Instruments drawn to the special attention of the House
Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018
Date laid: 17 October 2018
Parliamentary procedure: affirmative
The Regulations propose to make amendments to the key pieces of EU legislation (“MiFID II”) that govern the buying, selling and organised trading of financial instruments, such as shares, bonds, units in collective investment schemes and derivatives. It is clearly important that the Government should ensure that, if the UK leaves the EU in a “no deal scenario”, the legislation which governs the operation of financial services should continue to work effectively. Given the complexity of such legislation, it seems appropriate to transfer responsibility for applying the detailed requirements to the relevant regulatory bodies in the UK, including the Financial Conduct Authority (FCA), while reserving overall responsibility to HM Treasury (HMT) itself, as this instrument provides.
The Regulations propose to give the FCA temporary powers to operate the MiFID II transparency regime with flexibility, during a transitional period. HMT has told us that a statement of policy by the FCA on its use of these temporary powers could not be completed in time to be considered alongside these draft Regulations: while we recognise the timing difficulties, we consider that it would have been helpful to Parliamentary consideration of the Regulations if such a statement had been available.
HMT has also pointed out that it might refuse to approve any statement which the FCA proposed to make, if the Department considered that the statement would prejudice any international agreement that the UK hoped to reach. We trust that HMT would make known its reasons for any such refusal, which would no doubt be of interest to Parliament
HMT has told us that it is confident that four years beyond the transitional period is an appropriate period of time in which the FCA is able to become operationally ready to carry out its functions relating to transparency. The House may nevertheless wish to ask the Minister about the adequacy of resourcing for the FCA to carry out its new responsibilities.
We draw these Regulations to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
Markets in Financial Instruments Directive
1.In the Explanatory Memorandum (EM) to these draft Regulations, HM Treasury (HMT) says that the revised Markets in Financial Instruments Directive (MiFID)1 and the linked Markets in Financial Instruments Regulation (MiFIR) (collectively referred to as MiFID II) are the key pieces of EU legislation that govern the buying, selling, and organised trading of financial instruments, such as shares, bonds, units in collective investment schemes and derivatives. MiFID II took effect in early 2018. HMT summarises its aims as requiring more trades to be conducted through trading venues to promote transparency and financial stability, introducing new safeguards for algorithmic and high frequency trading, and providing a stricter framework for trading commodity derivatives by introducing a position limits and position reporting regime. The draft Regulations make amendments to MiFIR, the tertiary legislation made under MiFID II and the UK legislation which implemented MiFID which would otherwise no longer operate effectively once the UK has left the EU.
2.HMT sets the draft Regulations in the context of its overall approach to financial services regulation. It explains that functions under MiFID II are carried out by EU authorities, principally the European Commission and the European Securities and Markets Authority (ESMA), and that the draft Regulations generally transfer the functions of ESMA to the relevant UK regulator (the Financial Conduct Authority (FCA) or the Bank of England) and the functions of the Commission to HMT itself. They also transfer responsibility for making Binding Technical Standards (BTS) under MiFID II to the relevant UK regulators (the FCA or the Prudential Regulation Authority; in some cases the regulators will have joint responsibility for making BTS). HMT says that this in line with the approach taken in the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, which we drew to the attention of the House earlier this year,2 and which were considered in Grand Committee on 17 October. 3
Temporary powers for Financial Conduct Authority
3.In the EM, HMT sets out the detail of the changes being made to address deficiencies in retained EU law in relation to markets in financial instruments. We do not replicate that detail here, but we note in particular that the Regulations propose to grant the FCA a set of temporary powers that will allow it some flexibility over how the MiFID II transparency regime is operated during a transitional period of up to four years in length (which may be ended earlier by HMT). The Department states that powers being granted to the FCA aim to preserve existing outcomes of the transparency regime as far as possible, while providing the FCA with the time required to operate the transparency regime in a standalone UK context (including making any necessary changes to aspects of the transparency regime that are in the BTS) and avoiding any potential for regulatory arbitrage with relevant transparency regimes in third-countries.
4.HMT itemises the temporary powers in the EM, and says that, in exercising them, the FCA will take into account in each instance specified factors (for example, where the use of the relevant power would advance the FCA’s integrity objective or where a failure to use the power would unduly harm price formation). It adds that certain transparency conditions (such as the requirement to publish trading carried out under the waivers) will be suspended for the duration of the transitional period, and explains that this is because “the FCA will not have sufficient data or resources during the transitional period to comply with such transparency conditions”. Finally, HMT says that the FCA will have a statement of policy on how these temporary powers will be used in place before exit day; and that this statement of policy, and any subsequent changes to it, must be approved by the Treasury before being published.
5.We put questions to HMT about these temporary powers, the policy statement to be made by the FCA, and that body’s management of the transparency regime. We are publishing its answers at Appendix 1.
Conclusions
6.It is clearly important that the Government should ensure that, if the UK leaves the EU in a “no deal scenario”, the legislation which governs the operation of financial services should continue to work effectively; given the complexity of such legislation, it seems appropriate to transfer responsibility for applying the detailed requirements to the relevant regulatory bodies in the UK, while reserving overall responsibility to HMT itself.
7.The Regulations propose to give the FCA temporary powers to operate the MiFID II transparency regime with flexibility, during a transitional period, which may be justified by the circumstances in which the FCA is taking on these responsibilities. However, HMT has told us that a statement of policy by the FCA on its use of these temporary powers could not be completed in time to be considered alongside these draft Regulations: while we recognise the timing difficulties, we consider that it would have been helpful to Parliamentary consideration of the Regulations if such a statement had been available. HMT has also pointed out that it might refuse to approve any statement which the FCA proposed to make, if the Department considered that the statement would prejudice any international agreement that the UK hoped to reach. We trust that HMT would make known its reasons for any such refusal, which would no doubt be of interest to Parliament.
8.We note that in the EM HMT says that the FCA “will not have sufficient data or resources during the transitional period” to take forward certain transparency conditions. HMT has told us that it is confident that four years beyond the transitional period is an appropriate period of time in which the FCA is able to become operationally ready to carry out its functions relating to transparency. The House may nevertheless wish to ask the Minister about the adequacy of resourcing for the FCA to carry out its new responsibilities.
1 Implemented in particular by the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2017 (SI 2017/701) and the Data Reporting Services Regulations 2017 (SI 2017/699).
2 38th Report of Session 2017–19 (HL Paper 179).
3 See: HL Deb, 17 October 2018, cols 4GC-14GC.