Fifteenth Report Contents

Instruments of interest

Draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019

Draft Money Market Funds (Amendment) (EU Exit) Regulations 2019

Draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019

16.Benchmarks are used in a wide range of markets to help set prices, measure performance, or work out amounts payable under financial contracts. The Benchmarks Regulation4 places requirements on administrators (a natural or legal person that has control over the provision of a benchmark), supervised users of, and supervised contributors to, benchmarks. These relate to a range of issues including benchmark methodology, governance and transparency. Approved administrators and/or benchmarks are placed onto the publicly available European Securities and Markets Authority (ESMA) Benchmarks Register (“the ESMA register”). The Government is creating a Financial Conduct Authority (FCA) register of approved benchmarks and benchmark administrators to replace the register maintained by ESMA. Benchmarks and administrators who appeared on the ESMA register as the result of a successful application to the FCA will be migrated onto the FCA register.

17.Benchmarks which appear on the ESMA register at exit day, as a result of a successful application outside of the UK, will be temporarily migrated to the new FCA register for a period of 24 months after exit day. Supervised entities will automatically be able to continue to use these benchmarks, or benchmarks provided by these administrators, in the UK for up to 24 months after exit day, unless and until an application for approval in the UK is refused. These administrators or benchmarks must become approved by the FCA to enable their continued use in new contracts within the UK beyond this 24-month period.

18.A money market fund (MMF) is a fund that invests in liquid assets such as treasury bills, commercial paper and certificates of deposit.5 The draft Money Market Funds Regulation (“the MMF Regulation”)6 regulates the use of the designation “MMF” for funds to ensure that no fund may use that designation without authorisation. MMFs are structured as either undertakings for collective investment in transferable securities (UCITS) or alternative investment funds (AIFs) and can be currently marketed across the EU under the marketing passports rules. The MMF Regulation is amended so that after exit day it applies to MMFs established in the UK only. As set out in the Government’s “temporary market permissions regime”,7 European Economic Area (EEA) funds that satisfy the relevant conditions can continue to access the UK market on the same basis as they did before exit day for a period of up to three years from exit day, with a power for HM Treasury (HMT) to extend the regime by no more than 12 months at a time in certain circumstances. EEA funds which wish to access the UK market will need to gain the necessary permission to market into the UK as a third party.

19.A prospectus contains important information that investors use to decide whether to invest in a company’s securities. The Prospectus Directive8 contains the harmonised rules governing the content, format, approval, and distribution of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market in an EEA State. After exit day, all prospectuses for securities to be offered to the public in the UK or admitted to trading on a UK regulated market will be required to be approved by the FCA, rather than allowing prospectuses approved by another EEA regulator to be passported in for use in the UK, as is currently the case. However, any prospectus approved by the regulator in an EEA State prior to exit can continue to be used in the UK after exit day, up to the end of their validity (up to 12 months after the prospectus is first approved).

20.Each of these three instruments transfers responsibilities and functions that currently sit with EU bodies to the appropriate UK body. HMT will have responsibility for equivalence determinations and the power to make delegated acts. However, each instrument also introduces a legislative sub delegation power to the FCA, with the powers of the ESMA transferred to the FCA to draft binding technical standards. The Government considers that the FCA is the appropriate body to carry out these functions due to its technical expertise.9

Draft Motor Vehicles (Compulsory Insurance) (Amendment etc.) (EU Exit) Regulations 2019

21.The Motor Insurers Bureau (MIB) is the UK’s appointed Compensation Body, enabling UK residents who are victims of motor traffic accidents in another European Economic Area (EEA) Member State to make claims in the UK (“the visiting victims scheme”). The MIB estimates that 5,000 UK road traffic victims make claims via the visiting victims scheme each year. Of these 5,000, 4,300 are made against insurers and 700 made against the MIB.10 In the event of ‘no deal’ with the EU, this instrument removes the Compensation Body requirements from the MIB. UK residents who have already commenced court proceedings against the MIB prior to exit day will be able to continue pursuing visiting victims claims. The Department for Transport anticipates “more UK residents issuing legal proceedings from November 2018 to exit day in order to ensure their claim can continue to be made in the UK” and estimates that this “could be up to 240 personal injury cases” resulting in the average levy increasing by £15,000.11 All other victims of road traffic accidents in the EEA will continue to be able to pursue claims for compensation, but will now need to do so in the Member State where the accident occurred. When this instrument was previously presented as a proposed negative, the Committee recommended that this instrument be upgraded to the affirmative resolution procedure.

