Draft Uncertificated Securities (Amendment) Regulations 2013
Draft Financial Services Act 2012 (Consequential Amendments) Order 2013
Draft Financial Services Act 2012 (Misleading Statements and
Impressions) Order 2013
Draft Financial Services And Markets Act 2000 (Regulated Activities) (Amendment) Order 2013
The Committee consisted of the following Members:
Margaret McKinnon, Nick Beech, Committee Clerks
† attended the Committee
Draft Uncertificated Securities (Amendment) Regulations 2013
The Chair: With this it will be convenient to consider the draft Financial Services Act 2012 (Consequential Amendments) Order 2013, the draft Financial Services Act 2012 (Misleading Statements and Impressions) Order 2013 and the draft Financial Services And Markets Act 2000 (Regulated Activities) (Amendment) Order 2013.
The Government have been clear that the attempted manipulation of the London interbank offered rate is completely unacceptable and has no place in the UK financial services industry. That is why we moved quickly after the initial revelations to ask Martin Wheatley, the chief-executive designate of the Financial Conduct Authority, to consider what immediate reforms could be made. The Wheatley review, published in September last year, provides a 10-point plan to reform LIBOR, including recommendations to both the Government and market participants. The Government welcomed and endorsed the recommendations, and have asked all institutions to whom they are addressed to implement them without delay.
The Government believe that the banks and the British Bankers Association have to take responsibility for the failings and must act on Mr Wheatley’s recommendations, including the removal and replacement of the BBA as the operational LIBOR administrator. The Treasury and the BBA have been working together and have made significant progress in laying the foundations for the process. As was announced yesterday, Baroness Hogg will lead an independent committee that will recommend an appropriate successor to the BBA. That builds on the legislative changes we have already made.
Greg Clark: I am grateful for the hon. Gentleman’s intervention. He will know that there is great interest, not only from the Americans, but from supervisors across the world. The International Organisation of Securities Commissions, the college of regulators around the world, has taken a particular interest. Martin Wheatley
Mr Cunningham: Do I take it that the Minister is actually saying that we will work on an international basis, so that we get international agreements and everybody acts in unison on any proposals that come forward?
Greg Clark: That is very much the intention, but given the particular problems in the UK, we felt, and Martin Wheatley’s review recommended, that we should take immediate powers to give authority to the Financial Services Authority to bring LIBOR under regulation straight away, while pressing for co-ordinated international action, which is why we have the regulations before us today.
Following the Wheatley review, we introduced amendments to the Financial Services Bill that are relevant to today’s debate, including amendments to enable benchmark activities to be brought within the scope of statutory regulation under the Financial Services and Markets Act 2000, and to create a new, distinct criminal offence of making a false or misleading submission in connection with the determination of benchmarks. Following consultation at the end of last year, two draft orders that underpin the changes, which we are debating today, were laid before Parliament. Subject to the approval of this House and the House of Lords, the Government plan to bring both orders into force at the beginning of April. That will continue the Government’s approach to taking decisive action to reform LIBOR.
I shall say a little about the measures before us. The first statutory instrument amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to denote for the first time that submitting to and administering a benchmark are both regulated activities. The order specifies LIBOR as the relevant benchmark. The regulation of those activities will enhance and strengthen the future FCA’s ability to make rules on benchmark setting, as well as the FCA’s ability to supervise and take regulatory action directly against those involved in the benchmark-setting process.
John Healey (Wentworth and Dearne) (Lab): I am grateful to the Minister for giving way. I apologise for missing the beginning of his remarks. He said that LIBOR is the specified benchmark, but the explanatory memorandum says that LIBOR is the first of the specified benchmarks. Will he explain what the further specified benchmarks will be?
Greg Clark: The right hon. Gentleman is correct to pick up that the statutory instrument and the legislation allow the powers to apply to other benchmarks. The consultation that we undertook before Christmas asked whether there were more or other benchmarks that ought to be included from the outset; as he knows, and members of the Committee will recall, allegations were made around the potential manipulation of energy benchmarks, which are under investigation. The result of our consultation was that virtually all respondents
Nevertheless, in both the primary and the secondary legislation, we should have the ability to specify the regulation of any other benchmark, should it come to light that that is required in future. The issues with LIBOR have come to light, and we have taken decisive action; we now have an architecture in place that allows even quicker action, should there be any other benchmarks that cause problems.
