Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

Jonathan Reynolds Excerpts

Monday 17th December 2018 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

Good afternoon, Mr Sharma. As ever, it is a pleasure to see you in the Chair.

Once again, the Minister and I are in Committee to discuss Treasury-related statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. On each of those occasions, my Labour 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 passing through Committee.

The frustration that we will spend time and resources creating a framework that might never be used is a point that has already been made several times in Committee. All of us hope that the draft regulations will never have to be used; no deal would be so seriously detrimental to the UK that it is hard to believe that it is anything more than a threat from the Government to try to force their deal through. However, we must recognise that the instruments passing through the Committee might well not disappear on 29 March 2019. Given the chaotic events of the past few weeks, we simply cannot treat lightly the possibility of no deal.

What we are doing today could therefore end up in real and substantive changes to the statute book, so the measures need proper, in-depth scrutiny. If the Government end up without a deal, we have to bear in the mind the stress that the financial markets would be under. We believe that the draft regulations must be considered through that lens, because they would certainly have to be robust.

Members of the Committee might be aware that this draft statutory instrument was originally scheduled for discussion on 28 November, but that was postponed. That is because the Opposition requested that a full debate take place on the Floor of the House regarding this transposition. As has been mentioned previously in these Committees, we must agree to about 70 Treasury-related SIs to ensure that markets do not grind to a halt in the event of no deal. The secondary legislation process contains, as a democratic backstop—if I dare use the word—the option for a debate on the Floor of the House. In the case of this instrument, we believe that to be essential. I will explain why.

I very much appreciate the efforts that the Minister personally and the civil service have made to brief us on the process, and the information that they have provided to us. Earlier today, in the Treasury, we had a most helpful meeting with the civil service staff working on this, as well with representatives of the Financial Conduct Authority. I understand that they are working extremely hard to draft this legislation in a tight timeframe, and I appreciate them taking the time to engage with us, but my conversation in the Treasury reinforced the enormous magnitude of the issues with which we are dealing in this Committee. We simply must have this debate on the Floor of the House, where Members may contribute and the issues can be discussed in the depth they deserve.

The draft SI is different in size and scope from those that have preceded it. The markets in financial instruments directive, or MiFID, as it is more commonly known, is a sprawling piece of legislation that affects our financial markets, from investment banks to retail investors. Now in its second iteration, named MiFID II, the directive has transformed pre and post-trade efficiency in the UK. It has progressed us towards more transparent markets, enshrined critical investor protection, and taken a tough line on inducements.

For anyone not so familiar with the recent changes, there was significant debate about what constitutes an inducement from a financial adviser to encourage an investor to buy a product or service. That resulted in sweeping changes to historical market practices, such as the bundling of free investor research by sell-side operators into execution relationships. We cannot allow any room for the UK to dial back on those measures, or any other measure that helps to improves the transparency and fairness of financial markets in the UK.

The volume of potential legislative changes from transposing MiFID has necessitated the production of a Keeling schedule, which Her Majesty’s Treasury has stated it will not draw up for any other SI. If the Government are going to the expense and trouble of producing such a schedule, it should form part of a proper process of democratic review that goes beyond the Committee Room. The shadow Leader of the House, my hon. Friend the Member for Walsall South (Valerie Vaz), made that point during business questions last Thursday.

I wonder whether anyone in the room has come across a Keeling schedule before. We have some exceptionally distinguished Members here, but I would not be surprised if the answer were in single figures, because they are not used very often. A Keeling schedule is effectively a track changes on original legislation. It is necessitated by the significant scope of the alterations to the legislation. The last one needed was for the general data protection regulation. I think we can all attest to the sprawling reach of that item, given the effect on our inboxes. Just 18 Keeling schedules have been deposited in the Library since 2002. The Treasury has told us that it will not draw up such a schedule for any other SI, so how can the Government argue that an item demands a Keeling schedule but does not require a debate on the Floor of the House?

The Treasury’s impact assessment of the SI lists the familiarisation cost of it at £9.6 million. That far exceeds the next closest figure, which is for the capital requirements regulations, at £1.7 million. By comparison, the average equivalent cost for the remaining eight SIs for which the Treasury has conducted assessments is significantly lower at just £266,000. The Minister has reassured us on multiple occasions that policy decisions are not being made in the fabric of these instruments, but we must examine closely the implication of what we would be enabling.

