Financial Services (Implementation of Legislation) Bill [HL]
Thursday 22nd November 2018
(5 years, 12 months ago)
Lords ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Read Hansard Text
Financial Services (Implementation of Legislation) Bill [HL]
Tuesday 4th December 2018
(5 years, 11 months ago)
Lords ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Read Hansard Text Read Debate Ministerial Extracts
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I begin with some context to explain why the Government have brought the Bill forward at this time. The Government have been clear that we do not want or expect a no-deal scenario but it remains the role of a responsible Government to continue to prepare for all possible outcomes. This includes the unlikely event that we will reach 29 March next year without a withdrawal agreement or an implementation period.
I have updated noble Lords a number of times on how the Treasury will ensure that we have an effective financial services regulatory regime in the event of no deal. That stability and continuity is being delivered by the 60 or so statutory instruments that Her Majesty’s Treasury is introducing under the European Union (Withdrawal) Act 2018. These will ensure that all relevant existing legislation continues to operate effectively, minimises disruption for firms and protects financial stability.
We need to do more than just ensure that our regime continues to function. The UK’s position as a global financial centre is critical to our prosperity and benefits businesses and consumers across the UK. We need appropriate regulation in place, with the right balance between protecting stability and fostering competitiveness. We aim to be the safest and most transparent place to do business, leading the race to the top and always championing high regulatory standards in financial services markets.
In the unlikely event of no deal, thanks to the hard work of both Houses, we will have brought on to our statute book a vast and highly technical body of EU financial services legislation. We thank both Houses, but both Houses should thank our remarkable civil servants for their incredible work in preparing this great volume of legislation with such accuracy and detail.
However, the powers under the European Union (Withdrawal) Act relate only to EU legislation operative on exit day. Numerous pieces of legislation—or files, which I will refer to later—will not be covered by the withdrawal act powers. They include those that are either already agreed but not yet operative on exit day, or those still under negotiation but which will be operative soon after our departure. There are also provisions in the Bill that relate to non-operative provisions, which it would not make sense to bring into UK law alone.
In many cases, the UK strongly supported these laws when they were being negotiated and played a leading role in shaping them over a number of years. These laws provide up-to-date tools to deal with financial stability risks, ensure that our firms can operate on a level playing field with firms on the continent, allow the UK to meet its G20 commitments and maintain the highest international standards, and provide all-important business certainty and continuity.
As part of this ambition, the Treasury undertook extensive engagement with our financial services industry while negotiating these laws. The sector has been expecting many of these proposals for several years and has been preparing to implement and gain the benefits of them. For example, the prospectus regulation will reduce the financial and regulatory burden for companies wishing to fulfil their financing needs on public markets, while maintaining high standards of investor protection. The UK has been a strong supporter of the reform of the prospectus directive and engaged closely in the development of this regulation.
Implementation is critical to ensure that the UK retains its reputation as an attractive destination for capital. If we are to retain our position as the world’s leading financial centre in the unlikely event of a no deal, it will be vital that the Government can implement the key policies in these EU files in a timely way. Global markets adapt and evolve at pace. We cannot afford for our high regulatory standards to fall behind those of other major financial services jurisdictions. That is what the Bill seeks to address. It will do so in two main ways. First, it allows the Government to implement in the UK a specified list of the most necessary EU financial services legislative proposals in the pipeline through statutory instruments subject to the affirmative procedure. Noble Lords will find the full list and purpose of these files in the policy note published by the Treasury.
Secondly, and importantly, the Bill is only for a situation in which we leave the EU without a deal. It will allow for the Government to choose to implement only parts of these pieces of legislation and make adjustments and improvements as they are brought into UK law. I acknowledge that this is a broad power, but let me be clear on two fronts. In the event of leaving the EU without a withdrawal agreement and without a future economic partnership, the UK will not countenance accepting EU laws wholesale. It will therefore be vital to ensure that any legislation implemented in the UK can be adjusted to work best for the UK markets outside the EU in a no-deal scenario. The Bill is and can be only a stop-gap measure to minimise disruption in the event of no deal for a time-limited period. The Government fully recognise the need to establish a more sustainable process for updating financial services regulation following our exit from the EU and will come forward with proposals in due course.
In recognition of the breadth of powers sought in the Bill, it is subject to a number of strict safeguards. First, as I have stressed, this is strictly a temporary solution and will be limited by a non-extendable sunset clause at two years after a no-deal exit, ending on 29 March 2021. Secondly, the power will be subject to the affirmative procedure in every instance of its use, providing Parliament a guaranteed opportunity to debate, discuss and scrutinise the Government’s approach to implementing these files. Thirdly, the Treasury will be mandated to produce and publish annual reports on the exercise of the power. Finally, the power will be subject to limitations as in Section 8(5) and (7) of the European Union (Withdrawal) Act 2018. It cannot therefore be used to impose taxation, make retrospective provision, create some criminal offences, establish a public authority or amend the Human Rights Act or the devolution settlements.
It is crucial that we press ahead with preparations to ensure that, in the event of no deal, we can protect and enhance the UK’s position as a global financial centre. The Bill is an essential part of those preparations, providing us with the critical ability to implement legislation important to maintaining the functionality, reputation and international competitiveness of our financial sector.
I hope that noble Lords will recognise the Bill as the Government taking a responsible approach in their contingency planning. I look forward to this Second Reading debate on the Bill’s contents and to responding to noble Lords’ questions and scrutiny at its conclusion. I beg to move.
Lord Sharkey (LD)
My Lords, this very brief Bill has a perfectly reasonable objective, which we support. It makes obvious sense to deal with the in-flight files relating to financial services against the possibility that we crash out of the EU on 29 March. I entirely accept that we need to ensure the functioning of our statute book against the possibility of a chaotic exit from the EU. I entirely accept that we need a certain flexibility in the way we do this. We need to have the ability to incorporate pending EU legislation to which we have contributed significantly and which will bring clear benefits to the UK, but will not be incorporated, as the Minister said, by the EU withdrawal Act.
This need is not confined to the financial sector. I expect that the Government will want to bring forward similar legislation to cover other sectors. In particular, I would welcome equivalent legislation to cover the clinical trials regulation, which has been adopted but not yet applied. I realise that this is outside the Minister’s brief, but might he have a quick word with his colleagues in the Department of Health and Social Care about the Bill’s in-flight mechanism?
The Bill before us may be short but it raises a number of substantive questions. The first concerns policy change. It seems clear that the proposed in-flight mechanism will allow the Government to make policy changes by delegated legislation, as section 2 of the de minimis impact assessment makes explicit. That is specifically prohibited in the EU withdrawal Act because it would significantly reduce parliamentary scrutiny. The same objection applies here. Making or changing policy via SIs will equally diminish parliamentary scrutiny. If doing this was wrong for the EU withdrawal Act, why is it okay for this Bill? Is it right to change policy, perhaps significantly, without substantive parliamentary debate? The affirmative procedure certainly does not count as substantive parliamentary debate. I would be grateful for the Minister’s thoughts on the matter.
The second question relates to the schedule. The provisions in it are not the only in-flight financial services proposed legislation. For example, the UK Sustainable Investment and Finance Association points out two other provisions. The first is the European Commission’s proposal of May 2018 for a regulation establishing a framework to facilitate sustainable investment. The second is a proposal for a regulation on disclosure relating to sustainable investments and sustainability risks. Why were those two in-flight proposals not included in the schedule list? More generally, on what basis were the items in the list chosen and on what basis were they excluded?
I can easily see that some items in the schedule are critical. The Capital Requirements Regulation II and the Capital Requirements Directive V will allow us to update the rules on minimum capital requirements derived from the international Basel standards. The Central Counterparty Recovery and Resolution Regulation will ensure that CCPs and the Bank have mechanisms for acting defensively in a crisis to ensure financial stability and the continued functioning of CCPs. I probably do not need to remind your Lordships that the Bank of England’s chief economist, Andy Haldane, has pointed out that if CCPs were to fail chaotically or be unable to continue to function, it would be 2008 on steroids.
My real difficulty with the Bill lies with Clause 1. “Similar” in subsection (1)(a) seems to give very wide discretion. Who is to decide what is similar, and on what basis? Subsection (1)(b) appears to give the Treasury extreme latitude. What is the force of the word “adjustments”? Does it imply any limitation on the changes that may be made? If it does, what are they and should they not be in the Bill? There is then even wider latitude: these adjustments can be made as the Treasury considers “appropriate”. Would it not be better to limit what currently seems an absolute and unfettered discretion for the Treasury to decide what is appropriate? Should not “appropriate” be qualified? Would it not be better to specify a purpose and to know “appropriate” for what purpose or objective? In any case, we need some indication of what tests will be applied in deciding when an adjustment is appropriate.
The wording of subsection (1) makes it clear, given the wide powers, that policy change can be brought about by SIs, limiting parliamentary scrutiny. This becomes evident when we consider the wording in parentheses, which makes it plain that the Treasury adjustments do not even have to have anything to do with our withdrawal from the EU.
A further question arises from Clause 1(9). It is not clear to me—I know that this may be entirely my fault—what this subsection actually does. In particular, I am unclear about the phrase, “in that following year”. I am not sure what that refers to or what it means and I would be very grateful if the Minister would explain.
The policy note issued by the ministry has been very helpful in working through the Bill, but it raises one additional question. On page 3, paragraph 1.8 talks about the safeguards contained in the Bill. The final bullet point states that the power,
“cannot be used to impose taxation; make retrospective provision; create some criminal offences; establish a public authority; implement a withdrawal agreement; or amend the Human Rights Act 1998 or the devolution settlements”.
It follows from this that the power can create some criminal offences. It would be very helpful if the Minister would spell out for us just what criminal offences may not be created and, by extension, under what circumstances the Treasury would want to create new offences and what these might encompass.
Overall, the Bill effectively allows the introduction of fundamental new law by SI. There is no natural, native parent for these SIs. There will have been no primary legislation to allow thorough parliamentary scrutiny. We will be relying, if that is the right word, for proper scrutiny on the EU institutions, which we will have left and whose interests may not be aligned with ours. Perhaps we need a sunset clause for the effects of these SIs, and not just for the powers within the SIs themselves, so that there will be an opportunity for proper scrutiny as they are incorporated in new primary legislation. I am sure that we will come back to this in Committee.
As I started by saying, we support the objectives of the Bill but have some serious concerns about the unfettered nature of the powers it contains and the implications for parliamentary scrutiny. I hope that the Minister will be able to put our minds at rest, at least somewhat.
Lord Hodgson of Astley Abbotts (Con)
My Lords, it would be hard to argue with the importance of having the necessary financial architecture in place to protect and sustain the UK’s position in the event of a no-deal scenario. The ability of the appropriate authorities to act decisively to maintain financial stability and public confidence is critical in any country, and nowhere more than in the United Kingdom, given the size and importance of our financial services sector. So the Bill certainly has my “in principle” support, and although it seems narrowly drawn, covering only regulations which are in process as the UK leaves the EU, there are a number of particular importance, as the noble Lord, Lord Sharkey, pointed out.
When the tide went out as a result of the 2008 financial crisis, it did, in Warren Buffett’s famous phrase, reveal a number of people who had been swimming naked. As a result of that, the UK Government faced a crisis and had to become a significant shareholder in a number of major UK financial institutions. That must surely be inappropriate unless and until the shareholders, bondholders and creditors have borne their share of the pain. So ensuring that the UK keeps up to date with Bank and central counterparty recovery legislation is very important. We cannot allow gaps to appear in the regulatory framework that may offer opportunities for what is known as regulatory arbitrage. At a more practical level, as my noble friend pointed out in his opening remarks, the move to a more focused regulatory approach to the prospectus requirements, particularly for SMEs and investment managers, must be a welcome development. The UK needs to adopt these regulations if it is to avoid being at a competitive disadvantage.
However, as has also been pointed out by the noble Lord, Lord Sharkey, the Bill, though narrowly focused, nevertheless gives the Government extraordinarily wide powers. I am sure that in Committee we shall need to prove the extent to which they are necessary and the ways in which the Government anticipate using them. At this stage I have a handful of points to raise with my noble friend. At paragraph 1.9 of the policy note that accompanies the Bill, there is an assurance that the Government will:
“undertake engagement and co-operation with key stakeholders throughout the process”.
That is potentially a very important restriction on inappropriate use of the powers in the Bill, but as it stands it is quite a bland statement. It would be helpful if my noble friend could give a little more detail about what the Government envisage in terms of their links with the sector during this very important two-year period.
Another constraint is the reporting requirement in Clause 1(8). The clause requires a report 12 months after a no-deal Brexit. After a no-deal Brexit, 12 months will be a very long time indeed. Have the Government given some thought to bringing forward a shorter regulatory period so that their use of these extraordinarily wide powers becomes more transparent more quickly? Moreover, the requirement, as I read it as presently drafted, requires only a statement of the actions that have been taken. It would surely be more helpful to the outside observer if the Treasury was also required to give a statement about why it had felt it necessary to take individual actions, not just that they had been taken.
My final point concerns the paragraph in the letter kindly sent to us by the Chancellor of the Exchequer. Here I am going to cover ground that my noble friend and the noble Lord, Lord Sharkey, have covered. The important paragraph reads:
“It is of course vital that any financial service legislation best serves the interests of UK businesses and customers once we have left the EU, rather than the UK simply accepting EU laws wholesale. The measures in the Bill will therefore allow for the government to choose to implement only those EU files, or parts of those files, which it deems beneficial for the UK, and to make adjustments and improvements to the legislation as it is brought into UK law to ensure that it works best for UK markets in a ‘no deal’ scenario”.
That is a broad power, as my noble friend said in his opening statement. That whole paragraph contains some pretty challenging implications. For example, who is going to deem what is necessary for the UK, and who is going to ride herd on them to make sure that their judgments are being exercised properly?
These early decisions, taken against the background, as they will be, of a no-deal Brexit scenario, may well have a fundamental impact on the shape and structure of future UK securities legislation and consequently on the competitive position of the City of London. Further enlightenment on the background to this paragraph would be helpful when my noble friend comes to wind up.
I have said that I support this Bill, and I do. When I wrote my notes for it, I said that at least it provides an essential stop-gap—again a phrase that came up in my noble friend’s opening remarks—but stop-gaps cannot be, and cannot substitute for, a carefully crafted strategic plan. In Committee we shall need to explore in more detail the extent of the powers the Bill gives to the Government and the way in which the Government anticipate using them.
Baroness Liddell of Coatdyke (Lab)
My Lords, like other noble Lords, I welcome the introduction of the Bill. It is not the most exciting piece of legislation we will consider in this House, but it is pretty vital in the event of a no-deal exit. Taking up points that have been made by other noble Lords, it also points to the intensity of the negotiations that have been taking place outside the Brexit scenario on future financial services regulation. There is poignancy in it as well because for more than 20 years the British voice in the councils of Europe on financial services legislation has been dominant. We have helped to craft that legislation and regulation over those years, and this legislation points out how critical that is. It also reminds us that we are about to move from being rule makers to rule takers. This is one of the steps along the way. I know that that irritates the Brexiteers, but it is a statement of fact.
I am very conscious that a number of points have been made by other noble Lords. There is one specific question that I would like to ask because some confusion has been caused. I think all of us who are speaking on this Bill have been approached by members of the sustainable investment community. I have a difficulty: the number of pieces of in-flight legislation that they refer to does not match the number of pieces of in-flight legislation that the Minister has referred to in this Bill. Particularly in relation to sustainable investment, there is a reference at point 2.52 in the very helpful policy note that the,
“proposal aims to enhance the transparency and comparability of low carbon benchmarks”.
That comparability is an area where there could be widespread interpretation, and it would be helpful if the Minister could give us some idea of the parameters within which that comparability would take place.
Moving to the last part of the policy document, which refers to the European supervisory authority review and the action that the Government will have to take post exit, I would like to see some indication of the timescale that the UK would be considering in making regulatory changes to allow for the exchange of information and delegation to function smoothly. That is a pretty critical part of the functioning of markets. I would be grateful to have some guidance on this; it would be useful because this is not really covered by the sunset clause in the Bill.
There are a number of points that will no doubt be teased out as we go through Committee, and most of them have been referred to before. I too was a bit confused by the use of the word “similar” in the first clause, conscious as I am that I am sitting beside a former Lord Chancellor. It would be useful to have a much clearer definition of what “similar” actually means.
It is important to get this legislation on the statute book as quickly as possible. I hope it is not needed, but again it causes us to reflect on how significant financial services are. It is regrettable that in the political declaration and indeed in the withdrawal Act we do not have any proper explanation of the nature of the regulatory compromises that will be made, particularly in relation to going from passport into equivalence. A big gap is opening up there. I do not expect the Minister to answer that but it is something that we need to have at the back of our minds as we look at this legislation.
Baroness Bowles of Berkhamsted (LD)
My Lords, the Bill establishes a short-cut alternative to starting over again with primary legislation for provisions that are in the EU pipeline and in which the UK has already been engaged. It looks like a convenient scheme. However, I share the concerns raised by other noble Lords, although I agree that the legislation need to be implemented because the large majority of it—at least, what is in the schedule—completes the post-financial-crisis review of legislation.
I am sorry that we have not been given more guidance to what might be objectionable than the example of location policy. Once the short-cut onshoring of bits of legislation has happened, Parliament will be left with very little scope ever to come to grips with major financial services policy. That means that what we are doing now as a temporary measure will have permanent effects. It will all be delegated and in the hands of SIs and regulators—back to the Treasury and the regulatory officials who make up the rules in international consortiums. That, as I have said, is “delegate and deference”, not parliamentary democracy. It is far worse than the scrutiny available in the EU. If we are taking back control, we ought to make sure that our scrutiny is as good as that of the EU.
The Bill is also difficult for me because there is the possibility of wide powers being used differently from non-legislative promises, and because precedents are being set that may then be used in other circumstances. Here, a precedent is set of bypassing primary legislation and piggybacking on somebody else’s scrutiny—for our largest industry. Of course, that may be the truth of Brexit.
There are some non-legislative assurances listed in paragraph 1.9 of the Treasury policy document, which has already been referenced, but I am not sure I find them reassuring. The first is that any method other than coming to Parliament will be used in preference. I do not see virtue in avoiding the scrutiny of Parliament. There is also a commitment to undertake extensive engagement and co-operation with key stakeholders. I do not decry that but—from experience—that does not seem to include Parliament. In the present circumstances, it is all the more important to consult Parliament when, by the Government’s own admission, this is a process that replaces the more detailed scrutiny of primary legislation.
I too have noted the provisions about preparing reports. I particularly noted, in subsection (8)(b), the report on the,
“proposals for exercise of the powers”,
in the second year. Maybe that gives us something to expand on, because it is very important to have an overarching idea of the policy being pursued and the concerns that I have identified. But, as other noble Lords have perhaps already hinted, it is needed in advance of year one as well.
