EEA regulator. The transitional provisions introduced in this instrument mean that prospectuses passported into the UK prior to exit day will be treated as if they were originally approved by the FCA. However, after exit, this means that the FCA will be required to approve any supplements for prospectuses or registration documents that are passported into the UK prior to the UK’s departure.

I hope that that addresses the question. I am happy to share that document with the noble Baroness if she wishes, as it is quite detailed.

The noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, raised questions about the extension of public body exemptions to all third parties. I will provide a little reassurance on that point. This is absolutely in no way a dramatic loosening of the regulatory regime to allow some kind of Learjet sales bonanza for crackpot securities to bonkers regimes. There is an extremely strong financial promotions regime already on the statute to which all these securities will remain subject, set out in instruments such as the Financial Services and Markets Act, which, as noble Lords will be aware, imposes strong restrictions on the marketing and promotion of securities. This allows existing arrangements with EEA countries to roll over. It is not possible under global trade arrangements to provide favourable treatment for EEA countries over other third-party countries. This is a natural and necessary extension, and it will be held under very close review. We have worked closely with the FCA in drafting this instrument to ensure that investors remain suitably protected. We believe that this approach offers the most appropriate balance.

[Baroness Kramer]

Can I just ask a favour of the Minister? It seems that the protection is the prospectus; that is exactly what is being tossed out. Might it be possible to provide us later with a note that directs us to the various protections? That would be helpful.

[Lord Bethell]

I am very happy to provide that, and we will make sure that the noble Baroness is sent that material.

The point I was really trying to make is that the FCA is fully aware of this change in the regime and has put in place the resources necessary to track and review this important development. On the specific case of Syria, which is an extreme example of the natural concern around this point, I assure the noble Lord that these public bodies will not be allowed to be used to break international sanctions or criminal law.

On crowdfunding, the noble Baroness, Lady Kramer, asked about the potential loss of prospectus passporting. I assure her that the loss of prospectus passporting will not prevent any organisations, such as crowdfunding organisations, raising funds in the UK as well as the EU. It is just that any prospectus will need to be approved in the UK by the FSA; that is the principal change.

The noble Lord, Lord Tunnicliffe, asked a couple of short but precise questions for which, I am afraid to say, there are long answers; I will just trot through those. He asked about paragraph 2.14 and the update to the existing equivalence direction. This instrument transfers the power from the European Commission to Her Majesty’s Treasury to make equivalence decisions in respect of the EU prospectus regulation as of exit day. Such determinations are to be made through statutory instruments and are therefore subject to the usual parliamentary scrutiny procedures. If equivalence decisions were laid before Parliament on exit day, there would be a lag between their application in UK legislation and exit day itself. I hope that answers that question.

Secondly, on paragraph 2.20, he asked about the difference between the transitional provisions for registration documents and others introduced by this instrument. I will share with noble Lords a slightly long answer. Under the EU prospectus regulations, there are separate passporting regimes for registration documents and prospectuses. Given this, the instrument introduces separate transitional provisions for registration documents and prospectuses passported into the UK prior to the UK’s departure from the EU. However, the effect of these transitional provisions is almost identical. That is, they provide that documents approved by an EEA regulator and passported into the UK prior to exit will remain valid for use in the UK until the end of their normal period of validity. However, registration documents are valid only as a constituent part of the prospectus. Any prospectus that utilises a passported regulation document in the UK will still require FCA approval. On that note, I think we have drawn to a close on the questions.

Motion agreed.