5 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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| Department | HM Treasury
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| Basis of consideration | Minister's letter of 7 November 2013
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| Previous Committee Report | HC 83-xix (2013-14), chapter 4 (30 October 2013)
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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; recommended for debate in European Committee B on the draft Reasoned Opinion; further information requested
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Background
5.1 In recent years, following the financial services crisis,
the Commission has presented a wide range of regulatory proposals.
In September the Commission proposed 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.
5.2 When, last month, we considered this proposal
we noted that, although the Government clearly found this draft
Regulation unappealing, it seemed implicit in some of its comments,
such as that about the approach to delegated acts the Government
would be taking, that it expected the measure to be adopted. We
commented that 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. So we asked to have
a clearer idea of whether the Government intended to block the
proposal, or at the least have it radically amended.
5.3 As for the presentation of the proposal we
were concerned about two points. First, the Government had illustrated
to us the inadequacies of the Commission's impact assessment and
we asked to hear about its efforts to secure a better assessment
from the Commission.
5.4 Secondly, we had heard that the Government
had subsidiarity concerns about the proposal, but it had not explained
these to us. So we asked to have a full analysis of the Government's
subsidiarity concerns, which we would take into consideration
when deciding whether to recommend that the House issue a Reasoned
Opinion, the deadline for which is 2 December. We asked that the
analysis 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. Additionally, in relation
to the Government's assertion that the Commission's approach was
not suitable for all the benchmarks potentially within the scope
of the proposal, we wanted to know which of the benchmarks were
not suitable, and why ¯
we would consider this also when considering whether to recommend
a Reasoned Opinion.
5.5 Meanwhile the proposal remained under scrutiny.[20]
The Minister's letter
5.6 The Financial Secretary to the Treasury (Sajid
Javid) first comments that:
- the Government is a strong
proponent of benchmark reform having taken action domestically
to reform LIBOR and playing an active part in the work of the
International Organization of Securities Commissions (IOSCO) in
developing its principles for financial benchmarks; and
- the Government believes that there is scope for
action at an EU-wide level in relation to some benchmarks, subject
to various factors, which would include issues such as the geographical
spread of contributors or the potential impact of the failure
of those benchmarks across different Member States.
5.7 But he continues that:
- the Government considers that
for a vast majority of benchmarks, action is better taken at Member
State level, given that this action can be targeted to the particular
issues concerning those benchmarks;
- it is currently unclear how many benchmarks would
be captured by this proposal; and
- given the broad scope, which captures any index
referenced in a financial contract, and having spoken to market
participants, the Government estimates the number of benchmarks
captured could number at least in the tens of thousands.
5.8 In relation to subsidiarity the Minister
says:
"After further consideration, I consider that
this proposal does not comply with the principle of subsidiarity
under Article 5(3) of the TEU. This proposal, which is so broad
in its application, is not necessary and does not address a common
issue in all Member States, rather it seeks to regulate the production
and use of benchmarks which is so varied in nature that a harmonised
solution, of such broad application, would be harmful. The measures
would impose new burdens on administrators, contributors, regulators
and others, with very limited regard for the nature of the relevant
benchmark. Some benchmarks may cease to be produced, and the proposal
might discourage new benchmarks being produced. Furthermore, for
the vast majority of benchmarks, actions by Member States alone
would not conflict with or hamper the objectives of the proposed
action. Action at national level would allow each relevant Member
State to address the particular problems associated with specific
benchmarks and the benchmark-setting process in its jurisdiction.
"In particular, the Government strongly objects,
including on the ground of subsidiarity, to the inclusion of benchmarks
produced by national statistics authorities. Such authorities
are independent producers of official statistics relating to the
economy, population and society at national, regional and local
levels. Their special features, and the role they play, mean it
is not appropriate for them to require authorisation, and to be
supervised, in the manner proposed by the Commission with the
envisaged role for ESMA. The Government will continue to argue
robustly for the removal of national statistics authorities from
the scope of the legislation.
5.9 Finally, the Minister tells us that negotiations
have yet to commence in the Council and that, as negotiations
progress, the Government will continue to pursue effective benchmark
reform.
Conclusion
5.10 We note that the Minister does not clearly
address our question as to whether the Government intends to block
the proposal or have it radically amended. Nor does he respond
to our question about Government efforts to secure a better impact
assessment from the Commission. So we should like to hear further
from the Minister on these points, as well as hearing in due course
about developments in the negotiation of the proposal. Meanwhile
the document remains under scrutiny.
5.11 We are grateful for the Minister's further
comments on subsidiarity. We think the Government's concerns are
well founded, and we recommend that the House sends the attached
draft Reasoned Opinion to the Presidents of the EU institutions
by 2 December, following a debate in European Committee B.
20 See headnote. Back
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