Draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019

Carol Monaghan Excerpts

Tuesday 19th February 2019 General Committees

[Ms Eagle]

In assets, cash, pensions, contracts, swaps and all the things that currently make up our global trade in such issues. As the Minister points out from a sedentary position, many people’s future retirement plans are crucially dependent on getting this right.

These kind of EU regulations came into being in the first place because of the LIBOR scandal and the evidence of significant cheating in creating the prices of these benchmarks for these trades to happen. Until the LIBOR scandal, nobody had really looked at how international benchmarks such as LIBOR were generated. Everybody thought it simply happened according to market mechanisms, and that absolutely nothing nefarious was going on.

However, we then discovered that a great deal of nefariosity—I do not know whether that is a word—was going on, and that people’s rewards for indulging in that nefariosity were colossal. That is why all these regulations had to be immediately generated. That is the first thing. This is about a hugely important area of potential market manipulation and cheating, the risks of which, until we became aware the LIBOR scandal, were tiny and the rewards from which, if one indulged in it and got away with it, were colossal.

We also need to think not only about the individual market manipulation that might happen if we get this wrong, but about financial stability itself. If 2008 taught us anything, it was that these very complex and increasingly complicated global money and asset markets, for which these benchmarks effectively represent what is meant to be a market-generated price, are the weakest and least-regulated points across the world. The regime that is the most hands-off becomes the weakest, and—at the same time, paradoxically—the strongest defence against manipulation and disaster.

We know disasters such as the global financial crash affect real people’s lives across the globe. The draft regulations might look like very dry, boring, technical changes that the Minister has brought before us, but they are actually crucial. They are about real issues of financial stability, potential market manipulation and cheating. If we do not get this right, we will become the weakest link.

It is therefore absolutely and utterly crucial that, if we are to establish this kind of regime, we had better be sure that we are doing it correctly, that we have the time to do it correctly and that we have enough people in the FCA with enough sophistication to do it correctly. I worry about the size of our market—£130 billion in gross value, according to the Minister’s own figures. With the sudden ramping up from a mere 28 employees at the FCA to 158 full-time staff, which the Minister talked about, they are going to have to be some of the most sophisticated people on this earth. I hope he is paying them properly—[Interruption.] Not him personally, but the Government, of whom he is the representative in Committee. They had better be good at their jobs. I want the Minister to reassure us about that.

Is the FCA up to it? I do not mean to be horrible, but the Minister is suddenly giving it a lot of responsibility, with new staff: if we get it wrong and there is regulatory arbitrage to be exploited in the way the system works, we know that it will be. That might include leaving loopholes for huge market manipulation and enrichment at the expense of customers, pensioners and the people who are investing in the instruments, who will be traders. If the Minister does not get it right, the consequences will be huge.

How big is the risk? The impact assessment does not really talk about how big it is or the likely costs of the changes. I congratulate the Minister on being one of the few Ministers who has managed to produce an assessment to put before one of these statutory instrument Committees, which we are attending in great numbers at the moment. Large numbers of his ministerial colleagues have not been able to do that, which is a disgrace. That is the way in which the Government are dealing with the situation we find ourselves in.

The costs that the Minister puts before us are described as “unknown: likely significant” or “significant”. There is an inability to quantify the cost to business and to those who are in the market of the sudden change and the no-deal scenario. At a macro level, it is significant but unknowable, but at a micro level, in annex A, the Treasury has come up with a ridiculous little formula for the familiarisation costs for individual companies—as an ex-Treasury Minister, I am familiar with that kind of thing.

The Treasury has decided that the familiarisation cost of a statutory instrument for one firm is the number of words in the statutory instrument divided by the number of words that one can read in a minute—as if being able to read the statutory instrument means that one automatically understands it. In one of the most complex areas of regulation and statutory authority, that is the best that HMRC can come up with.

By the way, that figure has to be multiplied by one over 60 and by the hourly wage rate, which is £330 for a solicitor or legal executive with more than four years’ experience. What a joke! Is the Minister really suggesting that if one could read the statutory instrument at so many words per minute, one would automatically understand what it meant? I have been in the House for 27 years, and I can read quite a few words a minute, but I must confess that I have never come across a statutory instrument that I can automatically understand just because of that, especially in such a complex area.

[Carol Monaghan (Glasgow North West) (SNP)]

As a qualified maths and physics teacher, I think that the formula is frankly ridiculous. The number of words read per minute is what we could call a variable, because it can vary greatly. We might find plenty of lawyers who, in an attempt to increase their fees, become extremely slow readers.

[Ms Eagle]

I agree, but what worries me more about the formula than the variable that the hon. Lady talks about is the idea that somehow reading equals full comprehension of technical subjects. The Minister ought to go back and have a closer look at that, and the Treasury officials who are accompanying him certainly ought to come up with a more sophisticated formula for trying to see what the costs will be.

To sum up, we do not know what these things will cost. My hon. Friend the Member for Oxford East has posed some very important questions about how all of them mesh together and whether there have actually been changes in definitions—sneaky little changes that have gone beyond what the withdrawal Act allows in terms of just transposing issues from EU law into UK law. We would like to know the answers.

I would also like the Minister to tell us a little about the risks that he thinks this regime poses if the FCA really cannot get through to organising these benchmarks and transposing them in practical terms into UK law in the appropriate time scale, in what is a very changing situation—regulating an industry that we know will exploit every tiny bit of regulatory arbitrage that it can come across for its own profit.