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House of Lords Hansard
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Prospectus (Amendment etc.) (EU Exit) Regulations 2019
16 October 2019
Volume 800

Considered in Grand Committee

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That the Grand Committee do consider the Prospectus (Amendment etc.) (EU Exit) Regulations 2019.

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My Lords, the Government have previously made all necessary legislation under the EU withdrawal Act to ensure that, in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the Article 50 process, new EU legislation has become applicable. Under the EU withdrawal Act, this legislation will form part of UK law at exit. Additional deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit.

This instrument amends the EU prospectus regulation and related legislation, including a previous EU exit instrument—the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, or the official listing instrument. That instrument, which was debated back in February, fixed deficiencies in the EU prospectus regime prior to 29 March 2019. However, on 21 July 2019, the new EU prospectus regulation applied in full across the EU, replacing the existing regime.

The EU prospectus regulation contains the standardised rules that govern the format, content, approval and distribution of the prospectus that issuers may need to produce when securities are offered to the public or admitted to trading on a regulated market in an EEA state. Deficiency fixes to the new EU prospectus regulation are necessary to reflect that, after exit, the UK will be outside the EU single market and the EU’s regulatory and supervisory framework for financial services. Where appropriate, the amendments in the instrument follow the same approach as the prior amendments made in the official listing instrument to the UK prospectus regime. Overall, this instrument will ensure that the UK will continue to have an effective prospectus regime after exit.

First, after exit, EEA issuers wishing to access the UK market will be required to have their prospectus, or their registration document, approved directly by the Financial Conduct Authority, as any other third-country issuer would. Currently, an EEA issuer’s prospectus or registration document can be passported for use in the UK once it has been approved by an EEA regulator. To provide continuity, this instrument introduces transitional arrangements that will allow a prospectus approved by an EEA regulator and passported into the UK before exit to continue to be used and to be supplemented with additional information until the end of its normal period of validity.

Similarly, the instrument permits registration documents—the part of the prospectus that contains information on the issuer—that are passported into the UK before exit to continue to be used as a constituent part of a full prospectus in the UK. However, the full prospectus will still require FCA approval after exit. For both a full prospectus and a registration document, the period of validity is usually 12 months after it was originally approved. I should stress that the Government have worked very closely with the FCA in preparing this instrument. The FCA is confident that it has the appropriate level of resource to manage its responsibilities, including the approval of prospectuses as of exit day.

Secondly, the exemption for certain public bodies from the obligation to produce a prospectus under the EU prospectus regulation is maintained but is extended to the same set of public sector bodies of all third parties after exit. This exemption is limited to certain types of securities issued principally by Governments, central banks, local or regional authorities of a third country and public international bodies of which a third country is a member, such as the Nordic Investment Bank. This approach is in line with the approach previously taken in the official listing instrument. Noble Lords will remember that this issue was deliberated during the debate on that instrument in February and, as then, while this is a change from the current limitation to EEA states only, I believe it makes sense to extend this exemption more broadly. This will ensure UK capital markets continue to be attractive to public body issuers, which have historically raised substantial volumes of capital in the UK. We estimate that in 2016 and 2017 at least $84 billion was raised by public bodies making use of this exemption.

It is also important to remember that the EU prospectus regulation is not the only protection in place for those looking to invest in securities. Most significantly, the marketing and promotion of securities will remain subject to the financial promotion restrictions set out in the Financial Services and Markets Act and overseen by the FCA. The EU prospectus regulation allows issuers to incorporate information from certain documents that are available electronically elsewhere by making reference to them in a prospectus. This includes documents approved by the regulator of another EEA state. To provide continuity for market participants, this instrument sets out that information contained in the relevant documents approved by an EEA regulator before exit day can continue to be incorporated by reference in a UK prospectus going forward. However, the FCA will still need to approve any prospectus that incorporates information in this way before it can be used in the UK.

Lastly, this instrument ensures that matters in relation to the UK prospectus regime and transparency framework will continue to apply to Gibraltar, as they did prior to the UK’s departure from the EU. This is in line with the approach taken in other EU exit instruments.

As with all our EU exit legislation on financial services, the usual consultation process has not been used. It would have been unfeasible in the time available to prepare for exit. Nevertheless, the Treasury has engaged extensively with the financial services industry, particularly through TheCityUK, to develop our exit legislation, including this instrument. TheCityUK was supportive of the approach taken and helped to improve the clarity of the instrument.