I accept that a no-deal Brexit is not quite what is planned, but, even so, everything that the Government have ever said about our relationship with the EU post Brexit has aimed at getting equivalence or better. If that breaks down because policy changes a great deal, I will accept it, but we must not find that we abandon equivalence by accident because we have made various incremental changes that, in EU eyes, could collectively destroy equivalence prospects without there having been explicit consent to that being what we wished to do. Moreover, as emphasis has been put on consultation with stakeholders, how can we know, whatever the current intention, that the Bill does not turn out to be a dilutors’ charter, because the specified legislation is now out there as an Aunt Sally at which interested parties may chance their arm? I have seen the gleam in the eyes of some in the City already.
In the all-Peers meeting last week with the Minister, the noble Lord, Lord Bates, and the Economic Secretary to the Treasury, John Glen MP, it was said that the words “corresponding, or similar” from Clause 1(l)(a) would not permit changing or deleting aspects of wider legislation not detailed in the specified items of EU financial services legislation. We inevitably got on to bankers’ bonuses as the example everyone knows, so although the schedule includes CRD5 on prudential regulation of banks, it would not, according to the analysis, open up change to the details in CRD4, which is where most of the bankers’ bonus information resides. It would be good for the Minister to confirm that understanding, as an example.
Developing that point further, and because there are some proportionality measures on remuneration for smaller businesses within the specified legislation, does it mean that proportionality measures could not be stretched by the UK to apply to larger businesses than the EU legislation intended? Given that, in my experience, the UK has not used all proportionality provisions—some of which I worked very hard to get—what is the policy on implementation of proportionality?
I could go through the list of legislation and ask lots more questions, but I will spare noble Lords with just one more example. Are the Government now in favour of extending the suspension of the clearing obligation for pension funds—a measure that I forced into the original legislation without any particular support? We should be told, because it could be that the Government do not want to do that and it could be crossed out with our being able to make a specific objection.
Why cannot the Government make a more fulsome policy report now of their key points and concerns? I accept that some things will change, but that does not detract from being given a grounding in where decisions are coming from.
More generally, the words “corresponding, or similar” are too wide. It may be possible to have a corresponding piece of legislation that is not similar. At the moment, I am veering towards suggesting that the provision should be “corresponding, and similar”.
The next part that concerns me is that EU legislation could be cherry picked. That may not be the intention, but the words,
“or any of the provisions”,
allow that possibility. It is very permissive, covering from everything to nothing of a piece of specified EU legislation. I want to find ways to qualify that to ensure that the overall framework that could sustain the objective of equivalence is being retained, and is not disappeared by stealth or accident via statutory instrument. One way to deal with that might be for “corresponding, and similar” requirements to apply to the whole of a piece of legislation, rather than individual provisions, but I accept that we need some more tightly defined requirements for omissions that might be necessary.
Then I come to,
“any adjustments the Treasury consider appropriate”.
In the meeting, we were told that new things cannot be created, but it is not entirely clear that the “corresponding, or similar” provision governs subsection (1)(b). I come back to my point that in this context there needs to be some kind of track record on the policy against which you can measure what is being done. The word “appropriate”, which is the unfortunate and common construction used for delegated power, is usually employed when there is some policy context in the primary legislation. In the Bill, there is no policy context other than to pick, choose, change and avoid primary legislation.
I do not understand why it is necessary to have such broad powers for the completed specified legislation. It is known what was argued and it is in its final form. We will know what was lost and any changes that might need to be considered. Why can we not know them now?
Legislation that is not complete in the schedule is not new or surprising either: there have been years of consulting. I did some of it. By the time an EU proposal is published, before you go through any amendment provisions, it has been well consulted on. The Commission, other member states and many MEPs know the UK lines. I often used to get it from them before I ever got it from the Treasury. How about telling us what those lines are in respect of that legislation? They must exist. Again, that would give us a background against which we could measure what is intended. Without that, we are approving a procedure blind of policy, facts and principle. It is not sufficient to think that an affirmative procedure is enough to satisfy all those concerns.
Lord Leigh of Hurley (Con)
My Lords, I am pleased to speak today on this short, technical, perhaps not that exciting Bill, and thank my noble friend for his briefing earlier. I recognise that some will say that this is a belt-and-braces Bill to cover the very unwelcome possibility that we leave the EU on 29 March with no deal. I say that it is unwelcome not because I think that the UK cannot or will not flourish as an independent nation state outside the EU but because I really do not think that we will be ready at that time. I note that the Government recognise that, in those circumstances, only appropriate legislation will be brought in and then, importantly, it can be adjusted to suit us.
My position in supporting the Government and speaking for their proposals for the deal later this week is set out in an article I have written for today’s City A.M., so I will not bore the House further with my views on it.
I draw your Lordships’ attention to my interests in the register and to an entry which, for good reason, is not in it yet but which I ought to declare. I am, today, the senior partner of Cavendish Corporate Finance LLP, which will merge with finnCap Group PLC tomorrow. All being well, our first day of dealing on the AIM market starts at 7.30 am. So, as deputy chairman of an AIM-listed company, I have a vested interest in the operation of the market and will address some issues which are covered as specified EU financial legislation, which this Bill seeks to bring in on or after exit day.
The stated purpose of the power is,
“ensuring the Government can implement legislation which reflects the interests of the UK market and its participants”.
The House of Lords Delegated Powers and Regulatory Reform Committee criticised the similar powers contained in the European Union (Withdrawal) Act for giving what it called,
“excessively wide law-making powers to ministers”.
However, given the Bill’s stated purpose of ensuring the Government can implement legislation which reflects the interests of the UK market and its participants, it is both necessary and proportionate to allow Ministers to make,
“any adjustments the Treasury consider appropriate”,
so that the Government can make positive improvements to the proposed legislation for the benefit of the UK market and its participants, rather than just correct deficiencies, as the EU withdrawal Act allows.
Regulators and regulation have tended to focus on the largest and most visible markets but should address the whole of the UK financial markets, not just the FTSE 100, many of whose companies are multinational. The major public markets are just the visible tip of the iceberg, part of a broad financial ecosystem which supports the financing of and investment in UK businesses. Government should consider the impact and potential unintended consequences on the broader system before implementing EU legislation.
An important aspect of this broader system is the financing of small and medium enterprises. I am, of course, delighted to see that the Government support the aims of the SME growth market regulation proposals, to support the ability of SMEs to fulfil their financing needs on UK public markets through the reduction of administrative and financial burdens.
In this context, we need to consider the potential negative impact of the central securities depositories regulation, CSDR, and the related delegated cash penalties regulation, DCPR, on the provision of liquidity, which is so important for markets for small and medium enterprises, such as the London Stock Exchange’s AIM market. AIM is by far the most successful SME growth market in Europe. The EU does not have the same sort of experience or success as we do. Part of this success is due to the quote-driven nature of the market, with market-makers committed to providing liquidity at all times during market hours.
However, the CSDR introduces a new settlement discipline regime, under which trades not settled at an agreed time will face daily fines until they are. These fines will pass along the chain of settlement so that only the initial failing part of the settlement chain will pay. This will always be the liquidity providers, which are the market-makers, as they are the only type of participant permitted to sell shares they do not own—known as naked short sell—under the short selling regulation. Liquidity providers are thus fined for providing liquidity in periods when demand outstrips supply: in other words, for performing the specific purpose for which they exist. Penalising formal liquidity providers for not settling trades on time will lead to those very liquidity providers reducing their activities in smaller company securities in order to avoid these additional costs. This will lead to a further reduction in companies’ liquidity, thereby reducing their access to funding on public markets.
In addition, introducing a regulation to impose a fee appears to contradict the stated limitation of the power. The Government have committed to undertake extensive engagement and co-operation with key stakeholders throughout the process. In order to include views relevant to the broader market, this should include bodies representing smaller companies seeking funding for growth, such as the Quoted Companies Alliance, which has been of assistance to me with my remarks, and the ScaleUp Institute.
I hope that we do not need any of these measures, but I am happy to support the Bill in case we do and hope it provides a focus for the Government in their regulation of the SME market.
Baroness Kramer (LD)
My Lords, it seems rather strange to be the winder in a short debate like this. My noble friends Lord Sharkey and Lady Bowles laid out the position of these Benches with great clarity and raised a series of questions, so it is not my purpose today to repeat them but to say how much I stand behind them and the comments we heard from the noble Baroness, Lady Liddell, and the noble Lord, Lord Hodgson. I thank the noble Lord, Lord Leigh, because in a sense he made the point for us about the underlying concerns that we have with this legislation.
I think that everybody accepts that it is necessary to have some provision for how we deal with, as it were, in-flight directives or regulations from the EU since they were not covered in the EU withdrawal Act. If it was simply a matter of technically keeping abreast, none of us would have a lot of queries about this piece of legislation. However, as other noble Lords have demonstrated, there is plenty of scope within this for fundamental policy change, and policy change through statutory instrument—an issue which this House has tackled again and again, and which it tackled in the EU withdrawal Act. We are concerned about creating that kind of precedent once again here, as well as the actuality of what may happen under this Bill.
I raise it in the following sense. If we crash out and have a no-deal exit from the EU, the following months will be absolutely critical to the future of financial services within the UK. In those months, firms that have not already made the decision about what they relocate to the EU 27 will make further decisions, and the EU will be establishing its response to our departure and setting in place many of the key elements that it needs to be able to withdraw a significant part of that business to within the supervisory and monitoring powers of the European Union itself. An example that is given in the policy paper is that we may well end up with a location policy—in other words, a requirement from the EU that all financial transactions denominated in euros, or a significant portion of them, need to be repatriated to within the eurozone because of the exposure of the European Central Bank, which is acting as a backstop to liquidity crises with those instruments. Therefore, we may have those kinds of situations. Policy then will be absolutely critical.
I think many people take the view of the noble Lord, Lord Leigh, that the people who will be making change in that period will be the UK, and indeed he sought from the Government assurance that there would be policy action to dilute regulation in areas where he thought it was of interest. My noble friend Lady Bowles made the point that that alone begins to undermine the policy of third-country equivalence across financial services, which the Government, and the City, have seen as an underpinning to keeping our current level of dominance and vibrance. But there will also be changes within the EU, and I know that the City is very afraid of that. If those changes take place, again that undermines third-country equivalence if we are not following suit.
The point I am making is not about where you end up, on which side of this issue, but that absolutely critical policy decisions will have to be made, and those seem to be the kind of decisions that ought to be placed before this House. They will impact the functioning of the largest and most significant industry sector that we have within the UK, which feeds our tax base, which in turn supports our public services. To hand the decision-making around the issues to the Treasury, or to the Treasury working with the regulator, seems exceedingly high-risk. The breadth of power that is requested is not just to enable relevant and relatively minor adjustment; it covers a period of time in which fundamental decisions are made. We may make different decisions two or three years later, but it will be too late: the shape of our future financial services industry will basically be decided within that relatively short period. Amendments will need to be brought forward to try to tackle these issues.
I ask that the Government recognise how fundamental and significant the decision-making—and policy decision-making—will be during that period.
Lord Davies of Oldham (Lab)
My Lords, Her Majesty’s Opposition support this Bill in principle. The Government have every right, indeed they have a duty, to prepare against the possibility of a no-deal Brexit. A few months ago, when work on the M20 lorry park was first considered, it occasioned some surprise in the nation which had not realised that the Government might need to take constructive action against a no-deal outcome. After all, the Prime Minister had reassured us that negotiations were making satisfactory progress and few Members of Parliament had canvassed the idea of no deal as a good policy for the Government.
However, things have changed over time. Now, of course, the weakness of the Government’s case for the development of our position as a result of the negotiations means that a considerable element in the governing Conservative Party looks upon no deal as better than some other possibilities. Such an outcome is totally rejected by the Prime Minister, so her Government are setting out to mitigate the calamity of no deal against a background where they continue to expect a better result.
For the nation, however, these preparations take on a different salience: there is no certainty about the future and no deal is a possibility, however disastrous that would be for the economy and the country’s welfare. So we have this modest Bill to ensure that “in-flight” legislation in Brussels can be safely implemented in the crucial sector of the financial services industry; no one is in any doubt of the importance of the industry’s contribution to the welfare of the economy. The Bill updates the regulatory regime and seeks to minimise the problem of the year, or possibly two years, after no deal. It reflects the fact that a considerable amount of UK financial services legislation has been part of European law for a long time. Its applicability to the United Kingdom is therefore entrenched in our laws. This has provided a significant place for UK leadership. My noble friend Lady Liddell identified just how much the UK has contributed to the development of policy in Europe—the result of what is widely recognised as the advanced and sophisticated level of financial services in London and several other major cities of the country. It has been a prime mover of improvement in the development of legislation and regulation.
There will of course be an unquestionable loss when the UK quits the European Union. No one is saying for one moment that the industry will not flourish and play a significant role in our economy but it will be increasingly difficult for us to play the enhanced leadership role in Europe that has been the case in recent years. As we all appreciate, there are competing parties from other countries who are also very interested in securing control and power that they can exert over the industry.
As the noble Lords, Lord Hodgson and Lord Sharkey, pointed out, the problem with this legislation is that the legislative initiatives put forward significantly increase the power of the Government. There is a crucial phrase, which noble Lords have referred to on more than one occasion in this debate: the power for the Treasury to make adjustments where it considers appropriate. Of course, the Treasury will decide where this will be of benefit for the United Kingdom and where it will work best in the context of this country. The Treasury will defend itself with that phrase in the legislation, but it does not alter the fact that what are posited through delegated legislation as relatively minor transfers of powers in fact give the Treasury very considerable latitude.
We recognise that the powers last for only a short period—namely, two years—with a sunset clause attached to the legislation, and of course we approve of the fact that some gesture is made towards parliamentary scrutiny by the indication that the SIs will be subject to the affirmative procedure. However, the scope for government policy to develop in this process is considerable, and that has already been illustrated by the anxieties expressed by the noble Baroness, Lady Bowles, and my noble friend Lady Liddell.
Also drawn to our attention has been the case put forward by the UK Sustainable Investment and Finance Association. It wants to know, as I am sure we all do, where two pieces of in-flight legislation in which it has a significant interest appear in the list. If to govern is to choose, this certainly suggests that the Treasury can already operate with a heavy hand, even at this very early stage. Can the Minister clarify this position today? If not, rest assured that this and the other issues that have cropped up in this very well-informed debate will be the subject of considerable discussion and debate, as well as intensive scrutiny, in Committee.
Lord Bates
My Lords, I agree with the noble Lord, Lord Davies: this has been a well-informed debate, representative of the deep expertise in your Lordships’ House, which has been on full display. The areas of agreement were effectively two: recognition of the necessity of preparing for a no-deal scenario, and a united view that we hope never to be in the position of having to exercise the powers in this Bill.
The noble Lord, Lord Sharkey, began our debate by expressing concern about the range of powers, in particular those to include and exclude files. My noble friend Lord Hodgson questioned whether this was a stopgap measure and said that it could not be a substitute for longer-term legislation and a solution in this important area. The noble Baroness, Lady Liddell, having remarked that this is not the most exciting legislation to come before your Lordships’ House, recognised the importance of the financial services industry, to which it relates. She also recognised the role that the United Kingdom has played over many years in the European Union in shaping financial services regulations.
The noble Baroness, Lady Bowles, teed up what will be, if we are fortunate to secure a Second Reading, a Committee stage debate on words such as “implementation”, “proportionality”, “corresponding”, “similar”, “appropriate” and “adjustments”. It will be important to flesh out exactly what is meant by those terms.
My noble friend Lord Leigh talked about the impact of regulations in financial services on small and medium-sized enterprises. He also became perhaps the first Peer to announce in your Lordships’ House his forthcoming listing on AIM. I do not know whether it is appropriate to comment on that, but I wish him well—he is probably getting worried because I wished him well; it was a personal wish.
The noble Baroness, Lady Kramer, talked about the strong role of the financial services in underpinning the fiscal base of the economy, tax revenues and public services. She said it is vital that we retain that strength and continue to exert scrutiny. The noble Lord, Lord Davies, talked about the oft overlooked fact that, when we talk about the financial services, we are talking not just about the City of London but about a national industry, with hugely important centres in Bristol, Leeds and Edinburgh. He also reminded us of the international competitive nature of financial services, and that the UK’s leadership can never be taken for granted but must be earned and restated.
With that, let me move on to some of the points that were raised in the debate. The noble Lord, Lord Sharkey, asked why, if this is so important, other departments are not doing the same, specifically the Department of Health and Social Care. We have already put in place many of the legislative building blocks to deliver our exit from the EU. Since the European Union (Withdrawal) Act received Royal Assent, the Government have started laying statutory instruments to ensure a functioning statute book in all scenarios. Any requirements for further legislation in other areas will be announced in the usual way. I realise that that is not quite the answer that the noble Lord was looking for—or that I anticipated as I began reading out the note. His was a specific question, asking that I speak with colleagues in the Department of Health and Social Care, and I will certainly do that and find out how the particular legislation he referred to might be handled.
The noble Lord, Lord Sharkey, also mentioned the powers to adjust. As the final outcome on these files is still unclear, we need to make sure that we can bring them into UK law in a way that works best for UK markets. This could, for example, include areas where final parts of legislation could, if unchanged in a no-deal scenario, present inconsistencies with the UK regulatory framework, global standards or the UK’s position as an open, global financial market. It is important that we have the power to correct inconsistencies when bringing these into UK law.
The noble Lord then asked why we had chosen some files rather than others. The Bill provides the UK with an interim means to domesticate key EU financial services files that are in the European legislative pipeline. Those are the files that we believe will be the most important for market functioning and UK competitiveness in a no-deal scenario. Those in-flight files not listed on the face of the Bill include those that apply only to eurozone members, which we would never have implemented as a member state, those that the UK has opted out of, and those where there is not a critical need to implement the legislation in the narrow window of time covered in the Bill.
The noble Lord went on to ask what was meant by the word “appropriate”. Once we leave the European Union, we will lose our ability to influence the outcomes of files at a European level—something to which the noble Lord, Lord Davies, and the noble Baroness, Lady Liddell, also referred. As such, we will require the ability to ensure that the files or parts of the files implemented best suit the needs and the structures of the UK financial services market. The power to make appropriate adjustments to legislation is therefore designed to enable the UK Government to ensure that the implemented legislation is the best fit for the UK.
The noble Baroness, Lady Bowles, similarly asked about the power to adjust. The power will only allow the Government to make adjustments to files and not to make entirely new financial services policy not covered within the files. The power will also have to be exercised with the purpose of making similar or corresponding provision to specific lists of files set out in the Bill, so the subject matter of the regulations will naturally be limited. This is simply about ensuring that we implement legislation that is the best fit for the UK.
