Draft Market Abuse (Amendment) (EU Exit) Regulations 2018 Draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019

Anneliese Dodds Excerpts

Wednesday 23rd January 2019 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve in this Committee with you in the Chair, Mr Davies. I am grateful to the Minister for those helpful explanatory remarks.

Of course, the Minister and I are here once again to discuss two of the many Treasury statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. On each such occasion, my Front-Bench colleagues and I have spelled out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation that passes through delegated legislation Committees.

As I mentioned yesterday in relation to another statutory instrument, the Committee takes place in the context of a Government refusal to allow debate on the Floor of the House concerning the exceedingly complex MiFID transposition legislation, and just a couple of days following a Division on statutory instruments to implement a customs union with our Crown dependencies, with little to no indication of how that would interact with our future customs relationship with the EU27. The prospect of no deal looms large, given the Government’s refusal to rule it out, so we must recognise that, on 29 March, instruments considered by delegated legislation Committees such as this may well become what we rely on, especially given the very real risk that the Government are simply running down the clock. Such instruments could represent real and substantial change to the statute book; they need proper scrutiny and in-depth analysis.

[Paul Masterton (East Renfrewshire) (Con)]

I take the hon. Lady’s point, but is it not a bit rich to go on about the necessary scrutiny when half the people on her own side have not turned back up after the Division?

[Anneliese Dodds]

I do not know why other hon. Friends are not here. I am sure they will be coming back soon. It may be because they have been informed that another vote is just about to happen. I apologise if my remarks have to be cut in half as a result, as the Minister’s were.

Yesterday, in another Committee, I had a long discussion with the Minister about why an impact assessment had not been produced for the statutory instruments we were considering. I am grateful to him for the clarification he gave me earlier, but although we have an impact assessment for one of the instruments this Committee is considering—the credit rating agencies regulations—we do not have one for the market abuse directive and market abuse regulation transposition regulations. Yesterday, I and other hon. Members indicated our frustration at being required to be prepared to pass legislation without having been provided with an impact assessment, and that remains the case.

I note the comments by the right hon. Member for East Yorkshire about the details of the explanatory memorandum. In yesterday’s Committee, it was intimated in the explanatory memorandum that an impact assessment had been produced. The Minister generously said he had left that statement in the explanatory memorandum to draw the Committee’s attention to the fact that there was not an impact assessment. That was a valiant attempt to explain the situation, but it is my understanding that we have the same situation with the MAD-MAR regulations. I hope that is resolved as soon as possible. We need those impact assessments to be able to understand the potential impact of this significant legislation.

As the Minister explained, the two statutory instruments we are considering relate to important elements of the post-crisis financial architecture. With the Committee’s permission, I will discuss them in reverse order and begin with the credit rating agencies regulations. Regulations were introduced at EU level following credit rating agencies’ failure properly to assess the riskiness of complicated financial instruments—not least those structured finance products, such as collateralised debt obligations, that were backed up by sub-prime mortgages—in the run-up to the financial crisis. We all know the impact of what occurred then, when credit rating agencies were improperly regulated or, indeed, not regulated.

Arguably, credit rating agencies also facilitated the very sudden downgrade of the credit ratings of a number of countries, which obviously had a significant impact on their ability to borrow and on the cost of their doing so. If the Government continue on their current trajectory and we leave the EU without a deal, it will be essential that we do not dilute the regulatory framework for credit rating agencies in the UK, and that any ratings used for regulatory purposes, such as assessing capital adequacy, are robust.

With that in mind, I have a number of questions about the credit rating agencies regulations. First, I would like to push the Minister a bit more on the FCA’s capacity to deal with the new tasks and powers assigned to it by the draft regulations. I believe he said that the FCA now has 158 staff working on Brexit, but of course the draft regulations give it significant new powers with respect to criminal sanctions and investigations. Many of us may feel that such an extension of its role would have been better dealt with through primary legislation. I will come back to that, but there remains an issue with the FCA’s capacity to exercise those no-deal powers.

Yesterday, the Minister maintained that resourcing had not been raised with him at his last meeting with the head of the FCA. The Minister stated previously that the FCA would be able, in extremis, to garner additional resources by raising its levy on market participants. If there is a no-deal Brexit, markets may be operating in conditions of extreme uncertainty and considerable turbulence, so they may not greet an additional levy request from the FCA at that moment with unadulterated joy. I hope the Government are considering that point and what might happen if the FCA needs additional finance but its request is contested by market participants.

