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Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012

Volume 739: debated on Tuesday 17 July 2012

Considered in Grand Committee

Moved by

That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012.

Relevant document: 4th Report from the Joint Committee on Statutory Instruments.

My Lords, these regulations were laid before the House on 14 June and implement changes to legislation, now required under EU law, to ensure that UK financial services and commodity trading firms are able to bid in auctions of emissions allowances in the UK and across Europe. It is important that the UK allows these firms to bid in auctions of emissions allowances to maintain London’s position at the heart of the carbon market, of which it currently enjoys an 80% global share.

The EU Emissions Trading Scheme was the world’s first and largest international scheme for the trading of greenhouse gas emissions and is at the heart of the UK Government’s policy to tackle climate change cost-effectively. It is estimated that the EU Emissions Trading Scheme will deliver emissions reductions of 3,100 metric tonnes of CO2, relative to 2005 levels, between 2013 and 2020. Across the EU, it is predicted to deliver emissions savings of 21% below 2005’s verified emissions by 2020. There will also be a dramatic rise in the level of auctioning. This is in line with the market-based approach of the scheme and best ensures the efficiency of the system.

As the system moves to a greater level of auctioning, it is important to ensure confidence and integrity in it and in the way that auctions are run, so the EU regulatory framework for auctions has been strengthened and introduces common EU standards for regulating certain bidders in the auctioning of emissions allowances. It is up to each member state to implement this framework in accordance with its own national laws. This includes requiring certain bidders in the auctions to be authorised by national authorities: for the UK, that is the Financial Services Authority. To minimise administrative burdens, these regulations apply only to banks, investment banks and credit institutions when wishing to bid in auctions on behalf of others, and to commodity traders when bidding in their own right or on behalf of others. Under the EU rules, eligible participants in the EU ETS will be able to bid directly, subject to meeting certain admission requirements, without FSA authorisation. However, it is likely that financial institutions will provide an important means for operators to enter the market where direct bidding is not practical or desirable.

Implementing these changes will result in the Financial Services Authority gaining powers to authorise those financial services to bid in auctions of emissions allowances across Europe. To achieve this, the regulations amend secondary legislation relating to FiSMA, the Financial Services and Markets Act, and make minor amendments to the Act itself. Minor amendments to domestic anti- money laundering legislation are also required. We have considered the impacts of these regulations on business and have minimised costs to UK financial institutions by ensuring that, for such firms, we meet our obligations and no more. We consulted on our approach in the usual way and received no substantive responses. In addition, the regulatory policy committee has scrutinised and approved these changes. The FSA has also consulted on its regulatory approach, including any fees and compliance costs applying to those wishing to bid. Again, it received no substantive responses.

It is important to note that only those financial services firms wishing to bid in auctions of emissions allowances will be subject to these regulations and need to be authorised by the FSA. Firms will therefore seek authorisation to bid only if they consider that it will provide a financial return to them.

It is important that we make these legislative changes now, before the first auctions of phase 3 and aviation emissions allowances begin. The first UK auctions will take place in November this year, subject to EU approval. Germany and the European Commission have also indicated that they will begin auctioning allowances after the summer on their own platforms.

In summary, these legislative changes are required by EU law so that UK-based firms can participate in auctions of emissions allowances across Europe and provide services to others wishing to buy allowances. The changes are necessary to preserve London’s position at the heart of, and leading, the developing carbon market.

My Lords, what a joy it is to discuss with the Minister, after a fairly contentious issue last night—namely, the Government’s Finance Bill—this instrument, a measure that is not only uncontentious but is in fact welcomed by the Opposition. I agree with the rationale that he has given both for the necessity of the measure and the benefits that it will bring regarding access to the auctioning of greenhouse gas emission allowances.

We have one or two questions that I am sure that the Minister will be more than ready to answer. Is he as surprised as I am that, from what one can gather, the consultation, which, admittedly, ran for a very limited period, heard from only one respondent? This must surely be some kind of record. It indicates either that the measure is beyond reproach in every way—the answer that the Minister will certainly favour—or that it presents a limited opportunity. Small and medium-sized enterprises do not appear to think that they have much opportunity under the order. Does he have any comments to make on that?

I would be interested to see just how the Minister evaluates the significance of the measure in the Government’s overall objectives regarding climate change. Not only do we share those objectives but we are keen that the Government continue to sustain the policy to hit the targets that have been established for a considerable time now. I note the urgency of the situation, given that European auctions are taking place in the fairly near future. That is required under EU law and it is only right that the measure is before us. We give it our fullest support.

My Lords, I am grateful to the noble Lord, Lord Davies of Oldham, for making sure that our afternoon is not quite as exciting as the close of business last night. I thank him for his support for the measure, which is, rightly, seen not only as uncontentious but as supportive of this important area of policy development. In response to his question about the consultation, I can tell him that it lasted for eight weeks. I believe the lack of substantive responses is a reflection that this is a very simple measure, which simply extends the requirement of authorisation to firms if they want to continue to operate in the EU auction process as it moves into this new phase 3. I am not at all surprised or in any way concerned by the lack of substantive responses. As the noble Lord says, there was one, but I believe that it was pointing out something in the grammar or the spelling of the rules, which it is important to get right—I know that your Lordships’ are always very keen, as respondents to consultations are, to make sure we get the grammar right.

I do not actually know whether the respondent got it right; all I know is that that was the issue that came up.

On the noble Lord’s point about SMEs, I do not see it in the way that he sees it. Principally, this is a sophisticated market—trading in emissions is not something that the man or woman on the street would do. We are talking about, on the whole, sophisticated commodity trading firms or large financial intermediaries, so the measure is not targeted at SMEs directly. They will be the ultimate users and beneficiaries of the broad emissions system being put in place, but they are not likely to be players. On the other hand, if they want to be players, as the impact assessment set out, the costs of going through the registration authorisation process are not onerous.

On the noble Lord’s last point about how the order fits within the objective of meeting the climate change targets, I confirm what I said in opening. This Government, like the previous Government, are keen to see a market-based solution as far as possible to meeting the targets—the emissions trading system and auctioning very much underpin the market-based approach. In that context, this is a small additional measure to make sure that the auctioning element of this construct is properly regulated. I hope that that answers the noble Lord’s questions.

Motion agreed.