Before I conclude, I want to address the procedure under which this instrument has been made. It, along with three other financial services exit instruments, were made and laid before Parliament on 5 September under the made-affirmative procedure provided for in the EU withdrawal Act. As described earlier, this is an urgent procedure which brings an affirmative instrument into law immediately, before Parliament has considered the legislation, but the procedure also requires that Parliament must consider and approve a made-affirmative instrument if it is to remain law. The Government have not used this procedure lightly but, as we draw near to exit day, it is vital that we have critical exit legislation in place. It would have been inappropriate to leave this until the last minute. Industry and our financial regulators want legal certainty on the regime that will apply from exit.

In summary, this Government believe that the proposed legislation is necessary to ensure that the UK’s prospectus regime can continue to function appropriately post-exit if the UK leaves the EU without a deal. I hope that noble Lords will join me in supporting these regulations, which I commend to the Committee.

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My Lords, I thank the Minister for his introduction to the statutory instrument and also for his previous email contacts. As has been said, the delay to Brexit has brought another EU regulation into scope and, given that it is a regulation, it is already directly applicable. As usual I must declare my interests as in the register and especially as a director of the London Stock Exchange. I think that prospectuses are slightly relevant there.

All the usual concerns that have been voiced previously, often by the noble Lord, Lord Tunnicliffe, and my noble friend Lady Kramer, as well as me, about the complexity of following the state of play of our UK legislation apply. In statutory instruments such as this, which is a second round of amendments, they seem to bear more heavily than usual. It is rather unfortunate that the word “regulation” applies at so many different levels. It is easy, even for someone like me, to wonder which regulation it is: is it the EU regulation, is it one of the regulations that we have done for Brexit, or is it an individual regulation within a set of regulations? That is not helpful, but there is not a lot we can do about it, other than choose a new name.

On content I have little to complain about, given that the regulations seem to follow the usual logical pattern, but there are a few things to which it is worth drawing attention. Much as it is probably well known that, in many instances, I have reservations and consider IFRS to be unfit for purpose as applied to company level accounts, for reasons that I have elaborated in detail to the Kingman and Brydon inquiries—they relate to things such as solvency and conforming to company law, so they are quite fundamental—IFRS are nevertheless important at group level and in the context of listing companies from major overseas countries in the UK. So, I am pleased to see that existing equivalence provisions are to be maintained, although not in this instrument.

As I have said before in relation to IFRS, quite a lot of countries have tweaked it, often in ways that perhaps we should have done. Australia and Japan are examples. It is important not to be overly hung up about this UK-endorsed IFRS. That ties in to the debate about what we mean by equivalence. I sweated blood to get the equivalence provisions into most of our legislation, it being something that the UK wanted the EU to have on a global basis. The idea was that it would be a more broad brush thing—that it was outcomes-focused, and did the same thing—rather than the kind of detailed, line-by-line analysis that is how the EU has ended up applying it. Many speeches have been made about this in Europe, by me and others, saying that that was not how it was intended. I feel that we are falling into that trap a little bit ourselves. I can understand how industry wants to say, “If you can point to everything, therefore there must be equivalence”. Of course we know that equivalence is politicised when it comes to the EU. It may not give the UK equivalence on things where we have exactly the same law because it just does not feel like it or it fears that we are going to be Singapore-on-Thames or whatever. I just feel that we are being quite picky in our definitions. This came up, in relation to the Solvency II example in the previous debate, in the context of knowing exactly what we are equivalent to. We are losing the flavour of what equivalence has always meant in the UK context. That is in the box of “There is a debate to be had about equivalence”, which makes clearer to us what we are aiming at. In the context of wishing to maintain a centre for global capital markets, we should have the usual UK outcomes-focused version of equivalence and should not tie ourselves up too tightly.

I have a question of which I gave notice to the Minister. What happens if the FCA spots a flaw in a prospectus that has been passported in in the period where we have left the EU but it can be used? One answer might be that the FCA will not look at it because it has been passported in, so nothing will ever be spotted. These things happen, and while we were in the EU there was always a back route to get some kind of correction made inside the EU through contacting the regulator, through ESMA or however it was going to be done in some informal way. My common sense tells me that if there is some kind of material change that would provoke some kind of supplemental disclosure, but I wonder where in a legal text it says that the FCA could ask for that top-up in that period. When we were in the EU, it would have said, “You are not allowed to do it; it is passported”, but we are in this special hiatus moment, which could last for nigh on a year, in which there might be something.

Other specifics that I noted relate to the annual registration document, the incorporation of information by reference, the Gibraltar provisions and the transfer of functions to the UK. They all seem to be in proper order. They relate to the new regulation and to things that we need to put right. As far as I can tell, they follow the usual logical path.

