Clause
13Power
of FSA to prohibit, or require disclosure of, short
selling Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: I do not want to say a huge amount about the
clause. There was some discussion at the evidence sessions about
whether the clause was needed, because similar paths had been taken by
the FSA during the financial crisis to tackle some of the issues
relating to short selling of certain banks’ shares. It was
argued that the FSA took action under its market abuse powers and that
that was not appropriate. Indeed, the British Bankers Association
said:
“Our
members consider that it is inappropriate that the FSA’s current
rules on the emergency restriction of short selling sit within the
market abuse rules of the FSA handbook. Rather, it would be better for
them to be moved to the disclosure rules. The placement of generalised
rules on short selling into the market abuse rules wrongly associates
all forms of short selling with
abuse.” The
CBI echoes that. It
says: “The
previous temporary measures adopted by the FSA in respect of short
selling were taken under the market abuse regime partly because the FSA
believed it had no other power to
act.” We
welcome the fact that it is now put on a formal basis, although it
still sits within the part of the Financial Services and Markets Act
2000 that relates to market abuse. It has not gone all the way in
tackling the concern that the BBA
has. The
Minister has defended short selling on a number of occasions on the
Floor of the House—once in response to a question by my hon.
Friend the Member for Macclesfield (Sir Nicholas Winterton). The
Minister is a very clear opponent of that form of trading in markets.
Of course, it can give rise to a number of issues. The impact
assessment characterises the problems with short selling. It can lead
to three aspects of market failure: market abuse, disorderly markets
potentially leading to a depositor run, and transparency deficiencies.
It was around the issue of disorderly markets that such changes were
largely introduced.
12.15
pm We
do not, therefore, have an issue with the introduction of part 8A, but
I do want to raise a question about the wording of proposed new section
131B(1). My assumption is that the Government are seeking to prevent
the short selling of certain financial instruments, such as the shares
of Barclays bank, HSBC or the Royal Bank of Scotland. However, it is
not entirely clear from subsection (1) whether that is the
full limit of their ambitions, because it states:
“The
Authority may make rules prohibiting in specified cases persons from
engaging in short
selling”. I
am not sure whether that means that the Government would like to stop
an institution short selling. They might tell a particular hedge fund
or investment manager to stop short selling, rather than saying that
they want to stop the short selling of a particular financial
instrument. Will the Minister clarify that, because it would seem odd
for the rules to focus on stopping one institution from engaging in
short selling rather than applying across the market? If that is the
Government’s intention,
they could use powers elsewhere in the Bill instead. I would be grateful
for some clarity on that aspect of the rules from the
Minister. John
Howell: I have three issues on the clause. The first is
the definition, the second is the clarity of the proposals and the
third is the relationship with the international regime.
There has not
been a legal definition of short selling to date, so the Bill sets a
precedent. The Committee will recall the evidence session at which
Simon Gleeson of Clifford Chance said that the Bill provides
“a basis for
banning selling. The definition of short selling, as set out in the
legislation, is any transaction in which someone might benefit if the
value subsequently goes
down.”——[Official Report, Financial
Services Public Bill Committee, 10 December 2009; c.
105.] It was
commented that the proposals were more akin to banning selling than
short selling. That witness session revealed a wish for a more
thoughtful definition. There was an acknowledgement that it was
difficult to define short selling. The lawyers offered us the
opportunity to have a paper providing more evidence regarding what a
definition might look like. I am not sure whether anything has yet
emerged, but it would be useful to pursue it, because there is concern
that, by common consent, the definition in the Bill still needs to be
fleshed out. My question, therefore, is how the definition will be
taken forward, given the concern about it among such distinguished
lawyers. On
the clarity of the proposals, the clause proposes two
things—emergency powers to stop short selling, which is largely
separate from abuse, although linked to it, and a disclosure regime. To
look first at the stopping part of the proposals, my hon. Friend the
Member for Fareham made a valid point, which was also made by the
British Bankers Association, when he asked what the purpose of the
proposals is. Is it to allow the FSA to suspend trading and stop
activity in a certain instrument or is it to stop certain firms from
undertaking such activity?
The FSA
accepts that regulatory intervention is justified where there are
identified market failures and it is expected to deliver net benefits
to the market, and I see no disagreement about that. However, that
means that we need—the CBI has called for this—to know
more about the circumstances in which the provisions will be used and
how they will be used, given that the Bill is aimed principally not at
abuse, but at disorderly markets and transparency deficiencies. It is
relevant to link that to the assessment in the discussion paper that
the FSA produced on the issue almost a year ago. That paper looked at
six options, of which the stopping of the selling only when there was
an urgent need was the one that eventually came through into the Bill.
