Considered in Grand Committee
My Lords, I shall speak also to the Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010.
I start by setting out the purpose of the first order. Section 313A of the Financial Services and Markets Act 2000 gives the FSA the power to suspend or remove financial instruments from trading where this is necessary to protect either investors or the orderly functioning of the financial markets. The Act requires the FSA to give written notice both to the issuer of the instrument concerned and to all those who trade in financial instruments—for example, in those particular shares. This is a bureaucratic, burdensome and inefficient procedure, requiring the FSA to write to the increasing number of exchanges, trading platforms and firms that trade with each other over the counter. However, it is important that firms receive timely information of such an announcement to ensure that immediate effect can be given to the suspension of trading.
We propose to simplify the procedure for notifying firms of a trading suspension or of the removal of a financial instrument from trading. These regulations give the FSA the power to announce such a suspension or removal via a regulatory information service, as it already does with other regulatory announcements, and with which firms are very familiar. In practice, such announcements are rapidly disseminated by secondary information providers such as Bloomberg, Thomson Reuters and others.
In the light of this, we are also clarifying the procedure that the FSA must follow to give effect to a suspension or removal from trading. For example, the regulations set out what decisions the FSA may make following a challenge to a suspension or removal from trading imposed on a class of institutions by either affected institutions or the issuer; when the FSA is required to give written notice of its decisions; and when the decisions must be published by means of an RIS.
I make it clear that the FSA is not being given additional powers. The purpose of the regulations is to enable the FSA to use its existing powers more effectively. I ask noble Lords to note also that the coming into force date of this statutory instrument has been corrected from 6 April to 9 April, to take account of the Easter Recess.
It is crucial that the FSA has effective tools to deliver its objectives of ensuring market confidence and consumer protection. This is what the changes to Part 18A of the FSMA provide. I hope that noble Lords will agree that this is an important change.
I now move on to the second order: the Financial Services and Markets Act 2000 (Liability Of Issuers) Regulations 2010. The purpose of the regulations is to extend the current statutory regime for the liability of issuers for misstatements as set out in Section 90A of FSMA. These regulations are the culmination of an extensive period of review and consultation carried out initially by Professor Paul Davies QC, Cassel Professor of Commercial Law at the London School of Economics, and most recently by HM Treasury.
Under the existing statutory regime, issuers of securities traded on regulated markets in the United Kingdom are liable for fraudulent misstatements made to the market in a limited class of publications. These regulations extend that regime to cover both issuers of any securities admitted to trading on a securities market in the UK and issuers for which the UK is the issuer’s home state. Claims for misstatement may be brought not only by buyers of securities but also by sellers and holders of securities where they have acted in reliance on a fraudulent misstatement and suffered loss as a result. The regulations extend the regime to include not just announcements that are required to be made under the transparency directive but all information published by means of a recognised information service and information which has been announced by the issuer as being available by such means. While this brings a much greater number of announcements within the scope of the regime, we feel that there is likely to be little impact on the day-to-day checking process by issuers. Issuers and directors already face significant financial and reputational penalties for misstatements, and issuers are required to have robust disclosure assurance processes.
The regulations also create liability for dishonest delay in publishing information in limited circumstances. The claimant must be able to demonstrate that they have suffered loss in respect of their securities as a result of delay by the issuer in publishing information and that a manager within the issuer acted dishonestly in delaying publication of that information. There will naturally be situations where disclosure of information is delayed for good reason—for example, to check facts before publication. This will not be dishonest behaviour by the issuer and will not give rise to a claim.
The regulations provide that an issuer will not be subject to any form of liability other than liability under the statutory regime or certain specific forms of liability which are listed in the regulations. These include contractual liability and civil liability arising from a person having assumed responsibility to a particular person for a particular purpose for the accuracy or completeness of the information concerned. The latter preserves the existing liability under the common law for negligent misstatement, as decided in Caparo v Dickman and subsequent cases. I should like to make clear that responsibility statements in reports and accounts which companies are required to produce would not, in and of themselves, be regarded as constituting a representation to a particular person for a particular purpose for the accuracy or completeness of the information concerned.
In conclusion, these regulations are the culmination of an extensive period of review and consultation, and the proposals have gathered widespread support from affected parties throughout the process. They provide clarity as to the liability that issuers may have to pay in compensation to claimants who have suffered loss as a result of relying on misstatements or dishonest omissions by the issuer. I therefore hope that noble Lords will agree to the important amendments to the statutory regime provided for by these regulations. I beg to move.
My Lords, I thank the Minister for introducing these two sets of regulations. They are rather different from each other with the only common point being that each is rooted in Financial Services and Markets Act. It might have been more logical if they had been debated separately. The Treasury's capacity for grouping disparate issues never fails to amaze me. But I missed the trick and so we must debate them together.
