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Market Abuse (Amendment) (EU Exit) Regulations 2018

Volume 795: debated on Wednesday 23 January 2019

Considered in Grand Committee

Moved by

My Lords, as this instrument has been grouped I will speak also to the Credit Rating Agencies (Amendment) (EU Exit) Regulations 2019.

The Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the EU withdrawal Act to deliver this and a number of debates on these SIs have already been undertaken in both Houses. The SIs being debated today are part of this programme.

These SIs will fix deficiencies in UK law relating to market abuse and credit rating agencies to ensure that they continue to operate effectively post exit. Both SIs will be critical to ensure good market conduct practices to protect market integrity. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context.

Market abuse involves numerous illegal practices in relation to financial markets. Such practices include insider dealing, market manipulation and the unlawful disclosure of inside information. In 2016, the EU implemented the Market Abuse Regulation which empowered EU regulators and the Financial Conduct Authority in the UK, to prevent and detect market abuse. MAR aims to increase investor protection and market integrity, thereby enhancing the attractiveness of EU securities markets for capital raising.

The regulation applies to financial instruments traded on EU trading venues and worldwide market abuse that concerns these instruments. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The MAR therefore needs to be updated to reflect this and to ensure that the provisions work properly in a no-deal scenario. These draft regulations will amend the MAR to ensure that the UK sustains an ability to prohibit market abuse and to enforce against it effectively post exit.

Firstly, the EU-wide scope of MAR will be retained by this SI, so it will continue to capture financial instruments traded on both UK and EU trading venues and global conduct that impacts these instruments. A UK and EU scope accounts for the deeply integrated relationship between the financial markets in each jurisdiction due to current arrangements in the EU. This is necessary so that the FCA can continue to investigate, prohibit and pursue cases of market abuse that relate to financial instruments in EU markets that impact on UK markets if EU regulators are unable or unwilling to do so. If this provision were not in place, the FCA would not be able to enforce against market abuse on EU trading venues, and would subsequently not be able to protect the integrity and reputation of UK markets.

The SI retains an aspect of the MAR in references to emission allowances. As a result, UK firms will still be able to partake in secondary market trading under the EU Emissions Trading System even though the UK will leave it. This amendment also provides the FCA with the ability to monitor and enforce against UK-registered emission allowance market participants.

Exemptions in the MAR that relate to certain trading activities which cannot be enforced against the regulation are also retained by this SI and amended to a UK-only scope. These include exemptions on buy-backs and stabilisation, monetary and public debt management activities, and accepted market practices. The SI also transfers the power to extend exemptions relating to monetary and public debt management activities from the Commission to the Treasury. Furthermore, the SI transfers functions and powers from EU institutions to equivalent UK bodies in line with the general approach when onshoring EU legislation. In particular, it transfers powers such as the ability to make binding technical standards from the European Securities and Markets Authority to the FCA, which will continue to enforce the UK’s regime, given its substantial experience and expertise. The FCA has consulted on its proposed alterations to their binding technical standards. Moreover, the SI transfers powers from the European Commission to the Treasury; the Treasury will, for example, be able to make delegated Acts relevant to market abuse.

Moreover, further amendments to retained EU and UK legislation will be made by this SI, such as removing references to applicable EU regulation in the Criminal Justice Act 1993, as well as in the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 and EU amending legislation relating to the MAR so that the UK’s market abuse framework continues to operate efficiently post exit.

Finally, this first SI deletes co-operation obligations between UK and EU authorities. There will no longer be any requirement for UK bodies to share information with the EU, with no guarantee of reciprocity in respect of market abuse, although the FCA will still have the ability to respond to requests for information from overseas regulators and UK authorities will seek to maintain, where possible, current mutually beneficial co-operation arrangements with EU counterparts. Existing UK regimes for information sharing and co-operation with other countries already permits this on a discretionary basis.

I turn now to the credit rating agencies SI. A credit rating is used to assess the creditworthiness of a financial instrument or entity, which is often referred to as regulatory purposes. In 2009, as a result of the financial crisis, the EU introduced the Credit Rating Agencies Regulation, hereafter referred to as CRAR. It provided ESMA with the ability to supervise credit rating agencies, known as CRAs, with the aim of implementing further regulation over the sector.