John Healey: I am grateful to the Minister for that clear and helpful answer. He has told the Committee that, through the statutory instrument, we will have in place the primary and secondary legislation for further specified benchmarks. Will he confirm what the process will be, under the primary and secondary legislation, for confirming future specified benchmarks? In particular, will he give an assurance that any designation of a future specified benchmark will be made in a statement, or at least a written statement, to the House?
Greg Clark: I am happy to give that assurance. It is absolutely right that Parliament should scrutinise such decisions. That is the purpose of today’s debate, and that is our intention. We consulted on the inclusion of LIBOR, and that would be the preferred approach. I suppose there might be circumstances in which we needed to take emergency action, but Parliament should certainly be notified if we added another specified benchmark. The intention is that Parliament sends the important signal that the benchmarks need to enjoy confidence. They have a potential impact on the reputation of UK financial services, and it is important that Parliament expresses a view. The statutory instrument that would add a further benchmark is in fact subject to the affirmative procedure, so the House would have the opportunity, and indeed would be required, to give its consent to the addition of any such benchmark.
John Healey: To be clear, then, the regulation that the Minister is talking about is not in fact a secondary legislation framework for future specified benchmarks. Any specified benchmark beyond LIBOR, to which the explanatory memorandum refers, would require a separate and further statutory instrument, debated under the affirmative procedure, under which we are debating this regulation. I notice that some of the colleagues to the Minister’s left are nodding their assent.
Greg Clark: The right hon. Gentleman is absolutely right. The primary legislation gave us the possibility of regulating the benchmarks. The statutory instruments we are debating today address such issues as the submission of information, and criminal offences, which I am coming on to talk about. At this stage, the statutory instruments include one particular benchmark, which is LIBOR. In future, if we were to add another benchmark there would be a statutory instrument—a very short one, it is true—simply to specify that additional benchmark.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): My right hon. Friend the Member for Wentworth and Dearne has raised some of the pertinent issues on which I had hoped to press the Minister. However, there is one other matter on which it would be helpful to have information. As well as the legislative framework, there is the issue of the operational approach that the FCA has to take to the regulation of LIBOR benchmarking. Will the Minister say something about the budget and the staffing that the FCA will dedicate to putting the measure into practice?
Mr Cunningham: The Minister is being very generous in giving way. Will he clarify something? He mentioned that there is the potential for a criminal offence. Who would be liable? Would it be a corporate offence or an individual offence?
If the measures are approved, the FCA’s ability to make rules on benchmark setting, as well as its ability directly to supervise and take regulatory action against those involved in the benchmark-setting processes, will be assured. It will also implement a key recommendation of the Wheatley review. Under the measures, both the banks that submit to LIBOR and the successor to the BBA will be regulated by the FCA, so it is the corporate bodies that will be under regulation.
The draft measures provide for certain exemptions to those activities, to cover information that was not created specifically for the benchmark-setting process. Where a person, for example, simply supplies publicly available factual information, such as the stock market closing price, to the administrator of a specified benchmark, that activity would not constitute a submission to the benchmark and will not need to be separately regulated. Similarly, if the administrator of the benchmark happens to subscribe to a general information service, such as an online newspaper, the provider of that service will not be carrying out the activity of submitting to a specified benchmark.
The draft measures include provisions to ensure a smooth transition to the new regulated regime for those currently involved in the setting of LIBOR. One of the recommendations of the Wheatley review is that there be an orderly transition from one regime to the other, given the importance of the benchmark to many indices and many contracts across the world. The measures make two consequential changes to the definition of “consumer”, for the purposes of the FCA’s objectives. Those changes ensure that individuals whose rights, interests or obligations are affected by the benchmark are classed as consumers by the FCA in relation to meeting its objectives.
Let me come on to some of the powers to address potential abuse. The Financial Services Act 2012 (Misleading Statements and Impressions) Order 2013 underpins the new criminal offences created by the Financial Services Act 2012, as recommended by the Wheatley review. The Government have been clear
The Serious Fraud Office is already conducting a criminal investigation into allegations of LIBOR manipulation under the Fraud Act 2006; powers are clearly available under that Act. However, the Government believe that in future, the FCA should also have the power to investigate and prosecute that type of conduct relating to benchmarks.
