Draft Reasoned Opinion of the House of Commons
Submitted to the Presidents of the European Parliament,
the Council and the Commission, pursuant to Article 6 of Protocol
(No. 2) on the Application of the Principles of Subsidiarity and
Proportionality.
a Draft Regulation
on indices used as benchmarks in financial instruments and financial
contracts[21]
TREATY FRAMEWORK FOR APPRAISING COMPLIANCE WITH SUBSIDIARITY
5.12 In previous Reasoned Opinions, the House
of Commons has set out what it considers to be the correct context
in which national parliaments should assess a proposal's compliance
with subsidiarity. The House of Commons continues to rely on
that context without restating it.
PROPOSED LEGISLATION
Purpose
5.13 The overall purpose of the Regulation is
to create a regulatory framework for indices used as benchmarks
in financial instruments, financial contracts or to measure the
performance of investment funds. The Commission explains that
"an index is a measure, typically of a price or quantity,
determined from time to time from a representative set of underlying
data. When an index is used as a reference price for a financial
instrument or contract, it becomes a benchmark".[22]
The Commission says that "the integrity of financial benchmarks
is critical to the pricing of many financial instruments",
including loans and mortgages and they "also play an important
role in risk management".[23]
5.14 The main objectives of the proposed Regulation,
as summarised by the Commission in its explanatory memorandum,
are 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;
- 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;
- 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 should
have the power to mandate contributors to continue to contribute
to benchmarks; and
- ensure adequate protection for consumers and
investors using benchmarks by enhancing transparency, ensuring
adequate rights of redress and ensuring suitability is assessed
where necessary.[24]
OPERATION
5.15 The draft Regulation is based on Article
114 TFEU which, with reference to Article 26 TFEU, creates a competence
for the EU to adopt measures "for the approximation of the
provisions laid down by law, regulation or administrative action
in Member States which have as their object the establishment
and functioning of the internal market".
5.16 In summary, the draft Regulation proposes
to achieve the stated objectives by:
- imposing various governance
requirements on administrators and contributors, such as managing
conflicts of interest and transparency, as well as provisions
relating to the input data and methodology of the benchmark itself.
They also contain provisions relating to mandatory participation
for contributors and third country equivalence for non-EU countries
(Articles 2-21); and
- providing a procedure for authorisation and supervision
of administrators by competent authorities and creating a mechanism
for enforcement of the Regulation, for example by requiring Member
States to provide competent authorities with certain powers (Article
22-41).
SUBSIDIARITY
5.17 In its explanatory memorandum, the Commission
asserts the proposal's compliance with subsidiarity as follows:
"While many benchmarks are national, the benchmark
industry as a whole is international in both production and use.
While action at national level in relation to national indices
may help ensure that any intervention is appropriately tailored
to the problems at national level, this may lead to a patchwork
of divergent rules, could create an un-level playing field with
the single market and result in an inconsistent and un-coordinated
approach. Benchmarks are used to price a wide variety of cross
border transactions, in particular in the interbank funding market
and derivatives. A patchwork of national rules would impede the
opportunity to produce cross border benchmarks and therefore impede
these cross border transactions. This problem has been recognised
by the G20 and FSB which charged IOSCO with producing a global
set of principles to apply to financial benchmarks. An EU initiative
will help enhance the single market by creating a common framework
for reliable and correctly used benchmarks across different Member
States."[25]
5.18 The Commission also considers that EU level
action is necessary to protect consumers:
- who do not possess the necessary
knowledge or experience to appropriately assess benchmark suitability
and who may be given a limited choice of benchmarks through standard
contract terms and the force of unequal bargaining power —
this will be addressed by the requirement that responsibility
for checking the suitability of benchmarks for retail contracts
rests with lenders or creditors; and
- who are based in different Member States from
a fragmentary national approach to cross border financial contracts
by enabling the use of cross border benchmarks.[26]
ASPECTS OF THE REGULATION WHICH DO NOT COMPLY WITH
THE PRINCIPLE OF SUBSIDIARITY
I) FAILURE TO COMPLY WITH ESSENTIAL PROCEDURAL REQUIREMENTS
5.19 By virtue of Article 5 of Protocol (No.
2) "any draft legislative act should contain a detailed statement
making it possible to appraise compliance with the principles
of subsidiarity and proportionality". The requirement for
the detailed statement to be within the draft legislative act
implies that it should be contained in the Commission's explanatory
memorandum, which forms part of the draft legislative act and
which, importantly, is translated into all official languages
of the EU. The fact that it is translated into all official languages
of the EU allows the detailed statement to be appraised for compliance
with subsidiarity (and proportionality) in all the national parliaments
of Member States of the EU, in conformity with Article 5 of Protocol
(No. 2). This is to be contrasted with the Commission's impact
assessment, which is not contained within a draft legislative
act, and which is not translated into all the official languages
of the EU.
