Market Abuse (Amendment) (EU Exit) Regulations 2018
Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019
Motions to Approve
That the draft Regulations laid before the House on 29 November, 6 December and 13 December 2018 be approved.
Relevant document: 11th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A). Considered in Grand Committee on 23 January
May I just refer back to our previous exchange on this matter? When we last discussed credit rating agencies, I asked what would happen if there was a deal and I got a somewhat amorphous answer. Can the Minister be clearer than he was in his original answer on this point? I have asked this question in every SI debate that I have attended and I have received a slightly different answer from each Minister concerned, so it would be good to know whether the Government have a unified position on this.
Looking at the Explanatory Memorandum, which was discussed in Grand Committee, there is the registration process and the three bullet points. The first two points were that there would be a conversion regime with automatic registration, and that the registration regime would be available to new legal entities. The third, however, which nobody seemed able to understand, was that the automatic certification process would enable certified CRAs established outside the EU to notify the FCA of their intention to extend the certifications to the UK. Like the conversion regime, these notifications must be made before exit day. The Minister’s answer, which I checked again in Hansard, was again a little woolly.
Finally, there is the whole issue of how the law relates to the staff of credit rating agencies. We have improved the control of financial services and banks by having a senior management regime. I understand that that regime does not extend to credit rating agencies. The Minister went on to say that other regulations do, but I believe that those other regulations have the same sort of weak reservations that were there in 2008 and allowed the shambles in the money market. It seems somewhat deficient, because what happened in that period, as we know, and the reason nobody was prosecuted, is that everyone said, “It’s not me, guv”. There was not a clear single point of responsibility for the various exceptions to be made.
I am grateful to the noble Lord, who has maintained his reputation for holding the Government to account on statutory instruments. I understand exactly why he sought to raise these issues. He referred to my comment that we would “switch off” the SIs in the event of a deal. It is a phrase that appears in some of the briefing for Ministers, so I hope it was not the wrong thing to say. To help the noble Lord, I will set out in more detail the process of switching off.
As we set out in the White Paper on the EU withdrawal agreement Bill, that Bill will amend the European Union (Withdrawal) Act 2018 so that the conversion of EU law into retained EU law takes place at the end of the implementation period instead of on exit day. While the UK remains subject to EU law, and before the conversion of EU law into UK retained law, there is no requirement for most instruments relating to our exit from the EU to be enforced. I come to the question the noble Lord asked: the intention, therefore, is that the EU withdrawal agreement Bill will contain provision to delay all relevant SIs—including these—that enter into force on exit day until the end of the implementation period. The Bill will also ensure that Ministers can revoke or amend the SIs as appropriate so that they deal effectively with any deficiencies arising from the end of the implementation period. Some provisions may remain in effect, such as powers that allow us to prepare for the end of the implementation period.
The noble Lord raised two other issues in the Moses Room on 23 January. One question was on the process of CRAs registering before exit day. The CRA SI includes an automatic conversion regime for UK-based CRAs with an existing ESMA registration, and a temporary registration regime, or TRR, for CRAs establishing a new legal entity in the UK. To enter the conversion regime, a CRA will simply need to notify the FCA 20 days prior to exit day. A CRA that meets the criteria will enter the TRR if it has submitted an advanced application that has not yet been determined to the FCA prior to exit day. Basically, these regimes will help to ensure there are no gaps between the UK leaving the EU and UK-based CRAs not being registered with the FCA. The FCA will be provided with powers to start the preparatory work for registering UK CRAs prior to exit day.
The third issue the noble Lord raised is another that he touched on in his intervention in the Moses Room. He asked about the senior management structure of credit rating agencies and whether individuals could be held responsible. As I said then, it is a good question. The senior managers and certification regime does not currently apply to credit rating agencies. One of the reasons is that they do not actually handle customers’ money, which banks and other agencies do. Regulation 22 of the SI applies Section 400 of the FSMA, which provides that if an offence committed was,
“with the consent or connivance of an officer”,
of the body corporate, or due to neglect on its part, the individual as well as the corporate is guilty of an offence.
Part of that answer jarred a little with me then and jars now on repetition—the part that says it is because they do not handle customers’ money. Looking back at the disaster of 2008, one has to recognise that the credit rating agencies were a substantial part of that disaster. The fact they were giving very high ratings to essentially junk stock was one of the issues that compounded the crisis. As a minimum, I would be grateful if the Minister would take this issue back to the Treasury and recognise that it might be an unfortunate hole in the legislation.
I understand why the noble Lord is pressing me on this. As I said, the senior managers and certification regime does not currently apply to credit rating agencies. The noble Lord makes a good point; I hope he is now satisfied with some of the answers I have given. In answer to his last intervention, although the regime does not currently apply to CRAs, we will of course take his suggestion on board and see whether in future that might be amended. I beg to move.
I thank the noble Lord for his courteous replies and his help.