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My Lords, I beg to move that the House considers the draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019—
For once, it would be nice to get it right. The Minister is moving that they be approved.
I am always very happy to take correction from the noble Lord. If he would like, I am happy to ask that the House approve these regulations.
Let me try again. The Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already taken place here and in the House of Commons. The SI being debated today is part of this programme.
The SI will fix deficiencies in UK law relating to the UK’s listing regime, prospectus regime and transparency framework to ensure they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
Turning to the substance of the SI, many noble Lords will be familiar with the prospectus directive, the transparency directive and the consolidated admissions and reporting directive, or CARD, and with related legislation that is implemented into UK law to set the listing regime, prospectus regime and transparency framework that regulate capital markets activity in the UK.
The transparency directive harmonises transparency requirements across the EU by requiring issuers with securities, such as shares and bonds, admitted to trading on a regulated market to disclose a minimum level of ongoing information to the public. It built on and amended CARD, which co-ordinates the conditions for the admission of securities to official Stock Exchange listing.
A prospectus contains information on an issuer that is seeking to offer securities to the public or is seeking admission to trading on a regulated market. The information they provide is used by investors to make investment decisions. The prospectus directive contains the harmonised rules governing the content, approval, format and distribution of the prospectuses that issuers must produce when securities are offered to the public or admitted to trading on a regulated market in a member state of the European Economic Area.
In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The UK legislation implementing the prospectus directive, the transparency directive, the CARD and related legislation therefore needs to be updated to reflect this to ensure that the UK’s listing regime, prospectus regime and transparency framework operate properly in a no-deal scenario. These draft regulations therefore make the necessary amendments to the retained EU legislation to ensure these regimes are operable in a wholly domestic context.
First, this SI will transfer responsibility for powers and functions currently within the remit of EU authorities to the appropriate UK institutions. Specifically, it will transfer powers from the European Commission to HM Treasury, such as the ability to make delegated acts pursuant to the relevant legislation. It also transfers powers to the Financial Conduct Authority from the European Securities and Markets Authority to create and amend certain binding technical standards. This transfer of functions mirrors the current split between the legislative power of the Commission and the regulatory role of ESMA.
Secondly, it alters the scope of the legislation by ensuring that, post exit, EEA issuers wishing to access the UK’s capital markets will be required to have their prospectuses approved directly by the FCA, as any other third country would have to do. Currently, EEA issuers can passport prospectuses approved by other EEA regulators for use in the UK. This aligns with the approach taken across other financial services SIs laid under the EU withdrawal Act.
The SI also introduces grandfathering arrangements that will allow any prospectus approved by an EEA regulator and passported into the UK before exit day to continue to be used up to the end of their normal validity, as well as supplemented with additional information. The end of validity is usually up to 12 months after the prospectus is approved.
Thirdly, this SI extends the exemption under the prospectus directive for certain public bodies from the obligation to produce prospectuses to the same set of public bodies of all third countries post exit. If a UK-only approach were taken, EEA state public bodies that are currently accessing the UK market would be obliged to produce a prospectus to issue securities in the UK that they would not be required to do to issue securities in EEA states. Additionally, extending the exemption to public sector bodies of third countries is consistent with the UK treating EEA member states and third countries equally.
Fourthly, as the explanatory information for this SI states, in a no-deal scenario, the Treasury intends to issue an equivalence decision, in time for exit day, determining that EU-adopted international financial reporting standards can continue to be used to prepare financial statements for UK transparency and prospectus requirements. This will allow issuers registered in EEA states with securities admitted to trading on a regulated market or making an offer of securities in the UK to continue to use EU-adopted IFRS when preparing their consolidated accounts. This decision is consistent with the Government’s approach to provide continuity following the UK’s exit from the EU. This has been welcomed by the industry and is supported by the Financial Conduct Authority.
Additionally, this SI removes obligations within retained EU law for the FCA to co-operate and share information with EU regulators, as this obligation, with no guarantee of reciprocity, would not be appropriate as of exit day. However, the FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act as it is currently able to do with all other third countries.
This SI makes further amendments to retained EU and UK legislation to ensure that the UK’s listing regime, prospectus regime and transparency framework operate effectively once we leave the EU. It is important to note that, while this instrument covers the UK legislation implementing the prospectus directive, there is no power to domesticate the provisions of the prospectus regulation that apply from July 2019 in the Financial Services (Implementation of Legislation) Bill. These additional provisions make significant changes to the prospectus directive.
Certain provisions of the prospectus regulation have applied since July 2017 and July 2018, with the remainder of the legislation due to apply from July 2019, after the UK leaves the EU. It is the Government’s intention to domesticate the remaining provisions as they will constitute the prospectus regulatory regime from July 2019. However, the EU withdrawal Act will only convert EU legislation into UK law that is already in force and applies immediately before exit day. Therefore, remaining provisions of the prospectus regulation will be domesticated via a statutory instrument laid under the Financial Services (Implementation of Legislation) Bill. The Bill, as currently drafted, requires the affirmative resolution procedure for every statutory instrument made under it, providing Parliament with an opportunity to debate and discuss each file that the Government are implementing. This change, I acknowledge, was as a result of the scrutiny the legislation received in your Lordships’ House, and we are grateful for it.
The UK has played a leading role in shaping the prospectus regulation for the benefit of consumers and industry. It is welcomed by industry and acts to cut the cost to business of producing a prospectus in the UK.
