Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019

Lord Davies of Stamford Excerpts

Monday 18th February 2019 Lords Chamber

The situation that we are in at the moment is deeply unsatisfactory. We are imposing significant burdens on companies—burdens that extend to millions of pounds according to the Government’s own impact assessment, which they themselves admit is conservative. We are doing so in pursuit of a no-deal Brexit, which almost nobody who has been engaged with it—to use the noble Lord’s expression—finds satisfactory and almost all of whom would wish to rescind if they were given the opportunity. There has been no consultation in defiance of all the established rules of the Government and Parliament. This is unsatisfactory and therefore I beg to move.

[Lord Davies of Stamford (Lab)]

My Lords, the noble Lord, Lord Bridges, has told the House, quite correctly, that at present he has a role with Banco Santander. Although in my case there is no possible financial interest and the relationship occurred 30 years ago, I ought, in order to be completely transparent, to reveal that when Banco Santander initially installed itself in this country in the 1980s, I was its financial adviser. I am very pleased that at that time I was connected with a transaction that has proved to be extremely fruitful for Banco Santander and the British economy. Therefore, I genuinely wish the noble Lord every success in the role that he is currently playing for this distinguished financial institution. It has expanded over the decades in this country and I hope that that happy position will continue, although all of us—at least, on this side of the House—have some fears about that at present.

There is no doubt about the importance of this issue. We are talking about financial transparency and disclosure. Anyone who knows anything about the financial markets knows that, together with the avoidance of conflicts of interest, those are the most important foundations of a successful financial marketplace. When either of those two foundations have been weak, the human race has invariably ended up substantially regretting it. People have been ruined and even economies have, sadly, been seriously affected.

The European Union now has a good system. Together with the United States, the European Union has the longest experience of successful financial regulation in this area. People come from all over the world to discuss with us how we do things here and very often they follow our example. That is very sensible and desirable for things such as the prospectus directive, which has been imitated around the world. The whole business of regular financial disclosure—annual reports, interim reports and so forth—have, again, been very widely imitated around the world. Everyone knows that if you want to have a financial market where companies can raise serious sums of money, these things are essential.

I have always had a strong feeling that the scrutiny of secondary legislation, both in the Commons and in the Lords, is the most dubious and problematic area of parliamentary activity and the one most in need of reform. Like everybody else in the two major parties, when we were on the Back Benches in the Commons we were regularly press-ganged—I do not think that is too strong a word—by the Whips to sit on statutory instrument committees. They were absolutely deplorable occasions. They were a real travesty of good parliamentary scrutiny. I used to hope that the public would never come into the sessions because they would be horrified at what we were doing. In fact, I never saw a member of the public there, although occasionally one would see lobbyists of some kind. However, the fact is that we had no opportunity to brief ourselves, no opportunity to question Ministers—although of course in the Lords we do have that opportunity, which is a great improvement—and we had the system that we have here, which was that we could not modify these instruments if we thought it necessary to do so.

How can Parliament possibly do its job, or make a contribution, if it cannot modify a proposition for a statute or Bill by amendment? This is quite extraordinary—complete rubbish—and we should do something about it. It results in an enormous amount of legislation going through that is not properly scrutinised. In this series of statutory instruments, we see literally hundreds of important statutes supposedly being renewed—although whether they are renewed or modified is something one can never be quite sure about—and going through at a rate of knots. No one can judge the pace at which this is happening other than negatively; it is quite frightening, and a very bad moment for Parliament.

The situation is made much worse by the absence on these occasions of proper consultation or, in most cases, of impact assessments—as it happens, there is an impact assessment on the statutory instrument before us but, mostly, there are not. I want to clear up the controversy that exists between my noble friend Lord Adonis and the noble Lord, Lord Bridges. Consultation is an important term; it implies a set and standard process for consulting those likely to be impacted by legislation, and passing on to Parliament before it legislates—that is, before it is too late—the results of the interchange that has taken place with the stakeholders or parties who have an interest in the sectors of activity being regulated. This should be a standardised practice; we ought not to have to ask in each case, “What kind of consultation did you have? How many banks did you speak to? Who did you speak to: the directors, compliance officers, researchers, parliamentary affairs departments—a lot of companies have these kinds of things—or PR people?”

We should not need to ask these sorts of questions because we should know exactly what a consultation exercise involves. There should be—I am sure there is—a template in the Treasury and other serious departments, which indicates what you need to do to meet your obligation for a proper consultation when proposing legislation. A proper consultation has not been done here. What has happened here is engagement. The noble Lord, Lord Bridges, is proud of the distinction he has made but, frankly, engagement can mean what you want it to mean. No one knows, unless they have specifically asked the question, what it has actually involved, or indeed whom it has involved and not involved—who has been left out, perhaps deliberately, because the Government or department concerned did not want to hear some people’s negative views.

