Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018

Lord Jones Excerpts

Monday 25th June 2018 Lords Chamber

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, the UK and London are world-leading financial centres, providing access to a wide pool of investors and international capital. This is built on the expertise of the UK’s financial services sector in providing products that meet the needs of a variety of economic actors in the UK and around the world. The UK has therefore sought to establish itself as a leading western centre for Islamic finance, illustrated by the UK becoming the first western country to issue a sovereign sukuk, or Islamic-equivalent bond, in 2014. The UK attracts business and investment from Muslim and non-Muslim countries around the world, supporting growth and jobs in the UK, as the UK’s financial services framework accommodates Islamic finance instruments alongside their conventional equivalents.

The Government are committed to ensuring that this continues to be the case. Changes were made to the law in 2010 to define alternative finance investment bonds, which cover sukuk, as a specified investment. More recently, we took measures in the Finance Act 2018 to afford such instruments the same tax treatment enjoyed by conventional bonds when traded on new types of trading venue. This was accepted by the House, but the specified investment definition in financial services legislation requires updating to match the tax change.

The order in front of the House today does exactly that and ensures that there is an alignment of the tax and regulatory treatment of alternative finance investment bonds to provide certainty, clarity and consistency for issuers of these instruments in UK markets. The order adds two types of financial trading venue—so-called multilateral trading facilities and organised trading facilities—to the list of permitted venues for alternative finance investment bonds. Conventional bonds can already be traded in these venues. The order also amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 so that a person administering a benchmark, as specified in the regulated activities order, will be regarded as carrying on the activity by way of business. This technical amendment is consequential on the coming into force of the EU benchmarks regulation which was given effect in February of this year by the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018.

The order tracks an amendment made by the Finance Act 2018 which came into force on 1 April 2018. This left a gap in the treatment of alternative finance investment bonds in financial services regulation. We intend to close that gap as quickly as possible in the interests of certainty, clarity and consistency. Similarly, the amendment to the “by way of business” order is the final part of the legislation needed to complete the implementation of the EU benchmarks regulation into UK law. We wish to reassure issuers of and traders in alternative finance investment bonds that these instruments will be legally recognised in UK markets, giving certainty to the market. The London Stock Exchange has warned that continued failure to update the legislation for alternative finance investment bonds in regulation is causing issuers to look elsewhere.

The changes do not cause any new costs for business, as the regulatory framework for alternative finance investment bonds has been in place since 2007. The Financial Conduct Authority confirmed that there is currently only one firm in the UK authorised to operate a trading venue of the type which might be impacted by the proposed amendments. Instruments of this nature are very sophisticated and highly unlikely to be traded in this manner by anyone without a significant level of expertise in financial services—in other words, firms authorised by the Financial Conduct Authority.

We have a situation where differing treatment in regulation and taxation is afforded to alternative finance investment bonds compared to their conventional counterparts. This is unintended from a policy perspective and the Government want to act quickly to address this gap to protect the competitiveness of the UK markets. For that reason, I beg to move.

[Lord Jones (Lab)]

My Lords, I thank the Minister for his assured and persuasive introduction. I recollect him in another place, where I realised that he always mastered his brief. My remarks will be very brief; I have but one question. The Explanatory Memorandum refers, at paragraph 10.1, to the impact on voluntary organisations and charities being minimal. Can the Minister give an instance of a charity or voluntary organisation, to facilitate further understanding of his introduction?

[Lord Lexden (Con)]

My Lords, I shall comment briefly as a member of the Joint Committee on Statutory Instruments. The committee’s recent 26th report drew the attention of the House to this instrument, on the grounds that it appears to make an unusual use of enabling powers conferred by the Financial Services and Markets Act 2000. It is a long-established principle of the joint committee that, where an affirmative instrument imposes new duties significantly more onerous than those that existed before, and where it requires those affected to adopt different patterns of behaviour, there should be a period of at least 21 days between the making of the instrument and its commencement, to give those affected a reasonable chance to adapt to the changes required. This instrument allows only one day.

