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

Lord Tunnicliffe Excerpts

Wednesday 16th October 2019 Grand Committee

[Baroness Kramer (LD)]

My Lords, I begin by sharing an area of disagreement between myself and my colleague, despite the fact that she is far more expert in this area than I am. I pick up the issue that she raised at the end of her speech: the extension of the prospectus exemption for public bodies. I would like to hear from the Minister what risks he thinks we are taking on board as a consequence. There is a rationale to allowing the other members of the EU in effect to use our marketplaces without a prospectus: we know them all; we all participated in the same membership structure of the EU; every one of them is a democracy; and their financial services and most of their activities are governed by laws that are either common or very close to ours. So we have a very high level of confidence in the integrity of the bodies involved.

From reading this extension, I need to ask the Minister this. Presumably, as it reads as such, if President Assad of Syria were to decide to use the capital markets to raise some additional funds to prosecute his current war against those whom he considers rebel forces within Syria—he has joined with Kurdish forces—it will not be a problem. They can come to the UK; the law basically says yes. It is the same for a long list of countries including Saudi Arabia and Yemen. It seems a big step to have taken and not one that was extensively discussed in Parliament. I have raised this before, but never had much of an explanation or any analysis of the risks entailed. It is important that the reputation of our capital markets here continues to be protected. I know there are forces who want to see regulatory dilution—which noble Lords often talk about—who have a much more casino attitude towards financing and who love the idea of all the buccaneers being able to come in and use British markets while we make money from them. I raise those issues as they are genuine concerns that need to be addressed.

I want to address a related issue. Look at some of the fintechs. I am thinking particularly of crowdfunders, but this could apply to many others. The dominant crowdfunders across the European Union have typically been UK-based. The big four have been raising money for everything from charities to small businesses—but they are critical to start-ups and small businesses—from investors across the 28 countries of the EU. They are raising money not just from the UK market but from Estonia, France and Germany. That has been crucial to many of our small businesses and start-ups.

I now understand that, with the removal of passporting, the e-commerce directive and now the prospectus directive, they no longer have a mechanism that enables them to raise that funding. If we no longer have in common a single prospectus that operates across the 27, their ability to raise funding across the 27 is reduced to raising money from the one. There are consequences to that, which I wonder whether the Minister might address. I think all the four that I named have now set up an alternate location within the 27, so I suppose we can expect a shift of business out of the UK or a cost from running two operations, one in the UK and one outside. But it will make it difficult for new players in the crowdfunding arena to start up within the UK. It will be far more logical to set up somewhere within the 27 —Berlin being one of the most attractive locations. Those questions have to be addressed.

I want to pick the Minister up on equivalence. He made the point—which I think is right and fully accept—that the purpose of most of these SIs is to make sure that, at the nanosecond we leave, nothing has changed in the rules and regulations that people follow. I understand that but, initially, these conversations took place in the context of Mrs May’s intentions for a long-term relationship with the EU. It was one where we remained very close to the single market, with only rare circumstances in which there was an overweening reason to diverge. We are now, I understand—the Prime Minister has been very open about this—in the very different situation where divergence is the intent and leaving is in fact seen as an opportunity to break away from being close to the single market. Therefore, suddenly the issues of equivalence become much more difficult and complex. Although there has been fairly limited concern about long-term reciprocity—there are various temporary arrangements that run, typically, for only a matter of months—it is now becoming far more serious. That is why, on this side, we are constantly raising equivalence as an issue. It would be very wrong to assume that it is a given.

Perhaps I may pick up and address in a slightly different way the point that my colleague made. She basically explained how originally equivalence was meant to be much more focused on outcome rather than actual rules, but the EU is a rules-based organisation. It will not change the way that it works just for us. We might say that we are happy to give equivalence where we think there is equivalence in outcome. That is fine but, frankly, most people do not care very much about getting an equivalence decision from the UK. It is a pretty small market. However, we do care about getting equivalence decisions from the EU. The situation is not symmetrical. The EU has the customer base and the cash, and it uses the many instruments that London wishes to provide. Therefore, I point out that a lot of complexity is entangled in all this and, although this matter does not relate narrowly and directly to these SIs—except, for example, as in this one, where the removal of any mutuality in the prospectus directive is an issue—a lot of questions are embedded in all this.

[Lord Tunnicliffe (Lab)]

My Lords, I thank my Liberal Democrat colleagues for ranging in an interesting way over many of the issues relating to SIs in general and to this one in particular. We seem to have converged on one or two of the same ideas. I have of course slavishly worked through the Explanatory Memorandum in an attempt to understand it, and I quite enjoyed this one—you have to have some peculiar tastes to be here—until I got to paragraph 2.14, where a problem was being explained. The paragraph says:

“This decision was made to provide continuity for market participants after the UK leaves the EU and comes into effect on exit day. To maintain this continuity, this Direction will be amended to refer to the EU Prospectus Regulation”.


There is then the astounding sentence:

“This amendment is not contained within this instrument”.


At that point, my ability to read the document failed, because it explained a problem and then said that we are apparently not going to do anything about it. I hope that the Minister can enlighten me on that. Apart from that, I have only a couple of points to make.

To show my naivety, it was not until I got to paragraph 2.18 that I was informed that the prospectuses have three constituent parts—a registration document, a securities note and a prospectus summary—so I am now better informed. However, having explained how things are passported and so on, paragraph 2.20 then says:

“However, a prospectus that contains one of these registration documents will still require FCA approval for the securities note and the prospectus summary”.


I accept that it is my lack of understanding, but I cannot for the life of me see why one of the three is treated in one way but the other two are treated differently, so I would value an explanation.

We have all alighted on the same issue set out in paragraph 2.26: the exemption for public bodies being extended, apparently, to public bodies of the whole world—not “apparently”; that is what it actually says. At first I thought that this exemption must be discretionary, because there must be some public bodies where you would want a pretty solid prospectus. This would seem to allow some small town in Zambia or Zimbabwe to benefit from this exemption, so I would be very grateful if the Minister could spell out what the safeguards are for this, because it could lead to quite serious risks if there are not appropriate ones.