All these things are possible if you do not have a standardised system of consultation. It should be a permanent part of parliamentary procedure that you expect that consultation has been carried out and that everybody knows the principles under which it has been conducted. That does not happen here, and so we face this situation where we are being asked to vote through a whole lot of legislation at great speed. We do not know whether the impact will be what the Government say it will be; we do not know whether other people have been asked their opinion, or who has been asked. That is a very unsatisfactory situation. Has there been no consultation in the way that there normally would be? Let us be honest about it.

I come to my final point. The reason why there has been no consultation in the way that ordinarily there would be is, we are told, that we are under tremendous pressure. I say to the noble Lord, Lord Bridges, and others on that side of the House that that is a form of blackmail. I would not dream of listening to blackmail, whether about my business life, my past, my private life, or my political or governmental responsibilities. Anybody who attempted to blackmail me would be thrown out of the door; there is no question about it—I would not be interested. The Government are saying, “You have to pass these things or there will be terrible consequences for British industry and all these different sectors. You will be at fault if you haven’t done what we have told you to do”. That is no good; we should not listen to such nonsense. This is the responsibility of the Government. They got us into this mess and they should be expected to do their best to get us out of it, or at least to minimise the damage that there certainly will be.

As my noble friend Lord Adonis has said, it is entirely the Government’s fault that we find ourselves in this position. Any day they like, the Government could withdraw their notice to quit under Article 50. They could negotiate. We have been told by the continentals that any such request would be positively considered—that we could, if we wished, negotiate an extension to that date. More than that, the Government could have conducted these negotiations very differently. Unless I am very much mistaken, the Prime Minister accepted in December 2017 the idea that we would be permanently part of a customs union with the Republic of Ireland and therefore with the rest of the European Union. Then when she returned to the UK, she was rapped over the knuckles, or worse, by both the ERG and the DUP—two groups of extremists who have an unfortunate hold over British politics at the present time. She had to go back to the EU pathetically and say, “I am sorry, I thought I could agree that but actually I can’t”.

That is the whole history of this negotiation. It is deplorable. It has made us look idiotic across the world and, of course, has created a climate of uncertainty that is doing palpable, concrete economic damage to this country. This is a very important matter. We should show that we mean seriously what we say on the subject of consultation. It should be a standard provision—a right, if you like—which is respected, and always expected, in the case of new legislation put forward on a statutory instrument basis. Such is the importance of this matter and of recording our feelings on it that, if my noble friend feels moved to put his amendment to a vote, I will certainly support him.

[Lord Sharkey (LD)]

My Lords, I can be very brief. I declare an interest as chair of the Hansard Society, which is almost as obsessed with the effective scrutiny of secondary legislation as the noble Lord, Lord Adonis, is. I agree with everything that the noble Lord, Lord Davies of Stamford, has said about scrutiny, but I also have no objection to this SI per se. After listening to the exchanges, I understand the difference between consultation and engagement, and I support the view of the noble Lord, Lord Adonis, that there should have been consultation as well as engagement on this SI and the other SIs that we are considering today.

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[Baroness Bowles of Berkhamsted (LD)]

I declare my interest as a director of the London Stock Exchange, the relevance of which I am sure your Lordships can appreciate. I sometimes stop and wonder, “Okay, what would actually happen if we didn’t have one of these SIs?” Prospectuses would not go away; we would just have some annoying things to do with the EU and our regulators having to deal with it that would be single-ended, and I am not sure how it would all work. I am not suggesting that that is a solution but I am not sure that we would entirely be falling into a bottomless pit.

I have two fairly generic comments to make about this SI. First, in paragraph 92—I am not quite sure of what; I think it is the impact assessment—there is quite a good explanation of the transfer of functions that has been going on for loads of the statutory instruments that quite often have been debated in a much more lonely way in the Moses Room. As has been said, the Treasury takes over the powers of the Commission and then the binding technical standards go to the regulators. By and large that means that we are not really going to see a great deal of detail because the basic legislation is already done and in our legislation, and from now on significant changes are probably going to come in the technical standards. Of course, we do not have an entirely equivalent position with the EU here because we do not get a vote on the binding technical standards, whereas the European Parliament gets a vote, as indeed does the Council, if it wishes to negate the equivalent standards that come from the European supervisory authorities. From that point of view, it is sad that there has not been some kind of public consultation because it might have been the only sniff that they will ever get at it, unless there are more people like me, who make a nuisance of themselves by responding to the stakeholder consultations that regulators put out.

