I shall seek to remember where I was in my speech. I was talking about international co-ordination and how the FCA currently is part of a global network of regulators, and therefore has a more effective chance of spotting systemic risks building up in the global markets, and that the exchanges would not be plugged in at the same level of international co-operation and co-ordination. The FSB warned, in the aftermath of Russia’s invasion of Ukraine, that
“prices have swung wildly, with liquidity temporarily evaporating in some commodity derivatives market segments and a number of traders coming under strain”.
So I ask the Minister: in these uncertain times, how certain are we that UK exchanges can be patched into that wider market scrutiny and regulatory infrastructure, which the regulator currently has the power to do?
The powers retained by the FCA are limited to intervening on operational objectives and, most relevantly here, consumer protection and integrity, but I am concerned that that definition of consumer may be rather too narrow. It could refer, as it does in Section 1 of the 2000 Act, to the investor, rather than the man or woman on the street. I worry that “integrity” could simply refer to soundness, stability, orderliness and lack of crime. I would welcome the Minister’s view on how this maps on to the existing grounds for regulation that are to be revoked, which are much broader and relate to preventing market abuse and market distortion and try to ensure that there is no artificial inflation of commodity prices.
My concern is that we can have a sound and orderly market which works very well for investors but inflates prices for consumers and businesses and adds extra costs on to essential commodities. I believe the FCA should retain the power to intervene in these cases, and that the definition of grounds for intervention should be as broad as it is currently.
I mentioned the over-the-counter derivatives no longer being covered in regulation. I was rather worried to read in the Treasury’s consultation on wholesale markets that:
“The objective of including them as part of the regime was to prevent market participants from circumventing regulatory requirements that are applicable to exchange traded commodity derivatives by dealing in lookalike OTC contracts. However, in practice, identification of these contracts has proven difficult, and they have only been reported in a very small number of instances.”
Therefore, the Treasury concluded that
“the inclusion of these contracts and uncertainty about the scope of this requirement imposes increased legal risk and potential compliance costs for firms.”
To me, that sounds as though something important is proving difficult and, rather than seeking to solve it, make it easier and provide clearer guidance, we have decided to drop it altogether.
The consultation goes on to say:
“to ensure market integrity, the government proposes that the FCA and trading venues should continue to take account of relevant OTC contracts when monitoring markets.”
But amendments to Regulations 27 and 28 take away the power from the FCA to do this and to request information on these contracts. That is my reading of it, but I look forward to reassurance or clarification from the Minister. If the FCA is not able to monitor these transactions, how can we oversee them? Would it not be more desirable to have the FCA retain the powers it has?
I am grateful for the support of the noble Baroness, Lady Bennett of Manor Castle, for my amendments. Essentially, they seek to unhook the legislation from the EU but continue to require the FCA to maintain the same powers to set position limits and to intervene as widely as possible to ensure proper consumer protection and maintain international co-ordination, which is so essential in these markets.
Amendment 41 requires the FCA to make rules requiring listed companies to publish the revenue and earnings attributable to trading commodity derivatives and economically equivalent over-the-counter contracts. I think this is important because I have personal experience—and there is plenty of anecdotal evidence—of firms that are operating very significant trading activities but hiding their profits in their financial statements and in other parts of their accounts, because to disclose quite how much was being made from trading would bring a lot of questions about the nature of those companies. I am specifically talking about energy companies, which have very significant trading activities and are not, at the moment, required to disclose in their accounts the level of profit they are making from those activities.
This is important because it materially affects the ability of financial services to assess the health of these companies. If we are not seeing the extent to which they are engaged in these derivative-trading activities and we are unable to see where the profits are being made, how can we make fair and open assessments about the nature, success and propriety of their business? It is important that we give ourselves the transparency to see exactly how much of this is happening and the degree to which it is altering the balance sheets of companies in these sectors, which are so essential to
maintaining our standard of living and, in the case of energy and food companies, have such a material impact on our environment and global climate.
I am sorry that that was a very long speech, but I look forward to hearing the Minister’s responses and to continuing the debate.