5.20 The presumption in the Treaty on European
Union[27] is that decisions
should be taken as closely as possible to the EU citizen. A departure
from this presumption should not be taken for granted but justified
with sufficient detail and clarity that EU citizens and their
elected representatives can understand the qualitative and quantitative
reasons leading to a conclusion that "a Union objective can
be better achieved at union level", as required by Article
5 of Protocol (No. 2). The onus rests on the EU institution which
proposes the legislation to satisfy these requirements.
5.21 For the reasons given below, we do not
consider that the Commission has provided sufficient qualitative
and quantitative substantiation in the explanatory memorandum
of the necessity for action at EU level and the greater benefits
it would achieve. This omission, the House of Commons submits,
is a failure on behalf of the Commission to comply with essential
procedural requirements in Article 5 of Protocol (No. 2).
II) FAILURE TO COMPLY WITH THE PRINCIPLE OF SUBSIDIARITY
5.22 The House of Commons considers that the
impact assessment provided by the Commission provides insufficient
detail of the necessity for such a broad proposal. It should also
have provided a more considered estimate of the number of financial
benchmarks likely to be covered. Instead, the impact assessment
states that "the size of the market for financial instruments
and contracts potentially impacted by the benchmark industry is
enormous", whilst also stating 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"..[28]
Given the scope of this Regulation is intended to cover all financial
benchmarks within the EU, these figures appear exceptionally low.
5.23 The House considers that the first limb
of the test ("if and in so far as the objectives of the proposed
action cannot be sufficiently achieved by the Member States")[29]
is not satisfied because:
- 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;
- for the vast majority of benchmarks, actions
by Member States alone would not conflict with or hamper the objectives
of the proposed action and would be better taken at Member State
level given that this action can be targeted to the particular
issues concerning those benchmarks.
- national-level benchmark reform can be sufficiently
effective as demonstrated by the action taken by the UK to:
- reform LIBOR after the Wheatley 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
- make an active contribution to the work of the
International Organization of Securities Commissions (IOSCO) in
developing its Principles for financial benchmarks.
5.24 The second limb of the subsidiarity test
("but can rather, by reason of the scale or effects of the
proposed action, be better achieved at Union level")[30]
requires sufficient evidence of the greater benefits of EU action.
According to the Commission (see paragraphs 6 and 7 above) these
benefits are the enhancement of the single market by creating
a common framework for reliable and correctly used benchmarks
across different Member States, the promotion of cross border
transactions and the protection of consumers.
5.25 The House of Commons is not convinced by
the Commission's assertion of these benefits because there is
strong evidence from the UK financial services sector to demonstrate
that they are outweighed by the potential disadvantages of EU-level
action. This is because the proposal:
- seeks to regulate in a detailed
manner the production and use of benchmarks which is so varied
in nature that a harmonised solution, of such broad application,
would be harmful, particularly as the rules proposed do not seem
to be fully in line with internationally agreed IOSCO principles;
- would impose new burdens on administrators, contributors,
regulators and others, with very limited regard for the nature
of the relevant benchmark. These burdens may be very significant
given that it is currently unclear how many benchmarks would be
captured by this proposal — given the broad scope of the
proposal, which captures any index referenced in a financial contract,
UK market participants estimate the number of benchmarks captured
could be, at least, in the tens of thousands;
- may, through the imposition of such burdens,
result in the discontinuance of some existing benchmarks and impede
the creation of new benchmarks;
- could compromise the independence of national
statistics authorities as 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 be required to be
authorised and supervised, in the manner proposed by the Commission
with the envisaged role for the European Securities Markets Authority
(ESMA); and
- would not address the need to properly allow
for benchmarks used in non-EU jurisdictions to be used within
the EU and this could restrict the market in international financial
transactions— benchmark reform is an international issue.
CONCLUSION
5.26 For these reasons the House of Commons
considers this proposal does not comply with the principle of
subsidiarity.
21 COM(13) 641, final, 18.09.2013. Back
22
P.2 of the Commission's explanatory memorandum. Back
23
ibid. Back
24
P.2 of the Commission's explanatory memorandum. Back
25
P.5 of the Commission's explanatory memorandum. Back
26
P.6 of the explanatory memorandum. Back
27
Article 5 TEU. Back
28
Annex X to the Commission's impact assessment: Cost Benefit
Analysis And Administrative Burden Calculation. Back
29
Article 5(3) TEU. Back
30
Article 5(3) TEU. Back
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