The
Committee consisted of the following
Members:
Chair:
Mr. Gary
Streeter
†
Bailey,
Mr. Adrian (West Bromwich, West)
(Lab/Co-op)
Binley,
Mr. Brian (Northampton, South)
(Con)
†
Browne,
Mr. Jeremy (Taunton)
(LD)
Cable,
Dr. Vincent (Twickenham)
(LD)
†
Campbell,
Mr. Ronnie (Blyth Valley)
(Lab)
†
Duddridge,
James (Rochford and Southend, East)
(Con)
†
Hoban,
Mr. Mark (Fareham)
(Con)
†
Jack,
Mr. Michael (Fylde)
(Con)
†
McCarthy-Fry,
Sarah (Exchequer Secretary to the
Treasury)
MacShane,
Mr. Denis (Rotherham)
(Lab)
Meacher,
Mr. Michael (Oldham, West and Royton)
(Lab)
†
Mudie,
Mr. George (Leeds, East)
(Lab)
Riordan,
Mrs. Linda (Halifax)
(Lab/Co-op)
†
Smith,
Mr. Andrew (Oxford, East)
(Lab)
†
Stuart,
Mr. Graham (Beverley and Holderness)
(Con)
†
Todd,
Mr. Mark (South Derbyshire)
(Lab)
Glenn McKee, Committee
Clerk
† attended the
Committee
Seventh
Delegated Legislation
Committee
Tuesday 30
March
2010
[Mr.
Gary Streeter
in the
Chair]
Draft
Financial Services and Markets Act 2000 (Amendments to Part 18A etc.)
Regulations
2010
4.30
pm
The
Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):
I beg to
move,
That
the Committee has considered the raft Financial Services and Markets
Act 2000 (Amendments to Part 18A etc.) Regulations
2010.
The
Chair:
With this it will be convenient to consider the
Draft Financial Services and Markets Act 2000 (Liability of Issuers)
Regulations
2010.
Sarah
McCarthy-Fry:
It is a pleasure to serve under your
chairmanship, Mr. Streeter, and a pleasure that we are all
gathered again in one of the Committee Rooms. Certainly from my point
of view, these are the last statutory instruments before the Easter
recess.
The
regulations were debated in another place last week, and the hon.
Member for Fareham may note a certain similarity between what was said
then and my opening remarks today. None the less, I think it important
that we get some of these points on the record in both Houses of
Parliament. I can assure him that there is no reference this afternoon
to any
ombudspeople.
Let
me start by setting out the purpose of each set of regulations. Section
313A of the Financial Services and Markets Act 2000 gives the Financial
Services Authority the power to suspend or remove financial instruments
from trading where that is necessary to protect either investors or the
orderly functioning of the financial markets. The Act requires the FSA
to give written notice both to the issuer of the instrument concerned
and to all those who trade in financial instruments—for example,
in those particular shares. That burdensome and inefficient procedure
requires the FSA to write to the increasing number of exchanges,
trading platforms and firms that trade with one another over the
counter. It is important that firms receive timely information about
such an announcement, to ensure that immediate effect can be given to a
suspension of
trading.
Mr.
Michael Jack (Fylde) (Con):
Will the Minister put in
context, for the benefit of the Committee, the circumstances in which
these powers would be
used?
Sarah
McCarthy-Fry:
Is the right hon. Gentleman referring to the
powers in these regulations or to the powers that the FSA has to
suspend
trading?
Mr.
Jack:
The suspension of trading
powers.
Sarah
McCarthy-Fry:
The FSA would suspend trading if it felt
that that was necessary to financial stability as a whole and—if
I am correct; I am sure that someone will correct me if I am
not—if requested to do so by another EU member state. I am
talking about a suspension in another member state being carried
forward into the
UK.
Mr.
Mark Hoban (Fareham) (Con):
Given that the FSA has these
powers, how many times has it used
them?
Sarah
McCarthy-Fry:
The FSA has not used the powers under these
regulations, because under its existing powers, it can only suspend
listing. It has used those powers when requested to do so by another EU
state. It has not used the powers in respect of the UK to
date.
We
are proposing to simplify the procedure for notifying firms of a
trading suspension or removal of a financial instrument from trading.
Accordingly, the regulations give the FSA power to announce such a
suspension or removal via a regulatory information service, as it
already does for other regulatory announcements, with which firms are
familiar. In practice, such announcements are rapidly disseminated by
secondary information providers. Bloomberg and Thomson Reuters are
examples with which we are all
familiar.