The noble Lord, Lord Sharkey, asked what was meant by “some criminal offences”. The limitation in the Bill mirrors that in the European Union (Withdrawal) Act. It prohibits the creation of criminal offences for which an adult can be sentenced to a period of more than two years in prison.
The noble Baroness, Lady Liddell, asked about the comparability of low-carbon benchmarks. This is an important issue and I realise that a number of noble Lords have received representations on it. I undertake to look at it specifically and write ahead of Committee.
My noble friend Lord Hodgson asked about the reporting duty of the Government and whether that would include a statement on why a power is used. The report will provide an overview of how the power has been used in the first year and how the Government propose to use the powers in the second year. In the meantime, the Government will undertake extensive engagement and co-operation with key stakeholders throughout the process, ahead of and during each use of the power, and Parliament will have the opportunity to debate every SI under the affirmative procedure. He also asked whether it would be advisable for the Treasury to consult transparently ahead of each use. We agree, which is why, within the policy note accompanying the Bill, we have committed to undertaking extensive engagement and co-operation with key stakeholders throughout the process, ahead of and during each use of the power. In that term “stakeholders”, we very much include Parliament and your Lordships’ House.
The noble Baroness, Lady Bowles, asked whether it would be helpful to change the wording to “corresponding and similar”. This is classic territory for Committee and a well-worked amendment around that will elicit a more in-depth and appropriate response from the Minister at that point. She asked a specific question, which was also referred to by the noble Baroness, Lady Kramer: namely, whether the power could be used to remove the bankers’ bonus cap. While remuneration policies were introduced as part of the EU’s Capital Requirements Directive IV, they are due to be updated through the Capital Requirements Directive V, which is included in the Bill. The Bill allows us to choose not to implement certain files or to implement parts of them. At this point we are not proposing specific policy changes or decisions. Before bringing forward any secondary legislation using the powers in the Bill, we will engage with a wide range of stakeholders, including the financial services sector.
The noble Baroness, Lady Bowles, asked about legislation regarding pension firms. Again, this is something that might best be covered in a letter ahead of Committee. She also asked why we do not just do this through primary legislation in order to get proper parliamentary scrutiny. Given the number of files in question and the potential requirement to implement them at pace to respond to market developments and meet international obligations, it would not be feasible to rely exclusively on primary legislation in every instance. The Bill requires the use of the affirmative resolution procedure for every statutory instrument made. She went on to ask why the Government will not make a full report about concerns and the approach to policy in this Bill. At this point it is very difficult to say which files or parts of files we would seek to implement and whether and what adjustments would be made. This is because we do not know the exact context in which these decisions will be made and what the final versions of many of the files will look like.
My noble friend Lord Leigh asked about the potential negative impacts on, for example, CSDR. We recognise that there are aspects of these files that are currently under development which different parts of the sector may not fully support. The Bill allows us to choose not to implement files, to implement parts of them and to correct deficiencies in them, as well as to make adjustments to ensure that the legislation works best for the UK, subject to appropriate safeguards.
The noble Baroness, Lady Kramer, asked about the so-called Henry VIII powers being used. Of course we understand the concerns around the breadth of powers, and that is why we have included a number of safeguards within the Bill to address them, including explicitly listing the relevant files on the face of the Bill and sunsetting the powers to two years, consistent with the European Union (Withdrawal) Act.
The noble Lord, Lord Davies, asked about adjustments to powers. It would be possible under the terms of the power only to make adjustments to any EU file we would be implementing and not to completely change its intent. This power would allow us to make provisions which are broadly equivalent to the original file and which therefore seek to achieve a similar outcome in a way that best fits the UK. However, it would not be possible for the Government to use this power to implement something completely different from the original file.
Again, I thank noble Lords for their contributions to the debate.
Baroness Kramer
This may be extremely petty, so I ask for the compassion of the Minister. However, subsection (9) is completely incomprehensible. Three of us read it and we came up with entirely different conclusions as to what it meant in terms of both the preparation and publication of this report. Is he able to provide clarity now or else to do so by the time we get to the Committee stage? It may not be contentious at all—it is just that it is impossible to work out exactly what it means.
Lord Bates
I can understand that. It is a fairly short Bill, but I will undertake to write a more substantial letter between this Second Reading and Committee if it is granted by your Lordships’ House. I will cover and expand further on that point.
We will carefully consider all the points which have been raised in this debate. I thank noble Lords for bringing their expertise and knowledge to bear on this important piece of legislation. I request that the Bill now be given a Second Reading.
Financial Services (Implementation of Legislation) Bill [HL]
Tuesday 8th January 2019
(5 years, 10 months ago)
Lords ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 143-I(Rev) Revised marshalled list for Committee (PDF) - (7 Jan 2019)
Lord Taylor of Holbeach
That the House do now resolve itself into a committee on the bill.
Lord Taylor of Holbeach (Con)
My Lords, I beg to move.
Amendment to the Motion
Baroness McDonagh
Leave out from “do” to the end and insert “not resolve itself into a committee on the bill until the Committee stage of the Trade Bill is set down in House of Lords Business”.
Baroness McDonagh (Lab)
My Lords, I shall speak to the amendment in my name on the Order Paper. It is a Christmas miracle: I now have evidence that Santa Claus exists. The Trade Bill finished Second Reading on 11 September, and with the looming date of 29 March, I thought, “Gosh, we are going to get it back in October”, but there was no Trade Bill to be seen. It had to be November, but there was no sign of the Trade Bill anywhere. It must be December, then, but no sign of the Bill. So, on 19 December, I went to see the clerks and put down this amendment. I know many of my colleagues also started to ask to questions about the Trade Bill. It is a miracle: we get back from Christmas, and we have four days for Committee at the end of January.
This is part of a wider political strategy. I understand that some incompetency is involved in this—of course there is Chris Grayling—but this is part of a bigger strategy. Six months ago, the Government adopted a kick-the-can-down-the-road strategy, where every day when they got up they hoped something better would happen. When they realised that was not going to happen, they adopted a new strategy, called the cliff-edge strategy. We saw it at the weekend with the Prime Minister’s media interviews, and with the Answers to Questions yesterday from the Minister the noble Lord, Lord Callanan. The strategy is that “Either you agree with me, or I will wreak chaos and havoc on this House and this country”. It is never true when people tell you there is only one way. There are always other options, and the possibility of preventing chaos.
While I say today that I will not be moving this amendment and pressing it to a vote, I put the Chief Whip the noble Lord, Lord Taylor, on notice: if there are any further delays in legislation, any holding up of Bills that should go back to the other place, any dumping of hundreds of SIs without the time given to debate them, I will have no hesitation bringing such a Motion or amendment back to the House.
I think nearly a majority of Back-Benchers in every group in this House feel the same way. Even if the Government are not going to prevent chaos, we are.
Baroness Bowles of Berkhamsted (LD)
My Lords, for the purposes of the Committee stage of this Bill, I declare my interest as in the register as a director of the London Stock Exchange plc.
This Bill, as was elaborated at Second Reading, is intended to provide a way to land so-called in-flight legislation. However, as many noble Lords also observed during Second Reading, the scope for amendment of that legislation is wide and not limited to the type of onshoring provisions of the withdrawal Act. Indeed, there is no promise of onshoring at all. This point is noted by the Delegated Powers Committee in paragraph 17 of its report on this Bill. The fact is that there is just a wide power to make legislation related to any of the provisions in any of the legislation in subsection (2) or specified in the list in the Schedule. There are no provisions defining how close it must be to that legislation, and the power is not anchored only to withdrawal from the EU.
We should not lose sight of the fact that the mechanism is an alternative to primary legislation. Although the power is time-limited, I do not consider that that is sufficient control to replace primary legislation entirely. It cannot be left open for the Government to cherry pick, to diminish, to add or to do things that depart from expectation, in terms both of the policy in the EU instruments that the power covers and the policy that has been laid out by government with regard to relations with the EU after Brexit.
The doubt starts right at the opening words, which state:
“The Treasury may by regulations make provision … corresponding, or similar, to … any of the provisions, of any specified EU financial services legislation”.
The use of “or” clearly implies that the regulation may make provisions that are corresponding but not similar. A simple suggestion may be to make a penalty for a failure in a corresponding position, but not the same penalty. So, too, could it be the other way round: a provision may be similar but not corresponding. A penalty may be moved to somewhere else or attached to a different provision. We often talk in particular about criminal penalties, when we are equalising them out between different types of provisions.
Amendment 1 would replace “or” with “and” so that it said “corresponding and similar”, thus making the objective clear: it corresponds to a particular EU provision and it is in similar terms. That seems to be a good and clear start to the Bill rather than the imprecise start that it currently has.
On its own, the amendment would not solve all the problems, including the Government’s plea for some flexibility. In other amendments in later groups, I probe how that might be done. Other noble Lords have amendments in this group which suggest further limitations on power. As it has fallen to me to speak first, I shall briefly comment on them
Amendment 3, tabled by my noble friend Lord Sharkey, makes a good point about not changing the primary purpose of the EU legislation, and it could sit alongside my Amendment 1 as well as standing alone. Amendment 5, tabled by the noble Lord, Lord Davies of Oldham, and others, would limit the provisions to the circumstances of withdrawal from the EU. I am interested in the debate around that point. How far would the Government intend to stretch the term,
“adjustments in connection with the withdrawal”?
What other form of amendment not connected to withdrawal might they be contemplating?
Amendment 7, by the noble Lord, Lord Tunnicliffe, progresses the limitation to reflecting the UK position outside the EU. In later groups, I have put forward some probing amendments that would limit the scope of amendment in other ways but which are a little more permissive, so, for now, I reserve my own position on Amendments 5 and 7 save to say that, if it is not feasible to construct suitably restrained flexibility, limitations of the kind set out in Amendments 5 and 7 would have to become the default position. I beg to move.
Lord Sharkey (LD)
My Lords, I shall speak to Amendment 3. At Second Reading, there was much discussion of the wide powers that the Bill gives to the Treasury via secondary legislation. All the amendments in this group deal with that issue.
Clause 1 contains clear Henry VIII powers. It allows the Treasury to make policy and new laws entirely by means of statutory instrument. It even allows such new laws to be wholly unrelated to the UK’s exit from the EU. Unusually, it allows these new laws on to the statute book without any parent primary legislation. There will be no parent Acts for these new laws: no context, no detailed parliamentary discussion and no effective parliamentary scrutiny.
Lord Davies of Oldham (Lab)
My Lords, there is no need for me to repeat the arguments put forward in respect of the earlier measures considered here, so I will speak predominantly to Amendment 5. I looked carefully at the Minister’s summing up at the end of Second Reading. These issues had been articulated widely and we did not think that the Minister was at that time in a position to make forthright improvements, but we are worried now because we are now in Committee and we all recognise the privations of time. It seems to me that, with issues as serious as they are, the Minister ought to consider whether there is a basis for discussion between us outside the Chamber to resolve what, after all, is an essential part of the Bill but is not satisfactory, as it reads at present, to the Opposition parties.
Amendment 5 limits the adjustments—I notice that the word “adjustments” covers a multitude of potential activity and I am not sure that I am entirely happy with that as a defence of where the Government expect the Treasury to go—that the Treasury may make to specified EU financial services legislation to,
“adjustments in connection with the withdrawal of the United Kingdom from the EU”.
At present there is no restriction on these adjustments: they could be made in the context of circumstances other than the main purpose of the Bill. We must all recall that this is a Bill of a very specific kind; namely, to cope with a no-deal situation, with the expectation on the Government’s side that it will not become law—that is, it will not be necessary for it to become law because a deal will have been achieved. That is a position that verges on the optimistic at this point, but of course it will be clarified by debates both in this House and in the Commons over the next few days.
As currently drafted, the Bill allows the Treasury to make any adjustments it may consider appropriate. That is the dreamland of the Treasury. I should think it is probably the dreamland of any adviser to the Minister, or any Minister, on any Bill, that he should have that capacity; that there should be provision for adjustments to be made subsequently. Of course, these will be adjustments that the Treasury—the Government—considers to be appropriate. That is scarcely anything other than a pretty outrageous position to adopt.
I also want to comment on Amendment 7, which limits the adjustments—that word again—that the Treasury may make to provisions of specified EU financial services legislation
“to preventing, remedying or mitigating deficiencies in retained EU law”,
and prevents the regulations under Clause 1 from making policy changes,
“other than to reflect the United Kingdom’s new position”,
if we have a deal and have left the EU, vis-à-vis the European Union. The wording of this amendment comes directly from what the Minister said to the House at Second Reading. It comes from the Government’s own explanation of the powers they are using under the EU withdrawal Act for onshoring SIs. I cannot see how the Government can resist accepting the concept of this amendment. They surely do not want to arrogate to themselves powers different from those defined in Amendment 7, which follow the position the Government have adopted up to now. But the Minister must be sufficiently anxious that, in addition to the amendments we have just discussed, from both the Liberal Benches and ours, we have real anxieties about the way in which the Bill stands before the House. The response we received at Second Reading satisfied none of us; otherwise, we would not have felt moved to table these amendments. We will need to make progress because as far as the Opposition are concerned, these are central issues to the Bill if it eventually becomes law.
Baroness Liddell of Coatdyke (Lab)
My Lords, at Second Reading it was obvious to many of us across the House that the Bill was a useful safety net for in-flight legislation. As such, there was a spirit of collaboration and helpfulness. However, since then we have received the report of the Delegated Powers and Regulatory Reform Committee, which is quite scathing about some of the inconsistencies in the Bill. I quote from paragraph 5:
“Furthermore, the assumption that the Bill will only apply in a ‘no deal’ scenario has led in our view to inconsistencies in the drafting of the Bill”.
I still recognise the importance of getting the Bill on to the statute book but we cannot allow it to become a blank cheque. It is important to recognise that there are inconsistencies in the Bill. Indeed, the Delegated Powers Committee drew attention to the comments it had made during its consideration of how HMRC was covered in the withdrawal Bill, saying:
“We judge powers not on how the Government say that they will use them but on how any Government might use them”.
The Minister is an extremely honourable man, probably one of the most honourable in your Lordships’ House. It would be of enormous value to the Committee if we could get this cleared up. It may not be possible at this stage but certainly by Third Reading we should at least have something in the record of the debate that deals with these inconsistencies on a sequential basis. Noble Lords have already referred to some of the difficulties. There will be further opportunities to explore these in the amendments that we will be considering in due course. But this is an important and necessary piece of legislation and it does not help anybody to have gaps left in it that can create difficulties for the future.
Lord Adonis (Lab)
My Lords, my noble friend Lady Liddell has made an extremely important point. As the debates and scrutiny have progressed and further information has become available on the Bill since it was initiated, the concerns have become greater.
In my experience with legislation, as Ministers—particularly Ministers of the calibre of the noble Lord, Lord Bates—explain issues to the House and seek to meet concerns, there is normally a narrowing of points of difference. But in this case the points of difference have expanded as it has become clear that the extent of the powers granted under the Bill is much greater than originally explained; they were, as my noble friend said, to do with in-flight provisions. As we have elucidated the scale of the potential breadth of these powers, the concern has become greater, not only because of the report which my noble friend referred to but because we have now been able to look at the list of measures to which they will apply. We have also been able to study the Minister’s speeches at Second Reading, which have led me to be considerably more concerned than I was before.
In his opening and closing speeches at Second Reading, the Minister said, in essence, that in the event of provisions coming forward which are not to do with continuity or in-flight but are basically to do with us either anticipating changes that will be made by the European Union or implementing those which have been made in the institutions of the European Union—to which we may or may not have agreed ourselves—the Government have the right to implement them on their own judgment, by decree, provided that it is within a two-year period. I think we will be pressing the Minister time and again—and, to be blunt, this may well lead to him losing significant parts of the Bill on Report—on the fact that there is a complete answer to the situation in which he finds himself.
Lord Hodgson of Astley Abbotts (Con)
The noble Lord has already referred to the two-year sunset clause. Does he accept that in the short run, the imposition of the Brexit deadline will require things to be done quickly, and in those circumstances, if the sunset clause were shorter, would he be happier?
Lord Adonis
My Lords, the sunset clause is for two years, which is nearly half a Parliament. The fact that there is a sunset clause does not somehow legitimise everything that takes place in that period. There is no case for these provisions at all. Let us be clear that we are talking about further changes to the existing law; these are the provisions that are causing such difficulty for many of us in the House. We are prepared to grant the Minister powers to simply transpose existing provisions into UK law—indeed, I am not even sure that under the European Union (Withdrawal) Act he needs legal powers for that. The key issue here is that it all concerns further changes to the law. The statute book constantly needs to be capable of being updated; the whole purpose of Parliament is to debate further changes to the law, and we have established procedures which go back to time immemorial for doing that. They involve Second Reading, Committee, Report and Third Reading stages in both Houses of Parliament.
There is no reason whatever for subverting those principles simply because the Government are overloaded, which is essentially the argument at the moment. The answer is either not to make those changes in law, if effectively they can be made only by exercising powers by decree, or to create the necessary time to do so, which means the Government having the right priorities in what they put before Parliament. We always have to set priorities. As a former Minister, I know that what you do and do not put in the Queen’s Speech and the legislative programme is a matter of priorities. If necessary, the House must sit for longer.
Finally, if it comes down to whether this House should sit somewhat longer to debate major changes to the law of the land on financial services, I for one feel that it is our duty to sit here, debate these changes and not give the Government the power to legislate by decree. I hope that the noble Lord, Lord Hodgson of Astley Abbotts, feels the same because he has been responsible for financial services regulation in the past. That is effectively the power being granted here, potentially in significant areas that are not to do with simply transposing existing or in-flight European law into UK law. I am sorry to say this to the Minister, but the objections to the Bill are fundamental, not incremental. He may well find that, unless he can meet those objections, substantial parts of the Bill will be removed by the House on Report.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I thank noble Lords for contributing to the debate and speaking to their amendments. Let me set out the Government’s position regarding the amendment moved by the noble Baroness, Lady Bowles, and the amendments spoken to by the noble Lords, Lord Sharkey and Lord Davies. I will then come back to some of the points made during the debate by the noble Baroness, Lady Liddell, and the noble Lord, Lord Adonis.
I will speak to Amendments 1, 3, 5 and 7 together, if I may. They relate to the breadth of the amending power, which was central to the speech of the noble Lord, Lord Adonis, and the ability to account for the UK’s specific position outside the EU for the two years in which the power would operate. As I understand it, Amendment 1, moved by the noble Baroness, Lady Bowles, stems from her concern—repeated by all Members who spoke in the debate—that the power is currently drafted too broadly. The amendment would require that no legislation can be made under this Bill which is corresponding but not similar, or vice versa, to the original EU legislation. It is clearly important that we go into the precise definition of each term, as they have different interpretations and implications. In doing so, I hope that we will add to the body of information that can be referred to in future to clarify the Government’s intent in this process.