Although the FCA will have powers to investigate misconduct relating to LIBOR and other benchmarks, none of the offences provided for in FSMA apply to the misconduct relating to benchmarks that was revealed by recent investigations. To close that gap, the Government have created a new criminal offence, specifically related to benchmark misconduct in the financial services industry. They have also taken the opportunity to review and expand offences relating to making misleading statements with a view to inducing the recipient to engage in market activity. We intend the new offences to be backed up by a strong and dissuasive criminal penalty of up to seven years’ imprisonment and an unlimited fine.
The draft measures specify the activities, investments and benchmarks to which the offences relate, and carry forward the existing law that is required to support the new offences. Article 3 of the Financial Services Act 2012 (Misleading Statements and Impressions) Order 2013 specifies the benchmark—LIBOR—to which the new offence applies. In deference to the right hon. Member for Wentworth and Dearne, let me say that it will also apply to any future benchmarks specified in future measures.
Rogue individuals may still attempt to manipulate the rates, but if they do, the FCA will have the appropriate powers to investigate and prosecute them, whether as individuals or members of a corporate body.
Cathy Jamieson: I am listening carefully to what the Minister is saying on this important issue. In respect of the misleading statements and impressions order, will he clarify what the position would be if the misleading statement was made outside the United Kingdom, with the intention of concealing from Britain facts regarding relevant investments and agreements?
Greg Clark: The hon. Lady asks a very pertinent question on a point to which we have given thought. The decision that we came to was to have a broad definition, so that if there is a connection to the United Kingdom, the powers and penalties of the FCA relate to that. It does not require every part of the activity to be conducted in this country. We know that many of the reported abuses are international in scope and have contributory factors in many different jurisdictions. We have deliberately kept the scope broad to cover that.
The amendments introduced to the Financial Services Bill last year give the Government the power to regulate benchmarks beyond LIBOR through appropriate secondary legislation. I put on record the Government’s intention of moving swiftly if a need is established to bring in
Cathy Jamieson: The Minister referred to the Financial Services Bill, which was passed last year. I had the pleasure of serving on that Bill Committee. We tabled an amendment on the general collection powers and the capabilities of the Bank of England as a new regulatory hub, because we felt that that was important, particularly given the high-volume electronic trading that takes place. The Government did not agree to the amendment. I wonder whether Ministers have thought again about giving regulators clearer powers to collect trade data as part of the real-time monitoring of transactions and exchanges, as the US has done with its Office of Financial Research.
Greg Clark: I did not have the pleasure of serving with the hon. Lady on that Committee, but one of the principles of the weekly review, which was one of Wheatley’s recommendations, is that submissions should be grounded in objective data. As for supervising the conduct of the submitters as well as the administrators of the system, the ability to determine whether sufficient connection is made is provided for in the regulations.
As I said, the consultation that we initiated before Christmas established that an international dialogue should take place on other benchmarks and, as far as possible, a framework should be developed under the auspices of the International Organisation of Securities Commissions, the Financial Stability Board and the European Commission before the scope of benchmark regulations is extended beyond LIBOR. Progress is being made in those forums, but if there is any need to act, we will not hesitate to do so.
John Healey: We have before us two principal statutory instruments. The Minister has described the first, which creates the new activities that become the specified benchmarks, in some detail. The second relates to criminal offences. The impact assessment for both makes it clear that anybody working within an organisation that is categorised as small or medium is not within the scope of these benchmarks.
I have two questions. First, what is the threshold used in the impact assessments to decide what is a medium as opposed to a large business? Secondly, will the Minister explain why a whole swathe of businesses that might be involved in financial services are entirely not within the scope of these important statutory instruments?
It is important—I think all parts of the House would agree—that we restore the credibility and integrity of a rate that is referenced in contracts worth $300 trillion. With these changes, the Government have acted quickly and decisively to bring LIBOR under regulation. Once the misconduct regarding LIBOR was identified, Martin Wheatley carried out his review. The Government quickly endorsed the recommendations of the Wheatley review and tabled amendments to the Financial Services Bill to
With our plans to bring both measures into force at the beginning of April, we have fundamentally improved the prospective governance of LIBOR in less than a year. Such decisive action is necessary for a country and economy whose reputation depends on the confidence of investors—domestic and international—in the integrity of our system. We are sending a message that I hope is loud and clear to the world that the sort of behaviour we have seen in relation to LIBOR has no place in the UK’s financial services industry.
Cathy Jamieson: It is a pleasure to serve again under your chairmanship, Mrs Dorries. The four instruments before us raise a number of issues. I will begin by making a couple of points regarding the LIBOR scandal—it was indeed a scandal—before asking some specific questions about the instruments.
