Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2015

Lord Soley Excerpts

Tuesday 10th February 2015 Grand Committee

Together, these changes show the Government’s continued determination to deal with market abuses, to tackle the unacceptable behaviour of the few and to ensure that markets are fair for the many who depend on them. I beg to move.

[Lord Soley (Lab)]

I apologise to the Committee and to the Minister for being two minutes late for his opening statement, having been in the Chamber for the Recall of MPs Bill. I then heard the call of the noble Lord, Lord Newby, so I thought that I had better do that instead.

There are just a couple of points that I want to make on this very welcome SI; I have no problems with the thrust of it. The last bullet point in paragraph 7 of the Explanatory Memorandum refers to the European Union introducing powers in 2017. When the European Union brings in those rules in 2017, will we then have totally new legislation to address that? As I understand it—the Minister will correct me if I am wrong—the European Union has not decided on the content of the laws that it wishes to apply but, clearly, if we do not apply it then we will find ourselves with a different set of regulations from those that apply in European Union states. I am not sure whether they will apply to all states, but certainly they will apply to many. I want to be clear about whether we will bring in that regulation here and adjust to whatever the European Union decides after 2017, in which case we will then have to come back to the Floor of one House or the other to pass new legislation.

My understanding is that any criminal charges relating to a breach of the European Union regulations would not apply in the United Kingdom. Any breach of any European Union rule could be a criminal act, as it is here under Part 7 of the Financial Services Act. If that is to be the case, would we make our criminal offence the same as it would be in the European Union? The Minister might need to think about that, but one can see the dangers in that we would have a criminal code operating in new European Union legislation that was different from the criminal code that might apply here in the UK.

The only other matter I wanted to raise is not minor in content but is very brief. It is about where this SI applies to small businesses under Section 11. I recognise that it is very unlikely to have a big impact on small businesses of any type, but it could. I want to make sure that the Government have consulted with not only the British Chambers of Commerce but the Federation of Small Businesses. Is the FSB aware of this? Has it said that it is relaxed about it, from its members’ point of view?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this order and explaining it to us. I also thank my noble friend Lord Soley for coming along to swell our numbers. We have had so many interesting debates just between the two of us that three is difficult to cope with.

As usual on these exciting Treasury SIs, which I am asked by my party to handle, I studied the paperwork with great care. The superficial presentation of the order seems to take seven indices and put them into the LIBOR legislation. I remember that to some extent from our time discussing the Bill, but I had a further look into it. The essence of the legislation is summarised in the August 2014 report by the Fair and Effective Markets Review, which led to this recommendation. It seems to me that the process in fact bears on submittance. On page 5 of the report there is a list of submitters’ responsibilities. The responsibilities of benchmark administrators are overwhelmingly to look at submitters and make sure that they are right. I am very happy to be corrected by the Minister if I have got that wrong.

Since we are using this LIBOR framework—or LIBOR-type acts—as a vehicle for this order, I first ask the Minister how well the FCA has performed its LIBOR role over the couple of years that it has been in place. I made the point about the division between administrators and submitters because if I have read the paperwork properly—I would be only too pleased to be corrected—only two of these indices, SONIA and RONIA, have submitters at all. The full effect of the primary legislation makes sense for those. Can I ask the Minister whether these are here for completeness, or has there been malpractice in these indices? Obviously you cannot prove negatives, but has any known malpractice taken place in the creation and management of these indices in recent times?

Moving on to the other five indices, looking first at ISDAFIX, as I understand it the objective is to make it mechanical. The report I referred to says:

“Where practicable, IBA plans to transition the calculation methodology from this polled submission model to an algorithm-based approach, using tradeable quotes from regulated trading venues as the input for the rate”.

That is the end of the important part of the quote. More recently, the impact assessment says:

“ISDAFIX will be transitioned to a different methodology before April 2015”.

That would create a situation where, as far as I can see, there would be just an administrator. It would be valuable if the Minister could confirm that. Can he also confirm that the transition to the algorithm-based methodology will be completed by April 2015? If that deadline is missed, what is the Government’s intention? Will they use this to supervise the old system, or will they delay the introduction of the new system?

I understand from the paperwork that the gold fixing system is once again in transition. Will the transition to the new gold fixing methodology be completed by 1 April? If not, what will happen?

I was fascinated to read that the WM/Reuters London 4 pm Closing Spot Rate is once again, as far as I can see, mechanical—that is, it is a derivation from publicly available information, or at least market-recorded information, which implies that it is a mechanical index. I am somewhat confused at this when in recent years, and indeed months, we have had scandals in the foreign exchange market. Perhaps these are markets that fall out of the control that the order seeks to relate to. If not, and the order does not relate to those scandals, what are the Government doing to ensure that those markets where we have had problems in the recent past are properly under control?

If I am right in my understanding—I could have great humiliation in a few moments when the Minister explains to me that I am completely wrong—five out of the seven indices seem to be administrator-only. That raises the interesting question: what happens if there is an error? Surprisingly to me, not being a person of the City, there were no civil actions, as far as I know, as a result of the original LIBOR scandal. Looking at it from a distance, one felt that some parties may have been disadvantaged and there would be efforts by them to secure damages from the people who created that disadvantage. The only way there could be a problem with the administrator-only indices would be if there were errors. If there were, though, would the administrators have a commercial liability? If they did, who would pay? The administrators per se, as far as I can see, are not businesses of great substance; they are businesses created for the relatively modest task of administration.

I have a couple of other points. The UK is forging ahead of the EU in this area. I have no criticism of that; it makes perfect sense. My noble friend has asked how the thing will eventually come together, and I look forward to the response to that. However, have any other countries initiated legislation in these areas, and how does that legislation interface with the orders that we are looking at today?

My other question is: why seven? Were other indices considered? None is mentioned in the report, but do we know of other indices that were considered, what were they and why were they not included?

[Lord Newby]

My Lords, I am grateful to both noble Lords who have participated in this debate, particularly to the noble Lord, Lord Soley, for breaking up our traditional duet. He asked about the relationship between this order and the developing EU plans to do roughly the same thing. Negotiations are going on at EU level in which the UK is actively participating. The aim is that the EU regulation, when it comes forward, will be compatible with these measures. When it comes in, it will replace this order automatically because it will have legal force. However, the aim—there is no reason to think that this will not be possible—is that the EU measure does not require us to make any substantial change to the way that we run this regime. It will come in and supersede what we are doing, but only, as it were, in a legal sense rather than in a practical sense. That is the plan. We do not envisage that we will need to make any significant changes in the way that the administration or the procedures work as a result of that measure coming in.

[Lord Soley]

How will this measure come off the statute book? Is it because it is identical to another? I understand that this measure will have to come off the statute book.