First, we take “corresponding” to mean “identical in all essentials or respects”. The term “similar” means “having a resemblance in appearance, character, or quantity without being identical”. In practice, of course, the legal interpretation of the two terms can vary, with some judging that “corresponding” affords a wider latitude. However, it is nevertheless clear that on the basis of the current drafting, any exercise of the power would need to be limited in subject matter and purpose. It will be possible to exercise the power only to achieve the aim of the original EU legislation, with an option to make adjustments to account for the specificities of UK markets, rightly reflecting the fact that we will no longer be a member of the EU. It will not, therefore, allow for wholesale changes to the character and intent of the original legislation.
For example, if the Government were implementing a file on pensions regulation, they would need to seek to achieve the same purpose, even with adjustments, and remain focused on that subject matter—not extend it to another policy, such as insurance. However, the Bill provides the ability to best reflect UK circumstances in the implemented legislation, which is key. The intent is to clarify that, in a no-deal scenario, the UK has the tools to ensure that it remains an attractive and competitive place to do business and continues to implement the latest international standards, with regulation that reflects the best interests of UK markets and those international standards. The wording suggested in the amendment would allow provisions to be made under this Bill only should they be corresponding and similar. This would require the legislation as it is implemented to fulfil two different legal standards simultaneously. We consider that this would be a highly uncertain legal bar to pass and in some cases it may even make the power essentially unworkable.
I would also like to reassure the Committee that the formulation “corresponding, or similar” is well established and has been used—to provide recent examples—in the Pension Schemes Act 2015 and the Recall of MPs Act 2015. I hope that this will reassure the noble Baroness regarding the limitations that will apply and the formulation “corresponding, or similar”, for which there are precedents. In short, the current wording is already intended to ensure that the powers under this Bill cannot be used to create substantively new policy outside the bounds of the original EU legislation.
I turn to Amendment 3 tabled by the noble Lord, Lord Sharkey. I understand that this comes from a similar place, intending as it does to forbid the Government’s amending legislation in such a way that it would create significant new policy separate from the original EU legislation, a concern also expressed by the noble Lords, Lord Adonis and Lord Davies. I hope that my response to the amendment of the noble Baroness, Lady Bowles, will provide noble Lords with some degree of the reassurance that is needed. As drafted, the Bill would not allow the Government to significantly alter, expand or run contrary to the primary purposes of that original legislation.
I turn now to Amendments 5 and 7, tabled by the noble Lords, Lord Tunnicliffe and Lord Davies, and spoken to by the noble Lord, Lord Davies. They would limit the power in the Bill to make adjustments in a similar manner to the limitations in the EU withdrawal Act—limiting changes to legislation purely to a fixing of legal deficiencies. I understand the concern across the Committee that the power in this Bill goes beyond that of the EU withdrawal Act. I have already touched on the importance in a no-deal scenario of ensuring that European Union legislation implemented in domestic law best serves the interests of UK financial services, so I will not rehearse the same arguments again at length. However, I will reiterate that we cannot be certain about what files will look like once they are finalised or of the context in which the files will be implemented. The powers in the EU withdrawal Act are strictly limited, and the purpose of the legislation we are making under the Act is to ensure that there is a workable legal framework in place at the point of exit and to minimise disruption to financial services firms and their customers who currently operate under the existing EU rules. It is therefore appropriate to keep any changes made on exit day to a minimum.
There is a fundamental difference between this legislation and the EU withdrawal Act, and this comes directly to the point raised by the noble Lord, Lord Adonis. The withdrawal Act deals only with the legislation which has been agreed at the EU level, with the UK present at all stages of the negotiations. As my noble friend Lord Hodgson pointed out in his intervention, this Bill provides a temporary solution, specifically in a no-deal scenario, to deal with the dynamic regulatory landscape for the financial services industry after the UK has left the EU negotiating table and taken its own path. This is a different challenge that requires a different solution.
Lord Adonis
I am grateful to the Minister for giving way. In that case, why should there not be primary legislation?
Lord Bates
For the points I will come to in a minute, which the noble Lord has slightly pre-empted. Obviously he has read the wind-up speech I gave at Second Reading—the arguments about volume of legislation and timeliness remain consistent—but I will come back to that.
Lord Flight (Con)
Would I be correct in describing the reason for that legislation as enabling us to meet equivalence requirements going forward if we have not otherwise dealt with things?
Lord Bates
Equivalence is one of a range of considerations that could be taken into account at that point.
Baroness Kramer (LD)
We will have amendments discussing equivalence more directly later, but will the Minister confirm that nothing could be done to step away from or undermine equivalence, or does this allow that? That is certainly the way it has been read by most Members of this House.
Lord Bates
We will have the debate under the future group of amendments on equivalence. We are not setting here the test or the bar as one of equivalence. We are simply talking about the specific directives and regulations before us and mentioned in the Bill: the 15 here; the four already agreed, which are mentioned on page 1 of the Bill; and the further 11 mentioned in the Schedule accompanying it, which have not yet been agreed. Because they have not been agreed and may be under debate or amendment without the UK at the negotiating table, we are simply adding in that greater level of power to say that the UK, in the event of leaving without a deal, would need to look after the interests of the UK financial and industry sector and could not give a blank cheque in the opposite direction to the EU to pass whatever regulation that we would automatically implement because of adherence to a notion of equivalence. That cannot be right for UK financial services. We need to look at what comes to us, then act within the interests of the UK financial services sector at that time.
I will deal with some of the specific points raised. The noble Lord, Lord Sharkey, talked about the recommendation of the Delegated Powers and Regulatory Reform Committee. I pay tribute to the work it did on this and the quick turnaround and punchy conclusions it arrived at. We are considering its recommendations, which the noble Baroness, Lady Liddell, asked us to look at. I will be happy to meet with noble Lords ahead of Report to discuss where we stand. I thank the Delegated Powers and Regulatory Reform Committee for its work and recognise that it raised some very pertinent issues. We want to look at them in greater detail, and I would be happy to discuss that with noble Lords ahead of Report.
I hope I have gone some way to addressing noble Lords’ points at this stage. We will come to a number of the other points in future debates and groups.
Lord Sharkey
It seems the Minister has relied heavily in his responses on Clause 1(1)(a) by using this to demonstrate that there is really a tight restriction on what kind of things can be done by Clause 1. But he has not at all mentioned Clause 1(1)(b), which in many ways is the root of the problem because it contains the word “adjustments” and the phrase “consider appropriate”. To many of us, that seems to extend without limit the reach of the Treasury’s powers. That was the underlying purpose behind almost all the amendments in the first group. Could the Minister speak to Clause 1(1)(b)?
Lord Bates
I am happy to do that. As the negotiations on these files continue, further amendments may be agreed, proposed or dropped that the Government will wish to domesticate or remove using the powers under this Bill. As the final outcome on many of these files is still unclear, we need to make sure that we can bring them into UK law in a way that works best for UK markets. This might, for example, include areas where the final parts of legislation could, if unchanged in a no-deal scenario, present inconsistencies with the UK regulatory framework, with global standards or with the UK’s position as an open global financial market. It is important therefore that we have the power to adjust these inconsistencies when bringing them into UK law. I acknowledge that this is a—
Baroness Kramer
I am sorry, but the Minister just said that Clause 1(1)(b) allows an interpretation not to remain with the objective described in the European directive. His whole argument under Clause 1(1)(a) was that the words “corresponding” and “similar” provide, in different legal ways, for us to take steps only where it is consistent with the objective of the European directive. He is now directly saying that Clause 1(1)(b) allows us to take steps that are directly opposed to or completely inconsistent with the European directive. Could he provide us with some clarity on this? It seems that the power allows the Government to move in any direction they wish, and that is exactly the issue we are trying to raise here. Under those circumstances, is that for Parliament to decide or for the Treasury to decide through statutory instrument?
Lord Bates
I thank the noble Baroness for her intervention. There is a difference between the two elements and between the use of “adjustments” and the terms used earlier, “similar” and “corresponding”. Effectively, they relate to the two different groups that we have here. The first group is those for which we have been party to the negotiations and to agreeing. Following engagement, we know that the industry is keen to see those transposed into UK law, and we support it in that respect. Then there are those other elements that are incomplete, the final shape of which we do not yet know. Once the final shape is known—in all likelihood, that will be after the date in this scenario and once we have left the European Union and the negotiating table—we will have the power to adjust. Those are the two different elements.
Lord Adonis
My Lords, the noble Lord speaks as if there is not that power at the moment. There is: it is the power to introduce primary legislation. The Government do not lack this power; it is the power the Government have, in all cases, to recommend to Parliament changes in the law. What he has not made the case for is why the power should be given to the Government to make these changes by decree, which is, let us be clear, what Orders in Council amount to, with just a straight yes/no power in respect of the whole provision. He has not made that argument at all.
The Minister says that it is restricted, but the restrictions are entirely unsatisfactory. There is a time restriction of two years, which is more than enough time for the Government to do what they like with large parts of the statute book. The second, to which the Minister has just referred as though it is some kind of safeguard, are the measures listed in Schedule 1. But the list is incredibly extensive. These are fundamental and wide-ranging changes to the law, which in many cases, as the noble Lord himself has just said, we will not have played a part in agreeing within the democratic institutions of the European Union. Effectively, the Minister is saying that we will neither have played a part in agreeing them within the democratic processes of the European Union, nor will this Parliament have a proper role to play. The only people who will agree them are the Minister, the Chancellor of the Exchequer and a few officials in the Treasury, and we will then be expected to rubber-stamp them. I am afraid that that is totally unsatisfactory.
Lord Bates
That is not the case. I accept that the noble Lord is presenting a caricature of the situation that proves a particular point, but of course that is not what will happen. First of all, certain guarantees are presented in terms of reporting, which we will come on to again later. There are certain processes in terms of scrutiny of secondary legislation, not only by the Secondary Legislation Scrutiny Committee, which does incredible work and of course has a role set out in Standing Orders as to how it must scrutinise secondary legislation. Also, the affirmative SIs must be debated in your Lordships’ House. In addition to that, we have also undertaken that there should be proper engagement with the industry in talking about this and with other stakeholders too. There is a wide range of things.
We will delve deeper into some of the points in the noble Lord’s own amendments later. I appreciate that the role and purpose of Committee is to elicit from the Government further explanations about what these terms mean. We may have a difference about whether the noble Lord’s view is shared by the Front Bench, and whether all these matters should be dealt with by primary legislation in 15 Bills or by secondary legislation, which has been the convention, particularly when it comes to financial services.
Lord Bates
I will just finish this point if I may. That is why the noble Lord, Lord Tunnicliffe, and I and indeed the noble Baronesses, Lady Kramer and Lady Bowles, spent so much time in Grand Committee talking through various pieces of secondary legislation on financial services. That has been the conventional way in which we have worked. The noble Lord, Lord Adonis, believes that the legislation ought to be primary in this case. That is his view. It is not the Government’s view and it is my job to outline the Government’s view on this. We are following established procedures and providing powers under scrutiny to allow us to deal with a unique set of circumstances, which we have never had to deal with before.
Baroness Kramer
My Lords, this is genuinely a question of clarification. Is the Minister saying to me—I cannot read it in the language of the Bill—that Clause 1(1)(b), which states:
“with any adjustments the Treasury consider appropriate”,
excludes the category of in-flight legislation described as,
“specified EU financial services legislation”?
I assume that it includes that. Therefore, the Minister’s argument is that the Government will have to stick with the underlying objective for specified EU financial services legislation—which is what Clause 1(1)(a) is talking about—but the same legislation can then be overturned and dealt with completely differently under Clause 1(1)(b), which frankly allows adjustments as long as a piece of string. That is what I am trying to clarify. I understand that they are two different groups, but paragraph (b) surely applies to both groups.
Lord Bates
Perhaps it would be helpful at this stage to agree that these issues will be addressed in future groups. We will choose some wording—if not today, then certainly before Report—that is quite rightly required by the Committee to reassure itself about what is and is not referred to in that respect. With that, and with the undertaking to meet with colleagues specifically on the report of the Delegated Powers and Regulatory Reform Committee before Report, I invite noble Lords not to press this amendment.
Lord Rowlands (Lab)
As a member of the Delegated Powers Committee, I specifically draw the Minister’s attention and the attention of the Committee to our paragraph 16, which states that:
“The power to make adjustments is a very broad one with no restrictions”.
We have very deep concerns about the powers proposed in the Bill. I hope, listening to the Minister, that he will address this issue and recognise that it is fundamentally important.
Lord Bates
I am happy to give that undertaking. I thank the noble Lord for his work on the committee and thank it for its report, which raises specific concerns. I will address those initially through a meeting with interested colleagues ahead of Report and then, more formally on the record as a result of that, on Report.
Lord Judge (CB)
I am not proposing an amendment to an amendment, but I wonder whether it would help clarity of thinking for all of us and for the Minister, when he is reflecting on the various arguments that have been put forward in the debate, if we took out “(i)” and “(ii)”, put “(b)” before “any provision”, and took out “but” and that “(b)”, so that the provision read:
“corresponding, or similar, to the provisions, or any of the provisions, of any specified EU financial services legislation, or
(b) any provision that might”.
We could then limit the adjustments point to the second part.
Lord Bates
Her Majesty’s Government are, of course, very frugal and are always willing to take free legal advice, particularly when it comes from such a distinguished source. I shall add that suggestion to the others that I will take away. We appreciate it. Oh, something has miraculously appeared. It cannot be in response to the last suggestion—that would be far too quick—but is in response to the point made by the noble Baroness, Lady Kramer. “Adjustments” applies to both provisions, but the limitations come from “corresponding, or similar” and the limitation implied by the word “adjustments” itself in the glossary. Just for clarification at this stage, let me add the definition that we are working to so that people can see it. “Adjustments” means that it will be possible to exercise the power to achieve the aim of the original EU legislation only with an option to make adjustments to account for the specificities of UK markets, rightly reflecting the fact that we will no longer be a member of the EU. It will not therefore allow for wholesale changes to the character and intent of the original legislation. “Adjustments” is an inherently limiting word. With that, and with the commitments that I have given to reflect on the comments made by noble Lords and the legal advice that has been given, I invite the noble Baroness to withdraw the amendment—
Lord Adonis
What the Minister has said was clearly written for him by the Box: “‘Adjustments’ is an inherently limiting word”. Will he explain to the House how it inherently limits?
Lord Bates
The noble Lord is familiar with the way this works. I used to sit on that side of the House while he was having similar words prepared for him. Adjustment leads to an altered version of the original. Changes that produce something completely different go beyond adjustments. Dictionaries make it clear that adjusting is about making small changes to achieve a desired fit or to adapt to a new situation. I hope that helps.
Lord Adonis
Therefore only small changes can be made, not large changes. My reading of the provisions in the Schedule is that they involve large, not small, changes.
Lord Bates
I am getting a certain sense of déjà vu having sat through the early morning debates on the EU withdrawal Bill, as it was at that stage, on words such as “appropriate”. I do not particularly want to rehearse them here. It is very important that, when we use terms, the Government are required to define what they mean by them. I have presented what we believe is meant by “adjustments”, which is that it is inherently limiting in capacity. Should we wish to clarify that further, we will do so on Report. Similarly, if noble Lords have further suggestions, they are at liberty to table amendments suggesting additional wording at future stages.
Lord Adonis
Let us be grown up about this. The Minister knows that people disagree about the meaning of “limited” in these contexts. I do not think that we think that the Minister’s assurance that the provision will be limited amounts to much, because then we will of course have a big argument about what “limited” means. The only way we could have a meeting of minds on this would be if there were some satisfactory procedure for deciding what “limited” means. The procedure which comes to mind is an independent committee, such as the Delegated Powers and Regulatory Reform Committee. The Minister is extremely open-minded about suggestions from the Committee. Would he suggest introducing an amendment on Report giving the committee responsible for deciding on these regulatory powers the power to decide whether in fact a regulation meets the word “limited” in respect of adjustments?
Lord Bates
I am not going to direct what committees of this House opine on—it is certainly not within my powers to do so—and of course they are at liberty to express their views. From a constitutional point of view, having placed on the record, as a Minister of the Crown, our belief of the interpretation and meaning of the word “adjustment” in this context, I think that, when assessing an affirmative statutory instrument against the measures in this Bill, bodies such as the Secondary Legislation Scrutiny Committee will seek to link the two to test whether that is in fact the case. I am sure that the very fact that I have made that remark will be picked up in years to come as the various statutory instruments make their journey through your Lordships’ House. However, we will of course reflect on all these elements between now and Report.
Lord Eatwell (Non-Afl)
My Lords, as the chairman of a regulatory organisation, I find the discussion about the word “adjustment” very disturbing. I shall give the Minister an example. If a door is open and then you close it, you adjust the door, but it is still in essence the same piece of wood moving within a frame. Taking that over to financial regulation, if a particular regulatory structure permits a given activity and you then close the door and that activity is no longer permitted, that is an adjustment within a given framework. I suggest that when the noble Lord takes this back, the word “adjustment” should be considered very carefully, because in a regulatory context it does not work in the way that he has described.
Lord Bates
I certainly defer to the noble Lord’s great experience in this area of regulation. One purpose of this Bill is to give assurances and certainty to precisely the people whom he has spoken of—the regulators—so that they are clear about the Government’s intent. When we spoke to the regulators and the industry, they pointed out that we do not know what will be contained in these files once they land in a legislative context post Brexit in the unlikely event of no deal. Therefore, there has necessarily been a widening of the powers to cope with potentially changing circumstances of which we are not aware at this stage. However, I will certainly take back the points made by the noble Lord and others, and I thank Members of the Committee for raising their concerns.
Lord Bilimoria (CB)
I want to make one point. When we were dealing with the withdrawal Bill, one of our greatest fears concerned these Henry VIII powers. This is the first time that we are having to apply them in a specific Bill, and we are already scared about the consequences. Noble and learned Lords are already asking, “Have you thought about wording such as ‘adjustments’ and the interpretation of words?” From my experience, every time there is a grey area in a contract, it can be interpreted in different ways. It leaves the door open, and that is very dangerous. I ask the Minister, whom the whole House respects, to take all that into account; otherwise, on Report this will be badly defeated because a precedent is being laid here with a fear that the Henry VIII powers will demolish our whole democracy and the reason for our Parliament. That is really frightening.
Lord Bates
I hear what the noble Lord and the Committee have said. That is what a Committee stage is for: it is for the Government to listen to what noble Lords have to say. I am grateful for what they have said, and I undertake to take it back, reflect on it and discuss it with colleagues ahead of Report. In the meantime, if the noble Baroness is happy to withdraw her amendment, I shall be grateful.
