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

John Glen Excerpts

Wednesday 23rd January 2019 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.

[The Chair]

With this it will be convenient to consider the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.

[John Glen]

It is a pleasure to serve under your chairmanship again, Mr Davies. The Treasury has been preparing extensively for a range of outcomes in the context of the UK’s withdrawal from the EU, including a no-deal scenario. The draft regulations form part of the necessary work to ensure that there will continue to be a functioning regulatory and legislative regime for financial services if the UK leaves the EU with no deal and no implementation period.

[Sir Greg Knight (East Yorkshire) (Con)]

Although explanatory memorandums are not technically part of regulations, it is important that they be accurate and up to date in all respects. Will the Minister confirm that that is the case? In particular, will he confirm that the first sentence of paragraph 7.1 of both memorandums is still Government policy? It states:

“The UK will leave the EU on 29 March 2019.”

[John Glen]

I am happy to confirm that point—I wondered what my right hon. Friend was going to come out with.

As part of the programme that I have set out, the draft regulations will address legal deficiencies in retained EU legislation relating to market abuse and credit rating agencies. They are important for regulating market conduct practices and safeguarding market integrity. Their approach aligns with that of other legislation laid before Parliament under the European Union (Withdrawal) Act 2018, providing continuity by maintaining existing legislation at the point of exit, but amending deficiencies where necessary and introducing transitional provisions to ensure that they work as effectively as possible in a no-deal context. I shall first outline the 2018 draft regulations and then turn to the 2019 draft regulations.

Market abuse can involve a range of illegal practices relating to financial markets, including unlawful disclosure of inside information, insider dealing and market manipulation. MAR—the EU market abuse regulation, which came into effect in 2016—prohibits market abuse practices, thereby increasing market integrity and investor protection and enhancing the attractiveness of the EU securities markets for capital raising. It gives EU regulators powers and responsibilities to prevent and detect market abuse; the Financial Conduct Authority is the regulator that currently enforces it in the UK. MAR applies to financial instruments traded on EU trading venues, as well as market abuse that concerns such instruments anywhere in the world.

The 2018 draft regulations will make amendments to MAR and related legislation to ensure that the UK continues to have an effective regime to regulate market abuse once it leaves the EU. In line with our general approach of onshoring EU legislation by transferring powers and functions in the remit of EU authorities to the appropriate UK institutions, they will transfer powers from the European Commission to the Treasury, including the ability to make delegated Acts related to market abuse, and from the European Securities and Markets Authority to the FCA, enabling the FCA to make binding technical standards.

The FCA has consulted on its proposed changes to its binding technical standards, and it will continue to enforce the market abuse regime in line with its current role as part of the EU framework. That approach reflects the FCA’s extensive experience, expertise and capability to continue in that function post exit. I remind the Committee that it has 158 full-time employees working on Brexit—an increase from 28 in March 2018—and that in a few months it will publish its plans for the year 2019-20.

Furthermore, the statutory instrument retains the existing scope of MAR, so that it continues to apply to financial instruments traded on both UK and EU trading venues, as well as to conduct anywhere in the world that concerns these instruments. That means that the FCA will continue to be able to investigate, prohibit and pursue cases of market abuse related to financial instruments that affect UK markets, as far as is possible in a no-deal scenario. The scope has been limited to the UK and EU, and is not worldwide, given that markets in both jurisdictions are highly integrated due to the current arrangements.

The SI also retains exemptions in MAR—and amends the scope of the exemptions to UK-only—that relate to certain trading activities that cannot be enforced against the regulation[Official Report, 5 February 2019, Vol. 654, c. 1MC.] They include exemptions on monetary and public debt management activities, buy-backs and stabilisation, and accepted market practices. Power will be conferred on the Treasury to extend the exemptions related to monetary and public debt management activities. That power is currently held by the Commission.

In addition, the SI retains references to emission allowances. That will allow UK firms to continue to participate in secondary market trading under the emissions trading scheme, despite the UK leaving it, and will enable the FCA to continue to monitor and enforce against UK-registered emission allowance market participants.

Additionally, the SI removes co-operation requirements between the UK and EU counterparts. The UK will no longer be obliged to share information related to market abuse with the EU, given that there would be no guarantee of reciprocity. However, the FCA will still be able to respond to information requests from third-country regulators; indeed the existing domestic framework for co-operation on information sharing with countries outside the UK already allows for that on a discretionary basis.

Finally, the SI will make further amendments to retained EU and UK legislation, including EU legislation that amends MAR, to ensure that it is operable in a UK-only scenario; to the Criminal Justice Act 1993 to remove references to directly applicable EU regulation; and to the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 to ensure that the UK’s market abuse regime works effectively once the UK leaves the EU.

