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

Anneliese Dodds Excerpts

Tuesday 19th February 2019 General Committees

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

It is a pleasure to serve on this Committee with you in the Chair, Sir David. As always, I am grateful to the Minister for his explanation of the statutory instrument. Once again, the Minister and I are here to discuss a statutory instrument that would make provision for a regulatory framework after Brexit in the event that we crash out without a deal. On each occasion, I and my Labour Front-Bench colleagues have spelt out our objections to the Government’s approach to secondary legislation. The volume of EU exit secondary legislation is concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken. However, establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity.

Secondary legislation ought to be used only for technical, non-partisan, non-controversial changes because it allows limited accountability. Instead the Government continue to push through far-reaching financial legislation via this vehicle. As legislators, we have to get it right. The regulations could represent real and substantive changes to the statute book and they need proper in-depth scrutiny. In this light, the Opposition would like to put on record our deepest concerns that the process is not as accessible and transparent as it should be.

Yet again, we have an SI that changes primary legislation—in this case, FSMA. At the latest count, 288 changes had been made to that Act through Henry VIII powers, as part of the no-deal preparation process. In that connection, I am increasingly concerned about the mission creep that has been evidenced via the progression of SIs that have been laid before Delegated Legislation Committees.

After a discussion in one such Committee this morning about what was and was not facilitated by the EU (Withdrawal) Act 2018, I went back to that legislation to examine exactly what it describes as deficiencies, which are the purported basis for the SI. There is no reference to Ministers being able to determine what may be in the national interest, and to use secondary legislation to enact that. I have no doubt that there would be considerable financial turbulence in the event of no deal—the Minister was absolutely right to emphasise that this morning—but the no-deal SIs, coupled with the 2018 Act, do not provide carte blanche to deal with market turbulence.

The deficiencies mentioned in the 2018 Act do not encompass general problems that might arise and require a public policy response. Instead, they cover specific areas, such as where retained EU law would be redundant because it would have no practical application, or where reference is made to reciprocal obligations that would no longer exist. However, the Minister intimated this morning that it was acceptable for the FCA effectively to adopt a completely different approach to approving benchmarks from that of the European Securities and Markets Authority, if it felt that that was justified by its own objectives and not, I underline, those of the retained EU legislation. We have a similar issue with this SI, to which I will return later.

As with many of the instruments that we have been considering recently, the SI seeks to transfer significant powers to the FCA. First, regulation 19 allows the FCA to make rules requiring disclosure by issuers, but there is little guidance about how it should do that or about the limits of the rules. Will the Minister please provide us with further information in that regard?

Secondly, regulation 27 gives the FCA regulating power to make corporate governance rules relating to the corporate governance of issuers who want to trade securities. I hope that the Minister can explain the rationale for providing that wide-ranging power to the FCA, rather than allowing the Treasury to set those rules, at least in part. I appreciate that it would be done under the purview of the Treasury, but surely in many circumstances there would be more of a direct political impact in that area.

Thirdly, as with the SI we discussed only this morning, we find a new definition, this time that of “debt securities”. As before, it would be helpful to understand why the definition is present here.

Fourthly, I want to ask about the process for determining equivalence between UK and non-UK accounting standards in relation to the issuing of securities. The explanatory memorandum appears to suggest that the creation of an equivalence regime is an aspiration rather than a mechanism provided within the SI. I appreciate that it was probably written quite some time before the latest draft of the SI was, but the power to assess equivalence does appear to be provided, in regulations 67 and 68.

The process of assessing whether other countries’ accounting standards are equivalent to the UK’s or to the EU’s IFRS, which the regulations seem to deem equivalent to the UK’s approach, could be very onerous. It would be helpful to understand, first, whether the resource implication has been taken on board, and secondly, and above all, to know the anticipated timing of the process of assuring equivalence. If securities cannot be traded by issuers based in non-EEA countries until their accounting conventions have been deemed equivalent by the FCA, that could surely pose significant problems for the financial markets, even accounting for the fact that existing prospectuses will continue to be able to be passported into the UK under the SI. That would be an issue for new securities but also for those whose prospectuses had expired.

I would have thought that the cost of a potential gap would be rather more than the £700 one-off familiarisation cost per firm that is intimated in the impact assessment. There is an acknowledgement in that assessment that a change to business processes would be needed as a result of the SI, but the costs of that change are not quantified. From what I can see, there is just the one-off familiarisation cost, and we had a discussion about the basis for that this morning.

In the circumstances, it is unclear why the Government seem to have chosen not to assume equivalence for accounting procedures with non-EEA countries where the EU might have already deemed them equivalent for an initial period, with the FCA being able to review that later. In fact, there seems to be an inconsistency here, because a very different approach has been taken when it comes to allowing public bodies to issue securities without having to comply with prospectus requirements. There is a completely open door for those public bodies, even if they are from outwith the EEA.

As the Minister said, the impact assessment states that it is appropriate to enable public bodies to issue securities without their having to comply with prospectus requirements, even if they are from outwith the EEA, because that

“offers the most appropriate balance between investor protection and maintaining the attractiveness of the UK market, and is therefore the most appropriate option to preserve the continuity of the UK’s financial services market—in line with HM Treasury’s overall approach to financial services legislation, and the framework set out in the EUWA.”