Baroness Bowles of Berkhamsted
My Lords, I thank the Minister for his replies. Part of his early response sounded quite encouraging when he said that things would not move outside the bounds of the original EU legislation, but it got a bit worse later on when he said this meant that things could still be domesticated or removed to match the peculiarities of the UK financial markets, which basically means not doing it if we do not feel like doing it. That is certainly how it was presented, interpreted and ended up in the EU when I was in charge of putting through a lot of this legislation.
With regard to my own amendment, I think he has said that “corresponding” is tight, in that the provision has to be identical in all respects. But he went on to say that this is one of two definitions that give wider latitude; “similar” was somehow a looser term but did not have that same latitude. He made the point that trying to satisfy two different legal criteria can be confusing, and I would side with that view. He also said, I think, that one of the terms was meant to apply to one category of the legislation and the other, looser term—whichever that turns out to be—applied to the other.
If I understood correctly, he said that the list that appears in subsection (2)—which is the finished though not yet active legislation: there are no changes, it is all done and we know what it says—would be subject to the tighter of the definitions, which is possibly “corresponding”. Those in the annex, which have not been finished and possibly might not be finished until after we have left—so we will not be involved in the last tweaks—may need to be tweaked more and will be subject to the term “similar”. This starts an interesting discussion, which we can continue when we talk on other groups, of whether we should completely separate out how we deal with the legislation that we already know about and can already analyse regarding whether it works for the UK markets, as opposed to where things are not definite and one needs more reservations. I push that out as a point.
Other amendments, particularly Amendment 3 in the name of the noble Lord, Lord Sharkey, would also solve some points, as they go back to the question of the “primary purposes”. The key anxiety is that this Bill enables legislation to be made through a secondary method which is incapable of having scrutiny and will not necessarily have had scrutiny even at the European level by way of the adjustments, and there is no way to amend it. It could depart from the purpose, no matter what is said, because the Bill does not actually say there is to be no departure from the purpose. If you put in Amendment 3, or some other amendments that we will come to later, then you can tie it down and make clear where you will depart and where you cannot do so.
Let us be clear that one of the elephants in the room is whether we will implement the legislation at all. There is nothing compelling this. One can cherry pick it—we will come on to that in the next group of amendments—but there is nothing that says it will be onshored, so one could simply not have it at all. It is absolutely clear if you look at the first articles in subsection (2)(a),
“Articles 6 and 7 of the Central Securities Depositories Regulation”—
we know what the issue is there. I am sure there are people in this Chamber right now who could debate the benefits and otherwise of those particular articles. It was thought that the EU might not be able to make the technical standards, or that they would somehow be withdrawn. But no, the technical standards have been made; we know what they are and the likelihood that they will become active in 2020. The question could be put now: are we going to have it, or are we not? If we are not going to have it, should that be at the whim of the Treasury? This has significant repercussions on all kinds of other parts of the market where we may or not be deemed to have equivalence. We might as well discuss this now. It should not be someone sitting in an office and saying, “Well that can go and damn the consequences”.
We have a lot more to discuss around this as we go into the next groups but for the time being I beg leave—
Lord Adonis
Before the noble Baroness sits down, I just want to say that all the points she has made, and made extremely well, seem to me to be met by my noble friend Lord Davies of Oldham’s excellent Amendment 7. Most of the problems the Minister has encountered could be solved by him simply accepting it, because what Amendment 7 says is that:
“Regulations made under subsection (1) shall be limited to preventing, remedying or mitigating deficiencies in retained EU law”.
I have not yet heard a good argument put before the Committee, least of all by the Minister, for why we should not accept that amendment. The Minister says he wishes to discuss it further; I am not exactly sure what there is further to discuss, because unless my noble friend Lord Davies or the noble Baroness resile from this amendment, it is a very clear-cut position of principle, which seems to me to be fundamental to the maintenance of our proper parliamentary procedures.
So would the noble Baroness agree that the right position is for the Liberal Democrats and my noble friends to stick resolutely by Amendment 7, and unless the Minister is prepared to meet us on that, we should simply vote on that and seek to carry it, I hope with support across the House, because it is fundamental to the operation of parliamentary sovereignty? On Report, we should not get involved in a long technical discussion about how much additional power we might grant the Minister simply because he has put a proposal on the table in the first instance which is straightforwardly outrageous.
Baroness Bowles of Berkhamsted
I thank the noble Lord for his question. He will recall that I reserved my position on that amendment but said that I thought it is the default if we cannot find something workable that gives more flexibility to the Government. I will come on to why there may be a case for flexibility in the next group, where I have a set of amendments related to it, but I can give noble Lords a preview in that I think it is quite difficult to define what that flexibility should be, and so it is going to take a lot of work to better Amendment 7. What the noble Lord suggests as the common position might well come, but we have a duty to explore further. There is more to mine away at within this Bill, and so I will not give an absolute yes to that question. Furthermore, there may be others within the group who want to consider the points. With that, in order that we can move on, I beg leave to withdraw my amendment.
Baroness Bowles of Berkhamsted
My Lords, as I explained, I have three amendments in this group. They fit together as a set, but Amendment 2 can also be a useful standalone provision.
Amendment 2 would delete the words “or any of the provisions” from line 4. On its own, that amendment is intended to prevent the cherry picking of favourite bits of the legislation. Taken to its extreme, such cherry picking would even enable the cherry picking of revocations of prior legislation—such revocations might appear in the schedule because they are amendments to other pieces of legislation. So you might be able to enact them without any kind of replacement.
More generally, EU legislation is interwoven with checks and balances, and if some are left out, the nature of the legislation can be changed or rendered ineffective, for example if penalties are taken out or time limits changed. The DPRRC makes a similar point in its paragraph 17, which says that,
“the overall effect of the legislation might vary quite substantially depending on which provisions are implemented and which … are not”.
Whether on its own or in combination with other amendments, it would be a useful amendment to rule out the prospect of simply cherry picking.
Amendment 4 is a linguistic amendment that links to Amendment 6. It might not actually be necessary, but I tabled it to deal with the kind of omissions that might be necessary—for example, taking out things that are not relevant to the UK. An obvious one would be something to do with monetary union, which is not relevant to us. The amendment’s purpose is to clarify that “adjustments”—that nebulous word; maybe we need something else—includes omissions. Then, whether it is an adjustment, change, omission or whatever we want to call it, all become subject to the same controls I would put in with Amendment 6 and elsewhere. This does not work if you try to do it using the wording appearing earlier in the clause. It looks a bit bizarre to take out the possibility of omissions in one place and put it in somewhere else, but this is just to ensure that one could establish that the conditions imposed apply to all of it. At the time of drafting I thought it clearer to reference “omissions” than “provisions not provided for” or something of that nature.
The more substantive Amendment 6 states that any omission or adjustment made under subsection (1) that is not subject to similar conditions as those in the withdrawal Act—that could be tightened up to refer to a particular provision of that Act—and does not fall under that kind of provision is,
“only to be considered appropriate if the Treasury has at least three months previously laid before Parliament a report on the policy and reasons for omission or potential omission”.
Here I am, as I said I would try to do, crafting something using the ideas of the reports in subsections (8) and (9) so that, if the Treasury comes forward with some proposal, Parliament is not surprised by it because it has been laid out and possibly even debated and understood.
That would be very helpful, but, having put forward this suggestion as to making flexibility, I came to the conclusion that I do not think that that on its own is sufficient. It still gives far too wide a leeway for change because the kind of reporting we get when statutory instruments to do with EU exit are brought before us—the Minister will know that we spend hours on them in this Chamber and in Grand Committee—is a bit perfunctory. Anyway, even if they are reported, it does not mean that they can be stopped. Maybe I have not got this right. My point is that one still needs to have some other overarching provision that stops things going too far, which might come back to Amendment 7, in which case all these other ones would not be necessary, to my noble friend Lord Sharkey’s Amendment 3 or, when we get to the next group, to my Amendment 8.
I am trying to find a way to give the Government the possibility for flexibility, because I know as well as anybody else what EU legislation could look like in the absence of a strong input from the UK. I have said before that I know what it would look like if I had not been there. I concede that we have to have some defences. If the defence is not to be primary legislation, to go through it all again—and I am very conscious of the volume of that—then there need to be some guidelines. It cannot be just a simple free-for-all. We need to know what is going on, and the reporting has a huge input there, but we have to be able to say no if the departures are substantive. I beg to move.
Lord Adonis
My Lords, I understand what the noble Baroness is seeking to do: to tease out from the Government whether they are prepared to agree to new reporting requirements, which would be helpful. There is nothing in the new reporting requirements which I think is objectionable. On the contrary, the more the Government are prepared to explain their policy to Parliament, the better. I know the noble Baroness said she and her colleagues are considering what their stance will be when it comes to Report. Can I recommend Amendment 7 in the name of my noble friend Lord Davies of Oldham? It is significantly superior in this respect. It makes a clear distinction of principle between Orders in Council which are,
“limited to preventing, remedying or mitigating deficiencies in retained EU law”,
and, because they are so limited, an Order in Council procedure is justifiable; and changes to the law that go beyond that, and which, as a matter of principle, should be subjected to the primary legislation procedure. The Liberal Democrats do not want to give decree-making powers to the Government, so I cannot see an argument for not subjecting substantive changes in the law that go beyond,
“preventing, remedying or mitigating deficiencies in retained EU law”,
to primary legislation, as my noble friend Lord Davies of Oldham sets out in his Amendment 7. I encourage the noble Baroness and the Liberal Democrats to be true to their liberal principles and not to give dictatorial powers to the Government, and to support my noble friend’s Amendment 7.
Baroness Kramer
I say to the noble Lord—and perhaps to clarify for others—that I think there is a real difference regarding the in-flight legislation, which has gone through an extensive European process that we have been engaged in. That is a highly democratic process involving scrutiny and consultation on a scale that we rarely experience here in the UK. It has gone through the Council and Parliament, and the technical language is nearly all in place. That is in a different category from other provisions, which are typically dealt with in the schedule; everything is at a much earlier stage and—if we leave—we will not be engaged in the on-going process that shapes that outcome.
We can look for some flexibility on the first category. I say that in part because we are all incredibly conscious that just getting through the essentials of the legislation on our plate is overwhelming. The last thing I would wish to see is for us to fall out of equivalence by accident, because the Government put elements on which we have been engaged and on which we agree at the back end of their legislative priority list, and we find ourselves by default stepping out of an equivalent situation. That is a concern, and it is one of the reasons why we would like to explore some of the options my colleagues have been outlining.
Lord Tunnicliffe (Lab)
My Lords, I think the two groups of amendments in many ways cover the same issue. They are essentially about how much flexibility the Executive should have in using this new law. Taking noble Lords back to the creation of the withdrawal Act, it was an extremely painful process because we were naturally reluctant to give the extensive powers in the withdrawal Act to government. But we were in a sense battered into the very realistic understanding that, given the volume of work that had to be done, the only way to do it was through statutory instruments enabled by the withdrawal Act.
Lord Judge
I apologise for not leaping to my feet before the noble Lord, Lord Tunnicliffe; I was looking at something else—I am very sorry. Perhaps I may be allowed to say just a few words in support of the general idea behind Amendment 6.
We are going to embark on a huge body of secondary legislation. I have spoken in this House on a number of occasions about secondary legislation and I think that my views on its dangers are quite well known to a number of Members. One problem with secondary legislation, if we are honest, is that we have no idea what we are looking at. When secondary legislation comes through, I doubt whether more than 1% of the Members of this House actually look at it; I doubt whether more than 5% of the Members of the other place look at it, and it goes through.
We are here dealing with very complex legislation and doing it as best we can in a hurry, in the demanding situation that we are in. Would it not be helpful for an explanation to be given about any individual piece of secondary legislation, identifying, for example, the legislation in the EU with which it corresponds or to which it is similar? We could then look at it and say, “Yes, that’s fine. No need to argue about it”. Otherwise, we tend to leave it so that we examine it blind. There is something to be said for us knowing what is going on.
Lord Bates
My Lords, I thank noble Lords on all sides for their constructive suggestions during this short debate. I am grateful for these contributions. The noble Lord, Lord Tunnicliffe, made a fair point about the approach we have taken on considering secondary legislation in Committee. We have brought through 16 statutory instruments so far—we have the joy of another four awaiting us in Grand Committee tomorrow afternoon—out of a total package of some 60, 47 of which will use the affirmative procedure. So there is an element of scrutiny. The noble Lord rightly focused on the provisions of the EU withdrawal Act, which is the substance of Amendment 7, but then we were dealing with known entities and rules.
In introducing this amendment, the noble Baroness, Lady Bowles, made a very fair point and the noble Baroness, Lady Kramer, added to it. If I am paraphrasing her correctly, she recognises that, had she not been there, the legislation coming across to us might not have been dealt with in the interests of the United Kingdom financial services industry. I agree with that, from what I know of her role on that committee in that Parliament. Her input—and that of other members—at that stage was vital in shaping the legislation which subsequently came across. We thank her for that service. She is no longer there and, in the scenario for the future files that we are dealing with, neither will her successors be. Therefore, there needs to be a difference in the way these are treated—between the narrow definition in the EU withdrawal Act, when we knew what we were dealing with, and directives and regulations into which we may have had no input and no responsibility for shaping. These could, potentially, be damaging to the UK financial services industry. There is a long way to go with this debate, but that is the crux of it.
I turn to Amendments 2, 4 and 6, the aim of which is to require the publication of a report three months prior to the exercise of the powers under the Bill. This report would need to explain any policy adjustment or decision to omit aspects of the originating file. The noble and learned Lord, Lord Judge, also referred to this. I reassure noble Lords that the Government’s clear intention would be to set out this information in the reports currently required by the Bill.
Further to that, as is standard practice, the Government would of course seek to engage with interested parliamentarians and the industry on the legislation before taking any statutory instruments forward. Where the secondary legislation omits aspects of any EU files, it would certainly be in the public interest to be open about the choices the Government have made in not implementing them.
Regarding the requirement to publish the reports three months ahead of each exercise of the power, the Bill currently sets the requirement that any implementing legislation be subject to the affirmative procedure. This would require laying the relevant statutory instrument before Parliament, and an accompanying Explanatory Memorandum setting out the policy intent, before the debate on the SI itself and well ahead of implementation. This is the established process for scrutinising such statutory instruments and for this reason it is the model we have chosen to follow.
I am also mindful of the fast-moving nature of financial services. In particular, there may be a need to respond quickly to market developments, and it may be important to avoid imbalances with the EU for even a short period—for example, where the files may be of a deregulatory nature. With respect, I suggest that a three-month gap between a report and laying is too long to respond to market developments. Such a three-month requirement would place at risk the basic aim of the legislation, which is to safeguard the reputation, competitiveness and efficiency of UK financial markets. However, having listened to the points that the noble Baroness, Lady Bowles, made in moving her amendment and to the subsequent points of the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, I am willing to consider, ahead of Report, exactly how a process might run in the future to keep noble Lords better informed. Just to manage expectations, we will probably regard three months as too long for what might need to be very fast changes to ensure that UK financial services are not disadvantaged, but I signal my willingness to discuss the issue with the noble Baroness and see whether we can find an acceptable way forward.
Lord Tunnicliffe
Does the Minister accept that the problem he faces is bigger than that? It is not just about this group but about the fundamental fact that we parliamentarians dislike secondary legislation that changes the law. He faces a significant defeat in this House if we cannot come to some compromise agreement that seriously limits the ability of the Executive to impose law upon this Parliament. It is important that he recognises that—otherwise, we will end up deciding what the Bill says, and that is usually not good in terms of using the law in the future.
Lord Bates
I am always willing to engage and it is helpful, if I may say so, to engage in that debate, because the point the noble Lord is making is more on general principles than on detail. I subscribe to that, provided that we can agree to recognise that what the Government are seeking to do here is to deal with, effectively, processes that I am not aware have ever been dealt with before. We may be giving an undertaking to implement certain directives and regulations over which we have not had control and of which we do not yet know the precise nature. That is a different challenge from the normal routine of the types of onshoring that we are doing with the other statutory instruments. I am prepared to accept the noble Lord’s point if he will recognise the difference that we are dealing with between those two different types: that would be helpful.
Lord Tunnicliffe
I recognise that there is a difference, but at the end of the day my noble friend Lord Adonis’s point is valid: in day-to-day life the world changes, we have to react quickly to it and, where needed, we have to enact primary legislation. We are not creating a new environment where the Government enjoy executive power to change the laws in this area; surely we are seeking only to manage the transition. I do not see that it is the end of the world if the Government see something develop in Europe, say it is wrong, and say that that will not be covered by this Act and that we will have to bring forward primary legislation. We have done it in the past and we will have to do it after two years; that is the way new ideas should be introduced to this Parliament.
Lord Bates
I hear what the noble Lord is saying. Without wanting to rehearse Second Reading again or to undermine any of the progress that I feel we have already made on this in Committee, I will conclude by saying that from my perspective, the noble Baroness has made a proposal to deal with the length of time and the reporting—to address the noble and learned Lord’s point—about where there are changes, what changes have been made and why, and whether that report could be received in advance of the statutory instrument being laid and then debated in the House. In the spirit of recognising the points referred to, I have said that I am prepared to look at that. Three months may be too long but I am prepared to have a discussion ahead of Report on whether another time period may be more acceptable. With that, I hope that the noble Baroness will feel able to withdraw her amendment.
Baroness Bowles of Berkhamsted
I thank the Minister for his response. As the noble Lord, Lord Tunnicliffe, pointed out, the meat, if you like, in this group of amendments is in Amendment 6 and some mechanism of having reports to Parliament so that we are not surprised by what is going on. I think that that means more than just laying a finished instrument. When I was drafting it, I was looking more at the reports that are required by subsections (8) and (9). The noble Lord, Lord Hodgson, has tabled some amendments and I signed some of them because I think that good work can be done on the issue of reports. Perhaps my Amendment 6 ideas will go into that pot.
I think we are getting to a situation where some statutory instruments will be able to go through because there will not be significant changes or the sorts of changes that would lead to a loss of equivalence or a change of purpose or however we define it. But there will be some others, if there has been an unsatisfactory conclusion to some of this in-flight legislation, where the changes will be larger, and for which therefore the process that uses secondary legislation may not be appropriate, so one will have to fall back on primary legislation. That does not mean that that will be the destination for all of them, because they will not necessarily all be unsatisfactory. There will be an incentive, perhaps, to stay aligned and do some, but the fact that one or two might require primary legislation is not something that can be run away from.
