Financial Services (Implementation of Legislation) Bill [HL]

Lord Leigh of Hurley Excerpts

2nd reading (Hansard): House of Lords
Tuesday 4th December 2018 Lords Chamber

[Lord Leigh of Hurley (Con)]

My Lords, I am pleased to speak today on this short, technical, perhaps not that exciting Bill, and thank my noble friend for his briefing earlier. I recognise that some will say that this is a belt-and-braces Bill to cover the very unwelcome possibility that we leave the EU on 29 March with no deal. I say that it is unwelcome not because I think that the UK cannot or will not flourish as an independent nation state outside the EU but because I really do not think that we will be ready at that time. I note that the Government recognise that, in those circumstances, only appropriate legislation will be brought in and then, importantly, it can be adjusted to suit us.

My position in supporting the Government and speaking for their proposals for the deal later this week is set out in an article I have written for today’s City A.M., so I will not bore the House further with my views on it.

I draw your Lordships’ attention to my interests in the register and to an entry which, for good reason, is not in it yet but which I ought to declare. I am, today, the senior partner of Cavendish Corporate Finance LLP, which will merge with finnCap Group PLC tomorrow. All being well, our first day of dealing on the AIM market starts at 7.30 am. So, as deputy chairman of an AIM-listed company, I have a vested interest in the operation of the market and will address some issues which are covered as specified EU financial legislation, which this Bill seeks to bring in on or after exit day.

The stated purpose of the power is,

“ensuring the Government can implement legislation which reflects the interests of the UK market and its participants”.

The House of Lords Delegated Powers and Regulatory Reform Committee criticised the similar powers contained in the European Union (Withdrawal) Act for giving what it called,

“excessively wide law-making powers to ministers”.

However, given the Bill’s stated purpose of ensuring the Government can implement legislation which reflects the interests of the UK market and its participants, it is both necessary and proportionate to allow Ministers to make,

“any adjustments the Treasury consider appropriate”,

so that the Government can make positive improvements to the proposed legislation for the benefit of the UK market and its participants, rather than just correct deficiencies, as the EU withdrawal Act allows.

Regulators and regulation have tended to focus on the largest and most visible markets but should address the whole of the UK financial markets, not just the FTSE 100, many of whose companies are multinational. The major public markets are just the visible tip of the iceberg, part of a broad financial ecosystem which supports the financing of and investment in UK businesses. Government should consider the impact and potential unintended consequences on the broader system before implementing EU legislation.

An important aspect of this broader system is the financing of small and medium enterprises. I am, of course, delighted to see that the Government support the aims of the SME growth market regulation proposals, to support the ability of SMEs to fulfil their financing needs on UK public markets through the reduction of administrative and financial burdens.

In this context, we need to consider the potential negative impact of the central securities depositories regulation, CSDR, and the related delegated cash penalties regulation, DCPR, on the provision of liquidity, which is so important for markets for small and medium enterprises, such as the London Stock Exchange’s AIM market. AIM is by far the most successful SME growth market in Europe. The EU does not have the same sort of experience or success as we do. Part of this success is due to the quote-driven nature of the market, with market-makers committed to providing liquidity at all times during market hours.

However, the CSDR introduces a new settlement discipline regime, under which trades not settled at an agreed time will face daily fines until they are. These fines will pass along the chain of settlement so that only the initial failing part of the settlement chain will pay. This will always be the liquidity providers, which are the market-makers, as they are the only type of participant permitted to sell shares they do not own—known as naked short sell—under the short selling regulation. Liquidity providers are thus fined for providing liquidity in periods when demand outstrips supply: in other words, for performing the specific purpose for which they exist. Penalising formal liquidity providers for not settling trades on time will lead to those very liquidity providers reducing their activities in smaller company securities in order to avoid these additional costs. This will lead to a further reduction in companies’ liquidity, thereby reducing their access to funding on public markets.

In addition, introducing a regulation to impose a fee appears to contradict the stated limitation of the power. The Government have committed to undertake extensive engagement and co-operation with key stakeholders throughout the process. In order to include views relevant to the broader market, this should include bodies representing smaller companies seeking funding for growth, such as the Quoted Companies Alliance, which has been of assistance to me with my remarks, and the ScaleUp Institute.

I hope that we do not need any of these measures, but I am happy to support the Bill in case we do and hope it provides a focus for the Government in their regulation of the SME market.