The Treasury has been working closely with the Financial Conduct Authority in the drafting of this instrument. It has also engaged the financial services industry on this SI, and will continue to do so going forward. On
The Government believe that the proposed legislation is necessary to ensure that the UK’s listing regime, prospectus regime and transparency framework can continue to operate effectively post exit, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations, and I commend them to the House.
My Lords, for the avoidance of doubt, I say that the Motion before the House is that these draft regulations, laid before the House on
My Lords, perhaps also for the avoidance of doubt I should make it clear to the noble Lord, Lord Sharkey, that this is not a fatal amendment; it is a regret amendment. I have laid other amendments to the later statutory instruments.
The noble Lord, Lord Lilley, who made a fleeting appearance in our proceedings earlier, said that I have a reputation in the corridors of the House for being obsessive about these statutory instruments. I take that as an extreme compliment because, in my experience of politics, it is only the obsessive people who tend to get things done. Indeed, it is because of the Brexit and Eurosceptic obsessives, whose work goes back now 30 years, that we are in this mess to begin with. If it was not for obsessive anti-Europeans and Brexiters we would not be here. It is time for obsessive moderates like myself to start asserting ourselves. Unless the obsessive moderates assert themselves, the obsessive extremists, who seem to have taken charge of both our major political parties at the moment, will triumph. That is not in the national interest. I plead guilty to being an obsessive. I shall be obsessive about many more of these instruments, both this evening and for many days to come, because it is in the public interest that we are.
When the Minister, for whom I have great respect—I never cease to be astonished that he and the noble Lord, Lord Young, are still members of this Government as they are one of the most extremist Governments I have ever observed in my political lifetime—says that these regulations are necessary in order that we do not crash out with no deal, it is the Government of which he is a member that have a unilateral power to end no deal. This evening the Government could end the prospect of no deal by either making clear that they will apply for an extension of Article 50 or by using the power that they have to unilaterally revoke Article 50. For the noble Lord to try to cast on us the responsibility for a no-deal Brexit, which is entirely the creation of Her Majesty’s Government, is a true Alice in Wonderland situation.
Part of the reason I tabled this amendment is to encourage a wider debate. When it comes to the handling of financial services, we see the immense harm that will be done by Brexit at large and by any form of hard Brexit to Britain’s international position and trade. I can see many noble Lords around the House who are much more expert in this area than I am; we heard earlier from the noble Earl, Lord Kinnoull. I am not an expert; I come at this as a lay man. I read the debates to understand what has been happening in the financial services sector, which is one of the most important sectors of our economy. It made a £119 billion contribution to the UK’s economy last year; is 6.5% of our total economic output, with half of that being generated in London; and contains about 5,500 UK firms which use existing EU passporting rights to do business. We are talking not about small matters here but about the fundamental economic interests of the country and of a huge number of people whose livelihoods depend upon this sector, so I make no apology for detaining the House on this matter and becoming obsessive. I think we need more people to be obsessive about the economic good health of this country before it goes down the plughole in coming months and years if Brexit proceeds.
Looking at the history of the policy in relation to financial services alone, although there are much wider issues at stake, it is striking how far removed the current situation is from the aspirations even of the Government after the referendum three years ago. They then talked about keeping very close to the single market, the importance of having mutual recognition and maintaining passporting. The current Chancellor of the Exchequer said it was the fundamental objective of British policy to seek to negotiate that at the beginning. We have now moved in a steady retreat from that to an equivalence regime which the Chancellor himself condemned as inadequate in repeated speeches last year, so not only the negotiating position of the Government but what they actually negotiated in the political declaration was criticised as grossly inadequate by the Chancellor only months before. Now we have the obscenity of debating a no-deal situation which the Government had said was never their policy and which they now regard as being little short of calamitous for the country, to judge by the no-deal policy statements and technical papers that they published last year. We are in an extremely difficult situation. Although the argument for having the statute book in good order is there, there is a much bigger argument for us not proceeding with no-deal Brexit in the first place, taking it off the table entirely and having a more fundamental assessment of whether Brexit in any form is the right thing for us to do.
When it comes to the regulations we are talking about now, the issue about consultation is important. Unusually, for this instrument we have an economic impact assessment. It is not quite clear to me why it was decided that we would have one on this set of regulations but not on others and I await with interest the letter that the Minister will send to the noble Lord, Lord Trefgarne, and my noble friend Lord Cunningham about the handling of impact assessments and consultation in future. However, we have an impact assessment for these regulations and it is extremely concerning. It states that there will be significant costs as a result of the duplication and the other requirements which are brought about by these regulations. The annexe to the impact assessment states that the monetised familiarisation cost per firm will be £700, and that the total familiarisation cost to all impacted firms of this instrument alone—and we will debate three others this evening, let alone the cascade to come—will be £1.5 million.
As somebody who has occupied a position similar to that occupied by the noble Lord, Lord Bates, I know that the first thing one does when looking at reports of this kind is to go to the footnotes, which contain many of the most revealing statements. The whole basis of the calculation of the costs involved in these regulations depends on the validity of the figure of 2,113 business being affected. That is a suspiciously precise number, but the figure of 2,113 has a footnote, footnote No. 10, which is a masterly piece of construction by civil servants. It states:
“This figure is the number of issuers currently listed (as of
That means that the Treasury does not have clue how many people are actually going to be affected by this. It will include a plethora of other organisations, such as advisers, consultants and boutique firms. Noble Lords who know far more about this sector than I do will be able to tell us that. All these organisations will be affected by these regulations and, if this economic impact assessment amounts to anything, they will be hit by the £700 per firm familiarisation cost. I suspect that is a conservative cost; when I wade through what the changes to listing requirements will be when they are duplicated as we leave the EU with no deal, I suspect the figure could end up significantly higher.