The EU approach to drafting regulations, known as the Lamfalussy process, is being imported into UK law. The Treasury will enact the European Commission’s powers, and the FCA will take on the responsibilities of the European Securities and Markets Authority. That has wide-ranging implications for supervision. For example, it has been decided that the European Commission’s function of assessing equivalence would be transferred to the Treasury rather than the FCA, yet historically, equivalence decisions have been made by both parties in different circumstances. That should be properly examined and debated, rather than arbitrarily assigned.

In a letter to my colleague the noble Lord Tunnicliffe after the instrument was debated in the other place last month, Lord Bates explained that the intention is to continue the MiFID pre and post-trade transparency regime in the UK. To achieve that, the FCA will have the power to suspend the obligations for pre and post-trade transparency for a specified non-equity financial instrument or a class of non-equity financial instruments during a transitional period of up to four years beginning from exit day. That sounds to the Opposition like a very slippery slope.

Although the intention is that the balance of powers will be examined in future, we cannot be expected effectively to sign a blank cheque on the UK’s regulatory regime for four years. We understand, as the Minister explained, that the reason behind it is that the FCA will not be ready to operate the required framework of specified thresholds for transparency on day one. However, my hon. Friend the Member for Oxford East (Anneliese Dodds) raised that issue very early on in the process. It is frustrating that we are receiving clarity on it only now.

Equally, it is challenging for the Opposition to assess the transfer of powers to the FCA without an accompanying policy statement. We are told that the policy statement will be made available before exit day, but it is difficult for us comprehensively to assess the implications of the SI without that information. That is before we have even touched on the FCA’s resources to cope with the new regime, a point raised by my hon. Friend the Member for Oldham East and Saddleworth and my right hon. Friend the Member for Tottenham.

There are other issues bound up in the SI that we believe need further debate. Paragraph 7.15 of the explanatory memorandum states that EU trading venues will be denied

“the right to request access to a UK central counterparty (CCP)”

under the temporary permissions regime

“unless an equivalence decision is made by HM Treasury”

for that market segment. A lot of assumptions are bound up in that. It means that the European Commission’s function of assessing equivalence will be transferred to the Treasury, rather than the FCA. Is the Treasury set up to do that? Historically, the FCA has made decisions about equivalent jurisdictions.

Just two weeks ago, in this same Committee Room, the Minister and my hon. Friend the Member for West Ham (Lyn Brown) debated the draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, through which the Bank of England was given powers on equivalence decisions. What governs the decision-making process for restoring those powers to different institutions? A small addendum is included on the future of UCITS—undertakings for the collective investment of transferable securities—funds, which is a significant product segment across the EU with inflows of tens of billions of dollars every month. I know from stakeholders that it suffers particular issues related to temporary permissions regime applications.

For more than a decade, MiFID has acted as the cornerstone of how financial markets operate in the UK. Today, we are proposing hauling that entire operation back into the purview of our own regulators and the Treasury if we end up leaving the EU without a deal. More than any other instrument in this process, this one cannot be subject to a top-level discussion by a small group of Members in Committee. The Government helpfully cleared an easy 90 minutes of time to debate this instrument last week when they pulled the debate on the Brexit agreement. That was our window to discuss things further.

There was ample time for this debate to take place on the Floor of the House this week, too; that would have allowed Members to contribute to the analysis. Any reasonable Government in any other reasonable circumstances would have agreed to that request, but this Government cannot afford to allow any EU-related business on to the Floor of the House of Commons, because they are not sure of their majority, but Governments who do not have a majority in the House of Commons are not Governments at all.

As stated at the outset, a no-deal scenario would be so disastrous for the UK that it is difficult to see it as much more than a negotiating tool, by means of which the Government will try to force Parliament’s hand. We do not want markets to be unprepared, but there must be proper scrutiny on what we decide, with objections recorded and recognised.

The Opposition believe that this instrument must be debated properly on the Floor of the House. That is why we intend to divide the Committee. I urge fellow Members who support real scrutiny and the sovereignty of Parliament to join us in voting against it.