Data Reporting Services Regulations 2023
(4 months ago)
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Baroness Vere of Norbiton
That the Grand Committee do consider the Data Reporting Services Regulations 2023.
Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)
My Lords, both these instruments are made under powers in the Financial Services and Markets Act 2023, which I will refer to as FiSMA 2023. The regulations form part of the Government’s ambitious programme to deliver a smarter regulatory framework for financial services. As highlighted by the SLSC, these SIs replace areas of assimilated law—formerly known as retained EU law—in financial services with an approach to regulation that is tailored to the UK. Under this programme, the Government are delivering a regulatory framework that is logical, consistent and conducive to economic growth, while preserving the robust regulatory standards that are the cornerstone of the attractiveness of the UK markets.
I turn to the Data Reporting Services Regulations 2023. This instrument establishes a new legislative framework for the regulation of data reporting service providers—which I will now refer to as DRSPs—replacing the framework we inherited from the EU.
DRSPs are a type of financial market infrastructure that report trade data to either the public or the FCA. They are commercial entities that allow investment firms to fulfil their regulatory reporting obligations.
The appropriate reporting and dissemination of market data is key for markets to be supervised effectively, and for them to function properly. Information on trades and prices is essential for markets to properly value shares and other traded instruments, and therefore allow trades at the most effective price. More broadly, universal information is key in helping market participants to identify investment opportunities and evaluate positions.
There are three types of DRSPs. First, there are approved reporting mechanisms, which report details about transactions in financial markets to the FCA on behalf of investment firms. Secondly, there are approved publication arrangements, which publish trade reports to the public. Thirdly, there are consolidated tape providers, which collate trading data from a variety of sources and publish it in a single live data stream. All three of these types of DRSPs are vital to our financial services ecosystem and this instrument establishes a proportionate framework for their regulation, tailored to UK markets.
Under this new framework, the UK’s expert financial markets regulator, the FCA, will make detailed firm-facing requirements in its rulebook, making regulation for DRSPs more agile and more able to respond quickly to market developments and emerging technologies. This instrument also delivers on the Government’s Edinburgh reforms commitment to set up a regulatory framework for a UK consolidated tape. Currently there are no consolidated tape providers in the UK. This means that market participants must purchase market data from individual trading venues or data vendors to get a cross-market view, which is burdensome and costly.
It is the Government’s view that a UK consolidated tape will improve market transparency and facilitate data access, making it easier and cheaper for market participants to meet best execution requirements and manage risk. That is why the Government consulted on a number of legislative changes to facilitate the emergence of a consolidated tape as part of the wholesale markets review. There was broad support for the Government’s proposals which this instrument delivers. Most notably, this instrument introduces a power for the FCA to run a tender process to select one or more consolidated tape providers per asset class, and removes requirements which previously made running a tape in the UK commercially unattractive. These reforms will facilitate the emergence of a UK consolidated tape for any asset class. This will improve market efficiency, lower costs for firms and investors and make UK markets more attractive and competitive.
I will now move on to the second instrument, the Securitisation Regulations 2023. This instrument also forms part of the Government’s programme to deliver a smarter regulatory framework for financial services, by establishing a new legislative framework that replaces the assimilated law on securitisation. Securitisation is the process of packaging loans to form instruments that can be marketed to investors. It allows firms to transfer the risk of their loans or assets to other investors. This in turn allows lenders to free up their balance sheets, to provide further lending to the real economy.
The introduction of the securitisation regulation in 2019 kickstarted high-quality securitisation activity after a decline in the market following the global financial crisis. The securitisation regulation did this by introducing robust regulatory standards which addressed financial stability deficiencies which arose after the financial crisis. The securitisation regulation also encouraged investors to invest in safer, simpler, transparent, and standardised securitisations, by granting this form of securitisation beneficial regulatory treatment.
The Treasury conducted a review of the securitisation regulation in 2021. This review aimed to bolster securitisation standards to increase market transparency and investor protections, and to develop securitisation markets, to facilitate increased real economy lending. The new framework that this instrument establishes will allow the independent financial services regulators—the FCA and PRA—to make and further reform most firm-facing rules for securitisation with more agility and proportionality.
These regulators will consider taking forward reforms in line with the outcomes of their own consultations and the review of the securitisation regulation in 2021. All of these were received positively by the industry.