On LIBOR, it is important to recognise that it was not just a case of excessive risk-taking by investment bankers, as it is sometimes portrayed, but the corrupt manipulation of what should have been a trustworthy and independent index determining the inter-bank interest rate. It was also an example of a systemic failing that was confined not just to one bank but cut across many parts of the banking system. It showed clearly that we should be thinking about back-stop powers on banking safety. We should not just look at the issue firm by firm, but be capable of reforming the whole sector, for instance, if the ring-fencing process fails to live up to expectations.
Some of the questions I want to ask are, as I see them, on behalf of the public. There is a lot of technical detail in the measures before us and it is right and proper that we scrutinise that, but the issue for the public is: have they lost out because of the LIBOR manipulation? Many of them would not know. They will also want to know that the Government and the Opposition have scrutinised everything properly and have put in place proper mechanisms to ensure that it cannot happen again and that, if there is any suggestion of impropriety or wrongdoing, processes are in place to deal with it.
There are some concerns that the Government and the FSA have not clarified what businesses or consumers should do if they feel they have lost out. To date, the institutions responsible have been fined, but what about a redress process for anyone else who feels they have lost out?
I recognise that the Minister present was not in charge at the time—he mentioned that he did not serve on the Financial Services Bill Committee—but I recall that both I and my colleague, the shadow Financial Secretary to the Treasury, made the point several times that Ministers come and go and we need a system that outlives the lifespan of the office of the Minister dealing with the process.
The Minister has outlined today all the things that have been done in the course of a year, but the shadow Financial Secretary to the Treasury raised the issue of
I want to put some questions to the Minister regarding the public’s involvement. Will the Minister explain under what circumstances the FCA will use its new powers to compel banks to provide information about LIBOR? Can the public be absolutely satisfied that in future, any British banks that are involved will be made to repay profits made from any wrongdoing or LIBOR rigging? Will any individual traders guilty of LIBOR rigging face fines, an issue raised in an earlier question about individual and corporate responsibility?
The Minister focused on the measures dealing with LIBOR, rather than the others before us. We support the proposed changes in the uncertificated securities regulations, but there are serious issues to be raised on the important matter of the regulation of uncertificated securities, which has become the largest market for security trading by value. It is therefore proper that the operators of those systems be subject to the strictest scrutiny.
Ongoing scrutiny is to be welcomed, as is the removals of operators’ exemptions from the Competition Act 1998 and the Fair Trading Act 1973. The changes in the procedure for the refusal of or withdrawal of approval for giving directions under schedule 3 are less welcome, and I would like to hear the Minister’s views, for example, on the removal of a minimum period within which representations can be made before action is taken, and the restriction on parties able to make representations. Does that hinder consistent and transparent regulation? Perhaps the Minister will address that point.
Will the Minister also address proposed new regulation 11A(5)(a)? I will give him some time to reflect on that. What skills do the Government anticipate will be needed by a person to be appointed for the purpose of making reports? What procedure will determine whether a person has those skills? I accept that the Minister did not sit through the many sittings of the Financial Services Bill, but those issues were consistently raised there. We were constantly trying to find out who the people are, how they are to be appointed, who will determine the skills they require, and whether they will have the skills to ensure that the legislation is handled properly. I apologise if these issues seem rather technical, but it is not the first time the Opposition have raised them.
Will the Minister give more information about schedule 3(7)? The Bank of England will be able to bypass the procedures set out in that schedule where it “reasonably considers it necessary”. Previously, the Treasury had to “consider it essential”. Is that a lower standard, and if so, why?
John Healey: My hon. Friend has just put a very important question to the Minister. From the point of view of Members of this House, if a Treasury Minister is involved in that judgment, they can be held to account and scrutinised in this House. If it falls to the Governor in future, that becomes more distant and more difficult to do.
I would like to ask a couple of further questions, about the Financial Services Act 2012 (Consequential Amendments) Order 2013, which provides for a number of amendments of enactments in connection with the Financial Services Act 2012. Again, these issues were raised during consideration of that Bill. Who is responsible for updating the content of the respective handbooks and sourcebooks made available from the Prudential Regulatory Authority and the FCA, an issue raised by the shadow Financial Secretary to the Treasury in the Bill Committee? Will the substantive content of the FSA handbook be amended as we move into the new regulatory regime? If so, will there be consultation on any proposed amendments? If substantive amendments are planned, what aspects will be changed as a result? If he cannot give us all the detail on those issues, perhaps he will advise us at a later date in an appropriate way.