However, the circumstances need to be better defined because they were
not well defined in the document. Will the Minister comment on the
balance that we need between recognising the benefits of short
selling—an increased number of sellers, improved liquidity,
increasing trade volumes and reducing the transaction costs and overall
improvements in efficiency—and the specific problems that occur
in disorderly markets where there is an excess of volatility that can
lead to contagion.
The FSA
document also pointed out that emergency measures themselves may lead
to additional volatility just because they have had to be taken and
brought into
use. Therefore, something about the circumstances that justify the
imposition of this measure would
help. Let
me repeat again that the FSA accepts that regulatory intervention is
justified when there are identified market failures and when it is
expected to deliver net benefits to the market. Paragraph 3.17
states: “It
is not clear whether a lack of transparency about the level of
short-selling and the identity of short sellers gave rise to a material
market failure. Further there is the question whether the benefits of
any mandatory disclosure requirements exceed the
cost.” However,
what evidence is there that disclosure will be useful in normal market
situations and will improve stability in volatile times? The FSA
document is principally considering market abuse, but we need to extend
beyond that. A process needs to take place in relation to the costs
involved. I did not mean to be entirely glowing about the range of
benefits that is put in here. A process seems to be under way of
bringing the number down. I was struck by the way in which the impact
assessment does not take into account opportunity costs because they
were unable to be quantified. They may be unable to be quantified, but
they are certainly not equal to zero, so a process needs to take place
in relation to
that. Another
issue that I wanted to raise was the relationship with the
international regime. The Treasury has already admitted that the UK
currently has a wider definition of market views that many of its
European counterparts. Paragraph 5.2 of the FSA documents
states: “We
know that market participants have encountered problems and significant
costs in having to comply with the variety of different regimes
introduced in the relevant jurisdictions.”
There have also been
calls for the regime to be applied as widely as possible
internationally. In February, the International Organization of
Securities Commission and the Committee of European Securities
Regulators had working parties on short selling with the aim of trying
to produce a draft law by the end of 2009. It will be good to have an
update on that. The issue is not consistent across the European Union.
David Ereira in his evidence session said that no assurances could be
given that what is being proposed in this clause will dovetail into the
EU, and that the UK was jumping the gun. He
said: “It
will probably work out all right, because the wording is sufficiently
wide that in all probability we will be able to come up with
appropriate regulations that fit within whatever comes out of the
international processes. It just seems to me more appropriate to wait
and see what comes out of those international
processes”.——[Official Report, Financial
Services Public Bill Committee, 12 January 2010; c. 110,
Q48.] If we
look at how prominent members of the European Union have dealt with the
issue over the past few months, we get a varied pattern. Austria saw it
as abuse and linked it to market manipulation and insider trading.
Belgium linked it to good order, integrity and transparency and
introduced rules that are restrictions on the vending of shares. The
Czech Republic took no action. Denmark’s ban applies to short
selling in financial companies. Finland went for more supervision.
France aimed at short selling of financial sector securities and
Germany principally banned naked short selling of specific financial
institutions. That is a hugely disparate approach, and one can
completely understand where the lawyers who spoke in the
evidence-taking sessions were coming from when trying to get to grips
with the difficulties that
companies face with this, and the need for consistency. I hope that the
Minister will provide some clarification on those
issues. Ian
Pearson: Indeed I will. Let me set out the purpose and
thinking behind the clause before addressing the comments made by the
hon. Members for Henley and for Fareham. In clause 13, we are trying to
give the FSA the power to control all forms of short selling that might
threaten financial stability in the future. As has been demonstrated,
the FSA already has the power to control short selling, but under its
existing powers it can do that only when it considers that short
selling amounts to market abuse. Certain short selling
activities—which legally cannot and should not be characterised
as market abuse—might nevertheless give rise to disorderly
markets and create risks to financial stability. That is why new part
8A gives the FSA the power to control short selling, so as to protect
the stability of the financial system and maintain confidence in
it.
Responses to
our public consultation showed overwhelming support for allowing the
FSA to place clear and independent restrictions on short selling, and
to require the disclosure of short selling. Under certain
circumstances, the FSA would be able to ban short selling in certain
financial instruments, such as shares in a particular bank. In response
to the hon. Member for Fareham, let me take the opportunity to clarify
that the powers would not enable the FSA to ban an individual firm from
short selling a stock when another firm was able to continue doing
so.
The FSA
expects to use the power to prohibit short selling infrequently. As is
known, it last used this power in a time of extreme market turbulence
when there was high and prolonged price volatility and downward
pressure on the price of financial stocks. By giving clear, separate,
independent powers in legislation other than that relating solely to
market abuse, we give clarity to firms about the scope of the
FSA’s powers, and why it has those powers—again, I
emphasise that it is to protect the stability of the financial system
and to maintain confidence in that system.
