My Lords, the Government are planning for all eventualities, including the UK leaving the EU without an implementation period, and changes made in this statutory instrument might not take effect on
As the Minister said, MiFID II is the EU legislation that introduces a transparency and disclosure regime into financial markets, particularly by requiring firms to provide trade data to give transparency on the best-execution obligation and transaction reporting requirements, which are used by regulators to detect market abuse. The intended outcome of this regime is to improve protections for investors, increase confidence in financial markets and maintain financial stability.
The functions under MiFID II are carried out by EU authorities, so if the UK leaves in a no-deal scenario this legislation needs to continue to work, and these regulations transfer responsibilities to the FCA, the PRA and the Bank of England, with overall responsibility reserved to the Treasury. In particular, it gives the FCA a set of temporary powers to operate the MiFID II transparency regime with flexibility during a four-year transitional period—with the intention, it states, of preserving the existing outcomes of the transparency regime as far as possible: that is, improving protections for investors, increasing confidence in financial markets and ensuring financial stability.
The FCA has to issue a statement of policy on its use of these temporary powers but, as the Secondary Legislation Scrutiny Committee observed in its report of
It will take four years for the FCA to become operationally ready to carry out its functions relating to transparency and disclosure, and these regulations could result in significant policy changes. Yes, this SI addresses a deficiency by transferring the functions of the European Securities and Markets Authority to the relevant UK regulator and the functions of the Commission to the Treasury, but it also gives the FCA a set of temporary powers that allow it the scope to operate the transparency regime in a stand-alone UK context.
It is clear from reading the Explanatory Memorandum that these temporary powers go beyond the narrower issue of correcting deficiencies into making policy. For example, as the Explanatory Memorandum confirms, waivers and thresholds for disclosure contained in the current transparency and disclosure regime are calculated on the basis of EU-wide market data. An abrupt move to using UK-only data will pose operational challenges for the FCA and could result in outcomes that do not enhance investor protection and market confidence.
The Explanatory Memorandum further confirms that the FCA is given powers that include amending and freezing obligations on firms where it is considered appropriate. Certain transparency conditions could be suspended during the four-year transition period. In effect, there could be a weakening of the transparency regime, with implications for investor protection. These are important matters which necessitate the FCA statement of policy on how these temporary powers will be used being in place before exit day if there is no implementation period.
There is also a time-sensitive issue. Firms will need to review their contracts, and contracts on derivative trades may need to be agreed some time in advance. So I ask the Minister for an assurance that an FCA policy statement will be in place before exit day and that Parliament will have the opportunity to consider that statement, as the Secondary Legislation Scrutiny Committee flagged. In his opening speech the Minister acknowledged the need for the FCA to have the necessary resources. But it is not simply a matter of saying that it needs extra FTE of 200, 500 or whatever; it is about whether the Government are confident that there is the supply of staff with the necessary expertise to carry out what is going to be a hugely complex challenge for the FCA.
As the Treasury made clear in response to a question from the Secondary Legislation Scrutiny Committee, it can refuse to approve the FCA policy statement on the use of its temporary powers if the department considers that the statement would prejudice an international agreement it hoped to reach. That again prompts a series of questions. Can the Minister confirm that, in the event of the Treasury refusing such approval, its reasons will be made known to Parliament, and Parliament will be able to consider them? If the Treasury vetoes an FCA policy statement, what policy will apply in its stead? These temporary powers are given to the FCA to maintain a transparency and disclosure regime intended to protect investors and maintain confidence in financial markets, so could the Minister give an illustrative example of when potential prejudice to concluding an international agreement could justify vetoing an FCA policy statement and possibly weakening the transparency regime?