Lord Sharkey (LD)
My Lords, I will speak first to the data reporting services SI. The Explanatory Memorandum for this instrument helpfully reduces its 28 pages to a succinct six pages. It makes plain what the scrutiny situation with regard to the SI will be. Paragraph 7.4 says:
“Before FSMA 2023, the FCA did not have any rule-making powers over DRSPs, except for some limited powers in respect of technical standards, as well as limited powers of direction enabling them to establish the current authorisation process. These were not sufficient to replace the detailed provisions currently in retained EU law”.
Paragraph 6.6 goes on to remind us:
“Separately, Section 11 of FSMA 2023 inserts new section 300H into FSMA 2000 which establishes a general rule-making power for the FCA in relation to DRSPs. Going forward, it will be the responsibility of the FCA to make firm-facing rules in relation to DRSPs within the powers established by FSMA 2023”.
These new FCA rules will not be subject to parliamentary scrutiny—unlike the retained EU law provisions, which were. We should be clear that Parliament will be bypassed by these new FCA rules.
In this SI, we are simply being asked to consider a set of framework proposals for these new FCA rules, not the rules themselves. The helpful de minimis assessment makes this point very clearly in its opening paragraph when it says:
“Retained EU law will be replaced with rules set by our independent and expert regulators, operating within a framework set by government and Parliament”.
We regret that Parliament is being excluded from effective scrutiny here.
There are some questions relating to this framework; I would be grateful if the Minister could address them. In paragraph 7.10 of the Government’s response to the consultation on the WMR, there is a note on the issue of removing the requirement for CTPs to provide data streams free after 15 minutes. The report notes that most respondents favoured removing this requirement but others argued that
“retail and non-professional investors currently benefit from this obligation and removing it, even for CTPs, could risk disadvantaging them”.
Have the Government discussed this with the FCA? Which approach is currently favoured? Are we going to leave the 15 minutes in or take it out?
In paragraph 7.11 of the WMR response, it is noted that some respondents suggested that
“the current requirement in legislation for market participants, operators and data reporting services providers to make data available on a ‘reasonable commercial basis’ (RCB) is not working”.
These respondents argued that this is because the FCA
“does not have sufficient enforcement powers and asked for the FCA to be given appropriate enforcement powers to control the cost of market data”.
Can the Minister say whether this framework SI will allow the FCA to take on these obviously necessary enforcement powers?
I turn now to the 44 pages of the second SI before us, the Securitisation Regulations 2023. We acknowledge the need for action in this area but, as with the previous SI, we strongly regret that Parliament is in effect excluded from scrutiny of the rules to be set by the FCA and PRA. There are several areas in the instrument where it would be helpful to hear more detailed explanations from the Minister.
Paragraph 7.12 of the EM notes:
“This SI makes some changes to the regulatory perimeter, including scoping out”—
I take that to mean “ruling out of scope” rather than “investigating”—
“non-UK AIFMs from the definition of institutional investor”,
and transferring
“the responsibility for the supervision of providing securitisations by occupational pension schemes”
from TPR to the FCA. Can the Minister explain on what basis these two changes are thought to be beneficial and to whom?
I am also puzzled by this comment in paragraph 7.14 of the EM:
“Due diligence requirements for occupational pension schemes will remain in legislation and be supervised by TPR”.
It goes on to say:
“These requirements will be restated as part of a further SI in 2024”.
Why is there a need for restatement? What deficiencies are there in the current legislation?
Paragraph 7.20 of the EM says that
“this instrument exercises sections 71N(3) and 71N(4) FSMA to allow the FCA to disapply or modify their rules in relation to securitisation activity”.
Are there any limitations here to what the FCA may do or does it have carte blanche to do as it sees fit, absent any scrutiny from HMT or Parliament? If there are any limitations, where are they set out?
I close by referring to paragraph 10.4 of the EM and the Q2 2024 date for the publication of the outcomes of the FCA and PRA consultations and, therefore, of their new rules. This is a long wait. It is extremely unfortunate that these outcomes and the final new rules are not available to Parliament to inform our debate on this SI. No doubt we will have many more financial services SIs in this Session. Will the Minister ensure that the relevant consultation outcomes and proposed new rules are available to Parliament before we debate future SIs?
Lord Livermore (Lab)
My Lords, I am grateful to the Minister for introducing these two grouped SIs, both of which we support.
The Explanatory Memoranda accompanying these regulations note that the repeal of retained EU law remains subject to the entry into force of commencement regulations in order to ensure that there is no overlap or gap between the two different regimes. How soon is commencement expected once this package of SIs has been debated and passed?