That refers directly to consultation, which is so important to this. What consultation has there been? I am now used to quoting the section on consultation to the House, and for some reason it always appears as paragraph 10 of the Explanatory Memorandum to these instruments. I am not sure how these instruments are packaged so that consultation is always paragraph 10; there is clearly a template. However technical and detailed the material before it, consultation is always in paragraph 10. In this case it does not say that it has not undertaken a consultation on this instrument because the costs are negligible. It cannot say that because in this case there is an impact assessment which shows that the costs are far from negligible, so we have a complete non sequitur this time between paragraphs 10 and 11 of the Explanatory Memorandum. Paragraph 10 states:
“HM Treasury has not undertaken a consultation on the instrument”,
and then we have the usual blather,
“but has engaged with relevant stakeholders on its approach”,
without defining who the stakeholders are, what the engagement has been or what the response has been and then, after a nothing paragraph 11, paragraph 12.1 on impact states:
“There is an impact on businesses, particularly those involved in capital markets”,
which is set out in the impact assessment. It seems to me fundamentally wrong. In a case of this kind where there is a significant impact which could become greater over time, as our rules diverge, where there has been an attempt to quantify that impact and where we have so many people affected—2,113 is the minimum number of companies directly affected, but the real number will be significantly higher—not to have undertaken any consultation is simply and straightforwardly unacceptable. I repeat the point I make obsessively on these regulations: in no other context would this House regard it as acceptable not to have a consultation on changes of this kind. In any other context, the normal rules would apply. They require a Cabinet Office 12-week consultation with a proper opportunity for people to respond, and then the Government respond to the consultation and publish the consultation responses and their own response.
I should declare an interest as I am an adviser to Banco Santander and take considerable interest in these matters. Is the noble Lord saying that the finance industry, including UK finance, agrees with him that there has been no consultation whatever?
My Lords, there has been no public consultation. The bank to which the noble Lord is now an advisor may have been consulted. I do not know. He can perhaps tell us—because private sources of information are the main ones—whether it has been one of the organisations which have been engaged with privately by the Government.
“We are working closely with members and partners with regard to onshoring, to emphasise continuity with EU law and to avoid sudden and unpredictable legal changes in the UK in light of a ‘no-deal’ outcome. We have to date assessed close to 40 legal instruments relating directly to financial services which have been published and/or laid in Parliament, with a handful more to come. We have also responded to a number of onshoring relating consultations issued by the Financial Conduct Authority … and the Bank of England”— a point that I am sure the noble Lord will have heard Sam Woods make to the Select Committee in the other place last month. Therefore, what precisely does he mean when he says “no consultation”? Does he mean “no consultation” or “extensive engagement”?
The noble Lord needs to be very clear, because that paragraph then goes on to say that the Treasury,
“has engaged with relevant stakeholders on its approach to financial services legislation under the European Union (Withdrawal) Act 2018, including on this instrument, in order to familiarise them with the legislation ahead of laying”.
Therefore, there has been extensive engagement. Perhaps the noble Lord would be very precise on this matter.
My Lords, I read the words of paragraph 10 very precisely. Regarding the engagement with stakeholders, the noble Lord should be very careful about making himself a defence industry for the Treasury on these matters. The reality is that there has been engagement with stakeholders—it says so here. However, the only way that we will know about the engagement is if those who have been engaged with relay that to us. If they are fortunate enough to have former Ministers such as the noble Lord retained for these purposes, those people may tell the House via a circular route what has been happening. However, the way in which our parliamentary processes should work is that the consultation should be conducted formally and publicly, with the results being formally published and reported. That is not happening in the regime that is being set up at the moment.
The noble Lord is a former Minister in the Cabinet Office. It is the rules of the very department in which he was a Minister that require in all other circumstances, apart from these no-deal regulations, a formal 12-week public consultation. I am surprised that he should somehow think that it is adequate for that to be replaced by engagement with relevant stakeholders, undefined in paragraph 10.1. The noble Lord has aided the House greatly by starting to read out some of those who have been consulted with. There is no other way, apart from his intervention, in which we would have known who these stakeholders were. The way that this whole process is being conducted at the moment is utterly inadequate.
I am making the point that the noble Lord’s amendment—I am obsessive about these things—includes the words “no consultation”. This House should be absolutely aware that there has been plenty of engagement. I am sure that if he were to write to UK Finance and others, he would find out more. I totally accept the point that several on the Liberal Democrat Benches have made about the inadequacy of some of the processes. I was fully aware of that when we started and that point was well made. However, it is very important that when we have these debates we are very accurate. As far as I understand it—I have not been directly involved in this matter at all myself—there has been quite extensive engagement, so I would like the noble Lord to make that clear to the House.
My Lords, the noble Lord said that I should be precise and accurate. My amendment to the Motion says that,
“this House regrets that no consultation was undertaken on this instrument”.
Paragraph 10.1 of the Explanatory Memorandum in respect of these regulations says:
“HM Treasury has not undertaken a consultation on the instrument”.
Those are the exact words, so I cannot understand at all the point that the noble Lord is making. He is trying to excuse the fact that there has not been a consultation by saying that there has been a lesser form of engagement. However, that engagement is not a substitute for formal public consultation. Is he suggesting that it is an adequate substitute?
