My Lords, at Second Reading this Bill was slated as a technical, tidy-up, hypothetical Bill. It has proven much more interesting than that. I remind your Lordships of the declaration of interests I made at Second Reading, predicting it would happen the following day. With my noble friend Lord Bates’s best wishes it did, so I am now a deputy chairman of an AIM-listed financial services company. Although I have made the declaration, it is not yet on the website, so I repeat it in Committee.
At Second Reading my noble friend Lord Bates said:
“In the event of leaving the EU without a withdrawal agreement and without a future economic partnership the UK will not countenance accepting EU laws wholesale. It will therefore be vital to ensure that any legislation implemented in the UK can be adjusted to work best for the UK markets outside the EU in a no-deal scenario”.—[Official Report, 4/12/18; col. 935.]
I agree. It is important, both for the continued success of UK financial services and for the maintenance of equivalence with the EU post-withdrawal, that the competitive position of the sector is not adversely affected by the implementation of EU legislation.
The thrust of my remarks on the first part of the amendment is that transcribing EU legislation directly into UK law does not necessarily have the same result as if the UK were still part of the EU. It can in fact produce perverse and unintended outcomes. The best way of explaining this is by the example of the aforementioned central securities depositories regulation, CSDR. Leaving the EU will make the UK a third country under that regulation, so CSDR settlement discipline will not apply to EU dealers trading UK shares. But if we merely duplicate the CSDR in UK legislation, settlement discipline and the associated fines may be imposed on UK dealers trading UK shares in their own domestic market. That would leave the UK financial services participants at a competitive disadvantage to their EU peers while they are trading in the domestic UK market—clearly a nonsense. It illustrates why each piece of in-flight EU legislation should be considered separately, and why the Treasury should have the objective and power to amend each one appropriately, to ensure that the playing field remains at least level and that financial markets in the UK and their participants are not in a worse competitive position than if the UK had not withdrawn from the EU.
The second part of the amendment deals with small companies. On this, the EU has recognised that the administrative overheads and costs of compliance can weigh disproportionately on smaller listed companies. There was some consultation in February 2018, as a result of which, in May 2018, the European Commission proposed to adopt more proportionate rules to support SME listing while safeguarding investor protection and market integrity. The EU Commission recognises the peculiar and specific place the AIM market has as the leading SME growth market in the EU by a very long way. So the Commission proposed new rules aiming to reduce the administrative burden for these small companies and to foster the liquidity of publicly listed SME shares. Two examples of reliefs granted under this initiative are as follows. First, under market abuse regulation, smaller listed companies are exempted from the requirement to maintain a live insiders list at all times, on the grounds—correctly—that it is disproportionately burdensome and difficult for small companies to know minute by minute every single person who might be an insider. Secondly, under MiFID II, smaller company research funded by the company itself is deemed of such minor benefit to recipients that it would be disproportionate—to the risk that it might act as an inducement, which research perhaps is for larger companies—to require investors to pay for it or to refuse to receive it.
Within the EU, bodies representing UK smaller listed companies have been able to achieve these amendments—the disapplication of various rules—by speaking directly to the relevant directorate of the Commission. In addition, the Commission has reacted positively to direct approaches by representative bodies, such as the Quoted Companies Alliance, or QCA, seeking proportionate application of MiFID II rules to smaller companies. The exemption I have just mentioned on smaller company research is an example.
Smaller quoted companies are currently petitioning the Commission on the CSDR settlement discipline regime. This places a disproportionate burden on liquidity providers that specialise in making markets in the shares of smaller listed companies, which I mentioned at Second Reading. Penalising formal liquidity providers for not settling trades on time, in an environment where there is a paucity of trades and a lack of stock to deliver, will lead to those very liquidity providers reducing their activity in supporting smaller company securities. This is because we are pretty much unique in the UK in allowing short naked sales. If that happens, there will be a reduction in liquidity in growth company share-trading, which will severely curtail their ability to raise money, grow, create jobs and create value for long-term shareholders. The particular problem in the UK is that we are quote-driven, as opposed to electronic trading.
My point is that once we are outside the EU, these communication routes will be closed. Instead, organisations such as the QCA and other relevant bodies have to go to the Treasury. Therefore, the Treasury must have the objectives and the power to similarly amend or disapply certain rules to achieve appropriately proportionate regulation of the UK’s market for quoted SMEs and, in particular, smaller quoted SMEs.
Finally, I recognise that the maintenance of equivalence with the EU financial services regulatory framework is critical to the UK’s financial services sector. Concern has been raised that any exercise of the powers proposed in this Bill, other than to correct deficiencies or address inoperabilities, might jeopardise the perceived equivalence of the UK’s regulatory regime. However, as I hope I have explained with the example of the CSDR, it will be necessary for the Treasury to have the power to make more extensive amendments to legislation to ensure that the UK financial sector is not unintentionally placed at a competitive disadvantage to the EU, and so a genuinely level playing field will remain in place, which is, after all, the essence of equivalence.
Further, the fact that small listed companies’ representations have been invited to propose proportionate amendments to EU legislation, and that the Commission has made such amendments following these direct approaches, demonstrate that the Commission is open to amendments to the rules to ensure that they are more proportionate in order to support SME listings. Allowing the Treasury the objective and power to ensure that financial services regulations do not impose a disproportionate burden on small companies would merely be a continuation of current Commission policy and practice. It should not be objectionable and, therefore, should not in any way be seen as a threat to equivalence. I beg to move.