Town and Country Planning (Manston Airport) Special Development Order 2019 (SI 2019/86)

22.Operation Stack is a co-ordinated multi-agency response to situations when the capacity of the Port of Dover and/or Channel Tunnel becomes restricted. It involves closing sections of the M20 motorway to hold freight traffic in several phases and locations within the Port and Tunnel approach and along the M20 motorway. The disused Manston Airport was identified as an option capable of holding large numbers of goods vehicles. This Order extends the planning permission for Manston Airport originally granted in 2015 (as amended in 2016 and 2017) so that it will now expire on 31 December 2020. This instrument came into force on 24 January 2019, the day after it was laid. The Department for Transport (DfT) expresses regret in the Explanatory Memorandum that it was unable to observe the 21-day rule in laying the instrument. However, it also states that:

“given the urgent need to ensure the site has planning permission to provide this expanded use in time for preparatory works to be completed prior to the UK’s exit from the EU, taken with the detailed work needed before the Order could be made, we consider the breach of the 21-day rule for this Order is justified.”

23.We asked DfT why it could not go through all the necessary steps sooner, so that it could comply with the 21-day rule. DfT has said that it is planning for all outcomes for traffic management in Kent ahead of the UK’s exit from the EU. In particular, DfT saw a need for extra contingency capacity to hold goods vehicles in Kent, including that provided for at Manston under the terms of the existing Order. This required consideration of the potential for providing additional capacity and facilities at Manston, which would in turn require a new Order. DfT has told us that:

“to do this, we needed to undertake a range of environmental and habitat analysis to inform how the site could be managed with additional capacity, including the limitations and conditions of its use that have subsequently been contained in the new Order. Furthermore, we needed sufficiently robust modelling of likely traffic flows to justify the extension of capacity. This work was only completed earlier this month [January]. Given the urgent need to ensure the site has planning permission in time for preparatory infrastructure works to be completed prior to the UK’s Exit from the EU, we then needed to bring the Order into force on 24 January.”

The Committee is disappointed that DfT has failed to plan sufficiently well to enable the 21-day rule to be observed.

Electronic Identification and Trust Services for Electronic Transactions (Amendment etc) (EU Exit) Regulations 2018 (SI 2019/89)

24.The EU Regulation on electronic identification and trust services for electronic transactions (“the eIDAS Regulation”)12 sets out rules for electronic identification and trust services. These services help verify the identity of individuals and businesses online or the authenticity of electronic documents. The electronic identification aspects of the eIDAS Regulation require EU Member States and participating European Economic Area countries to recognise certain electronic identification schemes from other Member States to enable citizens to carry out transactions electronically for access to public sector digital services. The EU electronic identification schemes must first have gone through a peer review process (‘pre-notification’) before becoming formally notified schemes that are obliged to be accepted. This instrument, laid by the Department for Digital, Culture, Media and Sport, seeks to repeal the electronic identification aspects of the eIDAS Regulation in the event of ‘no deal’ with the EU, as the UK will no longer have access to the interoperability framework for electronic identification and these aspects will therefore be redundant as a result of exit. However, as the German electronic identification system is the only one which has been notified to date, the Explanatory Memorandum explains that “…there is therefore no significant impact”. The trust services aspects of the eIDAS Regulation relating to electronic signatures, electronic seals, timestamps, electronic delivery services, and website authentication are being retained.

4 Regulation EU 2016/11, introduced after a number of high-profile misconduct cases, including the attempted manipulation of crucial interest rate benchmarks such as the London Interbank Offered Rate (LIBOR) and the European Inter Bank Offered Rate (EURIBOR).

5 They are source of short-term financing, as they are a cash management tool generally used by financial institutions, corporates and governments to invest their excess cash over a short timeframe.

6 Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds.

7 The design and structure of the regime for funds, the ‘temporary marketing. permissions regime’ (TMPR) is set out in the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 for EEA UCITS (including MMFs which are UCITS), and the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018 for AIFs marketed by EEA AIFMs (including MMFs which are AIFs).

9 See also the main Committee’s report on Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018, 38th Report, Session 2017-19 (HL 179).

11 The average levy that MIB collects from each member is £3.2million. However, this is an estimated figure and the figure changes yearly. Each levy is calculated based on the premium income for each member.

12 Electronic identification, authentication and trust services (eIDAS).

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