I am more than happy to rise on this point. Obviously I would much rather not be in this situation, having voted to remain, but, given the time that we have, I think that the Treasury has done an extremely good job with the level of consultation that it has undertaken, as have the regulatory bodies. I completely understand the desire of the noble Lord and others in this House to have proper scrutiny of this SI, but I just wish to make sure that all Members of this House are aware of the situation. The noble Lord is quite right that there has been no formal consultation but there has certainly been extensive engagement and it is very important that we make that clear.
I am grateful to the noble Lord for making that clear. However, perhaps I may also make it clear to him that the time we have available is down to the Government. It is not because of some extra-terrestrial force that has been at work; it is because of the Government that we are operating within these confines. It is therefore absolutely appropriate that noble Lords who do not accept that we should be in this straitjacket in the first place do not accept for a moment the point that the noble Lord has just made—that dispensing with normal parliamentary and government procedures in respect of consultation is satisfactory because we are limited for time.
The situation that we are in at the moment is deeply unsatisfactory. We are imposing significant burdens on companies—burdens that extend to millions of pounds according to the Government’s own impact assessment, which they themselves admit is conservative. We are doing so in pursuit of a no-deal Brexit, which almost nobody who has been engaged with it—to use the noble Lord’s expression—finds satisfactory and almost all of whom would wish to rescind if they were given the opportunity. There has been no consultation in defiance of all the established rules of the Government and Parliament. This is unsatisfactory and therefore I beg to move.
My Lords, the noble Lord, Lord Bridges, has told the House, quite correctly, that at present he has a role with Banco Santander. Although in my case there is no possible financial interest and the relationship occurred 30 years ago, I ought, in order to be completely transparent, to reveal that when Banco Santander initially installed itself in this country in the 1980s, I was its financial adviser. I am very pleased that at that time I was connected with a transaction that has proved to be extremely fruitful for Banco Santander and the British economy. Therefore, I genuinely wish the noble Lord every success in the role that he is currently playing for this distinguished financial institution. It has expanded over the decades in this country and I hope that that happy position will continue, although all of us—at least, on this side of the House—have some fears about that at present.
There is no doubt about the importance of this issue. We are talking about financial transparency and disclosure. Anyone who knows anything about the financial markets knows that, together with the avoidance of conflicts of interest, those are the most important foundations of a successful financial marketplace. When either of those two foundations have been weak, the human race has invariably ended up substantially regretting it. People have been ruined and even economies have, sadly, been seriously affected.
The European Union now has a good system. Together with the United States, the European Union has the longest experience of successful financial regulation in this area. People come from all over the world to discuss with us how we do things here and very often they follow our example. That is very sensible and desirable for things such as the prospectus directive, which has been imitated around the world. The whole business of regular financial disclosure—annual reports, interim reports and so forth—have, again, been very widely imitated around the world. Everyone knows that if you want to have a financial market where companies can raise serious sums of money, these things are essential.
I have always had a strong feeling that the scrutiny of secondary legislation, both in the Commons and in the Lords, is the most dubious and problematic area of parliamentary activity and the one most in need of reform. Like everybody else in the two major parties, when we were on the Back Benches in the Commons we were regularly press-ganged—I do not think that is too strong a word—by the Whips to sit on statutory instrument committees. They were absolutely deplorable occasions. They were a real travesty of good parliamentary scrutiny. I used to hope that the public would never come into the sessions because they would be horrified at what we were doing. In fact, I never saw a member of the public there, although occasionally one would see lobbyists of some kind. However, the fact is that we had no opportunity to brief ourselves, no opportunity to question Ministers—although of course in the Lords we do have that opportunity, which is a great improvement—and we had the system that we have here, which was that we could not modify these instruments if we thought it necessary to do so.
How can Parliament possibly do its job, or make a contribution, if it cannot modify a proposition for a statute or Bill by amendment? This is quite extraordinary—complete rubbish—and we should do something about it. It results in an enormous amount of legislation going through that is not properly scrutinised. In this series of statutory instruments, we see literally hundreds of important statutes supposedly being renewed—although whether they are renewed or modified is something one can never be quite sure about—and going through at a rate of knots. No one can judge the pace at which this is happening other than negatively; it is quite frightening, and a very bad moment for Parliament.
The situation is made much worse by the absence on these occasions of proper consultation or, in most cases, of impact assessments—as it happens, there is an impact assessment on the statutory instrument before us but, mostly, there are not. I want to clear up the controversy that exists between my noble friend Lord Adonis and the noble Lord, Lord Bridges. Consultation is an important term; it implies a set and standard process for consulting those likely to be impacted by legislation, and passing on to Parliament before it legislates—that is, before it is too late—the results of the interchange that has taken place with the stakeholders or parties who have an interest in the sectors of activity being regulated. This should be a standardised practice; we ought not to have to ask in each case, “What kind of consultation did you have? How many banks did you speak to? Who did you speak to: the directors, compliance officers, researchers, parliamentary affairs departments—a lot of companies have these kinds of things—or PR people?”
We should not need to ask these sorts of questions because we should know exactly what a consultation exercise involves. There should be—I am sure there is—a template in the Treasury and other serious departments, which indicates what you need to do to meet your obligation for a proper consultation when proposing legislation. A proper consultation has not been done here. What has happened here is engagement. The noble Lord, Lord Bridges, is proud of the distinction he has made but, frankly, engagement can mean what you want it to mean. No one knows, unless they have specifically asked the question, what it has actually involved, or indeed whom it has involved and not involved—who has been left out, perhaps deliberately, because the Government or department concerned did not want to hear some people’s negative views.
