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

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

I can accept the need for emergency powers in the event of a chaotic, no-deal Brexit. I can accept trying to work out where they might be—perhaps matching changes that the EU is in the process of making—and I acknowledge that hard work is being done by all. However, I do not accept pretending that transparency measures will be preserved when they will not, and I object to removing waiver use publication and depriving the public of information on market developments without a better explanation.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting the instrument and I thank both noble Baronesses for the variety and depth of their questions. I tried to understand the instrument—I put quite a lot of effort into it—and I thank Treasury staff for helping us to do so. I came across a clear need for the maintenance of MiFID II in our law; I accept entirely the general direction of the instrument towards preserving it. Fortunately, I did not come into contact with the entire 900 pages, which is probably the only reason I can claim for still being sane.

I came across some of the concerns that have been expressed. The most worrying area, at least to me, is the temporary powers that the FCA is to have. Why has the SI not been delayed until we have sight of the FCA’s statement of policy on the use of temporary powers? No matter how expert one may be, we do not have a clear view of what powers we are giving away and what impact that may have. If that is not possible—clearly, that is the Government’s position—surely the statement of policy should be brought before Parliament. Its impact will be as big as that of granting the concept of temporary powers.

Can the Minister assure us that in those four years, the temporary powers will not be used to water down MiFID II? That seems an important step towards transparency in these intricate markets. I can see why the industry would want those watered down. It is crucial that the Government be able to assure us they will resist that, and that the temporary powers will not be used to water it down.

Finally, I would like to come back to the FCA having sufficient resources. In the past, the most detail the Minister has given is to say “it will have sufficient funds because it will be able to pre-set the industry, so funds are not a problem”. The noble Baroness hit the nail on the head: it is not about funds but available pools of talent. In the letter the Minister will undoubtedly write concerning this instrument, could we have some clarity, direct from the FCA, on why—in this very highly paid industry, where there is strong competition for talent—it is so confident it will be able to access the available talent to do the task required for this SI and the others considered today?

[Lord Bates]

My Lords, at this hour a letter is an attractive proposition. I counted some 27 questions, which is a pretty respectable ratio from the three distinguished speakers in this debate. I will try to deal with as many as I can in the time available. Clearly, I will have to read the Official Report with officials to see if there are any points we need to write on; I suspect there will be. Therefore, if we run out of time, I will include other answers in that communication.

The noble Baroness, Lady Bowles, asked why the amended thresholds which appear in Article 5(1)(a) and 5(1)(b) of the Commission of Delegated Regulation 2017/567—thresholds for determining which equity instruments are liquid—have not been changed. However, replacing references to Union data with UK market data in the legislation would change which instruments were classed as being liquid for UK market participants.

On the FCA not having the data, it needs sufficient time to build systems to analyse market data independently from ESMA. It estimates that this will take four years. As noted, the Treasury can end this period earlier if the transparency regime cannot operate earlier. The FCA does not have all the data relating to firms in the UK, as EU firms currently report back to their own competent authority and not to the FCA.

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[Lord Bates]

That is a good one for the letter. We will certainly address that point; it is a legitimate question to ask.

The noble Baroness, Lady Bowles, asked whether the FCA consultation was timed to come out after the debate should have occurred. No, the FCA operates completely independently of the Treasury. She also asked whether we had considered keeping the post-trade transparency even if pre-trade transparency is suspended. Simply replacing references to EU market data with UK market data in the legislation will result in significantly different calculations and thresholds for market participants. The FCA can use the data available to it. The intention is to maintain the outcomes of the transparency regime. Transparency will continue to operate during the temporary period.

The noble Baroness, Lady Drake, said that the instrument should not set bad precedents. It has been drafted in accordance with Section 8 of the EU withdrawal Act, and some policy changes are an unavoidable result of addressing deficiencies. We have sought to maintain the intended policy outcome of the legislation. She asked whether a sudden change in the requirement would be hard for firms to deal with. We have announced plans to grant the regulators temporary powers to phase in new requirements that would apply to firms in a no-deal exit. Those powers must be exercised by the regulators in accordance with their statutory objectives, as set by the FSMA. This is a sensible measure to ensure that firms have the time needed to adjust in an orderly way.

The question about whether the FCA has enough human capital to carry out its functions and responsibilities is interesting, I undertake to feed that point back to it, and it may feel better placed to respond. The FCA has reported to the Treasury that it is confident that it will have sufficient resources to operate the transitional transparency regime, due to the preparations that it is making. As it set out in its 2018-19 business plan, a significant proportion of its resources are already focused on the forthcoming exit.

The noble Baroness, Lady Drake, asked about the Secondary Legislation Scrutiny Committee report saying that the powers could have been made available to the House before the debate. Unfortunately this was not possible because the FCA had given priority to making regulatory rules fit for purpose in a no-deal scenario, to avoid significant disruption of financial markets. It would also be unusual for the FCA policy to be ready prior to the passing of legislation to which it relates. She also asked about the scale of what was covered—

[Lord Tunnicliffe]

In my experience it is not unusual for enabling legislation to be accompanied certainly by draft regulations. Often the House has demanded that, to give it proper comfort that it is right to give those powers.

[Lord Bates]

We are not talking about the secondary legislation; we are talking about the statement—but I take on board the noble Lord’s point.

The noble Baroness, Lady Drake, asked how many firms would be directly impacted by the SI. The answer is approximately 3,300 UK firms and 1,650 EEA firms. The FCA estimates that changes to reporting requirements and IT processes will affect approximately 1,500 branches of EEA firms, and that this will result in a one-off cost to business of £8.75 million.

The noble Baroness, Lady Drake, asked whether the statement would be ready. We have said quite specifically that it will be ready at least four weeks before exit. On views expressed by stakeholders, the Treasury has engaged with a wide range of stakeholders, representing large international firms as well as smaller UK businesses.

The noble Lord, Lord Tunnicliffe, asked whether the SI makes policy changes. The UK is putting in place all necessary legislation via the EU withdrawal Act to ensure that there is a functioning legal regime in the event of a no-deal exit in March 2019. He asked whether the FCA will have adequate resources. I covered that point in response to the noble Baronesses, Lady Bowles and Lady Drake. He also asked about the temporary permissions regime that applies for a limited period and who would decide when it ends. The length of the temporary permissions regime is determined in accordance with the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, made on 6 November.

In a previous debate, the noble Lord, Lord Tunnicliffe, asked why the Treasury is solely responsible for the equivalence decisions, which relates to this debate. Across all financial services statutory instruments, the Commission’s functions are transferred to the Treasury. The transferral of equivalence powers is in keeping with this approach. Equivalence decisions are made by the issue of Treasury regulations. Regulations are issued by statutory instrument and subject to parliamentary scrutiny.

Again in a previous debate, the noble Baroness, Lady Bowles, asked whether the impact assessment is accurate given the cost to firms and how extensive MiFID is. The estimated costs of familiarisation have been calculated using the formula given at the end of the impact assessment and relate only to the cost of reading and understanding the instrument. Of course, affected firms will also need to familiarise themselves with a number of materials that are already published.

The noble Lord, Lord Tunnicliffe, asked a further question about whether temporary powers would water down MiFID II. The temporary powers are included to try to preserve outcomes for transparency. Without these flexibilities there would be a cliff-edge risk as to how the transparency regime operates. It would create uncertainty for firms and business, which we are trying to avoid.

With those responses, and the undertaking to study in detail the Official Report and to write on the specific questions raised, I beg to move.