[Mr Ranil Jayawardena (North East Hampshire) (Con)]

Will the Minister make it his business to ensure that credit rating agencies share information appropriately not only with each other and with regulators, as necessary, but with consumers? Too often, they are inaccessible to consumers, and consumers cannot even write to them to have the appropriate information registered with them. Will he make it his business to sort that out or to impart that to the FCA?

[John Glen]

That probably merits a further meeting.

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On resuming—

[John Glen]

To pick up from where I left off, the best solution would be for my hon. Friend the Member for North East Hampshire to write to me about his specific concern. I will look into it thoroughly and get back to him as quickly as possible.

Let me turn to the 2019 draft regulations. A credit rating is used to assess the creditworthiness of an entity or financial instrument for regulatory purposes. CRAR, the credit rating agencies regulation, was introduced after the financial crisis in 2009 to ensure that EU bodies—in this case ESMA—could supervise credit rating agencies in a suitable way. The draft regulations will amend CRAR and related legislation to ensure that the UK continues to have an effective framework to regulate credit rating agencies once we have left the EU.

First, the draft regulations will transfer supervisory and enforcement powers from ESMA to the FCA to ensure that the FCA can effectively supervise credit rating agencies and enforce the new UK regime, as well as becoming responsible for the regulatory functions relating to the endorsement process. I should note that this provision was drawn to the special attention of the House of Lords in the 9 January report of Sub-Committee A of the Secondary Legislation Scrutiny Committee. It is a sensible provision, given the FCA’s role in regulating the operation of markets and safeguarding market integrity; it will enable the FCA to assess whether a third country’s regulatory and legal framework is as stringent as the UK’s, thereby enabling credit rating agencies in the third country that are affiliated with a UK-based credit rating agency to endorse ratings into the UK for regulatory use.

Secondly, the SI will transfer equivalence powers from the European Commission to the Treasury, which will enable the Treasury to determine whether a third-country regime is sufficiently aligned in its regulatory outcomes to be declared equivalent and allow for the clarification process, allowing unaffiliated CRAs in third countries to issue ratings in the EU for regulatory purposes. That is consistent with the transfer of equivalence powers across other areas of retained EU law in SIs that have already been debated in this Committee.

Thirdly, the SI will enable credit ratings to be used in the UK for regulatory purposes, should those ratings be issued by a CRA established in the UK with an FCA registration. The instrument will also allow for a transitional period of one year to enable credit ratings issued prior to exit day by EU firms that register or apply for registration with the FCA to be used for regulatory purposes in the UK. Furthermore, the SI sets out that firms are required to establish a legal entity in the UK to register with the FCA.

There are three types of registration regimes that will smooth the transition from ESMA registration to FCA registration: the conversion regime, which will enable UK-established CRAs to notify the FCA of their intention to convert their ESMA registration; a temporary registration regime, which will allow newly established legal entities in the UK to operate in the UK if they are part of a group of CRAs with ESMA registration; and an automatic certification process, which will allow certified CRAs established outside the EU to notify the FCA of their intention to extend certification to the UK. As part of the additional powers granted to it, the FCA will receive pre-exit powers to begin the preparatory work for registering CRAs before exit day.

Additionally, references to EU institutions in relation to appeal rights will be replaced with appropriate UK bodies. Given the new enforcement powers given to the FCA, where its warning and decision notice will apply to CRAs, a right to appeal such actions has also been provided. The relevant UK body will be the upper tribunal.

Finally, further amendments to UK legislation are made. The Financial Services and Markets Act 2000 is amended to enable the FCA to charge fees in relation to its new supervisory functions in respect of CRAs, as well as ensuring that the FCA is exempt from liability for damages relating to its new supervisory functions.

The Treasury has been working closely with the FCA and the Bank of England and engaging with industry bodies on both instruments. They have both been published in draft form, accompanied by an explanatory policy note, to maximise transparency to Parliament, industry and the public before being laid before Parliament.

In summary, the Government believe that these SIs are necessary to ensure that the regulatory regimes relating to market abuse and credit rating agencies work effectively if the UK leaves the EU without a deal or an implementation period. I hope colleagues will be able to join me in supporting the regulations, and I commend them to the Committee.

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[John Glen]

I am extremely grateful for the comments from the hon. Members for Oxford East and for Linlithgow and East Falkirk. I shall try to respond to the points raised in detail.

