Clause 10 - Prohibition on new use where administrator to cease providing critical benchmark

Financial Services Bill – in a Public Bill Committee at 12:15 pm on 26 November 2020.

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Question proposed, That the clause stand part of the Bill.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

Clause 10 inserts article 21A to the benchmarks regulation. This article provides the FCA with the power to issue a notice prohibiting some or all new use of a critical benchmark by supervised entities. The FCA may use this power where the administrator has stated that it wishes to cease providing the benchmark and the FCA has assessed the administrator’s plans to cease the benchmark or otherwise transfer it to a new administrator.

The FCA can exercise this power only if it considers that it is desirable to advance its consumer protection objective or its integrity objective under the Financial Services and Markets Act 2000. The notice will contain the reasons for the prohibition, the date when it is to take effect and any further information that the FCA considers appropriate to allow supervised entities to understand the decision. The FCA’s ability to prohibit new use in circumstances where the administrator is seeking to cease to provide the critical benchmark is an important step in preventing the pool of contracts referencing a benchmark from growing ahead of its possible cessation. I therefore recommend that the clause stand part of the Bill.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

I thank the Minister for his explanation. This clause is about the prohibition of the use of benchmarks. Again, I have a few questions. Is it the case that prohibition can take place only after the kind of assessment of the representative nature of the benchmark that we discussed under clause 9(3), or are there other grounds for issuing a notice prohibiting the use of a benchmark, such as suspected criminal activity or manipulation in some other way?

My second question is about use. New article 21A prohibits “new use” of a benchmark. I think the Minister is saying that there should not be new use of a benchmark, but there may be continued use for the reasons that we have discussed—for legacy reasons. Could the Minister confirm that existing contracts referenced in the benchmark would not be covered by this “new use” provision?

My third question is about paragraph 4 of new article 21A, which says that the FCA must have regard to effects outside the UK of any decision to cease use of a benchmark. I can see why such a provision would be there, because LIBOR is used to underpin contracts all over the world. However, what can the regulator, which only has jurisdiction in the UK, do to stop the use of a benchmark elsewhere in the world? To what degree does this require work with other regulators through, for example, the Financial Stability Board, or is the judgment that action by the FCA alone would be enough, even though that action might have international effects, because of the importance of UK benchmarks? I suppose it is as if some jurisdiction has a particular influence in a sport, so when they change the rules, everybody else has to change the rules, too.

I assume that those criteria about the protection of the consumer and so on that the Minister referred to are in the Bill to protect the FCA from litigation risk by making clear that in acting on this, it was doing so in line with its statutory objectives, because the danger of litigation risk runs right through this.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

The right hon. Gentleman raises a number of questions, and I should start by making it clear that we in the UK cannot stop use overseas. The provision applies to UK-supervised entities working with international partners. He is right to say that there is interconnectedness between those institutions, and the FCA has a significant role in terms of LIBOR.

The simple purpose here is that, where a benchmark is to be ceased, the pool of contracts referencing that benchmark should stop growing. The prohibition power that the right hon. Gentleman referenced is available only at the point at which the benchmark administrator has informed the FCA that it is planning to cease to publish it and the FCA has considered whether it is realistic for the benchmark to be ceased or transferred to a new administrator. Clearly, it would not be desirable for the pool of contracts that reference the benchmark to continue to grow in circumstances where it is likely that that benchmark is on a pathway to ceasing to be used. It is therefore appropriate at that stage to stop supervised entities entering into new contracts that reference the relevant benchmark.

In terms of the rules broadly governing the FCA in exercising this power, it can do that only if it is desirable to do so in order to advance this FSMA consumer protection objective or the integrity objective, so it would have to be confident that it would secure an appropriate degree of protection for consumers or advance the integrity of the market, and it would have to publish a statement along those lines. I recognise that this is complex, but we are really trying to give an appropriate toolkit to the FCA to do what is necessary not only to safeguard the appropriate ongoing construction of benchmarks, but to ensure that it has the authority to justify the management of the wind-down in circumstances where that is necessary.

Question put and agreed to.

Clause 10 accordingly ordered to stand part of the Bill.