CRAR and related legislation will be amended by this SI to ensure that the UK continues to have an effective regulatory environment to supervise CRAs once the UK has left the EU. First, the instrument will transfer powers from EU authorities to UK bodies. Powers will be transferred from the Commission to the Treasury so it is able to determine third country regimes as equivalent, consistent with the transfer of powers relating to equivalence in SIs that have previously been debated in your Lordships’ House. This enables the certification process whereby third country CRAs with no affiliation to those based in the UK will be able to issue ratings in the UK for regulatory use. Moreover, ESMA’s power to supervise and undertake enforcement action against CRAs will be transferred to the FCA under the new UK framework. The FCA will also be transferred responsibility for assessing third country jurisdictions relating to the endorsement process, enabling third country CRAs that are affiliated to those based in the UK to endorse ratings into the UK.

I note that this provision was drawn to the special attention of the House by the Secondary Legislation Scrutiny Committee Sub-Committee A in its report published on 9 January. The FCA is the appropriate body to regulate CRAs, given its current regulatory role in market operations and in protecting the integrity of these markets, and it has the necessary resource capacity to effectively carry out its new function.

When my noble friend says that the FCA has the necessary resource capacity, does that mean that it could do it if it had the money and resources to do it—in other words, if it were intellectually able to do it—or does he mean that it already has the financial and staffing capacity to do it?

The FCA has been consulted about these regulations. If there were a no-deal scenario, I am advised that it has the necessary resource capacity to effectively carry out its new function. Perhaps I can deal in more detail with my noble friend’s question now.

As I hope I said, the FCA has dedicated the necessary resources to account for the additional work through its 2018-19 business plan, and it will ensure that its considerable experience and technical expertise in regulating the financial services sector is reflected in its new supervisory role in relation to the CRAs.

I am sorry to trouble my noble friend again but who will pay for this? The resources of the FCA are, to a large extent, raised through various kinds of costings. I declare an interest, as set out in the register, as the chairman of PIMFA. Who will pay this bit of its budget?

My Lords, the chief executive of the FCA, Andrew Bailey, has said that he expects to hold FCA fees steady for a year or so, assuming that there is an implementation period. However, the FCA is able to increase its fees should it need to increase its income in the event of no deal.

As we have got on to the subject of fees, when the credit rating agencies want to get approval from ESMA, they have to pay a fee. Therefore, will we not have a comparable fee or is it just all part of the steady-state budget?

They will continue to have to pay a fee, so to that extent there will be no change, but instead of it going to ESMA, it will go to the FCA.

Furthermore, the SI will require firms to establish a legal entity in the UK to register with the FCA, in accordance with the current policy under CRAR. The SI provides the FCA with pre-exit powers so that it is able to begin registering firms, and the instrument will also establish three regimes to allow for FCA registration to smooth the transition from ESMA supervision to FCA supervision. First, UK-established CRAs will be able to convert their ESMA registration into one with the FCA through the conversion regime. Secondly, newly UK-established legal entities that are part of a group of CRAs that have a registration with ESMA will enter a temporary registration regime if they have submitted an advance application to the FCA which has not yet been processed. Thirdly, certified CRAs established outside the EU will, through the automatic certification process, be able to notify the FCA of their intention to extend certification to the UK.

The SI will also enable credit ratings issued by a CRA established in the UK, with an FCA registration, to be used for regulatory purposes in the UK. The instrument will also enable credit ratings issued before exit day by EU firms that register, or apply for registration, with the FCA to be eligible for regulatory purposes in the UK for up to a year.

In addition, in relation to appeal rights, given the new enforcement rules provided to the FCA, references to EU institutions will be replaced with the appropriate UK bodies. The Upper Tribunal will now be responsible for appeal requests that have been made as a result of an FCA decision, and the FCA’s warning and decision notice will apply to this SI also.

The Treasury has been working closely with the FCA in the drafting of these instruments. Both bodies have continuously engaged with CRAs and taken on board their views where possible when deciding on the direction of the instrument to ensure that the market is informed of its policy intention. The Treasury published the instruments in draft, along with an Explanatory Note for each, to maximise transparency to Parliament, industry and the public ahead of laying.

