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

Lord Mackay of Clashfern Excerpts

Monday 18th February 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I have a really serious question that I want to put to the Minister. I am concerned that one of the effects of this SI—I am not going to oppose it because I think that we have no choice but to allow it through—is to separate ESMA from the UK regulators of benchmarks administered in the UK. In this House and elsewhere, and I am sure that I have said it myself, we frequently talk about the excellence of UK regulators, but I am afraid that the history of the UK regulation of benchmarks is one where we frankly have to hang our heads in shame. The Libor scandal, which was finally exposed six or seven years ago, had clearly been a scandal in play for at least a decade. It represented a prolonged period in which Libor particularly, but other benchmarks as well, was being manipulated by the banks to achieve particular outcomes.

The regulator did not identify the problem and, when the regulators decided that they must act after much of this was exposed—primarily by US regulators and in the US media—found that at the time it was not even illegal to manipulate a benchmark in the UK. Consequently, the regulators were pretty powerless. I think that a couple of people have been brought to account, but very few of those who were engaged in or knew about this process—and certainly not the raft of senior management that benefited from the exceptional profits that led to higher pay for chief executives and others, year after year. It was a huge scandal.

Immediately after the scandal was exposed, the United States took the view that the UK regulators were so weak and so essentially complicit in this area that the US itself, particular for any dollar-denominated transactions, should become the locus of benchmarks. Obviously the UK fought back, because it is an iconic role seen as significant to underpinning the UK’s status as a global player in financial services. While I do not know many of the details, I believe that the link to ESMA—the reassurance that there is more than one set of regulator eyes covering the way in which benchmarks have been administrated—has been important in keeping the primary benchmarks in play in London.

I understand that the role of this SI is to say that benchmarks administered in the EU can still be used in the UK—that is almost the sole purpose. But, as I say, I am concerned that the future standing of the UK as the locus of most of the benchmarks used across the globe in nearly every transaction, no matter where that transaction takes place, is potentially undermined by the kind of separation that the Minister has just described. Is he aware of any aggressive moves by the United States to say that the situation is changing? We now have the UK regulator standing alone once again. We certainly hear from the UK a great deal of language about how regulation needs to become lighter touch and should not be so heavy-handed, and how we should be much more inclined to allow greater risk taking and greater profit taking. Will this become the occasion where the United States acts to use its weight, its authority and its legislative force to try to undermine London as a locus? Should there be something in the whole language that surrounds this of an ongoing co-operation and element of supervision that continues to involve ESMA to provide a defence for London in this arena?

[Lord Mackay of Clashfern (Con)]

My Lords, I have a great respect for the noble Lord, Lord Adonis, as I heard him many times answering questions as a Minister. The answers were always clear and a full answer to what he was asked. I also remember his difficult time as a Minister of State in the Department for Education, struggling with the impediments being placed to the implementation of his policy by judicial reviews, which he described in one of his books. But I have listened to a good number of these debates we have been having recently, and I regret to say that I cannot agree with the way in which he approaches this matter. I think that this is all part of the decision to leave the EU that the electorate took, advising Parliament that they wished that to happen.

Industry generally, and the financial industry in particular, is well aware of the situations that may arise as a result of that. Therefore, I would expect representatives to get in touch with the Treasury, for example, if they had any concerns in relation to these instruments. I wonder whether the noble Lord, Lord Adonis, has had any communication from any financial services people as to whether or not they would like him to succeed in his amendment to decline to approve these regulations.

--- Later in debate ---

[Lord Adonis]

My Lords, I shall not press the amendment. I am extremely grateful to, and flattered by, the compliment paid by the noble and learned Lord, Lord Mackay. He said that he does not understand my opposition to these regulations, but he will appreciate that there is no way in which I could conceive of being a Minister proposing to put arrangements in place for a no-deal Brexit. I would regard that as a fundamental betrayal of the national interest. Therefore, if he accepts as a premise that the whole activity that the state is engaged in at the moment is, in my view, fundamentally illegitimate, he might accept that the course that I am pursuing is at least logical.

[Lord Mackay of Clashfern]

Perhaps I should respond by saying that I did understand that. Fundamentally, the noble Lord, Lord Adonis, believes that his wisdom is superior to that of the 17 million who voted the other way.

[Lord Adonis]

And I am very anxious that they should have an opportunity to cast their vote on the deal which they can now see but which they did not know about three years ago because it did not exist. I am fairly confident that if the electorate of this country had any idea that three years ago they might have been putting in place arrangements for a no-deal Brexit, they would not have gone anywhere remotely close to the situation that we have today. However, on that note, I beg leave to withdraw.