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

Debate between Lord Davies of Stamford and Baroness Bowles of Berkhamsted

Monday 18th February 2019 Lords Chamber

[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.