The hon. Lady raised the general point that we are here debating on behalf of our constituents, as we always do in Committee and in the Chamber. It is right to have them in mind. Nearly 2 million people are employed, directly and indirectly, in the financial services industry. The scandal that we have witnessed in the attempted manipulation of LIBOR caused detriment to many ordinary working people up and down the country, who are far remote from the attempts to manipulate the benchmarks but nevertheless have suffered detriment to their personal reputation for working in an industry that always commanded high levels of respect. There has also been detriment internationally to the fortunes of the banks for which those people work, and those banks now have fines to pay. It is very much in our interests to have that in mind.
The hon. Lady asked about the possibility and appropriateness of redress if detriment is found to have been caused by such matters. It is worth setting out the context of what has been discovered so far about the attempted manipulation of LIBOR. It is not clear that the attempts that have been brought to light—and, indeed, brought to book through the fines—necessarily succeeded in changing the benchmarks themselves. That is why the FSA has referred—advisedly, in my view—to the attempted manipulation of LIBOR. The first question for the FSA is whether a discernible effect on the actual benchmark can be detected. Secondly, many of the reported instances of the attempted manipulation were fleeting and small. Even if, in future, those manipulations were found to have been made, it is not necessarily the case that particular consequences to individuals or companies could be ascribed to them.
Cathy Jamieson: I am again listening carefully to the Minister, and I am concerned about how the public will view the situation. It may sound to the public as though the Minister is saying that there have been a number of
Greg Clark: The hon. Lady makes an important point. It is important that everyone hears as plainly as possible—be it people in the industry or members of the public outside it—that if attempts to manipulate LIBOR are repeated in the future, they will result in a possible jail sentence and unlimited fines for both the individuals concerned and their employers. That is the message that is going out, very clearly. That does not mean to say that in the instances reported so far, the individuals and companies involved are off the hook. Existing powers are available to the prosecuting authorities conducting the investigations, and those investigations should be completed with dispatch. Today, we are making it crystal clear to anyone thinking they can engage in that crime in future that the consequences of doing so will be severe. It is important that everyone recognises that.
The right hon. Member for Wentworth and Dearne asked about the threshold in the impact assessment. In the case of submissions to LIBOR, all the submitters to the LIBOR benchmarks are of sufficient scale to be above the benchmark concerned. A sufficient volume of trade needs to be conducted to generate a reference, and small firms do not conduct enough business to be legitimate participants.
The hon. Lady asked whether individual traders will face fines. The Serious Fraud Office is looking at that issue already. It is the FCA’s responsibility to set the budget and resources available to it for staffing the regulation of LIBOR. By enacting this measure, we will require the FCA to set its own budget, which will be funded by a levy on the industry. It is appropriate that taxpayers should not be disadvantaged by the changes in practice required for this measure.
Let me address some of the points made in respect of the other measures, such as the uncertified securities regulations to which the hon. Lady referred. The regulatory arrangements for securities settlement systems have always been modelled on the recognised clearing houses and recognised investment exchanges in part 18 of FSMA. The new powers and other changes to these regulations essentially follow the changes that the Financial Services Act 2012 makes to part 18. Specifically, the regulations provide the Bank of England with new powers to require reports to be produced by skilled persons in respect of operators. It must determine the qualifications
On the consequential amendments order, to which the hon. Lady referred, the PRA and the FCA will have their own rulebooks and we expect no changes for the date of introduction. The rulebook will not be rewritten; it will be split between the two institutions and any further changes will be subject to consultation.
All those changes effectively line up the regulation of settlement systems with the changes to FSMA made by the Financial Services Act. Previously, the powers, as the right hon. Member for Wentworth and Dearne said, were in the hands of the Treasury but delegated to the FSA. In practical terms there is therefore no difference, as before, the powers were delegated to the FSA, and now they will be transferred to the Bank of England, consistent with the reforms made in the Financial Services Act.
A small number of amendments that required further consideration during the Act’s passage are included in this group of consequential amendments. Primarily, those refer to the rulebook, as the hon. Lady mentioned. I will undertake to inform the Committee, and the hon. Lady in particular, about any particular aspects that I have not been able to cover in my summation.