I will just put in a plug for Amendment 2, the anti-cherry-picking point that you cannot pick and choose between the provisions; it should be on a whole basis. If we were to pursue Amendment 7 as the mainstream amendment, I would suggest to the noble Lord, Lord Adonis, and the Labour Front Bench that something like Amendment 2 would perhaps slot in quite well, if it is not inherently covered by the wording, which I would have to analyse further.
I think we are slowly making progress, but my conclusion is that everything is still too wide, so we need to move on to the other groups. With that, I beg leave to withdraw my amendment.
“( ) But no adjustment may be made under subsection (1)(b) that jeopardises potential equivalence with the EU.”
Baroness Bowles of Berkhamsted
My Lords, this amendment is a simple, overarching provision that says that no adjustment may be made,
“that jeopardises potential equivalence with the EU”.
This goes to the heart of what is allowable under a statutory instrument and what is not. It seems to me that it is one thing to seek short-cut arrangements—if I might call them that—to land in-flight legislation without needing primary legislation but quite a different matter to then land that legislation at a destination that is very different from the one that was expected. This is especially the case for legislation under subsection (2), which is no longer under negotiation but which has in fact landed, even if it is not yet operational.
It is worth pointing out that everything the Government have said about Brexit, under whatever type of Brexit, is to try to obtain or retain equivalence—that is the expectation. It may be that equivalence does not work out; it might be due to things that the EU does which become problems for UK markets—and, as I said, I know pretty well how that might happen—or it might just be that the EU Commission delays or decides not to make an equivalence finding because it does not see it as in its interest. After all, it is EU Commission policy to make equivalence decisions only when the EU needs them—although it tends to find out in the end that it does need them. I know full well what an infuriating process equivalence can be, as I have played my part both in making sure that it gets into the legislation in the first place and then pressing EU officials to get on with it.
However, despite all those difficulties around equivalence and whether we will have it or not, that will not be decided overnight—even, if I may say so, in the event of a no-deal Brexit. Thus to abandon notions of equivalence, even at any time within two years of Brexit, would be a big step and a decision that should come before Parliament in primary legislation. I do not say that it should not happen, but it is a big departure. I do not remember that anybody’s manifesto said that they would abandon equivalence willy-nilly. Everything that has been said on every occasion, on everything to do with the Brexit negotiations, has been to try to get something better than equivalence, so it would be a big departure to set it aside. This is where the dividing line comes, and this would be the gatekeeper of those things that you do: “It’s okay—you’re keeping equivalence. No; you can’t do it this way if you want to break away from equivalence”.
The truth is that we have already given regulators sufficient leeway that they could make rules that led to an abandonment of equivalence by them not matching EU delegated Acts legislation. The way we have set it up, that has been given to the regulators. However, I do not think that our regulators would tend to go down that track—and if they did, I suspect that it would feature prominently in their consultations. I regret that the noble Lord, Lord Adonis, is not in his place, because I commend his amendment that we will come to later on, in which he suggests that some reporting from the Bank of England should be included. Possibly, if we are to have these reports that tell us what is going on across the piece, it would be a good idea to include in that what the FCA is doing, whether that is done through the FCA having a section of the report or through the Treasury dealing on its behalf with that aspect of the report that it told us about.
As I have already indicated, we know that there are concerns about certain bits or pieces of legislation, but we have to bear in mind that abandonment or significant alteration of any policy element of what is essentially EU primary legislation may well remove the hope of equivalence for part of the market, or indeed for other parts or entities that are not necessarily the direct beneficiaries of those adjustments. I could construct an argument around the changing of the buy-in regime. If that was dropped, it could have ramifications for equivalences in many other places, and that matter is already weighing on the consciences of those who are having to think about which way they would want to push that debate.
As I said, the business about what we do with equivalence needs a great deal more thought. As my noble friend Lady Kramer said, we cannot let it go by default of not doing something or by rushing something through in a statutory instrument that we cannot amend, knowing that it might lead to a loss of equivalence. I beg to move.
Lord Flight
My Lords, the hope is that if everything were sensible, the amendment would be appropriate and powerful. As the noble Baroness, Lady Bowles, pointed out, it is possible that the EU may go down paths of regulation that are not very sensible. In that situation, given that the market for the UK’s financial services industry is not just Europe, it may not be practical for the UK to use and follow equivalence. Indeed, there may need to be changes to the benefit of the industry other than vis-à-vis a Europe that has gone off the rails with its regulations.
Baroness Kramer
My Lords, I added my name to the amendment because I consider it one of the most important in the range we are addressing today. Two fundamental issues seem to underlie our concerns about the legislation. One issue comes from a constitutional perspective, concerning Henry VIII powers. It matters; we discussed it in other contexts but it is important in this context too. It has an impact on the relationship between Parliament and the Executive, including applying the ability to exercise policy power and Parliament’s role in scrutinising policy.
One aspect of that is particularly substantial in the Bill. In the two-year period when the regime discussed in the Bill holds sway, we will be in a critical time, determining our future relationship with the European Union and whether our financial services industry continues to have access to European markets for financial services. That is a huge discussion and decision; it should not be handed over to the Treasury to enact simply through statutory instruments. I am exceedingly concerned that using this legislation, we will find ourselves in a position where because of Treasury decisions, our negotiators will find that no matter what they wish at the end of their negotiating period, we will have diverged significantly in financial services, making it almost impossible to reconnect parts of the market. If the industry sees that we will go through a period in which that may happen, it will make decisions about where it puts operations, activities and jobs that would not be in the long-term interest of the UK. That two-year period—exactly the period when this legislation applies—is critical. We will basically delegate decisions on whether equivalence continues to be UK policy that come into effect in this House only through the weak medium of statutory instruments.
I see this measure as a safeguard. I recognise what was said by the noble Lord, Lord Flight: that some things about future European regulation in the financial services industry may be unsatisfactory and that we may decide to diverge from them. But it really should not be the Treasury’s decision to do that and it should not be the Treasury’s decision to shut off the possibility of creating a long-term equivalence regime. That is why I support this amendment. If we accept that within this Bill and the Government decide that there are indeed instances where they want to diverge, they can bring forward primary legislation. It is simply that they could not do that through secondary legislation in the way that this Bill would currently allow them to do so. That is too major and fundamental a decision.
I remind the Committee that the financial services industry is probably the most important sector in our economy. It delivers something like £76 billion a year in taxes which support our public services. To make a decision that will fundamentally impact on key aspects of the industry and with all the consequences that that entails must surely need to be done only through primary legislation and with the full and total engagement of this House. That is why I am particularly concerned about this clause.
Lord Tunnicliffe
My Lords, we are superficially attracted to this amendment and we await the Minister’s comments with interest.
Lord Bates
I thank noble Lords for their contributions to this debate. I shall begin by looking at what I think is an area of common ground: we all recognise the importance of the financial services industry to the UK. Perhaps I may pick up on a point made by my noble friend Lord Flight, that one of the main purposes of this Bill is to ensure that the UK remains an attractive and competitive place to do business, retaining our place as a world leader in financial services. To do this in a no-deal context, it is essential that the UK retains sovereignty over our rules. From the perspective of financial stability and protecting the UK taxpayer, it is essential that the Government, the Bank of England and the FCA have the tools available to ensure that the UK markets are appropriately and effectively regulated.
It would be wrong to set a condition over the UK’s regulatory framework that means decisions which are made about the UK’s future regime are determined through the lens of maintaining equivalence to the EU, irrespective of the quality of those rules and how future legislation and the market itself may evolve.
Baroness Kramer
I think that there may be a misunderstanding. This would mean that statutory instruments could not be used to create divergence—it does not mean that primary legislation could not be used to do so. That is the underlying point.
Lord Bates
The legislation we are dealing with is in its very composition a temporary measure; it is a temporary piece of primary legislation with a sunset clause.
Baroness Kramer
I know that we will discuss the sunset clause later. It does not mean that the statutory instruments created under this legislation die after two years, it means only that the powers in the overarching legislation will die. However, those two years are the critical period, so the sunset clause does not have the consequence that I think the Minister might suspect it does.
Lord Bates
To go back to first principles, I am saying that the power in this Bill is not in effect to make policy—rather, it is the ability to produce secondary legislation that has a policy content to it and which would then be subject to scrutiny in this House. That power is being put in place for an extraordinary set of circumstances—I think we all agree that these are extraordinary circumstances and in fact I should underscore that we hope that these powers will not be required to be acted upon, because there will be a deal and we will continue to have access to the market in financial services across the EU. That is our aim, but we are preparing for all eventualities.
The noble Baroness will be aware that equivalence determinations are autonomous decisions with the EU and, in turn, the UK retaining autonomy for determining if a foreign jurisdiction has equivalent standards and supervision. The EU takes a varied approach to assessments of equivalence, tailoring its approach to individual regimes with regard to how the assessment is conducted. The Commission itself has stated:
“It is the equivalence of regulatory and supervisory results that is being assessed, not a word-for-word sameness of legal texts”.
Indeed, for a recent example, one need to look only at the EU’s statements on equivalence in a no-deal scenario. Within these, the EU has been clear that equivalence decisions of the UK will be made where justified in the interest of the Union and its member states, with time limits and conditions to their decisions where appropriate. As such, it is very difficult to judge what the EU will take into account in its future assessments and how its autonomous third-country regime will evolve. Such an approach, plus the breadth and variety of considerations that form part of equivalence determinations, from the rules themselves to supervisory approaches, means that it would be very difficult to determine what effect, if any, a change or adjustment that the UK makes to our laws might have on a future equivalence determination in a given area, given that these are autonomous decisions taken by the EU. It is therefore difficult to see how the test set out in this amendment could be met.
Let me reiterate the importance of, in the case of a no-deal situation, retaining the ability to adjust our legislation so that it best serves the aims and objectives of the UK once we have left the EU, as my noble friend Lord Flight has identified. It is crucial to ensure that we can bring into force pieces of legislation in a way that works best for the interests of UK markets. The Government are also committed to doing this as transparently as possible, which is why we have set out the strict reporting requirements to which I know we will return on Report. In the light of that, I invite the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted
I thank the Minister for his response. I shall deal first with the point that this might be legislation that will never need to be implemented. But the fact is that something like this will probably be needed when we get to the next cliff edge, and in any event by passing this Bill, we will also set a precedent for what might then follow in subsequent legislation. You cannot get some dodgy things through on the basis of reasoning, “Oh, we might never need it”. We know only too well the effect of having let something slip through once. I can assure the Committee that that is not something I had a reputation for in Europe and I would not allow it here if I had anything to do with it.
Like my noble friend Lady Kramer, I fully accept the point made by the noble Lord, Lord Flight, that the legislation might not be “sensible” when looked at from the UK perspective. This is what is meant by not being able to fit in with the specificities of the UK. However, the trouble is that that is a very vague description. We would need far more of an indication of what is meant by that to allow it to be any kind of gatekeeper. I think that the point about equivalence is fundamental and it can be a gatekeeper. It is probably completely wrong not to contemplate having an equivalence Bill which actually lays out in more detail the sort of tests that would be applied. Looking further into the distance of how we deal with financial services legislation, we are not going to bring to the Floor of this House all the detail set out in the regulations and directives that I had to negotiate. The majority of that will no doubt be passed off to the Treasury and the regulators in some way that will not concern us. I am not sure that I agree with that, but I can see the writing on the wall. However, something big such as whether we want to stay aligned or whether we think that it has progressed too far—it is too uncertain, we cannot deal with this kind of uncertainty, and what are the tests?—could well be put into legislation.
I reject the notion that we cannot have a limitation such as this in some form or other as a guardian within this legislation because of the attitude of the EU and how it makes decisions. You know for sure that doing certain things would remove any chance of equivalence—such as leaving out a couple of articles of the main legislation. Boom! Not equivalent. There is no question. Because certain things are done in a slightly different way, maybe tweaking a little bit in a delegated Act would not be a bar, so that could possibly pass the test and go through.
I come back to subsection (2). The very first item there is a yes/no decision: are we having this, or will we neuter it to the extent that we do not have the buy-in regime of the CSDR? That is what it is all about. If we did not have the buy-in regime of the CSDR, we would not be equivalent in quite a lot of things to do with securities transactions, and maybe in things to do with our clearing houses or our exchanges. I remind the House of my interest as a director of the London Stock Exchange. These things are under active consideration, so doing something like that would, in my personal judgment, put equivalence at risk. I think you can make a dividing line through this.
Especially if there is some tentative encouragement from the Labour Front Benches, I think this is one of those amendments that usefully goes into the pot that we should be working on. The alternative is that you get even less, probably a very tight and improved version of Amendment 7, because an amendment such as this might offer not a great deal but a tad more flexibility—a tiny bit more. With that, I beg leave to withdraw my amendment.
Lord Leigh of Hurley
“( ) It is an objective of the Treasury, in exercising its powers under this Act, to ensure—(a) that financial markets in the United Kingdom and their participants are in no worse competitive position than if the United Kingdom had not withdrawn from the EU, and(b) that financial services regulations do not impose a disproportionate burden on small listed companies.”
Lord Leigh of Hurley (Con)
My Lords, at Second Reading this Bill was slated as a technical, tidy-up, hypothetical Bill. It has proven much more interesting than that. I remind your Lordships of the declaration of interests I made at Second Reading, predicting it would happen the following day. With my noble friend Lord Bates’s best wishes it did, so I am now a deputy chairman of an AIM-listed financial services company. Although I have made the declaration, it is not yet on the website, so I repeat it in Committee.
At Second Reading my noble friend Lord Bates said:
“In the event of leaving the EU without a withdrawal agreement and without a future economic partnership the UK will not countenance accepting EU laws wholesale. It will therefore be vital to ensure that any legislation implemented in the UK can be adjusted to work best for the UK markets outside the EU in a no-deal scenario”.—[Official Report, 4/12/18; col. 935.]
I agree. It is important, both for the continued success of UK financial services and for the maintenance of equivalence with the EU post-withdrawal, that the competitive position of the sector is not adversely affected by the implementation of EU legislation.
The thrust of my remarks on the first part of the amendment is that transcribing EU legislation directly into UK law does not necessarily have the same result as if the UK were still part of the EU. It can in fact produce perverse and unintended outcomes. The best way of explaining this is by the example of the aforementioned central securities depositories regulation, CSDR. Leaving the EU will make the UK a third country under that regulation, so CSDR settlement discipline will not apply to EU dealers trading UK shares. But if we merely duplicate the CSDR in UK legislation, settlement discipline and the associated fines may be imposed on UK dealers trading UK shares in their own domestic market. That would leave the UK financial services participants at a competitive disadvantage to their EU peers while they are trading in the domestic UK market—clearly a nonsense. It illustrates why each piece of in-flight EU legislation should be considered separately, and why the Treasury should have the objective and power to amend each one appropriately, to ensure that the playing field remains at least level and that financial markets in the UK and their participants are not in a worse competitive position than if the UK had not withdrawn from the EU.
Lord Hodgson of Astley Abbotts
My Lords, I have put my name to this amendment. My noble friend has raised an important point about Brexit itself and its implications for the regulatory regime. I do not propose to follow up on his technical discussion, but there is a wider point to be made. Here, I will draw on the remarks of the noble Baroness, Lady Kramer, who said that, in the two-year period during which the Bill provides powers, things will happen. We can set out our regulatory stall, but our strategy for regulation needs to become clearer during the two years in which the Act will be in effect.
It is important that the Government do some serious thinking about how this country will present itself to the world via its financial services as part and parcel of the new regime. Noble Lords will know that, for a number of years, I was a director of one of the self-regulatory organisations which governed the City before the passage of the Financial Services and Markets Act. A wise old bird once told us that we should think about it like a high jump. If you set the bar too low, everybody can clear it and you will attract to your market all sorts of undesirable characters and firms, and there will inevitably be failures and problems, which will damage your overall reputation and therefore you will lose your world standing. By contrast, if you set the bar so high that nobody can get over it without enormous cost, bureaucracy, time and difficulty, you may have a market relatively free of failure but it will have very many fewer participants. I encourage the Government to think about how we set that high-jump bar for regulations, given the comments my noble friend made in his opening remarks.
The only other point I want to make is this: regulation tends to be on an upward lockstep. For the most part, regulators do not have a reverse gear. Few regulators come along and say that, given that the world has changed, they no longer need the powers they have because they can do a perfectly satisfactory job without them. Rather, they are left with those powers, which then have to be enforced and have a cost. The commercial vessel then gets more and more barnacles and slows through the water, and it is never able to go in for a hull clean.
My remarks are not an argument against regulation per se. They urge the Government to have regular reviews of regulation to ensure that it is properly focused and achieves a worthwhile result.
Lord Adonis
My Lords, the longer the noble Lords, Lord Leigh and Lord Hodgson, spoke, the more concerned I became about their intentions in relation to the powers proposed in the Bill.
I fully accept the noble Lords’ perfectly reasonable intentions. We can have a debate on the right hygiene bar for the regulation of financial institutions—if Britain leaves the European Union, it will be a debate. The Foreign Secretary, Jeremy Hunt, opened it last week in his speech in Singapore, when he set out a vision of Britain being Singapore-on-sea, with a light-touch regulatory regime, offshore from Europe, ready to start competing—as I took it—on a lower bar. It perhaps will not be as low as the hygiene level mentioned by the noble Lord, Lord Hodgson, that starts to discredit us as a reputable financial centre, but he clearly wants it to be lower—he is a Tory, and generally speaking this is what Tories want. There is no great secret around what it is that the noble Lords, Lord Leigh and Lord Hodgson, want.
The crucial issue, however, is how the noble Lords’ intentions relate to the capacity of the Government, under this Bill, to effectively legislate by decree. If the Government want to make big changes in our regulatory regime, they should be debated openly and fully in this House and in the House of Commons. Indeed, if they are substantial departures from existing practice, the more difficult it will be to deliver paragraph (b) in the amendment, which states that,
“financial services regulations do not impose a disproportionate burden on small listed companies”.
That is all the more reason why they should go through the full and proper legislative procedures of this House: Second Reading, Committee, Report and Third Reading. That way, we can debate whether the hygiene level of the noble Lord, Lord Hodgson, is satisfactory. They make no argument whatever for giving the Government the power to rule by decree.
Lord Hodgson of Astley Abbotts
For the Hansard writer, I did not say “hygiene”, I said “high jump”.
Lord Adonis
I did not hear the noble Lord across the Chamber, but it does not affect the point. He wants to vary the level of the bar—that is the issue. I do not object in principle: he has a right as a parliamentarian to put forward proposals for changing the level of the bar. However, I object strongly that the Government should be allowed to make those changes by decree, the power that is given to them by this Bill, but we will return to that on Report.