The hon. Member for Oxford East raised five substantive points on the credit rating agencies. The first referred to the impact assessments, whose importance I recognise. I will not go over the full discussion that we had in Committee yesterday, but for the benefit of this Committee, I confirm that I will make the assessments available as soon as possible. I am in discussions with the Regulatory Policy Committee to get the impact assessments completed to its satisfaction. It quite rightly has exacting standards, with which I am keen to fully comply. I can commit to publishing the impact assessments when they are ready; I hope that will be next week, in time for the SI we have scheduled for next Wednesday. That is my expectation at this point.

The hon. Lady also mentioned FCA resources—I will not repeat the numbers that I gave earlier—and said that the powers in certain areas appear to go beyond ESMA’s powers. Why has that been deemed necessary? The FCA has powers deemed necessary for a wide range of firms. It is appropriate that those powers are consistent and that the FCA exercises them in accordance with its statutory objectives. The obligations on CRAs under the UK regime will remain aligned with those in the EU.

A point was also raised about fees. Andrew Bailey, the chief executive of the FCA, has said that he expects to hold FCA fees steady for a year or two, assuming an implementation period. Obviously, if it were necessary to increase those resources in a no-deal situation, that cost would have to be borne. That is why the Government’s position is that we are seeking to secure a deal. This whole programme of SIs—all 53 of them for financial services—is a precautionary measure.

The hon. Lady raised the issue of co-operation arrangements between the UK and the EU post-exit. After exiting the EU, the UK will no longer be obliged to undertake co-operation and information sharing with EU authorities. We will remove that legal obligation but UK authorities will continue to establish ambitious co-operation arrangements with our EU counterparts. The hon. Lady’s deep expertise in this area is testimony that we in the UK have led much of the sharpening of the regulations within the EU.

The FCA will look to put in place alternative arrangements for co-operation and information sharing with ESMA and EU regulators. The FCA and ESMA have publicly stated their ambition to agree a memorandum of understanding in relation to CRAs. That is what we anticipate and it is confirmed in ESMA’s statement of 9 November 2018.

The hon. Lady also raised an issue around the relationship to the 2009 regulations of the FCA. It would be appropriate for me to reflect and write to her with more detail. I emphasise that the point of these SIs is to hold regulations steady before and after exit in the circumstances of no deal. I make the general point that if we have no deal, the obligation on the Government to come forward with a whole range of additional regulation in financial services would be immediate and significant. Clearly, what we are doing here is transferring the appropriate powers for continuity at the point of exit. We are not saying that that will be the final state.

The hon. Lady raised two significant points with respect to the market abuse statutory instrument. On the point about the co-operation requirements being removed, I do not need to say more than I have already. The aspiration to have an ongoing, positive dynamic is there but, of course, in an unplanned no-deal scenario, we cannot anticipate the degree of co-operation. We would seek to be proactive in driving that and there is obviously a desire from market actors for us to achieve that. Changes made by the SI, and existing gateways for the FCA sharing confidential information, will enable the FCA to continue to co-operate and share information with ESMA and EU regulators, where we choose to do so.

The hon. Lady wanted to know whether UK authorities will build co-operation arrangements for their UK counterparts. I think I have covered that. Memorandums of understanding are being negotiated between regulators and we hope to reach an understanding on those before the end of March. We cannot do that unilaterally, but progress is being made.

What is the impact on EU issuers? There will be a change for EU issuers with financial instruments admitted to trade or trading on UK trading venues. UK MAR requires EU issuers with financial instruments admitted to trading or traded on UK trading venues to provide such notifications and reports to the FCA. That will mean that EU issuers with financial instruments admitted to trading or traded on UK trading venues will need to send reports to the FCA and their home regulator.

The hon. Lady has deep knowledge of this subject and has set out the considerable burden that that would place on the FCA. As I say, that is unavoidable at this stage, but obviously we would need to do some more work following exit in this no-deal scenario. I am grateful for the comments of the hon. Member for Linlithgow and East Falkirk, and I reiterate that the Government’s objective is to secure a deal, but, in the absence of that, this is none the less a comprehensive piece of work. We are working hard to secure the impact assessments and a fully functioning regulatory regime in the instance of no deal, which I and the Government believe to be wholly undesirable.

I hope that that adequately responds to the questions on both those statutory instruments. I think I have demonstrated that there is a need for these provisions to be made and passed by this Committee. I acknowledge the enduring concern about impact assessments; I accept that we are not in the optimal place, and I can only say that I am doing all I can to meet the appropriately exacting requirements of the RPC. I can do no more at this stage. I ask for the Committee’s support for these regulations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.

Draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019

Motion made, and Question put,

That the Committee has considered the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.—(John Glen.)