Market Abuse (Amendment) (EU Exit) Regulations 2018

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Market Abuse (Amendment) (EU Exit) Regulations 2018.

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.

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.

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.