Secondly, under the draft regulations, the FCA will have the power to develop regulations relating to credit rating agencies. I am concerned about the scope of the draft regulations and whether they really fall within the powers provided by the withdrawal Act. In particular, regulation 3 states:

“The FCA may make such rules applying to credit rating agencies…(a) with respect to the carrying on of a credit rating activity, or (b) with respect to the carrying on of an activity which is not a credit rating activity, as appear to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives under Part 1A of the Act”—

the Financial Services and Markets Act 2000. That seems a very broad power: it appears to empower the FCA to add to the corpus of law developed by the EU in its regulations on credit rating agencies. It is unclear where the justification for such a power lies. Is it provided for by the withdrawal Act deficiency powers? If so, will the Minister indicate under exactly which circumstances he envisages the power being used? I think the Committee needs that information before it can approve the draft regulations.

I also have a question about co-operation. As the Minister outlined, the draft regulations will remove any obligation to co-operate in processes intended to ensure appropriate regulation of credit rating agencies. Again, that seems like a policy decision rather than a technical one. For example, although in theory it would be possible to participate in the European ratings platform from outside the EU, that appears not to have been envisaged— the draft regulations do not provide the mechanisms to allow even the possibility of it. It would be helpful to understand why not.

Lastly, I am a bit confused by the manner in which the draft regulations have been presented. For example, the background information in the explanatory memorandum focuses on the use of credit ratings for regulatory purposes, but of course the EU’s regulatory machinery for credit rating agencies also imposes a large number of requirements on the agencies themselves, including many requirements to prevent any kind of conflict of interest. They are not allowed to provide advisory services or rate financial instruments without sufficient high-quality information on which to base their ratings, and they have to disclose their models and methodologies and publish an annual transparency report.

There are also a number of requirements that relate to directors on boards. Those goals have not been referred to; I assume that that is because they were already dealt with in the 2009 credit agencies regulation, but I hope that the Minister can confirm that. On my reading, the purpose of the 2009 regulation was to set out the means of implementing those requirements, rather than to provide a level 1 justification, as it would be called in EU parlance.

I have a related concern that it could be difficult to perform functions that relate to the internal operations of CRAs outwith the regulatory colleges that operate at EU level. It would be helpful if the Minister indicated whether, in his view, those controls will be maintained adequately without such co-operation.

Let me move on to the 2018 draft regulations, which implement what is colloquially known as MAD-MAR. MAD-MAR II was implemented in 2014—

--- Later in debate ---

On resuming—

[Anneliese Dodds]

I had just begun to discuss the second SI, which implements what is colloquially known as MAD-MAR—the market abuse directive and the market abuse regulation. As I mentioned, MAD II was implemented in 2014 and contained provisions on insider dealing and the unlawful publication and communication of inside information and market manipulation. As well as empowering national regulatory authorities to investigate and deter those activities, MAR widened the scope of MAD, strengthening the regime for commodity and other derivative markets and banning the manipulation of benchmarks such as LIBOR and reinforcing regulators’ powers.

I have two questions about the instrument. As with the other, it “removes co-operation requirements”—to use the Minister’s terms—but it does not provide a clear legal basis for that co-operation to continue. I am rather concerned about that in the context of the many regulatory developments in that area, particularly where technology is radically changing the channels and methods of communication within financial institutions.

As I am sure the Minister and anybody else who has been covered by those regulations will be aware, a large number of records need to be held by any market participant who needs to disclose on potential insider information for five whole years under MAD-MAR. That includes a list of all people who might be receiving insider information, as well as a record of the conversation that might have relayed that information. If conversations are not recorded, minutes are required. Even the format of those minutes is stipulated in a template set out by ESMA, so the requirements are very detailed. There are various stipulations in the event that minutes are not agreed within five business days and so on and so forth.

An issue with that process is the emergence of modern, Snapchat-type applications, which maintain no record of any conversation. I know that the EU was grappling with that matter and that ESMA is aware and vigilant about it, but I am not aware of any legislative changes to deal with it. I hope that the Minister can assure us that he will work with the FCA to ensure that any undermining of the MAR provisions through the use of new technology would be dealt with firmly, and that he feels satisfied that the FCA would be sufficiently empowered to do so.

Finally, it would be helpful if the Committee had a bit more information about how the Government intend to operate the system of notification of issuers when the issuer is not registered in the UK. Under MAD-MAR, the issuer would need to notify the competent authority of their home member state if they are not from the jurisdiction in which they operate. How will we ensure that issuers, many of whom will be from the EU27, are doing so under this new approach?