In summary, we believe that the proposed legislation is necessary to ensure that market abuse is effectively prohibited and credit rating agencies are appropriately supervised, and that the relevant legislation will continue to function appropriately if the UK leaves the EU without a deal or implementation period. I hope that noble Lords will join me in supporting these regulations.

My Lords, the first thing that I noticed on page one of the draft instrument is that it says this is done not just under the EU (Withdrawal) Act but under the European Communities Act, but it does not tell us which bits are which. If you are trying to go through and ask whether this corresponds to the rules laid down in the EU (Withdrawal) Act, you do not know, because the rules under the European Communities Act are not exactly the same. I do not find any difficulty in what has been done here, and I have come across this before in other statutory instruments. But I think it would be good practice when you are doing it with powers in lots of different places if the relevant bit of the instrument were to say which the enabling power was instead of putting it in an anonymous way. But then, I am still learning about how these things are done in the UK.

I accept the points made by the Minister about what I call the symmetry point: that some bits here need to be retained, extending into EU territory, if I can put it that way, so that we know what is going on. Emissions trading is one example of that. Perhaps I should declare an interest on the register—the usual London Stock Exchange Group plc issue. How will we get information back into the UK from, for instance, the trading of UK instruments on exchanges in the EU? This is the other side of the trading obligation. If the EU says that you can trade only on recognised exchanges—there are exchanges that, for example, trade UK-listed shares—that means that, unless there is some kind of deal done, people will theoretically want to trade in the EU rather than the UK, or they will want to cut off trading in the EU so that they own the trade in the UK. We have concentrated on that when talking about trading obligations; we have not talked about what happens to the information from the trading venues that remain in the EU.

I am sorry that I had not thought this out previously; it just occurred to me while the Minister was speaking. This is something for the regulators and, probably, the Government to look at as we move forward and work out what the EU is going to do in respect of exchanging information with us. The exchanges provide data to the FCA so you can see whether there is any funny business going on; it is one of the methods of detection, as you can see spikes and so forth that might indicate something strange.

Another question on symmetry is that I wonder why we have bothered, in new paragraphs 5 and 5A on page 11 of the regulation, to list all the European organisations that still have exemptions. One of the things I did from time to time in the EU, perhaps a little mischievously, was to take out the list of all the bodies that did not have to come under market abuse regulations. As I have said more than once, central banks can do things that, if anybody else did them, would be called market abuse. Generally speaking, we allow central banks to do that.

There is a general provision for certain public bodies and central banks of third countries. If the EU is now a third country, why bother to state that the Treasury can make particular exemptions for member states, the ESCB, members of a federal state, the Commission, the European Investment Bank, the European Financial Stability Facility and the European Stability Mechanism? Why not just treat them as generic public bodies? This gives the EU special treatment. Yes, one might want to prepare a list, but was this just a short cut? If we were going to compact these things down for the long term and if we were going to treat the EU as a third country, why list all EU bodies but not other third-country bodies? I am not sure that I would have put them on the face of the regulations, just for the sake of it. Those are all the issues that I wish to raise at this point.

My Lords, I want to make a couple of fundamental points. First, my noble friend uses the word “equivalent”, but of course this is not equivalent. It is equivalent only in the sense that it applies to Britain; therefore, immediately, it is not the same thing. He may say that this is chopping logic, but I think that it is important for us to underline that when you take into British law what has been up to now European law, you assert your control over what happens here but you deny the fact that you had some control over what happens over the whole area. That, therefore, is not equivalent. It may be what people want, but I doubt that people who voted to leave understood the details. Indeed, none of us did until we started to go through it—what I say is not in any way insulting to either side. The fact is that this is much more complex than we thought.