I shall take the Part 18A regulations first as these are the least controversial and I have no major concerns with them. The regulatory impact assessment says that there will be one Section 313A suspension each year. Will the Minister say how many have actually been made in each year since the FSA opened its doors for business? Linked to that, I note that the annual benefits amount to £10,000 savings for the FSA in each year; that is, each one of these will generate savings of £10,000. That would give a net present value, according to the RIA, of £93,000, which is stated to be over 10 years. I think that that means that the Treasury is using a discount rate of 1 per cent. Will the Minister confirm whether that is the case? If so, why is a 1 per cent discount rate appropriate?
More substantively, there clearly have been costs within the Treasury in consulting on, processing and drafting this instrument, not to mention the opportunity costs of the Minister, the noble Lord, Lord Oakeshott, and myself in preparing for and debating these regulations. Does the Minister really think that a net present value of £93,000 can justify the costs incurred in giving the FSA an easier life? The Minister said that this is an important change. It seems to me rather wasteful. With cost-benefit equations like that in the public sector, it is not surprising that whoever wins the election will find a lot of low-hanging fruit around to reduce the costs of bureaucracy.
I have little to say on the liability of issuers regulations. Perhaps I may be getting demob happy because I think that this is the last time that the Minister and I will be debating statutory instruments this side of the election. The Government have approached this issue carefully, starting with the review carried out by Professor Davies. There was some divergence of views during the consultation, but we agree with the line that the Government have taken. Clearly, one of the most difficult areas was the extraterritorial effect of extending the liability in respect of traded securities from the UK issue, wherever the markets on which they were traded are. We do not disagree with the Government’s approach but if there were to be an area where unintended consequences might occur, this would be my guess.
My question to the Government concerns the formal review of these new provisions. The Explanatory Note says that no formal review is scheduled and that the Government will monitor the impact of the regime. The regulatory impact statement is rather more forthcoming and says that the Government would expect to review the policy within three years. Can the Minister be clear with the Committee about the Government’s intentions here? Does the Minister agree that it would be important for the territorial basis of the regime, if not other areas, such as the safe-harbour wording, to be reviewed and will he commit the Government to doing so after a specified time?
I have one small point relating to the position of investor claims in the event of insolvency. The consultation response notes that there was a difference of view between those who thought that claims should rank alongside other creditors in an insolvency, which is the current position, and those who thought that such claims should be subordinated. The Government said that these regulations should not be held up while that matter was unresolved and I do not dissent from that, but will the Minster give an idea of when this might be resolved or considered further? I am not aware of any general review of insolvency law into which that sort of issue might be fitted. Is there any special purpose consideration being undertaken and, if so, when might that be brought to a conclusion?
My Lords, first, I declare my interest as a director of an investment management firm regulated by the FSA. I was very intrigued by the comments made by the noble Baroness, Lady Noakes, about the opportunity cost of preparing for a debate such as this. I feel my meter now running really fast. I am not sure whether my hourly rate is as high as that of a former leading partner of KPMG, but perhaps I can compare notes with the noble Baroness later.
We do not have serious worries about the first set of regulations, but I, too, would be interested to know how many times this procedure is likely to be invoked. I am having difficulty getting my head round exactly what pieces of paper we are talking about, although I know obviously that we are talking about OTC products. Perhaps I am rather old-fashioned but I would find it helpful to know what instruments the FSA is concerned about. Clearly, there was not a large number of responses to the Treasury consultation. Broadly speaking, we on these Benches do not have serious concerns but we would be interested in receiving a little more explanation.
We strongly support the principle behind the second set of regulations. The report of Professor Davies makes a very good case. Too many issuers have played fast and loose and they should be made to take their responsibilities more seriously in respect of damage or loss suffered as a consequence of giving inaccurate, false or misleading information. My only question is, if it is right to introduce this measure—we believe that it is—why has it taken so long to do it? The consultation closed in October 2008—almost 18 months ago—so why has it taken so long to introduce something which is widely supported and concerns the important issue of consumer and investor protection? But subject to that, we welcome the regulations.
My Lords, I am most grateful for the contributions that have been made to the debate. Both these sets of regulations have been made after comprehensive consultation and careful consideration.
The noble Baroness is correct—this is the last opportunity in this parliamentary Session that she and I will have to discuss statutory instruments. She feared that she may be feeling demob happy, but I feel upcoming withdrawal symptoms at no longer being challenged, as the noble Baroness always does so effectively. She always exhibits her absolute commitment to read every line and subsection of any statutory instrument or piece of legislation that I find myself proposing to the House or Grand Committee. She sets a standard for all to aspire to in the thoroughness with which she does her work on issues which are often very complex and probably quite tedious. However, they are important in the circumstances in which they are activated.