That was a general statement. There are two asymmetries in this piece of legislation that illustrate what is going on quite a lot of the time. One is that we will continue to recognise EU international financial reporting standards. That is a good thing in terms of openness and the ability and ease with which a prospectus can be done in the UK, but the other side of the coin is that the EU has said that it will not recognise, for example, audits done according to UK IFRS. I do not know whether it will continue with that as a generic ploy—I think it hurts the EU rather than us—but it illustrates the difference in openness and the position that the UK is taking on these things. A similar asymmetry occurs with grandfathering. We are saying, “Okay, if the prospectus has already been agreed before we leave the EU, it will be honoured for the 12-month duration that it’s allowed”, whereas I am afraid the EU has said that it will be cut off at the time of Brexit.

I do not think that those asymmetries harm us at all, but there are quite a lot of them spread throughout and some do operate in a harmful way. There are some of these—what was it?—“distinguished” lawyers who advise companies that they are better to operate out of the EU because the EU will not recognise us, whereas we will recognise the EU. I am not suggesting that we could necessarily operate in a different way, but industry has not always got what it wanted out of these engagements and would have sometimes preferred the Government to be a little more equivocal and to have waited to see on one or two of these things, so that, if you like, the balance of lack of knowledge was roughly the same.

[Lord Davies of Stamford]

I am most grateful to the noble Baroness for giving way. She just said something that alarms me greatly, which is that there will now be two forms of IFRS, one for the EU and the other for the UK. That seems to be a matter of enormous significance, and extremely undesirable. It means that you will not be able to make exact comparisons between potential investments in the UK and the rest of the EU.

Let us suppose you are doing a study of the pharmaceutical industry and you find that, in earnings per share, Glaxo or AstraZeneca has been progressing at a certain rate over the years, and German equivalents such as Bayer have different figures for growth of earnings per share. You are making comparisons, but the comparisons are falsified because of the different accounting conventions. Some of them might be very substantial. For example, if you change the conventions on amortisation of good will, that can be a very substantial figure in a balance sheet in a profit and loss account; it has a bearing on how you account for it. This is very serious, because it would be a serious reduction in the transparency of the financial markets, which would be of great disadvantage to individual investors, of course, but ultimately to firms themselves and their ability to raise money, and to the health of the financial markets, which we all depend on.

[Baroness Bowles of Berkhamsted]

I thank the noble Lord for that intervention. A statutory instrument on the endorsement of IFRS will be coming along from BEIS—I am already taking an interest in that. IFRS will still be a global standard, but I think there are now 144 countries that adopt and endorse them, in their own particular way. They normally go straight through, but there is sometimes a certain amount of adjustment; the Japanese have made some adjustments, as have the Australians. In fact, the EU has also done so here and there. I do not think the intention is that the UK-endorsed IFRS will differ from the EU ones, but—I say this with regret—that does not stop the EU saying that it will not recognise as equivalent those that are endorsed in the UK.

Recognising the need for continuity and stability in the financial markets, although the UK might have made rather a mess of it at the Brexit negotiation level, we probably have the high ground when it comes to how we are dealing with the conversion of legislation, given that it has to happen. However, I am just pointing out that some of the asymmetries—not these two, particularly—cause some difficulty. I think the IFRS one, such as it is, will cause more difficulty to the EU than to the UK.

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[Lord Bates]

If that is the case, it is happening under the existing rules. All we are doing is replicating those rules to avoid a cliff edge.

[Lord Davies of Stamford]

The Minister’s description of the position is not at all what I understood. As I understood it from my noble friend Lord Tunnicliffe—who spotted this, to his great credit—at present the prospectus directive provides that certain state bodies within the EEA do not have to produce a prospectus. So the Government of France do not have to produce a prospectus if they go to the markets and seek more money. That is a reasonable situation. Far from not changing the substance when they switch from an EU directive to an SI affecting only this country, it appears that the Government have made a significant change in the wording. It no longer says “any EEA sovereign body”—or words to that effect—but “any sovereign body anywhere in the world”. So, as the noble Baroness, Lady Kramer, pointed out, you would have a situation where the Government of Venezuela—if there is one—or of Eritrea, or wherever, could issue a prospectus in London. I cannot believe that that would really happen, but if it did it would be an invitation for the most appalling financial crisis. People would lose all faith in the whole system and the credibility of the prospectus arrangements that we have here.

[Lord Bates]

In those circumstances, we would be dealing with a third country. We would not be part of the EEA, so we could not give them the terms that apply within the EEA at the moment. We had quite a bit of debate on this last time. They would be a third country like any other. We want to develop a very close relationship, but that is a matter for negotiation and discussion.