I note that the consultations and reviews underpinning these regulations were held in 2021. Although the industry has commented on drafts of the SIs, not all feedback was incorporated and, in some specific areas, the regulators’ rules are still being finalised. Is the Minister satisfied that the changes in timelines have been communicated adequately to the relevant entities? Does she believe that any further communication needs to take place before commencement?
The Explanatory Memorandum for the first of these SIs notes, as did the Minister in her introduction, that
“there is no consolidated tape provider in the UK”.
Apparently, the MiFID II framework “attempted” to bring one about but the requirements for running a tape were thought to have made it “commercially unattractive”. The EM goes on to outline new measures contained in the SI aimed at facilitating a UK consolidated tape, including giving the FCA the power to run a tender exercise based on revised governance arrangements.
I wish to ask the Minister three related questions. First, what practical impact is the lack of a UK tape having and what alternative data sources are being used? Secondly, what is the timescale for the tender process? Thirdly, what will the Government do should there be no suitable bids or if concerns around the governance of a tape remain?
The Explanatory Memorandum for the second of these SIs notes that the FCA will have the power to review and modify its securitisation rules for specific purposes. When is the next overall review of securitisation expected?
Baroness Vere of Norbiton (Con)
My Lords, I am grateful to both noble Lords for their consideration. I will definitely have to write. I am grateful to the noble Lord, Lord Sharkey, for all his questions; I am just not clever enough to listen, write them all down and come up with a response at the same time. Had he given me fair warning, I would have come very well prepared and been able to answer all his questions. I am sure I can, but I will have to do so in writing.
I take issue with the premise behind many of the noble Lord’s comments about where Parliament sits in all this. He asked why we are not discussing the very detailed rules around what sits at what is in essence the back end of the market, to ensure that it functions in an appropriate way. Independent regulators fulfil many different roles within our society. Obviously, the FCA and PRA do many of those within the financial services sector. We entrust to them the role of making the detailed rules. That was agreed when FiSMA was passed by your Lordships’ House last year.
I reflect on my recent experience as Aviation Minister, when I worked with the Civil Aviation Authority all the time. I did not expect to take to Parliament detailed rules about how to build a safe aircraft. It was agreed with FiSMA that we hand over certain elements to the independent regulators. Part of the reason for handing over the regulation of the back end is to improve the agility and proportionality of regulation and to respond to changes to the market. There is a feeling that we are not particularly agile at the moment, and we could do much better. Clearly, we want UK financial services to maintain their place at the very top of the global financial services sector. That is my overarching response to some of the questions raised by the noble Lord in regard to both SIs.
I turn to the tender process for the consolidated tape. I mentioned in my opening remarks that we intend to remove the 15-minute requirement and the requirement to have a per-user charge. However, we have given the FCA the power to run a tender process for a consolidated tape. It has chosen the bond markets first, and the process for developing that is now well under way. We expect the tape to be in place by 2025, if all goes well. Between now and a tape being in place, it will be for the FCA to decide what the tender looks like, given the data in the market now, the market players, what the technology looks like and what information is required by whom, at what price and when. The FCA will do that detail; it is certainly not within my skill set to be able to scrutinise that.
That is the power we are giving the FCA. It may well be—who knows?—that all sorts of things are included as part of that tender process. We have taken out the requirement to make data free after 15 minutes, but that does not necessarily mean that this would not be in the final tender or the winning bid. It is all about providing agility. Previously, people tried to set up or thought about doing consolidated tapes on a commercial basis, and it just does not work. As it has not worked, the industry feels that the best way to do it is via the FCA process. We have now given the FCA the powers to do that. It will move from bonds on to equities next.
The noble Lord mentioned some issues around enforcement powers, and I will have to write to him about that. Indeed, on many of the other questions, I will probably write with further information.
On the issues raised by the noble Lord, Lord Livermore, the industry has been extensively consulted on both of these instruments. Draft SIs have been published. We believe that the industry is fully aware of where things currently stand, and we communicate regularly with it. Of all the industries that I have worked with, financial services are fairly on the ball about what is happening in government and do not necessarily always need to be nudged into responding to consultations or looking at draft statutory instruments. I am content with the amount of interaction that we have had with the financial services sector.
Returning to the impact of the consolidated tape, the practical impact of not having one would be very difficult to quantify, but one might imagine that it would cause our markets to be slightly less efficient and, as all good economists know, efficient markets are happy markets. That is why we think it would be a positive step for the UK to start to have consolidated tapes—we expect there to be one for each asset class.
I feel that was a slightly substandard response, but I will write with more information.