Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019

Lord Geddes Excerpts

Monday 18th February 2019 Lords Chamber

[Lord Bates]

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 12 December 2018, the Treasury published an instrument in draft, alongside an explanatory policy note on 21 November 2018, to maximise transparency to Parliament and industry.

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.

[The Deputy Speaker (Lord Geddes) (Con)]

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 21 January, be approved. The Question is that this Motion be agreed to.

Amendment to the Motion

Moved by