Motion to Approve
That the draft Order laid before the House on 9 February be approved.
My Lords, the order that we are looking at today forms part of the UK’s transposition of the markets in financial instruments directive II. The directive is accompanied by the markets in financial instruments regulation. I will, if I may, refer to these collectively as MiFID II.
Before I turn to the specific changes made by the order, let me start by explaining the important context in which the changes are made. MiFID II is a key part of our post-financial-crisis regulatory reform. Agreed by the EU in 2014, it will have a significant role in strengthening the regulation and transparency of our financial and commodity markets. This means keeping pace with market developments and strengthening the protections available for investors. MiFID II applies from 3 January 2018 and member states are under an obligation to transpose the directive into national law by July 2017. That brings us to why we are here today.
In the UK, we are transposing MiFID II through legislation and regulators’ rules. Last month, we concluded our consultation on the legislative changes needed to do that. This order therefore makes amendments to the regulated activities order, which sets the regulatory perimeter for financial services in the UK, to give effect to MiFID II.
The order makes three key changes. First, it brings the new activities and investments introduced by MiFID II within the regulatory perimeter. This includes, for example, structured deposits which are sold or advised to clients, emissions allowances and organised trading facilities. In accordance with the regulated activities order, this will mean that performing a specified activity in relation to a specified investment is a regulated activity for the purposes of the Financial Services and Markets Act.
Secondly, the order classifies binary options as a type of financial instrument. This means that the regulation of binary options will move from the Gambling Commission, where they are currently regulated as bets, to the Financial Conduct Authority. An example would be betting a sum of money against the FTSE 100 rising by 50 points. This is an important change that will ensure that consumers receive at least equivalent protections to those that exist with similar financial instruments.
Thirdly, the order updates definitions, references and makes a number of minor amendments to allow MiFID II to operate within our domestic legislative framework. I will be happy to answer any questions that your Lordships may have on the detail of the order as far as I am able. I beg to move.
My Lords, I apologise to the Minister for failing to contact her yesterday and give her some indication of one or two of the anxieties that I had about the order, but I am afraid that the disruption that affected the Palace also affected my liaison. Consequently, I was not able to warn her of what is to come. Nevertheless, I am sure she will be able to answer the points I make with great facility, as she usually does, or, if not, perhaps she will write to me in due course on the issues which are not covered.
Of course, we support MiFID II and bringing it into our national law. It entrenches consumer protection. If we learnt one thing from the financial crash of 2008, it was the need to guarantee consumer protection in the most adverse circumstances. MiFID is a European response to that worldwide crisis, which affected our colleagues in Europe as it did us here in Britain. I appreciate the fact that the Minister has brought the instrument forward.
The consultation for the Government’s transposition plans revealed that, along with this order, two further statutory instruments were required in order to deliver MiFID II: the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations and the data reporting services regulations. When can this House expect to scrutinise and debate those instruments? They are a crucial part of the package. As the Minister will appreciate, they have at least an indirect impact on the workings of the instrument in front of us today—I am thinking particularly of the extended regulatory provisions and their subsequent impact on the FCA and PRA. Given this, perhaps it would have been more helpful to debate all three instruments in the round, but we are making progress on this one first.
The public consultation on transposing MiFID closed in June 2015, nearly two years ago. The Economic Secretary to the Treasury, when moving this order in the other place, stated that,
“last month we concluded our consultation on the legislation needed”.—[Official Report, Commons, Second Delegated Legislation Committee, 14/3/17; col. 1.]
What were those discussions, who were they with and why did they last so long? Where are the documents on those proceedings, which, as far as I know, are not available to your Lordships’ House?
We of course support the supervision of binary options being transferred from the Gambling Commission to the Financial Conduct Authority. We agree that they are financial instruments and as such the FCA is clearly better placed to regulate their use. When does the Minister expect the FCA to produce its guidance, particularly about how it intends to protect potentially vulnerable consumers? The Minister will clearly appreciate that consumers need full disclosure about the product they are purchasing and we need the greatest clarity. Related to this, the consultation document says:
“Ahead of the legislation coming into force, the Government will consider whether consequential amendments to the Gambling Act 2005 are necessary in order to support the transfer of the regulation of relevant binary options from the Gambling Commission”.
