The clause inserts a new article into the benchmarks regulation that, in essence, provides the FCA with the power to designate a critical benchmark as an article 23A benchmark, if they consider that the representativeness of the benchmark cannot reasonably be restored, or there are not good reasons to restore and maintain its representativeness. This designation allows the FCA to use a number of the new powers that are set out later in the Bill, such as the ability to require that the administrator change the benchmarks methodology.
Given the significant impacts of making such a designation, we have included a number of safeguards to the designation power. First, if the FCA considers it appropriate to designate a benchmark, they must inform the administrator and allow 14 days for the administrator to make representations before proceeding with the designation. If the FCA decides to proceed with the designation, they must publish a notice. That should include, among other things, the reasons for their decision, the date it takes effect and any further information that the FCA considers appropriate to assist supervised entities in understanding the effects of the designation.
In summary, clause 13 sets out the procedure by which the FCA can designate a benchmark and access the powers detailed later in the Bill. I therefore recommend that the clause stand part of the Bill.
I am grateful to the Minister. Before I begin, I say to the hon. Member for Hertford and Stortford that we are under a duty here to try to understand what we are doing. It is in that spirit that I am asking these questions. I was reminded by a colleague about a different kind of Standing Committee, which some years ago was considering the Hunting Bill. He told me that after a month they were still on clause 1, which was about the title of the Bill, so I do not think we have gone over the top in asking these questions.
With your and the Minister’s indulgence, Mr Davies, I would like to make a few points about the next few clauses; I think they go together and get to the heart of what this area of the Bill is about. As I said, the Opposition understand why LIBOR is being wound down; we have gone over the history of the manipulation and so on. It is why the Bill rightly places such an emphasis on benchmarks being representative of market activity: so far, so uncontroversial.
However, there is a problem in the transition from LIBOR to SONIA or other new benchmarks. As we have referenced several times, there will clearly be some impact on the value of LIBOR-based contracts. That impact is openly acknowledged by the FCA when it says:
“Where parties to contracts referencing LIBOR cannot reach agreement on how those contracts would operate in the event of LIBOR’s cessation, discontinuation could cause uncertainty, litigation or loss of value because contracts no longer function as intended. If this problem affects large volumes of contracts it could pose risks to wider market integrity of contracts/financial instruments.”
Remember that, given the volume of money involved—we are talking about not millions or billions but trillions—this is a systemic risk, as well as a risk to individual parties to contract.
My understanding of the provisions in clause 13 and a few that follow is this. When the FCA feels that a benchmark is no longer representative of the market to which it relates or that that representativeness is at risk, it can designate the benchmark under article 23A of the benchmark regulation. Then there are various provisions about notices being published, reasonable fees being charged and so on; we can leave those aside. When such a benchmark is designated by the FCA, that can only be done in line with the statutory duties, to which the Minister referred, of consumer protection and market integrity. When a benchmark is designated in that way, new use of the benchmark is prohibited, but—this is the critical “but”—the FCA can mandate continued legacy use of that benchmark. The Minister may come back to me about timescales—five years, 10 years or whatever it is.
Finally, if the potential disruption brought about by the discontinuation of LIBOR—or a critical benchmark, if we want to refer to it in that way—is too great, it is suggested in the Bill that the FCA may compel its continuation, as we have discussed. How realistic is it for the FCA to continue to compel administrators to submit information to something that they have said they want to phase out in a year’s time? The provisions are intended to allow the FCA to wind down a critical benchmark but in a way that protects these legacy contracts, which are based on the old benchmark. That brings us to those legacy contracts and what is or is not included, and to the potential legal risks.
As I understand it, there might be two issues. First, what is the definition of a legacy contract? Is it one where there has not been agreement between the two parties to transfer to the new benchmark, or is it something different? What are we talking about when we discuss legacy contracts? What would we do if there were a dispute between the parties about whether something should be treated as a legacy contract or not?
Secondly, how will the provisions cope with the potential legal action and/or market disruption as a result of parties feeling aggrieved, for one reason or another, about the switch from one benchmark to another or, in consequence, taking action that results in disorderly markets? In other words, to what degree is the process subject to disruption through legal action by the parties involved, which could feed into market operation, given the volume of money involved in these contracts?
This situation is complicated even further by the fact that the UK is not the only jurisdiction passing such legislation. Both the European Union and the United States are passing similar legislation. Is it not the case that both contain the safe harbour provisions to which the Minister referred, and on which we had representations last week? In fact, I believe that legislation was introduced just a month ago in the New York Senate that contains these safe harbour provisions. New York law has particular influence over financial markets, given the volume of the US financial markets located in New York.
