Documents considered by the Committee on 4 February 2015 - European Scrutiny Contents

12 Financial services: benchmarks

Committee's assessment (a) Legally and politically important (b) Politically important
Committee's decision(a) Not cleared from scrutiny but scrutiny waiver granted under paragraph (3)(b) of the scrutiny reserve resolution; further information requested; (b) Cleared from scrutiny
Document details(a) Draft Regulation about benchmarks used in the financial services sector; (b) Opinion of the European Central Bank on document (a)
Legal base(a) Article 114 TFEU; co-decision; QMV (b) —
DepartmentHM Treasury
Document numbers(a) (35328), 13985/13 + ADDs 1-2, COM(13) 641

(b) (36347), —

Summary and Committee's conclusions

12.1 The draft Regulation (document (a)), held under scrutiny since October 2013, concerns indices used as benchmarks[56] in financial instruments, financial contracts or to measure the performance of investment funds. It seeks to improve governance of the benchmark process, prevent conflict of interests of benchmark administrators[57] and contributors,[58] enhance the quality and accuracy of input data and methodologies used by administrators and ensure adequate protection for consumers and investors using benchmarks.

12.2 The House of Commons is the only national parliament to have issued a Reasoned Opinion on this proposal (in November 2013). This challenged the supposed benefits of EU level action — the enhancement of the single market, the promotion of cross-border transactions and the protection of consumers — as being outweighed by potential disadvantages. Disbenefits included the unsuitability of harmonised rules to a wide variety of specific benchmarks, non-alignment with the International Organisation of Securities Commissions (IOSCO) standards, increased regulatory burdens on benchmark administrators and contributors, the risk to the independence of national statistics authorities and the lack of provision for third country benchmarks. In January 2014, the ECB published an Opinion which favoured the original proposal and its wide scope.

12.3 The Government now writes to inform us of the production of a new compromise text by the Latvian Presidency which contains significant improvements over the previous version and which it wishes to support in a General Approach. In view of this, it requests that we either clear the current document or grant a scrutiny waiver, though there is no official confirmation yet of when a General Approach might be sought. We note however that the next ECOFIN Council is on 17 February.

12.4 We thank the Minister for continuing to keep us well-informed of progress on the negotiation of the proposal (document (a)). We welcome the improvements, which the Minister says are reflected in the compromise text: the focus on a limited number of "critical benchmarks" and the reduced role for ESMA in favour of national supervisory authorities.

12.5 However, it is premature for us to clear the current document (a) from scrutiny given that:

a)  we have not yet had the chance to fully review the compromise text which has been made available to us (we understand that timing constraints prevent the deposit of the General Approach text with an Explanatory Memorandum); and

b)  this is a proposal on which we issued a Reasoned Opinion and which we would therefore wish to retain under scrutiny at this stage.

12.6 However, we are prepared to grant a scrutiny waiver in relation to document (a), pursuant to paragraph 3(b) of our scrutiny reserve resolution. This is to enable the Government to support a General Approach in Council in line with the improvements in the compromise text as described by the Minister. We look forward to hearing from her in due course as to the outcome of the relevant Council meeting.

12.7 Given the progress made on the proposal, we are now content to clear document (b), the ECB's Opinion.

Full details of the documents: (a) Draft Regulation on indices used as benchmarks in financial instruments and financial contracts: (35328), 13985/13 + ADDs 1-2, COM(13) 641; (b) Opinion of the European Central Bank of 7 January 2014 on indices used as benchmarks in financial instruments and financial contracts (CON/2014/2): (36347), —.

