4 Financial services: benchmarks
| (35328)
13985/13
+ ADDs 1-2
COM(13) 641
| Draft Regulation on indices used as benchmarks in financial instruments and financial contracts
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| Legal base | Article 114 TFEU; co-decision; QMV
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| Document originated | 18 September 2013
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| Deposited in Parliament | 26 September 2013
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| Department | HM Treasury
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| Basis of consideration | EM of 14 October 2013
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| Previous Committee Report | None
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| Discussion in Council | Not known
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| Committee's assessment | Legally and politically important
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| Committee's decision | Not cleared; further information requested.
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Background
4.1 In recent years, following the financial services crisis,
the Commission has presented a wide range of regulatory proposals.
The document
4.2 The Commission now presents this draft Regulation on indices
used as benchmarks in financial instruments, financial contracts
or to measure the performance of investment funds. The proposal
appears to have four main objectives:
· to
improve the governance and controls over the benchmark process
and in particular ensure that administrators avoid conflicts of
interest, or at least manage them adequately;
· to improve
the quality of the input data and methodologies used by benchmark
administrators and in particular ensure that sufficient and accurate
data is used in the determination of benchmarks;
· to ensure
that contributors to benchmarks are subject to adequate controls,
in particular to avoid conflicts of interest and that their contributions
to benchmarks are subject to adequate controls — where necessary
the relevant competent authority would have the power to mandate
contributors to continue to contribute to benchmarks; and
· to ensure
adequate protection for consumers and investors using benchmarks
by enhancing transparency, ensuring adequate rights of redress
and ensuring suitability is assessed where necessary.
4.3 Articles 2-21 of the draft Regulation:
· set
out various governance requirements proposed for administrators
and contributors, such as managing conflicts of interest and transparency;
· contain
provisions relating to the input data and methodology of the benchmark
itself; and
· contain
provisions relating to proposed mandatory participation for contributors
and third country equivalence for non-EU countries.
4.4 Articles 22-41 of the draft Regulation would:
· provide
the procedure for authorisation and supervision of administrators
by competent authorities; and
· create
a mechanism for enforcement of the Regulation, for example by
requiring Member States to provide competent authorities with
certain powers.
4.5 The draft Regulation is accompanied by the Commission's
impact assessment and an executive summary of the assessment.
The Government's view
4.6 The Financial Secretary to the Treasury (Sajid
Javid) comments that the Government is concerned that this proposal
and its scope may raise subsidiarity issues. The basis for this
concern appears to be illustrated by some of the policy implications
he discusses, after first telling us that:
· the
Government has shown clear commitment to benchmark reform, taking
a leading role with carefully crafted reforms to LIBOR;
· following
the revelations about misconduct relating to LIBOR in the summer
2012, the Government commissioned Martin Wheatley (Chief Executive
of the Financial Conduct Authority) to carry out a review of LIBOR;
· the
Government acted swiftly to implement the recommendations of his
review — the Financial Services Act 2012 brought benchmark
activities within the scope of regulation under the Financial
Services and Markets Act 2000 and created a new criminal offence
of making a false or misleading statement or impression in connection
with the determination of benchmarks; and
· the
Government has also been supportive of ongoing work on broader
benchmark reform in various international fora — most notably
in the International Organization of Securities Commissions (IOSCO),
where a group co-chaired by Martin Wheatley developed international
principles for financial benchmarks.
4.7 The Minister continues that:
· the
Government questions the need for, and appropriateness of, the
Commission legislating for this issue in the manner that it has
done;
· the
Commission has not demonstrated that pan-EU legislation is needed
across all benchmarks;
· for
the majority of benchmarks, the action that the Commission has
proposed can be taken effectively at Member State level, as exemplified
by the Government's reforms to LIBOR;
· the
scope of the Commission's proposal is broad and contains detailed
rules that would apply to a diverse range of benchmarks and do
not seem to be fully in line with internationally agreed IOSCO
principles;
· the
Government questions whether such a broad scope is appropriate,
given the nature of the proposal;
· benchmarks
are not homogeneous in nature and as such, the rules that work
for one will not necessarily work for another;
· it is
therefore important to understand the implications and appropriateness
of rules set out in the proposal for all benchmarks potentially
caught within the scope; and
· the
EU is the first jurisdiction to propose legislation covering all
financial benchmarks — benchmark reform is an international
issue and given the use of many benchmarks across borders, it
is important that the legislation properly allows for benchmarks
based in other jurisdictions to be used within the EU.
4.8 The Minister also notes that the draft Regulation
empowers the Commission to develop delegated acts in a number
of different areas and comments that:
· the
Government will consider the appropriateness in each case;
· it is
important that matters of policy are decided in the overarching
proposal; and
· as the
text evolves during negotiation, the Government will monitor these
issues to ensure that any that may have policy implications are
dealt with in the draft Regulation itself.
