8 Financial services: benchmarks
| Committee's assessment |
Legally and politically important |
| Committee's decision | Not cleared from scrutiny; further information requested; conditional scrutiny waiver granted for the Council meeting of 6 October; drawn to the attention of the Treasury Committee
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| Document details | Proposal for a Regulation on indices used as benchmarks in financial instruments and financial contracts
|
| Legal base | Article 114 TFEU; ordinary legislative procedure; QMV
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| Department | HM Treasury |
| Document Numbers | (35328), 13985/13 + ADDs 1-2, COM(13) 641
|
Summary and Committee's conclusions
8.1 This proposed Regulation concerns indices used as benchmarks
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 and contributors, enhance the quality and accuracy
of input data and methodologies used by administrators and ensure
adequate protection for consumers and investors using benchmarks.
On the basis of the preceding Committee's recommendation the House
of Commons issued a Reasoned Opinion on this proposal (in November
2013), challenging the supposed benefits of EU level action.
8.2 In February the previous Government told our
predecessors about a new compromise text tabled by the previous
Latvian Presidency, which contained significant improvements over
the previous version and which it wished to support in a General
Approach. The preceding Committee welcomed the improvements: the
focus on a limited number of "critical benchmarks" and
the reduced role for the European Securities and Markets Authority
in favour of national supervisory authorities. Although the Committee
found it premature to clear the document from scrutiny, it granted
a scrutiny waiver to enable the Government to support a General
Approach in the Council in line with the improvements in the compromise
text.
8.3 In our Report of 21 July, we said that we welcomed
the continued focus of the Presidency in trilogues on a proportionate
approach to the regulation of benchmarks. We asked the Minister
to inform us, once trilogues were sufficiently advanced of:
i) the extent to which the European Parliament's
"comply or explain" initiative was likely to incorporated
into a final text; and
ii) what such an initiative would involve, particularly
for UK benchmark producers, the financial services industry and
consumers.
8.4 The Economic Secretary to the Treasury (Harriet
Baldwin) writes now to inform the Committee of the possible, final
agreement of the proposal in Council on 6 October. She asks that
the document be cleared from scrutiny, in order to give the Government
the flexibility to support any text emerging from ongoing trilogues
which meets the Government's negotiating objectives and represents
a sufficiently proportionate approach to benchmark regulation.
8.5 We thank the Minister for her helpful letter.
8.6 We refer to the possibility that a final agreement
of the text could take place at the Council meeting of 6 October
when the House will be in recess. We also understand that because
trilogues are ongoing and because of the timing of the Conference
recess and that Council meeting, the Minister is unable at this
stage to supply us with a meaningful text for our consideration.
8.7 On the understanding that the UK will only
support a text at the 6 October meeting which meets the UK's negotiating
objectives as set out in the Minister's letter (particularly at
paragraph 8.10 of this Report), we grant a scrutiny waiver. We
request that the Minister lodge a text when one is available,
and continue to keep us closely informed of further developments,
particularly the outcome of the Council meeting.
8.8 We draw this Report to the attention of the
Treasury Committee.
Full
details of the documents:
Proposed Regulation
on indices used as benchmarks in financial instruments and financial
contracts: (35328), 13985/13 + ADDs 1-2, COM(13) 641.
Minister's letter of 10 September 2015
8.9 In her letter of 10 September, the Minister updates
us on developments and, in particular, responds to the questions
set out in our Report of 21 July.
8.10 On the question of proportionality, she says
that this remains an ongoing area of discussion. She explains:
"Throughout this process, our objective
has been to ensure that the Regulation will apply in a proportionate
manner, and fully accommodates and reflects the diverse nature
of benchmarks, consistent with the Principles for Financial Benchmarks,
published by International Organization of Securities Commissions
(IOSCO) in July 2013. The Government will continue to support
a strong Benchmarks Regulation that will apply in a fair and proportionate
manner and officials are working closely with international counterparts,
including the Presidency, to achieve this aim."
8.11 However, as the negotiations progress, the Minister
says that she cannot be certain of the extent to which the approach
of the European Parliament (EP) to proportionality will be incorporated
into the final Regulation. She explains that both the EP and General
Approach texts set out requirements on benchmark administrators,
supervised contributors and users of benchmarks within the EU.
She further explains that such contributors and users already
fall within the scope of other regulation as a matter of EU law,
including "a broad cross section of the financial services
industry, including credit institutions, investment firms, insurance
firms and trade repositories". This means that:
"The Regulation would therefore be directly
applicable to all UK benchmark administrators, supervised contributors
and supervised users. Contributors and users of benchmarks that
are not already regulated as a matter of EU law (and thus fall
outside of the relevant definition in the text) will not fall
within scope of the Benchmarks Regulation."
8.12 She then provides the further information we
requested on the EP's "comply or explain" initiative:
"In addition, the Parliament text proposes
that a number of the requirements expected of benchmark administrators
need not necessarily apply in respect of their non-critical benchmarks.
In these cases, the administrator will be expected to comply with
the Regulation, or explain why compliance would not be appropriate.
Under the Parliament proposal the requirements which are always
binding on administrators include the need to publish or disclose
all existing or potential conflicts of interest, the creation
of an accountability framework, and an independent internal or
external function with the capability to ensure compliance with
the Regulation."
8.13 The Minister comments on another aspect of the
proposal of interest to the Committee—its application to
third country benchmarks, administered outside the EU:
"Given the widespread use of third-country
benchmarks in EU markets, both the Parliament and Council texts
agree that alternative mechanisms beyond simple equivalence are
required to ensure a workable third-country regime. The UK continues
to work closely with international counterparts to ensure that
these mechanisms are appropriate and correctly calibrated in the
final Benchmarks Regulation, including safeguards against unintended
consequences."
8.14 She then addresses the possible, final agreement
of the proposal at ECOFIN meeting of 6 October:
"Given the number of complex outstanding
issues in the negotiation, we do not currently expect these be
resolved in the next trilogue on 22 September 2015; two further
meetings are expected in mid and late October. However, both Parliament
and the Presidency are working on draft compromise proposals and
it remains possible that a compromise agreement could be reached
at the next trilogue.
"In the event that the UK's objectives are
achieved in the forthcoming trilogue, the Government would wish
to be in a position to support the Regulation in the event of
a vote in the Economic and Financial Affairs Council on 6 October
2015. This will maximise the chance that the UK secures a positive
outcome on this file that has material consequences for financial
markets in the United Kingdom and the European Union. With this
in mind, and given that the detail of any final text is unlikely
to be known before the House rises for recess, I hope that on
the basis of the information provided, the Committee will able
to clear this document from scrutiny."
Previous Committee Reports
First Report, HC 342-i (2015-16), chapter 32 (21
July 2015); Thirty-seventh Report HC 219-xxxvi (2014-15), chapter
1 (18 March 2015); 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).
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