On the extension of the public body exemptions, we have to face a choice: do we shrink to UK-only, do we extend globally or do we keep it exactly the same in policy terms and make something special for the EEA when it is not necessarily making something special for us? I think that it is the right approach for a global capital market to have the same exemption as is already in the official listing instruments, and that we look globally. I am sure that concerns could be raised that central banks are not all equal everywhere—the noble Lord, Lord Tunnicliffe, and I have had this debate with previous Ministers—but here one is looking at a sophisticated market. Still, it would be nice to know what caveats had been thought of for some of the lesser known public bodies that this might include.

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My Lords, I begin by sharing an area of disagreement between myself and my colleague, despite the fact that she is far more expert in this area than I am. I pick up the issue that she raised at the end of her speech: the extension of the prospectus exemption for public bodies. I would like to hear from the Minister what risks he thinks we are taking on board as a consequence. There is a rationale to allowing the other members of the EU in effect to use our marketplaces without a prospectus: we know them all; we all participated in the same membership structure of the EU; every one of them is a democracy; and their financial services and most of their activities are governed by laws that are either common or very close to ours. So we have a very high level of confidence in the integrity of the bodies involved.

From reading this extension, I need to ask the Minister this. Presumably, as it reads as such, if President Assad of Syria were to decide to use the capital markets to raise some additional funds to prosecute his current war against those whom he considers rebel forces within Syria—he has joined with Kurdish forces—it will not be a problem. They can come to the UK; the law basically says yes. It is the same for a long list of countries including Saudi Arabia and Yemen. It seems a big step to have taken and not one that was extensively discussed in Parliament. I have raised this before, but never had much of an explanation or any analysis of the risks entailed. It is important that the reputation of our capital markets here continues to be protected. I know there are forces who want to see regulatory dilution—which noble Lords often talk about—who have a much more casino attitude towards financing and who love the idea of all the buccaneers being able to come in and use British markets while we make money from them. I raise those issues as they are genuine concerns that need to be addressed.

I want to address a related issue. Look at some of the fintechs. I am thinking particularly of crowdfunders, but this could apply to many others. The dominant crowdfunders across the European Union have typically been UK-based. The big four have been raising money for everything from charities to small businesses—but they are critical to start-ups and small businesses—from investors across the 28 countries of the EU. They are raising money not just from the UK market but from Estonia, France and Germany. That has been crucial to many of our small businesses and start-ups.

I now understand that, with the removal of passporting, the e-commerce directive and now the prospectus directive, they no longer have a mechanism that enables them to raise that funding. If we no longer have in common a single prospectus that operates across the 27, their ability to raise funding across the 27 is reduced to raising money from the one. There are consequences to that, which I wonder whether the Minister might address. I think all the four that I named have now set up an alternate location within the 27, so I suppose we can expect a shift of business out of the UK or a cost from running two operations, one in the UK and one outside. But it will make it difficult for new players in the crowdfunding arena to start up within the UK. It will be far more logical to set up somewhere within the 27 —Berlin being one of the most attractive locations. Those questions have to be addressed.

I want to pick the Minister up on equivalence. He made the point—which I think is right and fully accept—that the purpose of most of these SIs is to make sure that, at the nanosecond we leave, nothing has changed in the rules and regulations that people follow. I understand that but, initially, these conversations took place in the context of Mrs May’s intentions for a long-term relationship with the EU. It was one where we remained very close to the single market, with only rare circumstances in which there was an overweening reason to diverge. We are now, I understand—the Prime Minister has been very open about this—in the very different situation where divergence is the intent and leaving is in fact seen as an opportunity to break away from being close to the single market. Therefore, suddenly the issues of equivalence become much more difficult and complex. Although there has been fairly limited concern about long-term reciprocity—there are various temporary arrangements that run, typically, for only a matter of months—it is now becoming far more serious. That is why, on this side, we are constantly raising equivalence as an issue. It would be very wrong to assume that it is a given.

Perhaps I may pick up and address in a slightly different way the point that my colleague made. She basically explained how originally equivalence was meant to be much more focused on outcome rather than actual rules, but the EU is a rules-based organisation. It will not change the way that it works just for us. We might say that we are happy to give equivalence where we think there is equivalence in outcome. That is fine but, frankly, most people do not care very much about getting an equivalence decision from the UK. It is a pretty small market. However, we do care about getting equivalence decisions from the EU. The situation is not symmetrical. The EU has the customer base and the cash, and it uses the many instruments that London wishes to provide. Therefore, I point out that a lot of complexity is entangled in all this and, although this matter does not relate narrowly and directly to these SIs—except, for example, as in this one, where the removal of any mutuality in the prospectus directive is an issue—a lot of questions are embedded in all this.