All these things are possible if you do not have a standardised system of consultation. It should be a permanent part of parliamentary procedure that you expect that consultation has been carried out and that everybody knows the principles under which it has been conducted. That does not happen here, and so we face this situation where we are being asked to vote through a whole lot of legislation at great speed. We do not know whether the impact will be what the Government say it will be; we do not know whether other people have been asked their opinion, or who has been asked. That is a very unsatisfactory situation. Has there been no consultation in the way that there normally would be? Let us be honest about it.
I come to my final point. The reason why there has been no consultation in the way that ordinarily there would be is, we are told, that we are under tremendous pressure. I say to the noble Lord, Lord Bridges, and others on that side of the House, that that is a form of blackmail. I would not dream of listening to blackmail, whether about my business life, my past, my private life, or my political or governmental responsibilities. Anybody who attempted to blackmail me would be thrown out of the door; there is no question about it—I would not be interested. The Government are saying, “You have to pass these things or there will be terrible consequences for British industry and all these different sectors. You will be at fault if you haven’t done what we have told you to do”. That is no good; we should not listen to such nonsense. This is the responsibility of the Government. They got us into this mess and they should be expected to do their best to get us out of it, or at least to minimise the damage that there certainly will be.
As my noble friend Lord Adonis has said, it is entirely the Government’s fault that we find ourselves in this position. Any day they like, the Government could withdraw their notice to quit under Article 50. They could negotiate. We have been told by the continentals that any such request would be positively considered—that we could, if we wished, negotiate an extension to that date. More than that, the Government could have conducted these negotiations very differently. Unless I am very much mistaken, the Prime Minister accepted in December 2017 the idea that we would be permanently part of a customs union with the Republic of Ireland and therefore with the rest of the European Union. Then when she returned to the UK, she was rapped over the knuckles, or worse, by both the ERG and the DUP—two groups of extremists who have an unfortunate hold over British politics at the present time. She had to go back to the EU pathetically and say, “I am sorry, I thought I could agree that but actually I can’t”.
That is the whole history of this negotiation. It is deplorable. It has made us look idiotic across the world and, of course, has created a climate of uncertainty that is doing palpable, concrete economic damage to this country. This is a very important matter. We should show that we mean seriously what we say on the subject of consultation. It should be a standard provision—a right, if you like—which is respected, and always expected, in the case of new legislation put forward on a statutory instrument basis. Such is the importance of this matter and of recording our feelings on it that, if my noble friend feels moved to put his amendment to a vote, I will certainly support him.
My Lords, I can be very brief. I declare an interest as chair of the Hansard Society, which is almost as obsessed with the effective scrutiny of secondary legislation as the noble Lord, Lord Adonis, is. I agree with everything that the noble Lord, Lord Davies of Stamford, has said about scrutiny, but I also have no objection to this SI per se. After listening to the exchanges, I understand the difference between consultation and engagement, and I support the view of the noble Lord, Lord Adonis, that there should have been consultation as well as engagement on this SI and the other SIs that we are considering today.
My Lords, I rise to put the case for poor old business because once again it is the Government who are being blamed. This SI is about access to capital. Without good access to capital, business is constrained and we do not have the means to create the wealth that we need in our country. I have a lot of experience with prospectuses relating to both equity and debt and I am old enough to remember, and have produced prospectuses for, the 2003 prospectus directive. I have been invited, although I have not actually been, to many conferences to discuss the prospectus directive, the transparency directive and CARD—the consolidated admissions and reporting directive. This is very much in UK capital-raising mode. It is the devil that everyone knows, and these SIs grandfather through for British business a very important route to capital. It is not the only route but it is the listed route to capital here.
Here I want to say something very complimentary about the UK Listing Authority, which many noble Lords probably do not know. I have dealt with listing authorities in other countries as well, and the UK listing authority is exceptionally good. It is good at giving clear guidance and responding swiftly when it needs to give comments on a draft prospectus, and that is certainly not the case in some of the landlocked European places that are trying to snaffle our business. Again, it is of absolute importance that this SI goes through.
Turning briefly to the amendment of the noble Lord, Lord Adonis, I think that of the various amendments that he has tabled today, this is very much the back marker, in that I do not think the case for it is nearly as strong. I note that the original policy note for this came out on
Yes, I am sorry, we have now decided that they are distinguished lawyers—and others of the huge number of advisory people in London who help people get access to capital. There were a lot of notes in November and more in December, and what is interesting is that they have all been positive on this SI. So I am not sure what a full consultation would have produced in excess of the current SI. Anyway, that is what we have, and I very much hope that it too will sail through shortly.
I very much agree with the noble Earl, Lord Kinnoull. His remarks were spot on. This has been around for some time, everyone in the industry is adamant that it is necessary for ongoing financial services success, and there is no quibble about its importance. The only quibble that I might have with the noble Lord, Lord Adonis—who has explained that he is not a financial services expert—is about what he was focusing on in note 10: the underestimate of 2,113 firms having to bear the cost of £700 each. Of course, the £700 is calculated assuming that firms will use lawyers at £330 an hour in each and every case. I can assure noble Lords that my firm, for one, will not be.
I declare my interest as a director of the London Stock Exchange, the relevance of which I am sure your Lordships can appreciate. I sometimes stop and wonder, “Okay, what would actually happen if we didn’t have one of these SIs?” Prospectuses would not go away; we would just have some annoying things to do with the EU and our regulators having to deal with it that would be single-ended, and I am not sure how it would all work. I am not suggesting that that is a solution but I am not sure that we would entirely be falling into a bottomless pit.
