Documents considered by the Committee on 16 September 2015 - European Scrutiny Contents

8 Financial services: benchmarks

Committee's assessment Legally and politically important
Committee's decisionNot 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
Document detailsProposal for a Regulation on indices used as benchmarks in financial instruments and financial contracts
Legal baseArticle 114 TFEU; ordinary legislative procedure; QMV
DepartmentHM 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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Prepared 1 October 2015