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) —
|
| Department | HM 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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