I have two fairly generic comments to make about this SI. First, in paragraph 92—I am not quite sure of what; I think it is the impact assessment—there is quite a good explanation of the transfer of functions that has been going on for loads of the statutory instruments that quite often have been debated in a much more lonely way in the Moses Room. As has been said, the Treasury takes over the powers of the Commission and then the binding technical standards go to the regulators. By and large that means that we are not really going to see a great deal of detail because the basic legislation is already done and in our legislation, and from now on significant changes are probably going to come in the technical standards. Of course, we do not have an entirely equivalent position with the EU here because we do not get a vote on the binding technical standards, whereas the European Parliament gets a vote, as indeed does the Council, if it wishes to negate the equivalent standards that come from the European supervisory authorities. From that point of view, it is sad that there has not been some kind of public consultation because it might have been the only sniff that they will ever get at it, unless there are more people like me, who make a nuisance of themselves by responding to the stakeholder consultations that regulators put out.
That was a general statement. There are two asymmetries in this piece of legislation that illustrate what is going on quite a lot of the time. One is that we will continue to recognise EU international financial reporting standards. That is a good thing in terms of openness and the ability and ease with which a prospectus can be done in the UK, but the other side of the coin is that the EU has said that it will not recognise, for example, audits done according to UK IFRS. I do not know whether it will continue with that as a generic ploy—I think it hurts the EU rather than us—but it illustrates the difference in openness and the position that the UK is taking on these things. A similar asymmetry occurs with grandfathering. We are saying, “Okay, if the prospectus has already been agreed before we leave the EU, it will be honoured for the 12-month duration that it’s allowed”, whereas I am afraid the EU has said that it will be cut off at the time of Brexit.
I do not think that those asymmetries harm us at all, but there are quite a lot of them spread throughout and some do operate in a harmful way. There are some of these—what was it?—“distinguished” lawyers who advise companies that they are better to operate out of the EU because the EU will not recognise us, whereas we will recognise the EU. I am not suggesting that we could necessarily operate in a different way, but industry has not always got what it wanted out of these engagements and would have sometimes preferred the Government to be a little more equivocal and to have waited to see on one or two of these things, so that, if you like, the balance of lack of knowledge was roughly the same.
I am most grateful to the noble Baroness for giving way. She just said something that alarms me greatly, which is that there will now be two forms of IFRS, one for the EU and the other for the UK. That seems to be a matter of enormous significance, and extremely undesirable. It means that you will not be able to make exact comparisons between potential investments in the UK and the rest of the EU.
Let us suppose you are doing a study of the pharmaceutical industry and you find that, in earnings per share, Glaxo or AstraZeneca has been progressing at a certain rate over the years, and German equivalents such as Bayer have different figures for growth of earnings per share. You are making comparisons, but the comparisons are falsified because of the different accounting conventions. Some of them might be very substantial. For example, if you change the conventions on amortisation of good will, that can be a very substantial figure in a balance sheet in a profit and loss account; it has a bearing on how you account for it. This is very serious, because it would be a serious reduction in the transparency of the financial markets, which would be of great disadvantage to individual investors, of course, but ultimately to firms themselves, and their ability to raise money, and to the health of the financial markets, which we all depend on.
I thank the noble Lord for that intervention. A statutory instrument on the endorsement of IFRS will be coming along from BEIS—I am already taking an interest in that. IFRS will still be a global standard, but I think there are now 144 countries that adopt and endorse them, in their own particular way. They normally go straight through, but there is sometimes a certain amount of adjustment; the Japanese have made some adjustments, as have the Australians. In fact, the EU has also done so here and there. I do not think the intention is that the UK-endorsed IFRS will differ from the EU ones, but—I say this with regret—that does not stop the EU saying that it will not recognise as equivalent those that are endorsed in the UK.
Recognising the need for continuity and stability in the financial markets, although the UK might have made rather a mess of it at the Brexit negotiation level, we probably have the high ground when it comes to how we are dealing with the conversion of legislation, given that it has to happen. However, I am just pointing out that some of the asymmetries—not these two, particularly—cause some difficulty. I think the IFRS one, such as it is, will cause more difficulty to the EU than to the UK.
My Lords, I rise briefly to express my concern from these Benches that we may set some dangerous precedents in the processes that we are adopting in discussing and passing these SIs. I understand the difference between consultation and engagement on these issues but I have significant concerns. If the SI was indeed ready on
I fully accept that, as my noble friend Lord Leigh has said, industry is in favour of adopting these regulations, should we enter a no-deal scenario. However, there are reasons for us to be concerned across the House at the procedures taking place. We are being asked to approve legislation based on evidence that we perhaps feel is incomplete. I will not vote against the Government but I would like to express my concerns.
My Lords, in trying to take my role seriously I staggered my way through the Explanatory Memorandum to try to understand this SI. It all seemed pretty straightforward. Basically, at the moment if you have a prospectus approved by an EEA regulator, it can be used in the UK. We are foolishly—no, that is not the party line, is it?—considering crashing out of the EU and we need some substitute regulation. It seems that the bulk of this statutory instrument is saying that whereas before you would have it approved anywhere in Europe, now if you want to market it in the UK it has to be approved in the UK. That seems to be a consequence of leaving the club. I regret that we have not had the level of consultation that Members would have liked but I find it extraordinarily difficult to believe that the alternative—not approving this SI—is anything like as consequential as the intrinsic costs. No matter how much consulting we did, we would still have come to the conclusion that we should approve the SI.