The effect, which I think is important, is that we say of many of the things that we are talking about, “These institutions are international. We are still part of Europe, in the sense that we are working in this space. Therefore, we are going to try, even if we leave the European Union and even if we do so without a deal, to have arrangements that will overcome these problems”. Then my noble friend says, “We will do these things on a discretionary basis”. The problem with a discretionary basis is that it is exactly that. There will be occasions when the British Government—or the FCA—do some of these things and occasions when they do not. My concern is that, by translating where we are now into a national position and not an international position, as far as the financial services industry is concerned—I have declared my interest—we introduce a degree of randomness that we do not have at the moment. At the moment, we know when these things happen. Under the regulations, we will not know, because it will be at the discretion of the British Government to decide what things they will do in common and what things they will not.

The second thing to say is that this is entirely one-sided. We are saying that we will take these powers over the things that we have control of, but we have no deal under which we can get the information and no deal on things over which we have partial control. The noble Baroness who just spoke is absolutely right. There is a real issue about information. How will we know some of these things? If we leave the European Union and do not have information in common, there will be things that affect us which we will not know unless we have a deal which allows—and not only allows but makes—the European authorities to be in a position to tell the Government or the FCA the information that they have.

The third important thing is the whole question of who pays the bill. I am very much relieved by the Minister’s assertion that, for example, credit agencies will pay a fee, as they do at the moment, and that that fee will come to the FCA rather than to the European authorities. But it is important for him to recognise that there is already considerable unhappiness about the unaccountability of the FCA for the charges that it makes. There is no way of monitoring the charges which the FCA makes—no superior court to go to. There is a constant problem with the FCA because many of its charges seem, to those of us who represent people who have to pay them, to be unconnected either with the rise in the cost of living or indeed with the services that are provided. The difficulty with bringing everything back into this country is that there is nowhere to appeal to. The FCA is entirely under its own decision-making process, and says, “We have got enough money, but if we don’t have enough money, we’ll just raise the tariff”. I want to know from the Minister when we will have a situation in which even a group of people with whom I have no very close relationship—namely, the credit rating agencies; indeed, I have some pretty serious complaints about them—ought to have some opportunity to complain about the price that they are charged. I do not see any reference to that, nor indeed has the Minister mentioned it altogether.

My last point is, simply, that of course everything therefore comes into the hands of the Treasury. That is what happens when you nationalise what was and should be an international effort. Everything is decided by the Treasury. When people talked about “taking back control”, what that actually means here is that the Treasury takes back control. I see no opportunity for anybody outside the Treasury to be able to oversee the decisions that are made here. I say to the Minister that I am not at all sure that that is a very cheerful future. It seems that there was a great deal to be said for the much more open way in which the European Union deals with these matters. It is a much more transparent system than the system that we have in this country. One of the pieces of truth which I am afraid has been lost in the debates about Brexit is that in many areas, the European Union has been much more willing to discuss, much more open and much more transparent. We are going to lose all that, and I do not see anything in the Minister’s speech—admirable though it was—that indicates that the Treasury will open itself up to a more transparent system and provide opportunities for people to complain, argue and to know what the details are, and I see no sign that the same will happen with the FCA. This is therefore a further closure of the mechanisms of the financial world, and less transparency and openness. I am sorry that the Government have not taken this opportunity to say, “When the time comes, if we leave the European Union, we will start on a process of opening these things up”. I realise it cannot be part of this SI because it would change the nature of the legislation but I would like to hear something of the willingness of the Treasury to mimic, to some extent, the openness of the European Union, which we are now going to lose.

My Lords, perhaps I can start by posing the same question on these two SIs as I did before. Are they no-deal only SIs or ones that will be switched off? I am entirely happy for the Minister to reference his previous reply, if that is, in fact, the reply he will give. I have tested these SIs as best I can on the basis of paragraphs 7.1 to 7.9 of the Explanatory Memorandum. Noble Lords will have read these points before as they are the same in every Explanatory Memorandum. They basically say that new policy will not be introduced except where necessary.

Largely speaking, I have found nothing to complain about. However, there were one or two areas I did not understand. I start with the Explanatory Memorandum on the first SI, on market abuse. In paragraphs 2.7 and 2.8 once again I think the problem is that the author knew what they were talking about and I do not. The first sentence of paragraph 2.8 says:

“The decision to keep instruments admitted to trading or traded on EU venues, rather than amending to a UK only scope, was taken because of the close relationship between UK and EU markets”.