I was somewhat involved in the Gambling Act. The experience does not rate enormously highly on the list of my joys in speaking in this House and introducing legislation, so I am very glad to see that the Government are taking a very different view in this instance.
The consultation document goes on to say that further consideration will be given to the fee arrangements for firms that hold a Gambling Commission licence and to the implications of these legislative amendments for the relevant tax framework. Again, I do not expect an immediate, full answer today—perhaps I will get one—but I hope we will get an indication as to the progress that is to be made. Can the Minister say where the Government are on these issues, given that they are not included in the order? I am sure that firms will be grateful for clarification as to where they will stand when this legislation comes into force.
I feel particularly guilty about dropping my last question on the Minister at this point, but she has enormous support and great experience and she will handle it readily. I would have given her notice had I not been so disrupted by events yesterday. An issue was raised in the Explanatory Memorandum which accompanies this order. It says:
“The Treasury is working closely with representatives from local government and the FCA in order to mitigate the possible effect on local government’s participation in financial markets”.
Yet we have not been able to find anywhere in the impact assessment or the consultation document what the Government expect those effects to be. Is the Minister in a position to outline the key monetised and non-monetised issues involved in the transposition of MiFID II for local government in this country? What discussions have taken place between local government representatives and the Treasury?
My final point relates to costings. The estimated annual net cost to business has been calculated at £105.2 million, while the impact assessment states that the direct impact on business will be £148.5 million. Can the Minister clarify the disparity between these two figures?
My Lords, I thank the noble Lord for offering to accept a written response to some of his detailed points. We were all disrupted yesterday; it was an extraordinary day. My officials have had a great deal of difficulty advising me because nobody without a parliamentary pass is now allowed into the building. That makes it somewhat difficult for me to answer all his questions. I will do my best and will then follow up, copying the reply to anybody else who has an interest in the issues.
I very much agree with the noble Lord that these changes enhance consumer protection. We have to transpose vital parts of the post-financial crisis legislation into UK law and, indeed, until exit negotiations conclude we have an obligation to do so: we need to move ahead.
The noble Lord asked about the transposition of MiFID II in the round. As he said, in February we concluded our consultation on the legislation needed to transpose the instruments and there will be three statutory instruments. One is the order we are discussing today. As I explained, that applies from 3 January and we are under an obligation to transpose it into law by July, which I understand is very important in terms of people making preparations.
Of the other two statutory instruments, one transposes relevant requirements on the provision of data reporting services and the second transposes a wide range of other MiFID II requirements. For example, in accordance with MiFID II, it creates a position limits regime and imposes obligations on certain persons engaging in algorithmic trading. Regulators have also been consulting on the proposed rules to transpose MiFID II, one or two of which the noble Lord mentioned. I will obviously take away the point he made about consultation and debate on those issues.
I was glad to have the noble Lord’s support on the changes on options and I will look carefully at what he asked about the Gambling Act. However, there is a fair amount of agreement that it is right to bring that into the curtilage of the FCA. I am afraid that I do not have a reply on local government and I will ensure that I respond properly in my forthcoming letter.
It seems to be agreed that these are important reforms to ensure that our financial system is transparent and resilient. This is important to the City of London and other financial service operators right across the UK, which actually provide more employment outside London than in London. The changes form part of the wider regulatory reforms since the financial crisis to ensure the efficient functioning of our financial markets. I hope that we have learnt lessons from the past; this legislation puts those into practice by ensuring that our financial markets are effective and stable. There has been a fair degree of consultation. The noble Lord knows that I always value that, but I will ensure that his specific questions are answered and if necessary, we can have a further word about that.
Let me say how much I appreciate the Minister’s response. She will know that we are enthusiastic about the developments contained in the MiFID position. I was therefore not in any way being critical of the Government, merely seeking to elucidate things further. I am grateful for her response.