In
the light of that, we are also clarifying the procedure that the FSA
must follow to give effect to a suspension or removal from trading. For
example, the regulations set out what decisions the FSA may make
following a challenge to a suspension or removal from trading imposed
on a class of institutions by either affected institutions or the
issuer; when the FSA is required to give written notice of its
decisions; and when they must be published by means of an
RIS.
The
FSA is not being given any additional powers; the purpose of the
regulations is solely to enable the FSA to use its existing powers more
effectively. The Committee should note that the coming-into-force date
of the regulations has been corrected from 6 April to 9
April due to the Easter recess. I wanted to make the Committee aware of
that. It is crucial that the FSA has effective tools to deliver on its
objectives of market confidence and consumer protection, and that is
what the changes
provide.
The
purpose of the second set of regulations is to extend the current
statutory regime for the liability of issuers for misstatements set out
in section 90A of FSMA. The regulations are the culmination of an
extensive period of review and consultation carried out initially by
Professor Paul Davies, QC, Cassel Professor of Commercial Law at the
London School of Economics, and more recently by HM
Treasury.
Under
the existing statutory regime, issuers of securities traded on
regulated markets in the United Kingdom are liable for fraudulent
misstatements made to the market in a limited class of publications.
The regulations extend the regime to cover issuers of any securities
admitted to trading on a securities market in the UK, and issuers for
which the UK is the issuer’s home
state.
Claims
for misstatement may be brought not only by buyers of securities but
also by sellers and holders of securities, if they have acted in
reliance on a fraudulent misstatement and suffered loss as a result. We
should
make it clear that a holder wishing to bring a claim for misstatement
will need to prove that they have consciously decided to continue to
hold shares in reliance on the
misstatement.
The
regulations extend the regime to include not just announcements that
are required to be made under the transparency directive, but all
information published by means of a recognised information service, and
information that has been announced by the issuer as being available by
such
means.
This
will bring a much greater number of announcements within the scope of
the regime, but we feel that there is likely to be little impact on the
day-to-day checking process by issuers. Issuers and directors already
face significant financial and reputational penalties for
misstatements, and issuers are required to have robust disclosure
assurance
processes.
The
regulations also create liability for dishonest delay in publishing
information in limited circumstances. The claimant must be able to
demonstrate that they have suffered loss in respect of their securities
as a result of delay by the issuer in publishing information and that a
manager within the issuer acted dishonestly in delaying publication of
the information. Naturally, there will be situations where disclosure
of information is delayed for good reason—for example, to check
facts before publication. That would not be dishonest behaviour by the
issuer, and would not give rise to a
claim.
The
regulations provide that an issuer will not be subject to any form of
liability other than liability under the statutory regime or certain
specific forms of liability that are listed in the regulations,
including contractual liability and civil liability arising from a
person’s having assumed responsibility, to a particular person
for a particular purpose, for the accuracy or completeness of the
information concerned. The latter point is important because it
preserves the existing liability under common law for negligent
misstatement, as decided in Caparo v. Dickman and subsequent
cases.
Mr.
Jack:
The Minister has put emphasis on the word
“issuer”. Does that imply that the regulations apply to a
new issuer of a security, or to continuing provision of information for
a security that has already been
issued?
Sarah
McCarthy-Fry:
The right hon. Gentleman asks a good
question. Off the top of my head, I do not know the answer to it, but I
will endeavour to get the response to him by the end of this
Committee.
Responsibility
statements in reports and accounts that companies are required to
produce would not, in and of themselves, be regarded as constituting a
representation to a particular person for a particular purpose of the
accuracy or completeness of the information
concerned.
As
I said at the beginning, the regulations are the culmination of an
extensive period of review and consultation, and there has been
widespread support from affected parties throughout the process. The
regulations provide clarity on the liability that issuers may have to
pay in compensation to claimants who have suffered loss as a result of
relying on misstatements, or on dishonest omissions by the issuer. I am
able to say to the right hon. Member for Fylde that they will apply to
new and continuing
issuers.
I
hope that the Committee will agree to the amendments to the statutory
regime provided for by the
regulations.
4.39
pm
Mr.
Hoban:
It is a pleasure to serve under your chairmanship
again, Mr.
Streeter.
The
statutory instruments have been subject to a full consultation process,
and there seems to be little doubt in the industry that the Government
have chosen the right path. However, I have to ask the Minister why we
are doing this. The regulatory impact assessment for the first set of
regulations suggests that the net benefit is £93,166 over a
10-year period. That is on the basis that there is one trading
suspension per year and each trading suspension involves a financial
saving to the
FSA.
Mr.
Jack:
Does my hon. Friend agree that the fact that the net
benefit is costed in the document as £93,166 shows an
unbelievable degree of precision, which is perhaps unmatched by other
aspects of Treasury
forecasting?