The FSA will
have the power to fine or censure persons who breach short selling
rules. That extends to all people who engage in short selling,
including those who are not authorised persons under FSMA. Allied to
that, the FSA will be able to require the production of information and
documents from a person—or persons connected to a
person—suspect of having contravened those rules. These are
straightforward enforcement powers, and it is not unusual for such
powers to extend to unauthorised persons in that way, as is the case
with the market abuse
regime.
The hon.
Gentleman made the point that we are putting short selling powers in
the market abuse rules section. I have said this already: we are
introducing a new part 8A. Although it will follow part 8 of FSMA,
which contains provisions on market abuse, it is entirely separate from
it. The new powers given in part 8A will not be dependent on provisions
in part 8; part 8A is located after it, but it is entirely separate.
Without being too controversial, let me draw an analogy with the
measure that allowed us to take action against Iceland. That featured
in a Bill with a long title that included the word
“terrorism”, even though the actions we took were about
protecting consumers. I shall not speak any further on that
matter.
The hon.
Member for Henley said that there was no proper definition of short
selling, and went on to give a number of international examples of
where other countries have taken action on short selling. We pretty
much know what we mean when we talk about short selling, but the FSA
will obviously consult on the definition that is to be included in its
rules.
12.30
pm On
the point that the hon. Member for Henley made about disclosure, there
is a global regulatory consensus that requiring disclosure on short
positions is a good thing and will help reduce the potential for
abusive behaviour and disorderly markets, so it is important to
implement it. He also asked about the relationship to EU rules. The
powers given to the FSA in the Bill will enable it to implement any new
EU rules on the
matter. It
is not possible to specify in detail what future circumstances might
require the introduction of an emergency ban. It is essential not to
fetter the FSA’s discretion to take action in conditions that
might require swift intervention. However, when using the proposed
emergency powers, the FSA would need to be satisfied that its rules
were necessary to maintain confidence in or protect the stability of
the UK financial system. For example, if short selling threatened to
destabilise an institution or institutions whose failure could have
systemic effects, or if short selling were otherwise leading to a
widespread loss of market confidence, it would be appropriate for the
FSA to
act. The
clause is important. It has been helpful to have this stand part debate
in order to put certain matters on the record. I commend the clause to
the
Committee. Question
put and agreed to.
Clause 13
accordingly ordered to stand part of the
Bill.
Clause
18Collective
proceedings
orders
Mr.
Hoban: I beg to move amendment 58, in
schedule 9, page 192, leave out line 10 and
insert ‘Select Committee for
Children, Schools and Families of the House of
Commons.’. As
this is the first clause of many dealing with collective proceedings,
with your agreement, Mr. Gale, I will preface my remarks
with some general comments about collective proceedings to save the
need for a separate stand part debate. The amendment flows explicitly
from the argument that I will make about the
clause. The
genesis of this clause and subsequent clauses on collective proceedings
lies in a report produced by the Civil Justice Council, a body that
advises the Lord Chancellor. The report, entitled “Improving
Access to Justice through Collective Actions”, was published in
December 2008. It was the product of a long process of discussion and
consultation within the legal community. If you are minded to read it,
Mr. Gale, you will see that the report runs to about 550
pages, so it is not an inconsequential document. It sets out some of
the benefits of collective proceedings. They are worth rehearsing as a
backdrop to this
debate. The
report
states: “Existing
collective actions are effective in part, but could be improved
considerably to promote better enforcement of citizens’ rights,
whilst protecting defendants from nonmeritorious
litigation...Effective collective actions promote competition and
market efficiency, consistent with the Government’s economic
principles and objectives, benefiting individual citizens, businesses
and society as a whole...Collective claims can benefit defendants
in resolving disputes more economically and efficiently, with greater
conclusive certainty than can arise through unitary claims...The
Court is the most appropriate body to ensure that any new collective
procedure is fairly balanced as between claimants and defendants, the
latter of which should be properly protected from unmeritorious,
vexatious or spurious claims as well as from so-called blackmail
claims.” The
report’s findings conclude with the
recommendation: “There
should be no presumption as to whether collective claims should be
brought on an opt-in or opt-out
basis.” I
will refer explicitly to that issue during debate on clause 19, which
gives the basis for opt-in or opt-out proceedings, a subject of some
controversy among various bodies.