4.9 Turning to the Commission's impact assessment
the Minister says that:
· the
Government considers that the assessment provides insufficient
detail for such a broad proposal;
· it is
important that the impacts of implementing the proposed legislation
are properly assessed;
· despite
the assessment stating that "the size of the market for financial
instruments and contracts potentially impacted by the benchmark
industry is enormous", it also states that "the approximate
number of benchmark administrators under scope in Europe is 500
and the approximate number of contributors to benchmarks under
scope is also 500";
· when
the scope of this Regulation is intended to cover all financial
benchmarks within the EU, these figures appear exceptionally low;
and
· the
Government considers that a more considered estimate of the number
of financial benchmarks likely to be covered by the proposal is
necessary before a true impact assessment can be made.
4.10 In a further comment illustrative of the apparent
inadequacy of the presentation of the proposal by the Commission
the Minister, noting that it is currently unclear how many benchmarks
and companies would be covered, given that at present many of
them are not supervised and do not fall within the scope of financial
regulation, says that it is not possible to calculate the potential
financial implications on UK financial market participants and
UK companies of the obligations that would be imposed.
Conclusion
4.11 The Minister makes plain that the Government
finds this draft Regulation unappealing. Nevertheless it seems
implicit in some of his comments, such as that about the approach
to delegated acts the Government will take, that it expects the
measure to be adopted. We would have expected, given the imperfections
in the proposal and its presentation, the prospect of a more robust
challenge to the principle of the proposal. We ask the Minister
to give us a clearer idea of whether the Government intends to
block the proposal, or at the least have it radically amended.
4.12 As for the presentation of the proposal we
are concerned about two points. First, the Minister illustrates
the inadequacies of the Commission's impact assessment. We should
like hear about the Government's efforts to secure a better assessment
from the Commission.
4.13 Secondly, the Minister suggests that the
Government has subsidiarity concerns about the proposal. He ought
to know, however, that it is not sufficient to state that the
"Government is concerned that this proposal and its scope
may raise subsidiarity issues" under the subsidiarity heading
of an Explanatory Memorandum. If the Minister is so concerned,
it is incumbent on him to explain his concerns to Parliament under
this heading and in detail. The principle of subsidiarity is intended
to protect EU electorates from supranational legislation where
national legislation is more appropriate, and so is of primary
importance to the scrutiny we carry out, particularly for a proposal
as important as this. We therefore ask the Minister to send a
full analysis of the Government's subsidiarity concerns in time
for our meeting on 12 November, which we will take into consideration
when deciding on that day whether to recommend that the House
issue a Reasoned Opinion, the deadline for which is 2 December.
4.14 In undertaking this analysis, we ask the
Minister to address the Commission's justifications for action
at the end of section 5 of its impact assessment, entitled Baseline
scenario — how would problems evolve without EU action?,
which, in the absence of evidence to the contrary, appear difficult
to refute:
"While the principles by IOSCO's and
ESMA/EBA and the work by the OSSG may stimulate action and encourage
convergence in rules, given their non-binding nature, not all
Member States may respond, and those that do may act in different
ways. This could lead to a fragmented regime governing the use
of benchmarks within the EU. While this is not a problem for benchmarks
that are entirely national, for those that are widely used or
produced across a number of Member States national action typically
does not capture all links in the chain of a benchmark's production.
Another drawback is that risks would be addressed by in a piecemeal
fashion, but would not address all risks, or constitute an integrated
framework. Fragmentation could also facilitate regulatory arbitrage,
as benchmark production can be easily moved to other Member States.
This would compromise benchmark quality. Besides, sanctions under
the MAR proposal have a deterrent but not preventive effect and
they address manipulation by contributors but do not cover the
current deficiencies of the benchmark setting process regarding
the lack of appropriate governance, controls and transparency
by administrators and contributors.
"Consequently, in the absence of European
action, important benchmarks with a European dimension would be
regulated only at the national level. Other critical benchmarks
such as those for oil might continue to be self-regulated in some
jurisdictions and so not address the fundamental conflicts of
interest that exist. Allowing this baseline scenario to remain
would result in the on-going lack of trust in benchmarks, contracts
and financial instruments would continue to reference unreliable
benchmarks and their prices would be distorted.
"Finally, as there is an international
consensus of the need for a coordinated approach on benchmarks'
reform, the Commission is participating in IOSCO and ESMA/EBA
task forces on benchmarks' reform in order to ensure the maximum
level of alignment across these work streams and the Commission's
proposal."
4.15 Additionally, the Minister says in his Explanatory
Memorandum that the Commission's approach is not suitable for
all the benchmarks potentially within the scope of the proposal.
We ask him to say which of the benchmarks are not suitable, and
why. We will consider his further explanation on this when considering
whether to recommend a Reasoned Opinion.
4.16 Pending the Minister's replies, the proposal
remains under scrutiny.
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