The noble Baroness and the noble Lord, Lord Oakeshott of Seagrove Bay, asked how often these powers have been exercised under FSMA. Section 313 was inserted into FSMA to reflect a requirement arising from the EU’s Markets in Financial Instruments Directive—otherwise known as MiFID. The powers under Section 313A have not yet been used by the FSA to suspend trading of a financial instrument. The powers under subsections (4) to (5) of Section 313C to suspend or remove a financial instrument from trading where that instrument has been suspended or removed from trading in another EEA state are used frequently by the FSA. Under subsections (4) to (5) of Section 313C the FSA is simply acting on notice from other EEA competent authorities.
The FSA has other ways in which it can suspend trading under FSMA. For example, it has the power to suspend the listing of a financial instrument under Section 77 of FSMA, as it did when it suspended Northern Rock and Bradford & Bingley shares in 2008. However, these other various powers are dependent on breaches of listing, prospectus transparency or disclosure rules and apply only to suspension from listing or trading on a regulated market. They do not enable the FSA to suspend trading across the whole market, and trading in the OTC, or over-the-counter, market can continue. Suspending trading across the whole market may be necessary to protect consumers—for example, if the issuer is in severe financial difficulty—or to maintain market integrity if trading has become disorderly. MiFID gives the FSA the power to suspend trading on OTC markets, and therefore it is essential to ensure that the FSA is able to carry out its duties effectively.
Let me be clear: there have been actual occasions during the crisis that have required a trading suspension when the FSA was able only to suspend listing. Suspending OTC trading would not have been practical, as the FSA would have had to serve written notices on the many individual firms trading on the OTC.
Why is that important if the FSA has never used the powers? The FSA is of the view that it is very important to address that defect in the current UK regime—in particular, in the post-MiFID context, where considerable trading now takes place outside the rules of exchanges and multilateral trading facilities. If the FSA can demand a suspension across that entire market quickly, that will give it a more effective tool to manage volatility and market stability concerns. It will also greatly enhance the FSA's ability to protect investors' interests, because investment firms and banks will not be able to trade in financial instruments where trading has been suspended for regulatory reasons.
The Takeover Panel has also expressed concerns about the FSA's inability to halt trading in the OTC markets. The Takeover Panel relies on the FSA to halt trading in the event of problems during merger and acquisition activity. In its view, halting OTC trading is essential to that.
The noble Baroness asked whether the cost/benefit justifies the Part 18 regulations. We are of course required under EU law to ensure that the FSA can exercise the power to suspend shares from trading, so we do not have a choice whether we want to take that power. The discount rate used is apparently in accordance with HM Treasury guidance. I will have to do the maths myself and find out whether the noble Baroness is correct. I look forward to getting a briefing from my officials and will of course share the outcome with both the noble Baroness and the noble Lord, Lord Oakeshott.
The noble Lord, Lord Oakeshott, asked why there was an 18-month delay in issuing the liability consultation. I am advised—and this makes great sense from my experience in the Treasury—that the Treasury has had to prioritise work during the banking crisis. The Treasury is a very lean machine in that respect; it does not carry excess capacity. Clearly, the banking crisis has had to take up a lot of capacity which the Treasury would otherwise have been able to use to focus on other issues.
The noble Baroness also asked whether we will consider the issue of ranking with the Insolvency Service. I can commit that we will do that in due course. I hope in writing to the noble Baroness and the noble Lord to give a little more information or colour to what “in due course” might mean. I can also confirm to the noble Baroness that we will review the proposals within three years and consider the extraterritoriality issue that was raised.
As I said, in order to ensure that the FSA has effective tools to deliver its objectives of market confidence and consumer protection, it is clear that we need to give it the option to give notice of its decisions by using the RIS services. The Part 18A regulations achieve that aim. The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010 provide clarity as to the liability that issuers may have to pay in compensation to claimants who have suffered loss as a result of relying on misstatements or dishonest omissions by the issuer. I regard these as important steps forward, and for my own part I have been happy to devote a few hours to this matter, as I am sure have the noble Baroness and the noble Lord. My own hourly charge rate is rather lower than that of a KPMG partner and certainly a lot lower than that of a former Secretary of State or anyone who offers themselves rather as a taxi offers itself to the public for financial gain.
It is most kind of the noble Lord to say that. One takes any compliment from him with great pleasure because they are so rarely on offer. With that, I commend these regulations to the Committee and I thank noble Lords for their participation in the debate.