At the moment, the intentions of the European withdrawal Act are elaborately debated in this House, precisely to meet the objective rightly set out by my noble friend Lord Tunnicliffe: that there should be a transposing of European legislation to British law and any further changes to the law should be sufficient only to prevent, remedy or mitigate deficiencies in retained EU law. That is a limited objective which justifies the power of the Government to do this by Orders in Council. As soon as we get to much wider political objectives—the kind that the noble Lord has just set out and as set out by this amendment—it completely undercuts the justification for this Bill. The justification for this Bill should surely not be for major departures of this kind in the law and the regulatory regime to be made by Orders in Council rather than by the full, open and proper debate which is necessitated by introducing primary legislation.
Lord Flight
My Lords, first, I declare my interest in the register. I want to make a small point, to which no one has referred so far. There is quite an importance in the various trade and regulatory bodies to discuss with the Treasury, and potentially with the regulator in the EU, what makes sense and what does not. That is a check on the Government having too much power where they will potentially have to do things in a way that is not approved by the noble Lord, Lord Adonis.
Lord Deben (Con)
My Lords, I remind the House of my declaration in the register of interests, particularly my chairmanship of PIMFA, the organisation that represents independent financial advisers and wealth managers.
I have to disagree with the noble Lord, Lord Adonis, about the meaning and purpose of this amendment. But I have to say to my noble friend that one of the reasons for this amendment is that many of us are very concerned that the Treasury in particular should take very seriously the issues of the financial services sector and the contribution that it makes to the British economy. That seriousness has not always been evident.
Secondly, the European Commission has been very helpful in listening to the British applications and those of our colleagues in the rest of the European Union and, should we leave the European Union, which I trust will not happen, we would certainly expect to have at least as much access as we have on the present stage and certainly as much influence.
I am concerned because in the past we have sought to pass amendments that asked the Treasury to bear in mind important matters. For example, an amendment some years ago stated that the Treasury should insist that regulators bear in mind the need for savings in our society. That was pooh-poohed by the Government who said that it was entirely unnecessary and of course everybody knew that. The result has been that regulators have not taken that issue into account and indeed pointed out that the Government did not accept when it was suggested to them that saving as part of our society was important. So it is important to bring home to the Government the issues raised with this amendment.
I want to make two further points. First, this is a very competitive world. We need to have legislation if we are not a member of the European Union that enables us to continue to be as competitive as possible. This may not be exactly the right wording, but it carries that meaning. Secondly, small companies find much of the legislation not only burdensome but unnecessary—points that my noble friend Lord Leigh properly made. That is not because one wants lower levels of legislation.
At this point, I want to take serious objection to what the noble Lord, Lord Adonis, said. I happen to be a Conservative. I sit on the Conservative Benches and I have been a Conservative Minister for longer than almost anyone else. But I am very much in favour of this regulation. The industry that I am happy to work in is also very much in favour of sensible legislation because we do not like cowboys either. They produce extremely bad reputations. Nobody can be tougher about the fact that we need proper regulation. There is no question in these amendments that somehow or other we would lower the bar. That is not the issue.
I would agree about some of the remarks made about Singapore. I am deeply upset to have a Foreign Secretary who thinks that Britain should be compared to Singapore. Fundamentally, that is as about as helpful as suggesting that we should be like Liechtenstein. I am sorry, but it is not a sensible comparison for so many reasons, not least because of the autocratic Government of Singapore. I do not want to be associated with them as a comparison.
However, our financial services need proper regulation. We want regulation, but it has to be proper regulation within the context of our competition. Therefore, it is proper to say that we do not want regulation that either makes it more difficult for us to compete or lays a disproportionate burden on the shoulders of small companies. Those seem two such simple and reasonable things to suggest that, on this occasion, my noble friends here and I are helping the Government.
Ministers are always suspicious, particularly when I say that I am trying to help the Government, but I am, on this occasion, trying to help them. I am doing it in great difficulty because I do not like this Bill at all. I do not want to leave the European Union. It is more and more clear that leaving the European Union is barmy, and we are having to spend time talking about barmy things that will take two years and then go away. It is a pretty insulting thing for this House, but that is what we are having to do. So I ask Ministers please to take this seriously and not to take the view of the noble Lord, Lord Adonis, in the way that he put it, but merely to agree that the amendment is sensible. If the Government cannot give us that undertaking, I have to say that the financial services industry will be very suspicious. If the Government are not prepared to do at least as well as the European Union has done in negotiation and discussion, I will be very sad.
I hope that people notice just how good the Commission has been when they attack the European Union for bureaucracy and suchlike. It has been more open and more able to discuss, and more concerned about the issues than any of our governmental structures. We have to remind people that the European Union is more open, more willing to listen and more concerned to be there for industry than the Treasury has been in history, which is why this amendment has been tabled.
Baroness Kramer
My Lords, I have to say to the noble Lord, Lord Deben, that every alarm bell went off in my head when I heard the noble Lord, Lord Leigh, basically argue that this would be a route to get naked short selling on AIM. This is essentially a mechanism that will allow people to enter into contracts which they know if they had to fulfil they would be very unlikely to fulfil—talk about risk. That general underlying principle worries many of us who think that a less speculative financial services industry is, in the long run, much more sustainable than a far more speculative financial services industry. That is exactly the point. It is people selling short shares that they will not be able to buy if they are ever forced to close on the contract.
Lord Leigh of Hurley
With great respect, I must say that that is not the situation in respect of the AIM market. This is where market-makers who are bound to make a market respond to requests for specified sums or amounts of shares with quoted prices. I think that the noble Baroness is talking about a different type of short selling.
Baroness Kramer
I thought that the noble Lord described naked short selling, which I thought I just defined. Anyway, I am nervous about the idea of policies such as this. There will be enormous pressure to use this opportunity, where the Treasury alone is the decision-maker, basically to loosen the regulatory structure that we have in the UK. That issue is a fundamental one for Parliament.
I would say to the noble Lord, Lord Hodgson, who talked about the need to find the appropriate place and that it is good that we can have those discussions with the Treasury, to have them with Parliament because there is another side to the argument. One reason why the UK been spectacularly successful as a financial centre is because the regulatory environment in which it functions is considered by many to be a global gold standard. If the noble Lord goes to countries such as China, India or other places, the level of trust and respect in financial institutions that are framed within those EU parameters—he could say it is foolish or sensible—is very high. It annoys the United States to heaven and beyond because so often it has loosened its regulatory standards but has not seen the business shift out of the EU into the US.
If you talk to companies, part of that reason is the reputational issue. For many companies, to be able to turn to clients and say, “I operate in the gold standard regulatory environment which means that you can trust me and what I do”, is so key to the future of their business that clients will reply, “If there is a significant loosening of standards, it might in the short term increase my profits but in the long term it will damage my regular relationship with my client base and I will need to move to the place that carries that gold standard kitemark”. Losing the kitemark is significant. That is something that this House and the other House should consider and should not be simply left to a conversation between the industry and the Treasury. It backs up our whole argument that this Bill, by transferring all those decisions simply to statutory instruments, is running into very dangerous territory.
Baroness Bowles of Berkhamsted
My Lords, a couple of interesting points have been made in the context of this amendment. As it reads, it looks reasonably acceptable as we do not want gold-plating, which could potentially happen. I echo that the Commission has been particularly good at dealing with smaller companies and businesses. My experience is that that has not always been reflected in the UK when the dispensations have been a matter for the member state. On more than one occasion, I have written to regulators and others about that.
One of the points was about asymmetric effects and the fact that when we are no longer a member state the law will bear down on us when we replicate it, or nearly replicate it, in a different way from when we were a member state. It is not only in financial services legislation that this could potentially happen. It happens with contractual obligations. When we replicate Rome I and Rome II, if the other party is in, say, New York, the penalty for breach of contract will be different in the UK from what it would be in France because we no longer tick the member state box. It essentially means that the higher New York penalty will apply rather than it being limited.
I sit on one of the secondary legislation scrutiny committees, and there have been various occasions when asymmetries have come up. There have sometimes been attempts to balance them, but sometimes not. It depends. These judgments about asymmetries already appear to be going on under the withdrawal Act. From the ones that I have seen, by and large it has not looked as though we could have dealt with them differently, but the issue is worth investigating. To say that the Treasury should do what it can for small businesses is a good thing, whether or not we say that we should not be put in a worse competitive position. Our markets are bigger and, because we have bigger global markets, we may have to regulate in a way that looks stronger rather than weaker. There may be other ways that it does not suit the specificities. I would be a little worried about “no worse competitive position” taken to its extreme, but in the general sense it is possibly more acceptable.
Lord Tunnicliffe
My Lords, listening to this debate, one cannot but feel that this is about a policy decision. The last thing I want in this Bill is policy decisions which will introduce different levels of regulation and proportionality. That may not have been the intention. I did not find the words very attractive because they led me to all sorts of different scenarios. I think I heard it advocated as quite a narrow concept to provide against unintended consequences as a result of slavishly transcribing a piece of legislation. If that is the intention, it may have some attraction, but as drafted, the narrowness of that is in no way clear and the breadth of it would involve serious policy changes. It is not the purpose of this Bill to introduce serious policy changes.
Lord Bates
My Lords, I again thank all noble Lords who have taken part in this debate, particularly my noble friend Lord Leigh. His amendment touches on the critical point with regard to the Bill, which is the importance of safeguarding the competitiveness of the UK’s world-leading financial services industry as well as maintaining proportionality in the regulations that govern these markets. These are two of the key reasons this Bill has been introduced. It will ensure that our regulatory system remains up to date in the period following a no-deal exit and that UK firms are not left at a competitive disadvantage as regulations are updated in the EU. I can of course assure my noble friend that the Treasury will exercise its powers under this Bill with competitiveness and proportionality firmly in mind, which my noble friends Lord Flight and Lord Hodgson encouraged, and which my noble friend Lord Deben urged it to do.
When people are talking about the market in the City, people instinctively think of very large institutions, but having worked in the financial services industry, I recognise that it is made up of many small firms delivering outstanding benefits and value to their clients. There are some 58,000 small and medium-sized businesses operating in financial services.
In answer to the points raised by the noble Lord, Lord Adonis, the reason the UK is so successful and the City of London so respected around the world is the strength of the regulatory basis. Reputation and trust are all when it comes to conducting financial services. If people are investing their life savings or pensions with organisations, they need to have confidence that the organisations they are investing in will look after them well and that they will get the return or benefit that they anticipate.
I therefore appreciate my noble friend’s helpful and well-intentioned amendment. However, I am mindful of the difficulties of placing these assurances on a statutory footing, given the difficulties of defining these terms clearly in legislation. In particular, judging the exercise of powers against a hypothetical case—for example, the state of the UK financial market had the UK not left the EU—would be highly challenging. It is also worth noting that many of the files are themselves being designed, with the UK’s input, at the moment, to aid competitiveness and proportionality issues. It is right that we put that on record at this point. My noble friend Lord Leigh set out clearly at the beginning that we pay tribute to the work of the Commission in listening to the voice of small business, a point to which my noble friend Lord Deben returned. Examples are the prospectus regulation listed in Clause 1, which creates a more proportionate regime for all firms, including SMEs, and key measures such as the introduction of a new growth prospectus—a lighter, less burdensome document—to be used by SMEs within the regulation. I hope my noble friend will recognise that the Government are alert to his concerns in this area and support the need to maintain the competitiveness of the UK financial services industry and to ensure that any regulatory burdens are applied to small and medium-sized enterprises in a proportionate way. In the light of these reassurances, I hope my noble friend feels able to withdraw his amendment.
Lord Leigh of Hurley
I thank my noble friends Lord Flight and Lord Hodgson for supporting this amendment. They have become the wise old birds. I was very pleased to have two people supporting this amendment who have started financial services businesses in London and grown them to be global financial services businesses. It goes to show the power and expertise that resides in this House.
I thank the noble Lord, Lord Adonis, for his comments. I am sure he was not seeking to stereotype Tories. Curiously enough, although many people would regard captains of industry as natural Tories, one finds that the large multinationals are the companies that want more, not less, regulation because it consolidates their position. From the perspective of small businesses, as the noble Lord, Lord Adonis, said, we look for more appropriate regulation, rather than less regulation.
I am very grateful to him and to my noble friend Lord Bates for picking up my complimentary remarks about the EU Commission. I am a bit worried that I will be drummed out of the ERG after this. Nevertheless, it is true that the Commission has listened. My worry is that it listened to us because we had a voice. However, if we leave under a hard Brexit, we will not have a voice through bodies such as the QCA and therefore, because it does not really understand AIM and other aspects of the financial services industry in London, it will produce inappropriate regulation. We will need a very effective and immediate reaction to that, which I believe the Treasury is capable of doing.
I say to the noble Baroness, Lady Kramer, that the naked short selling by market-makers in the AIM market is essential to liquidity. It is not to be confused with naked short selling by hedge funds, which is a very risky and different proposition. It just goes to show that it is a complicated area. I will be honest: I am not wholly sure that I understand it or how it works but I understand that much—that it is essential to liquidity.
The noble Lord, Lord Tunnicliffe, is right. Essentially this is about unintended consequences; none the less, it is always nice to get into legislation protection for the financial services sector and small businesses.
With the very welcome reassurances from my noble friend Lord Bates, I beg leave to withdraw the amendment.
Lord Davies of Oldham
Lord Davies of Oldham
My Lords, I can be brief because we have already had at least four debates this afternoon on the exact issues that this amendment and Amendment 11 in my name and that of my noble friend Lord Tunnicliffe deal with. It all revolves around the fact that we are not prepared to give the Government and the Treasury primary powers over issues that would normally require primary legislation just because this Bill has some exceptional qualities to it. It does indeed have exceptional qualities, as has been pointed out on all sides. It is meant to have a lifetime of a bare two years. The vast majority—I will withdraw that remark; I cannot qualify it. Some people who have spoken today have sought to make some improvements to the Bill but I do not have the slightest doubt that they hope that the Bill will never be necessary and that we will not crash out of the European Union without an agreed position.
Two debates ago, the noble Baronesses, Lady Bowles and Lady Kramer, did exactly what we seek to do with this amendment—that is, to identify just where our limits are with regard to the intention in the Bill and to point out that it is misconceived because it attributes to the Treasury powers that we ought not to allow it to have. We thought that we had spotted the area where the debate would flare up most significantly in Henry VIII powers terms, but in fact these issues have already been discussed without the need to mention that moniker too often.
I therefore move this amendment on the basis that the Committee and the Minister know only too well the strength of feeling on all sides that this Bill cannot be a Trojan horse to allow the Treasury and the Government to introduce measures that they would ordinarily introduce through primary legislation but which they are trying, through the enabling quality of this Bill, to introduce through statutory instruments and Treasury adjustments. We have debated this matter long and hard. We all know where we stand and I therefore beg to move, although I do not expect too much in the way of contributions in support.
Lord Bates
My Lords, first, I am sure that I speak for the whole Committee in thanking the noble Lord for his succinctness in presenting his amendment. I recognise the old adage that everything needs to be said but not everyone needs to say it. That is a good principle. In following him in that spirit, I will put on the record a few comments that I believe will be helpful for our wider debates.
We appreciate the concerns across the Committee regarding the Henry VIII powers and, where they are proposed, it is clear that their necessity must be well evidenced. In the case of the financial services legislation, to which the power in this Bill will apply, I hope that noble Lords will accept the need for such a power.
An inability to amend existing primary legislation such as the Financial Services and Markets Act 2000 will render it impossible to implement this necessary body of legislation. Further, as noble Lords will be aware, the exercise of many functions under financial services legislation is carried out by the independent regulators—the Financial Conduct Authority and the Bank of England. The capacity and expertise of the financial regulators will be absolutely crucial to the effective implementation of these pieces of legislation and, consequently, to the resilience and prosperity of the financial services sector here in the UK.
The amendment would remove the ability to delegate to the regulators because, as a general rule, a power to make secondary legislation does not include a power to sub-delegate. An inability to effectively delegate powers to the regulators in implementing the legislation contained in this Bill would severely undermine the value of transposing the original legislation into UK law. In many cases, it would effectively render legislation unenforceable, and the Bill would simply not be able to achieve its central goal of ensuring that the UK continues to be an attractive and competitive place to do business in the immediate two-year period post exit, in the unwelcome and unlikely event of a no-deal scenario. Given this context and the context of the previous debate, I invite the noble Lord to consider withdrawing his amendment.
Lord Adonis
Lord Adonis
My Lords, my Amendments 11A, 11B, 12A and 15A seek to establish fuller procedures for the consideration of any changes to the law that the Government might wish to make that go beyond simply transposing European law in the shape of seeking advice from the House of Commons Treasury Select Committee, the House of Lords Secondary Legislation Scrutiny Committee or any other committee charged by the House of Commons or the House of Lords with fulfilling similar functions, as well as advice from the Bank of England.
Given the gravity of the issues that are potentially at stake in these changes in the law over and above simply transposing existing European law, advice from these committees is essential because we have to make significant decisions where the only power that we have is to say yes or no to statutory instruments. We will not tease out the issues, as we do in the normal course of Committee debates such as this. As one long experienced both as a Minister and as an opposition Member going through that process, I know that it is hugely valuable for the House at large in coming to understand and get to grips with the issues at stake. However, by definition those processes will not be available under this Bill because its whole purpose is to give the Government the power to legislate by means of statutory instruments, which are either subject to no debate whatever in this House or subject to only a short debate with the power to say yes or no.
In those circumstances, imposing on the Government a requirement to seek advice first from the Treasury Select Committee, our own delegated legislation Select Committee and the Bank of England, and to make that advice available to Parliament, would be both an important means of informing your Lordships and Members of the House of Commons about the issues at stake and, to be blunt, a check on the Government’s acting without seeking proper advice, while exposing their proposed changes in the law to proper scrutiny.
Lord Deben (Con)
I hope that my noble friend the Minister has listened carefully to the noble Lord, Lord Adonis, on this matter. We are faced with a real difficulty here. We have agreed to many kinds of legislation, of which this is only one, to protect ourselves against the extraordinarily damaging situation whereby we leave the European Union without a deal. One of the dangers, to which the noble Baroness, Lady Kramer, pointed, was that, if we are not careful, we will be so sure that something is not necessary that we will not look at it as carefully as we ought.
The reason I suggest that my noble friend take Amendment 7 and the amendments that we are now discussing very seriously is this: the whole purpose of Parliament is to make sure that we expose the full extent of decisions of the Executive; it is to curb the Executive in the sense that it ensures that things do not slip through with unintended results.
I am sure that the Government have every intention of using this legislation properly; I am in no way criticising them about that. However, it is true that decisions made primarily by civil servants, which are not open to public scrutiny, can be disastrous. Any of us who have been Ministers know that; we know that one of the most important, perhaps the most important, protection the public have—and the most important discipline that one has as a Minister—is that decisions have to be debated and discussed. My noble friend knows that in this House, where we have limited powers, it is still true that very often during Committee and Report terrible gaps have been shown in legislative proposals. These are gaps which, once they have been revealed, the Government are rapidly determined to fill: to change what they are proposing because they had not meant to have that result.