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My Lords, I thank my Liberal Democrat colleagues for ranging in an interesting way over many of the issues relating to SIs in general and to this one in particular. We seem to have converged on one or two of the same ideas. I have of course slavishly worked through the Explanatory Memorandum in an attempt to understand it, and I quite enjoyed this one—you have to have some peculiar tastes to be here—until I got to paragraph 2.14, where a problem was being explained. The paragraph says:

“This decision was made to provide continuity for market participants after the UK leaves the EU and comes into effect on exit day. To maintain this continuity, this Direction will be amended to refer to the EU Prospectus Regulation”.

There is then the astounding sentence:

“This amendment is not contained within this instrument”.

At that point, my ability to read the document failed, because it explained a problem and then said that we are apparently not going to do anything about it. I hope that the Minister can enlighten me on that. Apart from that, I have only a couple of points to make.

To show my naivety, it was not until I got to paragraph 2.18 that I was informed that the prospectuses have three constituent parts—a registration document, a securities note and a prospectus summary—so I am now better informed. However, having explained how things are passported and so on, paragraph 2.20 then says:

“However, a prospectus that contains one of these registration documents will still require FCA approval for the securities note and the prospectus summary”.

I accept that it is my lack of understanding, but I cannot for the life of me see why one of the three is treated in one way but the other two are treated differently, so I would value an explanation.

We have all alighted on the same issue set out in paragraph 2.26: the exemption for public bodies being extended, apparently, to public bodies of the whole world—not “apparently”; that is what it actually says. At first I thought that this exemption must be discretionary, because there must be some public bodies where you would want a pretty solid prospectus. This would seem to allow some small town in Zambia or Zimbabwe to benefit from this exemption, so I would be very grateful if the Minister could spell out what the safeguards are for this, because it could lead to quite serious risks if there are not appropriate ones.

I have a final word for this process. I hope that this is the last Treasury no-deal SI. I would be really happy to see some nods from officials—I see none of them moved. I assume it is, at least. It seems that while they are all terribly complex, they all boil down to two ideas. The first is what I would loosely call “competence transfer”. Over and again, we were told which body does it now and which body will do it in the future. There is loads of cross-referencing to make things work; if you slung hard enough, you could see how it worked.

The other thing that is consistent through many of the SIs is the creation of a transition arrangement, but these transition arrangements are all asymmetric. They allow EU firms to carry on trading in the UK under one set of rules or another, but they do not preserve any rights for UK firms trading in the EU. It is perfectly clear why—we can only influence what we influence—but it is a sorry state of affairs. It points to a future where the UK is a second-class participant in the European financial services industry. Leaving the EU without a deal will have a catastrophic effect on the City of London’s financial sector. It would be an irresponsible act of gross self-harm. We, the Labour Party and the Lib Dems, have slogged our way through 58 SIs and have co-operated in passing them because we accept the fact that, without them, the effect would be even worse, but it is with a heavy heart that we have done so. As we say goodbye to these SIs, I pray that they are never used.

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I thank noble Lords again for an incredibly detailed analysis of a complex but very important SI. I share the small prayer made by the noble Lord, Lord Tunnicliffe, at the end there. I look forward to the end of this debate to find out whether his prayer has been answered in the ongoing negotiations. In the meantime, we will put prayer to one side and focus on trying to secure this SI. I will talk about some of the very detailed things that were raised but also some of the larger things.

On equivalence, I completely understand what the noble Baronesses, Lady Bowles and Lady Kramer, and the noble Lord, Lord Tunnicliffe, are talking about in terms of the ongoing regime. The strategy is very much that, under a no-deal scenario, which would be hugely regrettable and is not government policy, there is the largest amount of alignment possible with the current situation to provide market security and avoid any kind of cliff edge or calamity. That is very much the view supported by regulators, by industry, by government and by our partners in the EU. What kind of regime the City will have after that will be a matter for a debate that will occur here in Parliament, principally. There remains on the statute book a huge amount of protections for the City. They are not addressed in this or any of the other SIs, but I reassure noble Lords that the debate will be lively and will engage everyone involved in the financial services industry. This SI is simply trying to protect the industry in a no-deal scenario. That is its intention; it does not seek to creep further than that.

