Session 2009-10
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General Committee Debates
Delegated Legislation Committee Debates

Draft Financial Services and Markets Act 2000 (Amendments to Part 18A etc.) Regulations 2010, Draft Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010



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

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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. 

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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

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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.
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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. 

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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

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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.  

 

DRAFT FINANCIAL SERVICES AND MARKETS ACT 2000 (LIABILITY OF ISSUERS) REGULATIONS 2010 

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.  


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Prepared 12:41 on 31st March 2010