My Lords, once again I thank the noble Lord, Lord Bates, for his introduction and declare my interest as a director of the London Stock Exchange plc. I will speak on many of the things that the noble Baroness, Lady Drake, has just mentioned. I too echo the feelings of Secondary Legislation Scrutiny Committee (Sub-Committee B) about being asked to approve this legislation in the absence of the FCA policy. Even if it is not completed, we could have been given more clues about its shape and type of content.
In its reply to the sub-committee, the Treasury says the response to the FCA consultation is needed first. I think that refers to the FCA consultation that came out last Friday, and I wonder whether it was timed to come out after we would have, under the normal scheme of things, approved this the previous Wednesday. So was it actually being kept away from our beady eyes? I could not get around to looking at it until today; in fact, I could not even find it when I looked earlier. In fact, it just repeats that the policy is yet to come. It is 986 pages long, but on pages 39-41 I found some useful information. It says:
“We will issue a statement of policy on how the temporary powers will be used”.
That refers to the transparency regime. Everything else in there just details the powers it has been given.
I found a little more useful information around page 770, but only about the new Article 17A of the relevant BTS, which appears to say how it will operate those waivers that will remain, such as “large in scale”, and how it will operate deferred publication on venues—but these are not actually among the main things that the FCA has been given the power to suspend.
The only firm policy we have been given is that the FCA does not have the necessary resources and that some of the most controversial, industry-disliked parts of MiFID II and publication on waiver volumes are to be suspended by up to four years. It is a major policy change to go from mandatory measures to suspension for such a long period and yet the Government say that they aim to preserve existing outcomes of the transparency regime as far as possible.
I shall go on to test that statement in a moment but, before I do, I should mention that the Treasury, in reply to the Secondary Legislation Committee, in Appendix 1, states:
“A properly considered statement of policy on the use of the temporary powers would need to be informed by”,
the FCA consultations. However, there is nothing in the FCA consultations that informs how the policy of suspension will be used. In another reply, it states:
“HM Treasury received no objections from any of the industry stakeholders on the way these powers would be used by the FCA”.
So it seems that industry has been consulted. However, it was not a public consultation—I have looked for that too. Industry has been spoken to and has some knowledge of what is going on but we, who have to approve this legislation, are the ones most kept in the dark. This is a decision in search of a policy and that is not the way properly to treat Parliament.
I shall go on to test the statement about preserving existing outcomes of the transparency regime as far as possible. With equities, the double-volume cap is suspended because the FCA does not have all the information, but here there is a mitigating measure in that the FCA can suspend two of the transparency waivers for six months at a time. The formulation used for the suspension of those waivers is,
“if the FCA considers that it is necessary to do so to advance the FCA’s integrity objective under section 1D of FSMA”.
I have asked the Minister to confirm whether the policy intention of the double-volume cap—which, broadly speaking, is to limit the amount of dark trading—is fully encompassed in that integrity objective, taken together with the additional conditions of having reference to consumer protection, competition and the pre-Brexit thresholds.
I ask this question about the integrity objective because the FCA objectives as defined in FSMA are not coupled to MiFID II, and historically UK regulators have gone to less-strict standards. For example, on best execution, the UK regulators always went with “all reasonable efforts”—indeed, I remember the fight to get that wording into MiFID I—rather than the strict “best endeavours” that the EU finally went out with as the standard of MiFID II. So if we fall back on FSMA objectives, my concern is that they are not as strict as the requirements of MiFID II.
There is a mechanism here for the FCA to address the dark-trading policy, but it is thrown into doubt by the statement that there will be no publication of trading under waivers and that the FCA will not have sufficient data. Does this mean that there will be no way of checking whether the FCA has done its job? I do not understand why the FCA will not have data, because it collects UK data. What lack of data is preventing information under the equity waivers when they are used?