For those who wish to engage in the technical debate on equivalence, can I share a little advertisement from my Treasury colleagues for an important consultation that they are undertaking? They are issuing a call for evidence on a long-term review of the regulatory framework and the key issues which we will need to consider for a regime which operates outside of the EU. For those who wish to engage in a formal review, this is a wonderful platform and opportunity. We should be very happy and thankful to hear noble Lords’ views on the future of equivalence as part of that process.

I emphasise that it is very much the intention of the Government, in a deal or no-deal scenario, to work closely with EU member states. There is nothing in this SI, or in the strategy that it is part of, that precludes or in any way diminishes the determination of the Government to work with other EU states to have the best possible regulatory framework for the financial services industry.

Moving on to one of the detailed questions raised by the noble Baroness, Lady Bowles, she asked what would happen when there were flaws in a prospectus that has been passported into the UK prior to the UK’s departure, given that the recourse to the original approving regulator would be different or gone. The answer to a seemingly short and straightforward question is a little long; I have two or three of these, for which I apologise, but let me give noble Lords the full answer.

Under the EU prospectus regulation, if a significant new factor, material mistake or material inaccuracy which may impact on the investors’ assessment of the securities being offered arises, the issuer must produce a supplement to the prospectus or the registration document to address this. Currently this supplement must be approved by the relevant EEA regulator. The transitional provisions introduced in this instrument mean that prospectuses passported into the UK prior to exit day will be treated as if they were originally approved by the FCA. However, after exit, this means that the FCA will be required to approve any supplements for prospectuses or registration documents that are passported into the UK prior to the UK’s departure.

I hope that that addresses the question. I am happy to share that document with the noble Baroness if she wishes, as it is quite detailed.

The noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, raised questions about the extension of public body exemptions to all third parties. I will provide a little reassurance on that point. This is absolutely in no way a dramatic loosening of the regulatory regime to allow some kind of Learjet sales bonanza for crackpot securities to bonkers regimes. There is an extremely strong financial promotions regime already on the statute to which all these securities will remain subject, set out in instruments such as the Financial Services and Markets Act, which, as noble Lords will be aware, imposes strong restrictions on the marketing and promotion of securities. This allows existing arrangements with EEA countries to roll over. It is not possible under global trade arrangements to provide favourable treatment for EEA countries over other third-party countries. This is a natural and necessary extension, and it will be held under very close review. We have worked closely with the FCA in drafting this instrument to ensure that investors remain suitably protected. We believe that this approach offers the most appropriate balance.

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Can I just ask a favour of the Minister? It seems that the protection is the prospectus; that is exactly what is being tossed out. Might it be possible to provide us later with a note that directs us to the various protections? That would be helpful.

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I am very happy to provide that, and we will make sure that the noble Baroness is sent that material.

The point I was really trying to make is that the FCA is fully aware of this change in the regime and has put in place the resources necessary to track and review this important development. On the specific case of Syria, which is an extreme example of the natural concern around this point, I assure the noble Lord that these public bodies will not be allowed to be used to break international sanctions or criminal law.

On crowdfunding, the noble Baroness, Lady Kramer, asked about the potential loss of prospectus passporting. I assure her that the loss of prospectus passporting will not prevent any organisations, such as crowdfunding organisations, raising funds in the UK as well as the EU. It is just that any prospectus will need to be approved in the UK by the FSA; that is the principal change.

The noble Lord, Lord Tunnicliffe, asked a couple of short but precise questions for which, I am afraid to say, there are long answers; I will just trot through those. He asked about paragraph 2.14 and the update to the existing equivalence direction. This instrument transfers the power from the European Commission to Her Majesty’s Treasury to make equivalence decisions in respect of the EU prospectus regulation as of exit day. Such determinations are to be made through statutory instruments and are therefore subject to the usual parliamentary scrutiny procedures. If equivalence decisions were laid before Parliament on exit day, there would be a lag between their application in UK legislation and exit day itself. I hope that answers that question.

Secondly, on paragraph 2.20, he asked about the difference between the transitional provisions for registration documents and others introduced by this instrument. I will share with noble Lords a slightly long answer. Under the EU prospectus regulations, there are separate passporting regimes for registration documents and prospectuses. Given this, the instrument introduces separate transitional provisions for registration documents and prospectuses passported into the UK prior to the UK’s departure from the EU. However, the effect of these transitional provisions is almost identical. That is, they provide that documents approved by an EEA regulator and passported into the UK prior to exit will remain valid for use in the UK until the end of their normal period of validity. However, registration documents are valid only as a constituent part of the prospectus. Any prospectus that utilises a passported regulation document in the UK will still require FCA approval. On that note, I think we have drawn to a close on the questions.

Motion agreed.

Committee adjourned at 7.28 pm.