Given what I said previously, I suggest that that exemption is in line with the former but not the latter. It may well be in line with the approach that the Government decide to take to financial services legislation, but it is not clear that it is justified by the 2018 Act.

Fifthly, the explanatory memorandum refers to an SI that was to be laid before the House by the Department for Business, Energy and Industrial Strategy this January—last month—about the future adoption and use of UK-adopted international accounting standards. The Minister seemed to suggest that that would happen only at some unspecified point before exit, so it would help if he could give us more clarity about the timing. BEIS is not the Minister’s Department, and I do not know whether the SI has been delayed because of issues with setting up the new UK IFRS endorsement board within the Financial Reporting Council, but given that the explanatory memorandum refers to the SI being laid before the House last month, it would be helpful to know when it will be in place. In the SI that we are debating, reference is made to UK-adopted international accounting standards, so presumably amendments will need to be made to change the language once the BEIS SI has been laid before the House.

Finally, I am pleased that the Minister made it clear that the future elements of the prospectus regulation that have not yet been enacted will be covered by the in-flight files Bill; that was not stated in the explanatory memorandum. I wonder about the extent to which that coheres with the approach taken to benchmarks. This morning it was stated that although all the provisions for benchmarks had not yet commenced, the SI assumed that they would be complied with, whereas with the SI that we are debating it is suggested that additional legislation will be necessary. That is presumably because more substantive changes will come in under these regulations, but clarification would be helpful.

--- Later in debate ---

[Anneliese Dodds]

I am grateful to the Minister for those clarifications. To be absolutely clear, the equivalence gap that I was concerned about was not about EU IFRS and whether they are equivalent to UK rules. It was about non-EEA countries’ accounting rules and the process by which the FCA deems them to be equivalent. That process does not seem to be set out clearly in the SI. I am concerned that it could take the FCA some time to assess that equivalence, and that within that time costs could be imposed on business. Sorry; I obviously did not express that point sufficiently clearly.

[John Glen]

I think the hon. Lady probably did express the point clearly, and I did not absorb it properly. The challenge is to make the distinction between third countries and public bodies.

[Anneliese Dodds]

That is another one.

[John Glen]

To be honest, I think the best thing is to write to the hon. Lady and set out my response clearly for the record, and also to make it available to the Committee.

The hon. Lady asked what we are doing in the SIs within the remit of section 8 powers on deficiency fixing, and I can say a little more about that. The 2018 Act, which gives Ministers the power to lay the SIs before the House, was debated thoroughly, and it represents the considered view of Parliament as we prepare to leave the EU. The section 8 powers were the subject of particular scrutiny and debate, and we spent approximately 12 hours in Committee debating the clause that grants them. What constitutes a deficiency in retained EU law is clearly defined in section 8 of the Act, and the Treasury is clear that the relevant SIs fall within the scope of that power. I do not think that the scrutiny that has taken place so far would have allowed us to reach this point, if that had not been the case.

On the question of whether the FCA has the resources to carry out the extra functions, we are absolutely clear that it does. It has had the additional resource of 130 full-time equivalents over the past year. Its business plan for 2019-20 will give more detail on that, but it has the discretion to raise more from a levy should that be needed. I accept that £16 million has been diverted to Brexit-related SIs, but I contend that that work is wholly necessary to prepare for the unwelcome outcome of a no-deal scenario without an implementation period.

The hon. Lady asked for an explanation regarding the FCA’s sub-delegation powers to legislate. Regulation 72 provides the FCA with the powers to make technical standards for the purposes specified in part 3 of schedule 2 to the SI. Currently, the European Securities and Markets Authority exercises those powers. As the powers relate to technical standards currently made by ESMA, it was considered appropriate to delegate them to the FCA rather than to the Treasury. Again, that is consistent with the financial services legislation domesticated under the 2018 Act.

The hon. Lady also drew attention to the in-flight files Bill. The challenge is that in a no-deal situation without an implementation period, a whole body of work is ongoing, some of which we have been very involved in, as a country within the EU, and some of which we absolutely desire to happen but will not land fully until after exit day. It would be possible to adopt the four files at the start of the in-flight files Bill, as per the terms that we discussed on Second Reading, only if we fixed the deficiencies in the language. They would essentially mark the next iteration of an evolution in the regulations on prospectus. In the same way, the general review that would cover the benchmarks we discussed this morning would have to be in the schedule of files. Those would not be the four that are nearly done, so we would have to make a judgment subsequently.

If I may, I will conclude the discussion. I will examine the record, and if there are any outstanding points, I will write to the hon. Lady and make my response available to the Committee. The Government contend that the SI is needed to ensure that the UK has an effective prospectus regime, listing regime and transparency framework. We seek to do that within the letter of the law. If the UK leaves the EU without a deal or an implementation period, we must ensure that we have made the appropriate provisions for the legislation to function. I hope that the Committee has found the sitting informative and will join me in supporting the regulations.

Question put.