As ever, I tried to look at the Explanatory Memorandum in the context of the basic assumption of the withdrawal Act: everything is transferred and no new concepts are introduced. The one area where I have some questions is on a very narrow point, which is the exemption for certain government and local authority securities. The memorandum says:
“Under the current Prospectus Directive rules, certain public bodies are exempt from the requirement to produce a prospectus when they undertake to offer securities to the public or request the admission of securities to trading on a regulated market. This includes EEA States, EEA local authorities, EEA central banks, and public international bodies of which one or more EEA States are a member”.
The dilemma is whether we continue that exemption. There is an argument that we should, but in order not to recognise EEA states, there then becomes the decision to extend that exemption.
There are two ways that that exemption is described. In the third bullet point of paragraph 2.5 of the Explanatory Memorandum:
“Extending the existing exemption from the requirement to produce a prospectus and certain exemptions under the Transparency Directive that currently apply to certain EEA public bodies, to certain third country public bodies”.
That would seem to be a controlled extension of the exemption, which took account of the countries to which the exemption was applied, whereas in paragraph 7.22 it says:
“To address this deficiency, the government will extend these types of public bodies exemptions to the same types of public sector bodies of all third countries”.
I think Venezuela is a third country, and the idea that the public offers of securities in Venezuela should be treated the same as those in other EEA states would seem somewhat anomalous.
I would value, if the Minister can get something from the Box in time, a couple of assurances. The first is that the criteria for approval of prospectuses by the FCA remain substantially identical to the present EU states’ regulations. Secondly, the extension of the public bodies exemption to certain or all non-EEA states seems a significant policy shift. Could he explain why this is desirable or even allowable under the European Union (Withdrawal) Act?
Again, I thank noble Lords for their contributions to this debate, which has been very useful and has focused on two themes, as will I. The first is about process, the second about the level of consultation or engagement. I will try to put some points on the record and address the specific technical points raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe.
What we are doing here is onshoring the regulations that already exist, which have gone through a scrutiny process involving the European Commission and regulators in the EU, the European Parliament and our own House. We are onshoring those to the UK. These are exceptional circumstances; they are not normal circumstances in which we are doing it.
The criticism seems to be: why have we waited so long? It is worth putting on the record here that the powers by which we are undertaking this process were set out in some detail by the EU withdrawal Act. I think I said, wrongly, that there were only 10 hours of consideration about the Section 8 process. In fact there were 12 hours of consideration of this process, which was then adopted by both Houses of Parliament.
However, the EU withdrawal Act did not get its Royal Assent until
I want noble Lords, particularly my noble friend Lady Altmann, who I know has a great deal of expertise in this area, to feel reassured that what we are dealing with here are rules and regulations which the industry was already operating by, but under a different regulatory system, that we are now bringing onshore and applying fixes using powers and scrutiny that were set out by the EU withdrawal Act. In a timely process, we have brought that forward. I cannot claim that that will satisfy everybody, but it is worth putting that position on the record.
On whether it was consultation or engagement, in many ways we are discussing the words and phrases of it. What we are talking about here is not a normal consultation. I readily accept the point made by the noble Lord, Lord Adonis, that the rules on consultation are laid down by the Cabinet Office. As set out, they involve a particular process. That is why we are always very careful when we say “consultation” at the Dispatch Box; it has a particular formula attached to it. We might instead say “engagement”. We have consistently used the term “industry engagement” through this process. As came out in the contributions from the noble Earl, Lord Kinnoull, and my noble friend Lord Leigh, industry has been almost the wind in our sails, urging us to get on with this, because of the consequences of not having these safeguards in place, leading to a cliff edge. There has been a push. My noble friend Lord Bridges highlighted the report by Stephen Jones in his UK Finance newsletter. I see my noble friend Lady Wheatcroft in her place, so I hesitate to summarise it in this way, but in terms of the City there are effectively only two main bodies: there is UK Finance, which represents a substantial body of financial services, and TheCityUK. My noble friend Lord Bridges referred to UK Finance.
Everything that the Minister has said is based on the premise that we are dealing with a no-deal situation. All the bodies to which he has referred, given the choice between no deal, a deal and not having Brexit at all, would infinitely prefer having no Brexit or having a deal. The circumstances in which the Minister seeks to justify the use of what are essentially exceptional decree-making powers on the part of the Government are circumstances entirely of the Government’s own making.
This is a separate debate. The noble Lord is moving his amendment, expressing regret from your Lordships’ House that there has been no consultation with industry on this measure. That is what his amendment says, as my noble friend Lord Bridges pointed out. I am not trying to raise the temperature to the same level as perhaps existed earlier in the Chamber; I am trying to maintain it at a level where we are focusing on the legitimate scrutiny which the noble Lord and the noble Lord, Lord Davies, are applying to this process. My noble friend Lord Bridges talked about UK Finance; I was about to quote TheCityUK.
I thank the Minister but he is rapidly losing me. Had the noble Lord, Lord Tunnicliffe, not raised it just now, I would not have known that we are about to give approval for the issuance in the UK of Venezuelan sovereign bonds. That may not have been of particular interest to TheCityUK or UK Finance because of the way in which they look at the world, but I suggest that, had we had a 12-week public consultation, somebody would have come in with that information, which might have been of great interest to this House and created some pressure on government to re-examine that provision and clause. While industry bodies are crucial, there are many other stakeholders with an interest which by necessity have apparently been excluded from this process so far. Underscoring their importance is the issue in front of us today.