The Civil
Justice Council’s report set out the basis for that. However, I
want to raise one issue. The Ministry of Justice, in responding to the
report, said that it did not see any merit in a general application of
collective proceedings but that proceedings should go ahead on a
sector-by-sector basis. So why is the financial services sector an
appropriate one for the introduction of what is a relatively novel
procedure in UK law, notwithstanding the existence of group litigation
orders? I
want to deal with three general questions. First, as I have said, why
is collective action needed in the financial services sector? Secondly,
is there an alternative to legal action? Thirdly, if we believe that
collective proceedings are the right course of action, are there
appropriate procedural safeguards to balance the interests of
defendants and
claimants? Why
is collective action needed? The explanatory note to clause 18, which
is phenomenally brief given the nature of the clause’s subject
matter,
says: “This
clause provides that the court can authorise collective proceedings to
be brought on behalf of a group of financial services claims that share
the same, similar or related issues of fact or
law.” We
can think relatively easily of issues in the financial sector that fall
into that category, such as mortgage endowment mis-selling and the sale
of payment protection insurance. One could also argue that Equitable
Life is another example of the type of case that might warrant a
collective proceedings order.
Such cases
have a common thread; they are not isolated examples. The Civil Justice
Council talked about the benefit of bringing these claims collectively,
ensuring a more conclusive outcome than where a unitary claim is
brought. So we could aggregate these cases, rather than deal with them
on case by case. That would give greater consistency and it would
result in a speedier response.
A timely
example is the bank charges case that was recently heard in the Supreme
Court. In parallel with that case, although there was a stay in hearing
individual cases, a large number of people were bringing cases through
county courts or small claims courts against banks, because of unfair
bank charges. The reason why the test case ended up in the Supreme
Court was that it was easier to deal with those issues on a collective
basis rather than on a case-by-case basis, although there would have
been a read-across between the Supreme Court case and resolving the
historic claims if the matters had gone in the OFT’s
favour.
Clearly there
are cases with a common thread which one could see falling within a
collective proceedings order, but I suppose that my question is not so
much about whether any cases will benefit from this process, as about
what it says about the strength of our regulatory system if we feel
that legal action is the right step to take. For me, that is the most
difficult issue to address, because we are talking about introducing
collective proceedings orders in a heavily regulated sector. The FSA
rulebook governs the activities of the people who will be defendants in
these cases. We already have an alternative disputes resolution
procedure in place—the Financial Ombudsman Service. Although the
remit of the FOS is to cover individual cases, it has almost filled a
vacuum in the current regulatory structure, in that it has also dealt
with a series of claims in particular areas. So it was the FOS that
dealt with the fallout from mortgage endowment mis-selling, for
example; it has dealt with all the cases that have arisen because of
that mis-selling.
It strikes me
that we are looking at a relatively novel legal process, when there
should be a mechanism in the regulatory structure that consumers can
rely on, without having to have recourse to the law. In the evidence
session, Peter Vicary-Smith
said: “It
is certainly the case that the regulator is not doing its job, as we
can see from the evidence on payment protection insurance and the
persistent mis-selling and lack of action. It created a situation where
the Financial Ombudsman Service was overwhelmed by claims, of which
some 89 per cent., I think, have been upheld. It is undoubtedly the
case that there are
problems.”——[Official Report, Financial
Services Public Bill Committee, 8 December 2009; c. 50,
Q140.] What we
do not see is the reform to the FSA that allow consumers to say that a
proper regulatory mechanism is in place. In debating clause 26, I think
that we will talk about the consumer redress route that the Bill also
introduces, but the Government need to make a much clearer argument
about why this particular route has been chosen, given that a
regulatory structure is in place to protect the interest of customers
of financial services.
Is there not
a reform in the structure of regulation or the powers of the FSA that
would render the proposals unnecessary? The Ministry of
Justice’s response to the Civil Justice Council report
states: “Rights
of action should be introduced only where there is evidence of need and
following an assessment of economic and other impacts and consideration
of alternative approaches. In particular, regulatory options should be
considered before introducing court based
options”. I
do not think that the Government have made that case—it is not
apparent from last year’s White Paper or the explanatory notes.
I hope that the Minister will take the opportunity to explain why this
route is preferred and why other regulatory options are not
available. The
CBI said in its briefing to the Committee that it believed
that “priority
should be to ensure that current regulation does its job, and then
greater emphasis placed on other, more effective forms of redress such
as alternative dispute
resolution.” To
use the Minister’s favourite Titanic metaphor, perhaps we should
focus more on prevention than on cure, and think about what we should
do to avoid sailing into the iceberg in the first place, rather than on
what is going to happen on deck when the ship hits the iceberg. Some
consideration should be given to what the regulators are failing to do
at the moment that makes the provisions
necessary.
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