Background and previous scrutiny

12.8 The background to document (a), an account of its provisions, the draft Reasoned Opinion and our assessment of the Commission's response are set out in our Twentieth, Twenty-third, Thirty-ninth and Forty-seventh Reports of 2013-14. The debate on the Reasoned Opinion took place on 28 November 2013.[59] An account of the ECB Opinion (document (b)) is provided in our Fifteenth and Twenty-second Reports of 2014-15.[60]

12.9 In our last Report we noted the encouraging progress towards a more proportionate approach to regulating benchmarks, in line with IOSCO standards. We said that we expected the Minister to report to us before any General Approach was agreed. We also asked for her to include in that update the Government's view on press reports that the compromise text (a version of 9 September 2014) included Institutions for Occupational Retirement Provision (IORPS) under the definition of "supervised entities", thereby restricting their use of benchmarks to those "which are robust" and "provided by administrators that meet prescriptive requirements": was this a prudent development for holders of pensions or an unwelcome constraint on investment in pensions? We also requested the Minister, in the event of rapid progress in negotiations and significant changes proposed to the original text, to consider depositing with us the proposed General Approach text together with an Explanatory Memorandum as this would provide better transparency.

Minister's letter of 2 February 2015

12.10 The Economic Secretary to the Treasury (Andrea Leadsom) provides the following update on progress in the negotiations of the Regulation. She says:

    "The Latvian Presidency of the Council of the European Union has proposed a new compromise text on the EU Benchmarks Regulation. This text contains significant improvements over the previous version.

    "Most importantly, the text changes the balance between national competent authorities and the European Securities and Markets Authority (ESMA) in favour of the former. The circumstances in which ESMA can take binding decisions in relation to the regulation of benchmarks has been very tightly constrained, and the ability of supervisors to retain control of supervision of benchmarks in their jurisdictions is maintained.

    "On the important issue of which benchmarks are designated as critical, our objective in negotiations has been to ensure that this is a small and clearly defined category. The present Council text achieves this objective, with a benchmark only able to be defined as 'critical' on an EU-wide basis if they meet a high quantitative criteria, alongside a slightly lower quantitative threshold for benchmarks that can meet a set of cumulative qualitative criteria.

    "In your letter you raise the issue of the benchmarks that Institutions for Occupational Retirement Provision (IORPS) should use. The Government strongly believes that given their responsibility for the savings of pension holders, it should be ensured that the benchmarks IORPS use are robust and are held to high standards.

    "I have written regularly to update the Committee as negotiations have progressed and significant changes to the Commission's original proposal have been clearly highlighted and explained. I will ask my officials to share the Council text as it currently stands with your Committee. It is worth noting that this text is likely to be subject to further minor changes before General Approach is agreed.

    "Overall, the Council text has significantly improved over its several iterations and on the issues of greatest interest to the UK in this negotiation. Therefore, the Government is prepared to support a General Approach on the basis of the current proposed text, and I hope that on the basis of the information provided, the Committee will able to clear or waive scrutiny on this document."

Previous Committee Reports

(a) (35328), 13985/13: Twenty-eighth Report HC 219-xxvii, (2014-15), chapter 7 (7 January 2015); Twenty-second Report HC 219-xxi, (2014-15), chapter 8, (26 November 2014); Fifteenth Report HC 219-xv (2014-15), chapter 8 (22 October 2014); Forty-seventh Report HC 83-xlii (2013-14), chapter 12 (30 April 2014); Twenty-third Report HC 83-xxi (2013-14), chapter 5 (20 November 2013); Twentieth Report HC 83-xix (2013-14), chapter 4 (30 October 2013); (b) (36347), —: Twenty-eighth Report HC 219-xxvii, (2014-15), chapter 7 (7 January 2015),Twenty-second Report HC 219-xxi, (2014-15), chapter 8, (26 November 2014); Fifteenth Report HC 219-xv (2014-15), chapter 8 (22 October 2014).

56   Defined in the proposal as "any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument is determined or an index that is used to measure the performance of an investment fund". Back

57   Defined in the proposal as "the natural or legal person that has control over the provision of a benchmark". In practical terms this means those responsible for the establishment, design, production and dissemination of a Benchmark. Back

58   Defined in the proposal as "a natural or legal person contributing input data". This is data used by the administrator to determine the benchmark. Back

59   Stg Co Deb, European Standing Committee B, 28 November 2013, cols. 3-10. Back

60   Fifteenth Report, HC 219-xv (2014-15), chapter 8 (22 October 2014). Back

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Prepared 13 February 2015