If that is the case, it is happening under the existing rules. All we are doing is replicating those rules to avoid a cliff edge.
The Minister’s description of the position is not at all what I understood. As I understood it from my noble friend Lord Tunnicliffe—who spotted this, to his great credit—at present the prospectus directive provides that certain state bodies within the EEA do not have to produce a prospectus. So the Government of France do not have to produce a prospectus if they go to the markets and seek more money. That is a reasonable situation. Far from not changing the substance when they switch from an EU directive to an SI affecting only this country, it appears that the Government have made a significant change in the wording. It no longer says “any EEA sovereign body”—or words to that effect—but “any sovereign body anywhere in the world”. So, as the noble Baroness, Lady Kramer, pointed out, you would have a situation where the Government of Venezuela—if there is one—or of Eritrea, or wherever, could issue a prospectus in London. I cannot believe that that would really happen, but if it did it would be an invitation for the most appalling financial crisis. People would lose all faith in the whole system and the credibility of the prospectus arrangements that we have here.
In those circumstances, we would be dealing with a third country. We would not be part of the EEA, so we could not give them the terms that apply within the EEA at the moment. We had quite a bit of debate on this last time. They would be a third country like any other. We want to develop a very close relationship, but that is a matter for negotiation and discussion.
The suggestion that the EEA does not exist, because we are out of the EU, is surely not valid. Many regulations specify how they apply to different countries. It would be entirely available to the Government to say that the exemption for public moneys should apply to EEA countries and not to other third countries. It is an entirely possible outcome; I am not saying whether it is good or bad. I want to know why the Government have moved from the EEA to everybody, including Venezuela.
Is there any hope that there might be some in-flight information on this? I had understood, from listening to this debate, that this is not a rollover of the current rules; it is a way to make the rules more palatable—presumably to many of the Brexit community—by saying, “We will recognise that EEA state organisations do not have to use prospectuses, but don’t worry, we’re not treating them as special, we’re now going to allow it for every other country, even if they don’t have equivalence”. That is a policy shift. All I am saying is that a consultation would surely have surfaced that issue and the Government would have dealt with it in a different way.
The official position here is that, under international trade law, we cannot favour some countries’ public bodies and not others. It is all or nothing. I take it that I may have other opportunities this evening—perhaps into early morning—to put on record the words of Miles Celic, chief executive of TheCityUK, and of the Investment Association, responding to the engagement which they have had with us. A lot of the issues which have been raised will come up again and I will respond to them then.
My Lords, the longer this debate has gone on, like so many of our debates on these no-deal regulations, the clearer the case has become for having this consultation. In the last 15 minutes, prompted by my noble friend Lord Tunnicliffe, a very important issue has arisen about the distinction between EEA and non-EEA states when it comes to the new listings and publications regime. The noble Baroness, Lady Kramer, brought up the exceedingly important policy point underlying it. This is not my area—my role is simply to facilitate the proper scrutiny by Parliament of these important changes to the law—but it has become ever clearer as this debate has gone on, let alone all the others we have had, why there should have been proper consultation.
Some noble Lords have said that these are exceptional circumstances. I repeat the point that, first, these are exceptional circumstances of the Government’s own making. We are not talking about acts of God here; these are acts of the Government and the Government could correct these acts. The second point was made by the noble Baroness, Lady Altmann, and is incredibly important. The precedents we are setting in the examination of the statutory instruments and the processes we require to put in place, given that we are going to have a cascade more—particularly if we do indeed Brexit at the end of this process, because we are going to have literally hundreds of these, year by year—will all be cited.
The noble Lord, Lord Bridges, says that it is all very well, we have engagement not consultation, and the noble Earl is relieved that his industry is not actually going to be trashed by this regulation, although there are many others that will do so in due course if we Brexit. He says that we should get on with it and that the people he knows are very grateful that they have at least had the opportunity to engage. I tell the House that, once these precedents start to be cited, we can wave goodbye to the normal Cabinet Office processes and procedures for conducting consultations. That is what will happen. That is what always happens once you start sliding down this kind of slippery slope.
The Minister quoted TheCityUK in respect of this instrument. It is important to understand TheCityUK. I have been reading its representations and what it thinks about how the Government have handled the Brexit process in relation to financial services. Shortly after the Brexit referendum, in September 2016, the same guy the Minister quoted said:
“While at this stage it is too early to talk about conclusions from the Brexit negotiations, access to the single market on terms that resemble, as closely as possible, the access the UK currently enjoys is the top of our list”.
That is what this organisation said.
Then, when the Government published the political declaration with the withdrawal agreement at the end of last year, which marked a significant retreat from the objectives that were set out before in terms of mutual recognition, TheCityUK said:
“Mutual recognition would have been the best way forward. It is regrettable and frustrating that this approach has been dropped before even making it to the negotiating table”.
That is what these vital sectors of our economy think about what is happening at the moment. The fact that they are clutching at the straws of having no-deal regulations in place that prevent catastrophe if we leave in five weeks’ time with no arrangement whatever with the EU is no excuse at all for the way this whole business is being handled and for the discarding of our normal processes and procedures.
I make no excuse for detaining the House at this hour. I would be very happy to carry on these debates with the Minister into the early hours if it would bring about change in government policy. He is normally very open to these matters, so maybe it is an invitation to keep going for a long period, because we might then get proper processes of consultation and engagement in place. As a poor substitute for that, I beg leave to test the opinion of the House.
Ayes 21, Noes 121.