Mr.
Hoban:
It is remarkably precise, but of course that
precise number is based on a set of imprecise assumptions. It is
assumed that there will be one suspension per year, which we know, from
the Minister’s remarks, has not been the case to date. There
have been no suspensions so far. It is assumed that the cost is
£10,000. Of course, with 10 suspensions over a 10-year period,
at a rate of £10,000, and the application of a discount rate,
the result would be the remarkably precise number of
£93,166.
I wonder why
we are spending legislative time introducing regulations to facilitate
the use of a power that has not been used. It would be helpful if the
Minister explained further why the Government commenced the process,
and what the end-to-end cost has been. That does not appear to be
reflected in the impact
assessment.
On
the second set of regulations, it is, again, not clear how many times
uncertainty has arisen about the principles applying to statements made
by an issuer. The costs sound pretty interesting. The regulatory impact
assessment states, on page
4:
“It
is reasonable to envisage perhaps 2-3 cases over the next ten years,
with costs in the region of £1-2 million for each
side”
and
adds that there would also be a raft of smaller cases. It gives a cost
range of £5 million to £15 million.
It would be
helpful if the Minister explained what assessment the Government have
made of the current costs, how much litigation has arisen as a
consequence of people relying on the common law in relation to
issuers’ statements, and what benefit is expected to accrue from
the regulations, particularly given the fact that, as she has said,
there would be little impact on the day-to-day checking process of
issuers, because of the risk to reputation of getting things
wrong.
Page 5 of the
regulatory impact assessment
states:
“Directors
contemplating dishonesty already face an array of penalties and are
likely to mislead only in extreme and pressured
circumstances.”
I
am not quite sure what sort of mischief is to be tackled by the
regulations, and whether the scale warrants the introduction of the
statutory instrument and the time being taken by the Government and the
industry to respond to consultation on it.
4.43
pm
Mr.
Jack:
It is a pleasure to speak in the debate,
Mr. Streeter. I had better mention that I am a director of a
plc, as stated in the Register of Members’ Financial Interests,
and as I declared at the start of my speech on the Budget; but I do not
think that that relates directly to the matters under
consideration.
I
should like the Minister to clarify one remark that she made. She said
that the regulations could be invoked by another member state. I am
intrigued to know under what circumstances another member state would
invoke the measures to the extent of issuing some kind of request or
instruction to, I presume, the equivalent of the FSA throughout the
European Union, to de-list a security.
It is not
entirely clear to me under what circumstances the FSA must accede to a
request and follow through on the procedures that we are discussing. I
presume that there must be some burden of proof that a security is in
some way flawed, as determined in the regulations. Will the Minister
clarify the reality of how it is to
operate?
4.45
pm
Sarah
McCarthy-Fry:
I thank those who contributed to the
debate—and those who did not. First, I shall answer the right
hon. Member for Fylde.
The powers
under section 313C of FSMA to suspend or remove a financial instrument
from trading deal with when an instrument has been suspended or removed
from trading in another European economic area state; the powers have
been used by the FSA, which acts on notice from other EEA competent
authorities. I am sure that the Committee will agree that if an
instrument has been suspended or removed from trading for the
protection of EEA consumers, the FSA would similarly want to protect
consumers in this country.
I turn next
to the remarks of the hon. Member for Fareham. The FSA is of the view
that it is important to
address the defect in the UK regime, although it has not yet used the
powers. That is so particularly in the post-MiFID context—the
markets in financial instruments directive—as considerable
trading takes place outside the rules of exchanges and multilateral
trading facilities.
Mr.
Hoban:
Is it not the case that the statutory instrument
simply enables the FSA to issue notifications through the regulatory
information services, rather than writing directly to each participant
in those markets? The FSA is asking for an easier route for doing the
same job, despite the fact that it has never used the
powers.
Sarah
McCarthy-Fry:
It is not just information. At the moment,
powers can be used only through the regulated market—through
what is traded on the London stock exchange. We are extending them to
enable the FSA to do that. The Takeover Panel expressed concerns about
the FSA’s inability to halt trading in the over-the-counter
markets. Indeed, there were occasions during the financial crisis when
a trading suspension was required, and the FSA was able only to suspend
the listing.
It is
important that the FSA has effective tools to deliver its objectives. I
believe that the regulations help it to do that.
Question
put and agreed to.
Resolved,
That the
Committee has considered the draft Financial Services and Markets Act
2000 (Liability of Issuers) Regulations 2010.—(
Sarah
McCarthy-Fry
.
)
4.48
pm
Committee
rose.