Given the international nature of the use of these benchmarks and the contracts based on them, if we legislate here and do not have a safe harbour provision, do we open up the potential for what some refer to as forum shopping or regulatory arbitrage, whereby parties gravitate to the jurisdiction that appears to offer the highest levels of protection? Let us remember that the firms that we are talking about are global in nature and highly international. It would not be unusual for someone involved in this area to have an office in London and New York, and maybe in other countries, too.
Is the absence of a safe harbour because the Government are against it, or might they make an amendment to that effect on Report in the Commons or in the other place? Does the Minister accept the point that, in the absence of a safe harbour provision in the UK but its inclusion in American or parallel European legislation, we could face the issue of forum shopping?
Finally, in the event of legal action, who gets sued? Is it for the parties to the contracts to sue one another, or is there a danger that these provisions create the potential for the FCA, through the act of designating and winding up a benchmark, to be sued by people who feel that they are caught on the wrong side of price changes?
I accept that that is a lot of questions to give the Minister at once.
I want to ask a quick question about what is perhaps neither synthetic nor ghostly LIBOR, but zombie LIBOR, because it seems to be lurching on and not quite dead.
I am curious about the monitoring of whether these critical benchmarks are becoming unrepresentative, how that practically would work and at which stage that happens. I also note that there is an obligation under clauses 13 to 16 to bring things to the attention of the public and the supervised entities, but no such requirement to bring them to the attention of Parliament. Will the Minister reflect on whether it would be useful to us as parliamentarians to hear about those things? We cannot necessarily be expected to monitor things on the FCA website as members of the public, and those things might be something that parliamentarians might usefully want to find out.
I thank the hon. Lady and the right hon. Member for Wolverhampton South East for their questions, and I will do my best to address them.
On legacy use, this is broadly where a benchmark was used in specified existing contracts or instruments prior to its designation as an article 23A benchmark. The right hon. Gentleman went on to ask a series of questions about the concept of safe harbours, the different jurisdictions of legal process, and the compulsion process. The Government believe that the proposal is realistic. The administrators do not submit information; the contributors do. On safe harbours, which we picked up on from the evidence from the gentleman from the trade association last week, we recognise the challenges identified in that session, and the powers are designed to assist those contracts that cannot feasibly move away from LIBOR, as Paul Richards described. I am committed to looking to address the issue of safe harbour through further work with industry.
In practice, it will not be possible to table amendments during the passage of this Bill, but that is not down to my unwillingness to do so; it is a matter of the maturity of the conversation, and I think that will be acknowledged. A live productive conversation is going on.
Is the parallel legislation in the United States and the EU part of that consideration? When we received the oral evidence last week, I confess that I had not appreciated that parallel legislation on this subject, with safe harbour provisions, was going through in those two jurisdictions. Given the co-operation that already exists through the FSB, involving in the Federal Reserve Bank of New York and the Bank of England, is that part of the consideration?
We are looking and working internationally. We have an active dialogue with the US through a regulatory working group, and we will be monitoring that. There is no question of us seeking to find some competitive advantage in this; there will be a need to find as much alignment as possible to give as much clarity and certainty to the market actors. However, the conversation is not at that stage yet here. There is no sense that that is jeopardising the integrity of this process. This is the first step, but we reserve the right to do other things further to the conclusion of those conversations.
As for accountability to Parliament, as raised by the hon. Member for Glasgow Central, the legislation requires the FCA to produce statements of policy and notices when exercising the powers. There is also a requirement to review the exercise of its methodology every two years and to publish a report following that review. The FCA is required to exercise its powers in accordance with the two statutory objectives: consumer protection and market integrity. That is the relationship to parliamentary accountability.
Turning to the other matters raised by the right hon. Gentleman around the administrator challenging a designation, if the FCA decides to designate a benchmark under this article, the benchmark administrator has the option of referring the matter to the upper tribunal. The FCA is required to inform the administrator of its right to refer the decision to the upper tribunal and the procedure for doing so.
As for the continued publication of a benchmark that has been deemed unrepresentative, in the case of a critical benchmark such as LIBOR, the benchmark is so widely used that its discontinuation would represent a risk to financial stability and create disruption for market participants. Therefore, this Bill provides the FCA with the power to require a change to how a critical benchmark is determined, including input data, to preserve the existence of the benchmark for a limited time period to help those contracts that otherwise would not realistically transfer to an alternative benchmark.
I hope I have done justice to most of what the right hon. Gentleman raised. I will seek to review what we have exchanged and, if there are outstanding matters, to write to him. I am relieved we have moved beyond clause 1.