My noble friend explained that very few firms—possibly only one—would be affected by this change. He also made clear that the Government were responding to a grave concern expressed by the London Stock Exchange that the continued failure to amend the permitted arrangements for alternative investment finance bonds is damaging the competitiveness of UK markets. The committee was unpersuaded that the changes to the law made by the proposed order are so urgent that they must have immediate effect. If the need for amendments was really so pressing, the draft order should have been laid before Parliament much earlier, with a commencement date of 1 April 2018 to coincide with the tax changes referred to in the Treasury’s memorandum

Because of frequent and recurrent poor practice, the Joint Committee on Statutory Instruments has recently published a special report, Transparency and Accountability in Subordinate Legislation, to remind the Government of the need for new law to be published promptly, so that those affected by the changes it makes are protected from being subjected to them before they have had a reasonable opportunity to understand and prepare for them. That is a general principle to which the Government should always adhere. I commend the committee’s important recent report on the major issues of transparency and accountability to my noble friend and all his colleagues in this House and the other place. I hope the House will have a brief opportunity to consider it in due course.

--- Later in debate ---

[Lord Bates]

My noble friend should not apologise for a contribution such as that, which is very welcome. I know that she follows these matters closely and is an outstanding trade envoy to Jordan and to other parts of the Middle East. This instrument carries a strong message: that the UK and London are very much open for business.

The noble Baroness, Lady Kramer, was quite right to highlight the importance of this particular market, worth $3.5 trillion now, but it is also the fastest growing element. If we desire, as we do, to seek to retain our position as the world’s pre-eminent financial market, we need to be as strong in areas of Islamic finance as we are in other areas of finance. Whether it is Masala or rupee-denominated bonds from India or renminbi-denominated bonds from China, this is a great financial centre and we want to keep it that way. That is why we are introducing this instrument.

I want to prioritise my remarks, if I may, by taking probably the most important point first. Several noble Lords raised the 26th report of the Joint Committee on Statutory Instruments. I put on record that I accept that we have not met the standard that we would want to set ourselves for conduct in this. I know there is concern in the committee that, with a lot of SIs about to come down the track, we must maintain very high standards and be held correctly to them. I draw your Lordships’ attention to the substantive response we made which presents the reasons for the provision, contained in appendix 4 of the report. I reiterate to members of the committee—including my noble friend Lord Lexden—that we do take on board the criticism and will look at ways to ensure that this type of situation does not happen again.

Let me turn to some of the points raised in the debate. The noble Lord, Lord Tunnicliffe, undersells himself. Having stood frequently on the other side of the Dispatch Box from him, I know that he is nothing if not assiduous and sharp in getting to the heart of the issue. His point on the Explanatory Memorandum is reflected in the text of the Joint Committee’s report. It falls into the category of things that we need to do much better. The amendment was very narrow and technical, and I do not envy the officials who then had to produce the Explanatory Memorandum. However, I take on board his point.

Similarly, the noble Lord, Lord Jones, drew our attention to paragraph 10.1 of the Explanatory Memorandum. Its reference to the impact on,

“business, charities or voluntary bodies”,

as minimal is standard wording. We certainly would not expect, in instruments of this nature, charities to get involved, but that does not mean to say that they cannot. Despite his great build-up, I am struggling to come up with an example of a charity or voluntary organisation that might want to take advantage of this. I do not know if he has one in mind but, if not—

[Lord Jones]

I could not bring myself to take advantage of the Minister. I have been a Minister and have been in the same predicament, but if I were challenged in such a way, I would never have such facility or charm as he has.

[Lord Bates]

I think I should just sit down now. The noble Lord is very kind.

I will deal with some of the points raised by the noble Baroness, Lady Kramer, and then I will come back to the noble Lord, Lord Tunnicliffe. The noble Baroness asked whether a sukuk could be an asset-backed security as they are not always a sovereign bond. That is exactly right. We keep our regulatory framework under constant review to make sure that it can adapt to emerging market practice. As for it becoming difficult to comprehend, this is not an easy task given its size and complexity. The Government have no current plans to do so, but will revisit the topic later.

The noble Baroness asked about compliance with Islamic principles, which the noble Lord, Lord Tunnicliffe, also touched on. As secular entities, UK regulators do not operate on Islamic compliance. We set the framework to allow consumers to decide what to do with this. We operate on the basis of no barriers but no favours for these types of instruments.