I hope that the Minister might expand on that because I find the language of that paragraph, in particular, extraordinarily difficult to understand.

On international co-operation, we have had one reply. I want to press the noble Lord further. We hope that the outcome of this—no matter how badly we do it—is that we are still in this international market and therefore working together not just with the EU but with the rest of the world. As I understand it at the moment, we effectively work with the rest of the world keeping abuse regulations, in particular, up to date through the channels of the EU. How will that be replaced? The abuse regulations, in particular, clearly have to be kept up to date.

The remaining thing to say about the first SI is that it should not be in front of us because of the absurd paragraph 12.5 in the Explanatory Memorandum that says we are going to have an impact assessment but not until we have agreed the instrument. As we know, the noble Lord, Lord Bates, took some stick on that—I think that would be the right term—and your Lordships might moderate that stick by some useful comments. I do not know.

Moving on to credit rating agencies, I have a couple of questions. One is, once again, due to my failure to understand. I did get O-level English—I am not that bad, I hope. My understanding of the three bullet points in paragraph 7.12 of the Explanatory Memorandum diminished as I read through them. In particular, I have no idea what this means:

“The Automatic Certification Process will enable Certified CRAs established outside the EU to notify the FCA of their intention to extend certification to the UK. Like the Conversion Regime, these notifications must be made before exit day”.

I do not know what a “Certified CRA” is.

Finally, paragraph 7.15 covers enforcement and makes reference to criminal actions. It also makes reference to sections in FSMA, which would be a joy if I had an up-to-date copy to check them against. What I would like to be reassured about—or not if it is not true—is whether credit rating agencies are subject to the requirement to have a senior management regime where the clarity of roles is such that if a criminal prosecution was to take place, as referred to in this paragraph, that prosecution could be directed at an individual.

My Lords, I am grateful to all noble Lords who have taken part in this debate and I notice that neither the noble Baroness, Lady Bowles, nor the noble Lord, Lord Tunnicliffe, have any fundamental objections to the detail of the SIs before us. I shall try to deal with the points they have made, along with those made by my noble friend. I was asked why the European Communities Act is mentioned. The answer is that the ECA powers are used to make consequential amendments to the Criminal Justice Act 1993 and the UK Market Abuse Regulation 2016. The European Communities Act is mentioned because it is the parent rather than the withdrawal Act.

My noble friend raised a number of points that go slightly wider of the mark. I would just say to him that it is a consequence of leaving the EU—like him, I campaigned to remain—that we can no longer influence what he described as “over there”. I used the word “equivalence” because what we are trying to do is make sure that if and when we do leave, the regime in this country is as equivalent as it can be to the regime when we were in the EU. Likewise, he talked about discretion. Indeed, we will not have the discretion that we have at the moment to influence what happens in the EU as a direct consequence of us having left.

Both my noble friend and the noble Baroness, Lady Bowles, raised the question of how we get information from the EU. In terms of ESMA and EU regulators co-operating and sharing information with the FCA, it will look to make use of the existing arrangements in the Financial Services and Markets Act 2000 to co-operate and share information which should be in the interests of both parties. We hope that that will continue. I was asked why we have bothered to keep paragraph 5 in the MAR SI, which is the list of EU institutions. We have omitted these exemptions from the UK MAR to achieve symmetry with the EU, but we recognise that after exit we may achieve or negotiate closer links, in which case it would be desirable to reinstate the current position if it was reciprocated or desired. I was also asked why we have exempted EU bodies under MAR. The UK and the EU markets are highly integrated, a point made by the noble Lord, Lord Tunnicliffe, and the relationship between them means that the exemptions may also be necessary for EU institutions interacting in the UK market.

My noble friend raised the issue of FCA fees. He will understand that those are not within the scope of the EU withdrawal Act powers or indeed within this statutory instrument. However, I hope that he was reassured by what I quoted from the chief executive, Andrew Bailey. He expects FCA fees to remain steady for a year or two, assuming that there is an implementation period.