There are other things that the FCA could also do. Under MiFID I, venues had the task to monitor waivers and impose restrictions under conduct of business rules. My next question is: is the FCA empowered to revert to such a mechanism should they wish and are there any plans to do so? I certainly have not seen any in the consultation because it was all silent about how these powers would be used. Concerning equities, my conclusion is that there is, possibly, the ability to live up to the statement about preserving the outcomes of the transparency regime because there is a substitute regime, but there is still no way for observers to know that if there is no information about the use of waivers.
On non-equities—I will not do everything because we would be here all night—the policy objective is to have pre-trade and post-trade transparency, lowering costs for investors and less over-the-counter trading. There is some evidence on the ESMA website of costs having come down already after the EU transitional measures were introduced. In the US, the evidence is very substantial that costs are lower for bonds when they come under the TRACE post-trade reporting system.
MiFID II went further than the US with provisions for pre-trade as well as post-trade transparency—the pre-trade was, of course, the bond traders’ most hated—although it is still pretty much a fledgling provision and covers only a small part of the market, the liquidity tests having ruled out most instruments; it ends up covering only about 1%. It is those liquidity tests that use EU-wide data, hence the suggestion that there needs to be a suspension. The same integrity objective and other conditions are used and I question whether they can fully cover the policy objectives that I have outlined. Here there is no mitigating alternative suggested for the FCA to use. As far as I can see, the pre-trade and post-trade transparency regime goes completely—and from the tone of everything that has been written, that seems to be the likely outcome. Preserving as much as possible, therefore, means preserving nothing. I think we should have a touch more honesty about that.
There has been massive lobbying to get rid of bond transparency—bond traders do not like it. Consultant Russell Dinnage, reported in the FT by Norma Cohen on
“Bond trading is like playing poker …You never want to give your hand away”.
But he also highlights the importance of the measures to derivatives, interest rate swap and exchange-traded funds, which will all come under the suspension chop. Transparency helps to get away from that gambler mentality, which is pretty fundamental to addressing culture and attitude in financial services. That same FT article also references the view from another consultant, Larry Tabb: that if EU transparency rules had been around in 2006-07, banks would have been alerted sooner to the souring of the US mortgage securities market. So it is no trivial measure as an early warning about financial stability.
I can assure noble Lords that this is not something that a consultant has dreamt up retrospectively. These were the very issues that were being discussed when MiFID II was negotiated—that is engrained on my brain, and the scars are on my back. Therefore, I have a series of questions. Is any consideration being given to continuing to have post-trade transparency, even if pre-trade transparency is suspended? Is it expected that suspensions will be done at the same time for venues and systematic internalisers? Also, what volume of the data originates in the UK anyway, given London’s position, and what volumes might be expected to move? Is it really true that the London volumes cannot sustain sufficient data for transparency?
Finally, I come again to the suspension of publication of trading carried out under waivers—I am still mystified as to what that is all about. The policy note says that the FCA will have neither data nor resources to do that. On non-equities, it seems likely that there will be nothing to publish anyway; if there is no transparency regime because it has been suspended, there is no need for waivers. However, if and where there are waivers, such as on equities, why will the FCA not have the data? It collects all the UK data. I cannot see that being suspended—or will it? Perhaps the Minister could let me know.
If the FCA does not have the data, how can it monitor market integrity and make those other suspension decisions based on market integrity? How is there to be any measure of whether the policy objectives—less dark trading—have been achieved? If the FCA has the data, why can it not be published so that others can take a view on, comment on and perhaps even judge the FCA’s efficacy? Should investors not have that information? It may look charming to have fancy words around the suspensions about the integrity objective, taking account of the latest ESMA data, preserving as much as possible and so forth but in reality, such words conceal the fact that there will be no policy preservation when suspension takes place. That is for non-equities.
I can accept the need for emergency powers in the event of a chaotic, no-deal Brexit. I can accept trying to work out where they might be—perhaps matching changes that the EU is in the process of making—and I acknowledge that hard work is being done by all. However, I do not accept pretending that transparency measures will be preserved when they will not, and I object to removing waiver use publication and depriving the public of information on market developments without a better explanation.