The noble Lord, Lord Tunnicliffe, asked why the scope of this SI covers financial instruments in both UK and EU trading venues. I think the answer is that there is a very close relationship between the UK and EU markets and the scope provided by this SI ensures that the FCA will continue to have the ability to investigate and pursue cases of market abuse related to financial instruments which affect UK markets. UK companies may have instruments that are quoted not in London, but in Europe. If there were abuse there, it could affect the integrity of the UK market. This means that the FCA could take action where activity in a financial instrument, which was traded on an EU venue, impacted on UK markets. We want to maintain the current levels of integrity and confidence that UK markets currently hold. The impact assessment—

We would expect the EU regulators to intervene and investigate market abuse in an EU trading venue of a UK-related instrument. We would expect it to take the lead. The provision in the SI is for what I hope is the unlikely event that they decide for whatever reason not to intervene, but that we feel there is a need to investigate market abuse because it is having an impact on UK markets. That is why that particular power is as I have said.

To return to the lack of an impact assessment, we did ship a bit of water yesterday. We recognise the importance of having impact assessments available to inform these debates. Treasury Ministers are doing everything they can to make these available as soon as possible. They are in discussions with the Regulatory Policy Committee to improve the impact assessments and enable them to complete their review of them. We hope to publish the relevant impact assessment next week.

I omitted to congratulate the noble Lord on getting out an impact assessment on the final SI—the credit rating business. Because it came out, I was foolish enough to read it; it is interesting that the numbers showed a cost to the industry of £11.4 million. I did not really understand what that meant—whether the figure was big or little. It is obviously £11.4 million, but do these people make hundreds and thousands of millions of pounds such that it is nothing or will it be a significant cost to them?

It is a very good question, and the answer is that we do not have the exact information as to the exact turnover or number of people employed in the CRAs. I will make further inquiries and see if I can shed some light on that. I might get some in-flight refuelling.

When my noble friend sheds some light on that, would he be kind enough to explain something which is often hidden in this? I do not quite understand why there is an additional cost if we are to do the same thing, only locally, because they must have been paying somewhere else. Could my noble friend make sure that we have an answer that shows which bits are, if you like, real additions and which are a replacement for somewhere else? That is all I want to know.

Seeing whether one can net it off is a very good question, and I will see whether we can do that—I probably cannot do it on my feet.

To revert to the point made by the noble Lord, Lord Tunnicliffe, about how the £11.4 million cost to the credit rating agencies relates to the size of the industry, we expect credit rating agencies to incur an estimated £10,000 per firm for changes to IT systems and £60,000 per firm for reporting requirements. This is for the five firms that the FCA expects to enter the regime. On top of that, there are familiarisation costs. Perhaps I could write to the noble Lord with more information, seeing whether we can net it off, as my noble friend has just said, by looking at what they have to pay at the moment.

The answer to the noble Lord, Lord Tunnicliffe, about the status of this SI, if there is an agreement, is the same as in the last debate. The SIs would be delayed and may then be repealed or amended as appropriate, depending on what deal we actually do.

The noble Lord asked for an explanation of the third option of paragraph 7.12 of the Explanatory Memorandum. This relates to credit rating agencies’ pre-exit applications to the FCA. All credit rating agencies will need to register with the FCA in order to establish legal entities in the UK following exit. Firms can complete this registration through the automatic certification process. Basically, if you have a credit rating agency which is located outside the EU but which has registered with an EU credit rating agency, it can apply to have that certification extended to the UK in a sort of passporting arrangement.

The noble Lord, Lord Tunnicliffe, asked about the senior management structure of credit rating agencies and whether individuals could be held responsible. It is a good question. The senior managers and certification regime does not currently apply to credit rating agencies; I think that one of the reasons is that they do not actually handle customers’ money, which of course banks and other agencies do. Regulation 22 of the SI applies Section 400 of the FiSMA, 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.

Finally, on international co-operation, the MAR SI amends Part 8 of the FiSMA to facilitate international co-operation between EU and non-EU regulators and the FCA. There are existing co-operation provisions for cases of market abuse that we will seek to rely on. Related to that, both the Treasury and the FCA will continue to co-operate internationally with the EU to facilitate identification and enforcement of market abuse, and we are confident that the FCA and HMT can continue this co-operation despite no longer being part of the EU.

Motion agreed.

Sitting suspended.