In those circumstances, it is difficult, is it not, to give these powers so totally to the bureaucratic system? That is so even if one imagines that Ministers themselves have no intention of delivering other than what is perfectly in line with these legislative requirements. Therefore, it is not unreasonable to suggest that there should in all circumstances be a public discussion. The Government’s usual response is, “We can’t possibly do this as there isn’t time”. I am prepared to accept that as a generality, but this is not to impose a long-winded system; it is merely to say that what is proposed shall have sufficient public exposure and discussion to enable people to see whether it is within the proper confines of the Bill or reaches beyond it.
Although I had to disagree with the noble Lord, Lord Adonis, on an earlier amendment and his view of it, this one seems to draw attention to a very real issue. My noble friend and I share a considerable desire that these circumstances shall never arise. He is in no position to share my further desire, which is that we shall not leave the European Union anyway—I have no idea what his personal views are but I know what his views have to be at the Dispatch Box. The public will become less and less enamoured with this whole unprofitable and unacceptable process. If the Government want to protect themselves, at least to some extent, it is extremely important to make sure that these matters are processed in public. If they were ever to come about, the Government would find that protecting and defending what they have done was extremely hard, but why not accept that some further process beyond that allowed for in this Bill would be a democratic help in circumstances which will, we hope, not occur?
Baroness Bowles of Berkhamsted
My Lords, I agreed with the amendments of Lord Adonis; I do not agree that they are not needed, even with Amendment 7. There is still the issue of sequencing in terms of what is and is not being done; Amendment 7 does not solve the cherry-picking point or various other things. I attach quite a lot of importance to the reports provided by subsections (8) and (9). In that context, I read the amendments that added in the Bank of England. The noble Lord has explained that in the sense of taking advice from the Bank of England. But when doing these transpositions, there are inevitably delegated acts and other associated things that will be done at the level of the regulators and will not even be contained in a statutory instrument. Therefore I thought it was right that the regulators reported how things are dealt with as well as the Treasury. I support the amendment but would add the PRA and the FCA. In that way, we get the full Treasury report through to the regulators, so that we see that we are all on the same page and where the tweaks, even within the available limits, are made. So I agree with the noble Lord.
As to whether Amendment 11A is needed, there is no harm in putting it there. The Secondary Legislation Scrutiny Committee and other committees will still be doing their part when the things come to them, so I see no reason not to give some work to the Treasury Select Committee.
Lord Tunnicliffe
My Lords, we have an open mind on the amendments. The noble Lord, Lord Deben, hit the nail on the head in saying that the gap between primary legislation and the SI process is too wide. Since we are shovelling a lot of stuff into the statutory instrument process, this is a good time to consider some intermediate action. I do not move from my commitment to tighten up what is available for secondary legislation under this Act, and we will be pursuing that, but I shall listen to the Minister’s response with care to see whether this would be the occasion to make some progress in this important area and give two views of a piece of secondary legislation, instead of the usual process. No matter how hard the Minister and I, and colleagues on the Liberal Democrat Benches, try to give some life to the affirmative SI process, we know in our hearts that we are not going to vote against it because we are not going to provoke a constitutional crisis. Some process in between the two—this may be the right one—deserves careful consideration.
Lord Bates
I thank the noble Lord, Lord Adonis, for introducing his amendment, and all noble Lords who have spoken. I will touch on some of the points made, but before I do, perhaps I may say that, as we are moving rapidly through the different groups, it is important that we keep updating where we are. In earlier groups, I was responding positively to my noble friend Lord Deben’s point that the legislature needed to be better informed about the effects where changes are made and where we are derogating from existing directives that are in flight. I dealt with the concerns that had been raised by the Delegated Powers and Regulatory Reform Committee, and agreed to meet and talk further about them—so as we move along I do not want to lose sight of the fact that this is an unfolding story. Already, three hours into Committee, we have agreed to undertake and look carefully at some of the points raised.
I recognise the immense wealth of expertise which is here, not least in ministerial office from the noble Lord, Lord Adonis. I would not dare try to calculate the years of ministerial office represented by my noble friend Lord Deben, especially when I have my noble friend Lord Young of Cookham to my left; between them they could put up a cricket score of years.
There needs to be proper scrutiny; I accept that. The Secondary Legislation Scrutiny Committee already scrutinises all instruments laid before each House that are subject to parliamentary proceedings, and it is required to draw to the special attention of the House those instruments which are politically or legally important, or which give rise to issues of public policy likely to be of interest to the House. In addition, Standing Orders set out that the Joint Committee on Statutory Instruments must report on affirmative statutory instruments before debates can be scheduled. This is the established process for scrutinising statutory instruments, and it is a model we have sought to follow.
Baroness Bowles of Berkhamsted
I certainly was talking in terms of what was delegated and how it was dealing with the things that it then had to deal with. I am not sure that that was the same as the mover’s view, but mine was in the category of doing what was within its power.
Lord Bates
I agree, in that spirit, to take back that point and look at it in the wider context of my opening remarks in responding to the noble Lord, Lord Adonis. I hope that he will feel able to withdraw his amendment at this stage, because we will return to these issues in some detail at Report, hopefully with some more to say.
Lord Adonis
My Lords, I am grateful to the Minister for that characteristically open-minded and engaging response. I would welcome the opportunity for further discussions. The interaction between my amendments and Amendment 7 is crucial. If Amendment 7 is carried, the scope of the changes we are talking about reduces so markedly that the need for advice also reduces. In particular, if Amendment 7 is carried, it is not clear to me that the generality of the issues in the Schedule would come before the House in the form of statutory instruments anyway; they would come before the House in the form of primary legislation.
Primary legislation is of course subject to all those processes of parliamentary scrutiny and decision-making that deal with the underlying concern that there will not be enough exposure of the issues at stake to debate and consultation. The interaction between Amendment 7 and my amendments is crucial. A good deal of the case for my amendments depends on what the Government and the House decide to do in respect of the issues raised in Amendment 7.
However, the wider issue that has come out in this debate and comes up time and again in this House is well worth us considering further on Report: namely, how Parliament deals with secondary legislation and statutory instruments. The point made by the noble Lord, Lord Deben, my noble friend Lord Tunnicliffe and the noble Baroness, Lady Bowles, is completely right. I thought it was neatly put by my noble friend: there is far too big a gulf between the way we consider statutory instruments and the way we consider primary legislation.
The noble Lord, Lord Hodgson, mentioned bars. We have a very high bar for changing the law by primary legislation, with hour after hour of debate—in discussing this two-clause Bill we are now in our fourth hour of Committee. We have had a Second Reading, and we will have Report and Third Reading. Those procedures are tried and tested.
When it comes to secondary legislation, much of which introduces changes to the law—particularly under this Bill, potentially—that are equivalent to changes brought about by primary legislation, our consideration of these changes is cursory. It is a brief debate if you are lucky when a statutory instrument is debated by the House, and there is no power to amend it. As my noble friend Lord Tunnicliffe said, if we try to reject it we will get immediately into a constitutional crisis because there cannot then be the process of reconciliation between the two Houses that takes place in the case of ordinary legislation.
Time and again we come up against this issue. To be blunt, time and again we duck it, because there is no great desire on the part of the Government to give us powers to amend statutory instruments or to have more elaborate procedures for discussing them, precisely because that would, in fact, make your Lordships more powerful on statutory instruments because we could then amend them and ask the House of Commons to think again. The issues raised by the Bill and all the requirements to do with leaving the European Union put this in stark relief, because a very substantial part of the legislative business of Parliament over the next two to three years if we leave the European Union will be conducted by means of statutory instruments, including all the fundamental changes to the financial regulatory system set out in the Schedule.
The conclusion I draw from all this is precisely the same as that of the noble Lord, Lord Deben: we are at one on the fundamental issue that we should not be leaving the European Union in the first place. One of the reasons why we should not be doing so is that we are not taking back control but giving the Government unprecedented powers to rule by decree—which is, of course, farcical. We have far more control at the moment, from the combination of our established procedures for primary legislation when it comes to our changes in the law, plus all the democratic processes we have within the European Union in respect of changes to the law made at the European Union’s behest, than we will ever have by leaving it and having no role to play in the changes recommended or brought about by the EU, and then having to go through this truncated rule by decree process in this Bill and the EU withdrawal Act.
So the right response to all the debate we have had today is not to leave the European Union and to have a people’s vote to give us the opportunity to express the ever more pronounced view of the public that this whole thing is deeply antipathetic not just to the best interests of the country but to our proper parliamentary procedures. But it is probably going a bit too far to press the Minister to accept that whole case just in responding to my one amendment, so just for now I will beg leave to withdraw.
Lord Hodgson of Astley Abbotts
My Lords, in moving Amendment 12 I will speak to Amendments 13, 14 and 15, all of which are consequential. In this we will touch on some of the points raised in Amendment 6 by the noble Baroness, Lady Bowles. I am extremely grateful to her for having put her name to these amendments, as I am to my noble friend, Lord Leigh of Hurley.
The debate at Second Reading on 4 December and the debates on the amendments we have had this afternoon showed the very wide executive powers the Government are taking under the Bill’s provisions, notwithstanding the existence of a two-year sunset clause. The Government argue, in my view with some justification, that in the event of a no-deal Brexit these wide powers will be needed to cover the wide range of eventualities that might result from such an outcome. Further, given the great importance to the UK of the financial services sector, these powers are doubly needed. But if the Government accept, as I believe they do, that these powers are unusually wide, they surely cannot object to the legislature having a higher degree of transparency regarding when and why these powers will be used, so that it might undertake its proper constitutional role—referred to by the noble Lord, Lord Adonis, and others—while scrutinising the activities of the Executive and holding them to account.
I respectfully suggest that the Bill as drafted fails in this purpose. Under Clause 1(8) the only evidence or check of the Government’s use of the power is the report by the Treasury, which it must provide at the end of 12 months—that is, April 2020. Noble Lords will be aware that this is already half way through the two-year period. The phrase about shutting stable doors and bolting horses comes to mind. No less importantly, while Clause 1(8) requires the Treasury to report when it has used the powers, it does not require any explanation as to why they have been used. The Treasury report in April 2020 under this subsection could be just a series of one-line entries.
My amendments have two very simple purposes: to shorten the reporting period and to require the report to include some qualitative explanation as to why it was felt necessary to use the powers in the first place. Amendment 12 would shorten the reporting period so that instead of there being just one report during the Bill’s life, there would be three: in October 2019, and in April and October 2020. Amendment 14 would require each of these reports to give a forward look on any expected use of the powers in the next six-month reporting period. Finally, Amendment 15 would require an explanation of the reasons why the powers are being used in the period under review and why their use is planned in the following six-month period.
Under the Bill, the Government are taking exceptional powers that, as has been pointed out repeatedly this afternoon, could in certain circumstances be used quite arbitrarily. I do not have the purity of approach of the noble Lord, Lord Adonis—perish the thought. I am not sure that his purity of thought is entirely aimed at preserving the UK constitution; I think that he might have a wider objective, but never mind. However, I accept the broad argument of the unique challenge of a no-deal Brexit justifying the Government’s approach and the powers they propose to take. But I cannot and do not accept that the Bill as drafted gives sufficient opportunity for the legislature to scrutinise, let alone obtain justification of, their use. These modest amendments would redress this imbalance, achieve the degree of transparency commensurate with the seriousness of the intended powers and so help to maintain public trust and confidence. I beg to move.
Baroness Bowles of Berkhamsted
My Lords, I have Amendment 16 in this group. As the noble Lord, Lord Hodgson, said, I added my name to his amendments and I thank him for trying to bring some better order to the reports and to increase the frequency with which they are produced. Amendment 16 says that the reports must include a table setting out which provisions of the financial services legislation have been transposed into domestic legislation, and under which statutory instruments. I ask for that because it is awfully difficult to know where things have been put. The Minister will recall that on several occasions when we have been discussing statutory instruments under the withdrawal Bill, I have had to go hunting for the articles of the legislation that has been transposed, and they have popped up in a different instrument and sometimes been dealt with at rather different times.
If that kind of thing is going to happen again, we need the safeguard of knowing where things have been put. In European parlance, this was called a “coronation table”, which showed where the European legislation ended up. One does not necessarily need to do that going forward, once we are amending under our own rules, but something like it would be a first step to obtaining equivalence, because we will also have to demonstrate to the EU where everything has been put. Therefore, this seems a useful addition to these reports, thereby keeping Parliament informed about how things are progressing.
Lord Tunnicliffe
My Lords, we have constantly been debating the same issue, which this amendment addresses from another direction. I am afraid that my experience of government producing annual reports is that, on average, they tend to appear every 18 months, rather than 12 months. I am not quite sure what the last report of the two does anyway, and the idea of one meaningful report every six months has a lot to commend it. Being prescriptive about its contents would also be quite useful, and I look forward to the Minister’s response.
Lord Bates
I thank my noble friend Lord Hodgson for ably introducing this amendment. A substantial part of my speaking notes is remarkably similar to those for Amendment 2, when I responded to the comments made by the noble Baroness, Lady Bowles, on early reporting. Again, we have made some progress, so let us perhaps just leave that on the record.
I will make a couple of specific points about my noble friend’s amendments, and those which the noble Baroness, Lady Bowles, has put her name to as well. These amendments would require the Government to lay reports on the use of the power every six months, rather than every year; to set out why the power would need to be used; and to include a table setting out the provisions of the EU legislation that have or have not been transposed into domestic legislation, as the noble and learned Lord, Lord Judge, mentioned in an earlier debate. Again, I can assure noble Lords that the Government’s intention has always been to set out such reasoning and detail as part of the reports referenced in subsections (8) and (9).
As to the frequency of the reports, the current drafting has been designed so that the reports will provide an overview of how the powers have been used in the first year, and how the Government propose to use them in the second year. The intention behind this is to allow enough time to pass for a meaningful report to be drawn together. I hope this helps to clarify the Government’s intention to be as transparent as possible in the exercise of these powers.
As with the amendments tabled earlier by the noble Baroness, Lady Bowles, I have listened carefully to the arguments being presented on all sides, and particularly in this instance by my noble friend Lord Hodgson. It may be that we need to consider further exactly how such a process can run, so that we can provide the House and Parliament with the necessary assurances that it seeks. In that regard, I ask my noble friend to withdraw his amendment, given my commitment that we will look again at this issue and seek to make some constructive suggestions on a new way forward at Report.
Lord Hodgson of Astley Abbotts
I thank all those who have taken part. I thank the noble Lord, Lord Tunnicliffe, for his two-thirds of a loaf, and the noble Baroness, Lady Bowles, whose amendment I should have referred to in my opening remarks; it was rude of me not to have done so. A table of derivations and destinations is what I think such a table would be called in UK law; it would be a very helpful addition to the schedule to the reports that we have in mind. My noble friend was smooth—to the point that I thought he was going to turn me down on, but at the end the horse swerved in and jumped the fence. I am glad that he has agreed to put this into the mix. I am grateful to him and happy to withdraw the amendment for the time being.
Lord Sharkey
“Expiration of regulations
Any regulations made under section 1 expire after the period of four years beginning with exit day.”
Lord Sharkey
My Lords, given the debate so far I can be very brief. If the Bill proceeds as currently drafted, it will enable the Treasury to create a new set of laws and policies for our financial services industry, all via secondary legislation. These new laws and policies will not have been exposed to proper parliamentary scrutiny and will not have been amendable. This stands in extreme contrast to the careful, detailed and very lengthy scrutiny given to all previous changes in the laws and policies for our financial services industry—scrutiny which has frequently resulted in very significant amendments. This is an entirely unsatisfactory state of affairs, and I know we will come back to this on Report.
But if we are to have legal and policy changes introduced by SI, then we should at the very least have the opportunity to review them after the fact. That is what my amendment proposes. The Bill as it stands contains a sunset provision for the powers in Clause 1. My amendment proposes a sunset provision for the regulations created by the powers in Clause 1. The sunset provision for the powers extends for two years after we leave the EU. My amendment proposes that the new regulations expire two years after that.
This would have two effects. It would give time to assess how the new regulations were working in practice. It would also mean introducing primary legislation to reinstate and/or modify or add to new regulations. This would guarantee what we do not have in this Bill: a means of proper, full parliamentary scrutiny of new laws governing a critical part of our national and economic life. My amendment would restore to Parliament the ability to debate and amend these new laws in the proper context of primary legislation. I beg to move.
Baroness Kramer
I want to make one very quick comment to add to those of the noble Lord, Lord Sharkey. There is a real danger that the pattern within this Bill becomes a precedent, and that for future financial legislation we in effect see this process of Treasury decision enacted through statutory instrument. This sunset clause would make that impossible. It would make sure that this was, in effect, a one-off, and that there was a return to normal practice following the end of four years.
Lord Davies of Oldham
My Lords, it is time to be kind to Ministers when one gets to this end of the Bill. My advice to the Minister is to indicate what a logjam of SIs there would be four years on from the consequences of this strategy. I understand entirely, and sympathise very much with the intent behind the amendment, but if I were the Minister I think I would point out a few of the practical difficulties.
Lord Bates
There speaks the voice of experience. From his time speaking from this side of the Chamber, the noble Lord has perhaps pre-empted some of the concerns that we would have about this proposal, but let me put them on the record.
I am grateful to the noble Lord for giving us an opportunity to debate this important area. In implementing files under the Bill, it will be necessary to amend existing legislation to reflect updates to the regime. Should all powers under the Bill lapse at a stroke, without replacement, the legal effect on amended legislation would be unclear.
At a time when we should be seeking to provide industry with clarity and certainty, I am afraid that the amendment would have the unfortunate and unintended effect of providing just the opposite. Rather than minimising the cliff-edge risks, it would create a new series of cliff-edge challenges to be faced in the coming years. The potential for this legislation to lapse without replacement does not provide certainty to firms. Compliance with new regulatory regimes can be costly, and it would have a negative effect on firms’ confidence in the Government’s ability to set effective and proportionate regulation should we implement vital legislative reform only for it to drop away after a given period.
I appreciate the noble Lord’s concern that regulations made using this power will have a lasting effect on the structure of the UK’s financial services regulatory framework. This is why the power can apply only to a limited set of important files, which have been set out on the face of the Bill. In a no-deal scenario, implementing those files could be crucial to avoid conceding a competitive advantage to businesses operating in EU-based markets or to remain compliant with the Basel rules and meet our G20 commitment to international standards.
The noble Lord is clearly right, however, in pointing out that this cannot be a long-term model for a regulatory framework. Beyond this temporary solution, once we have left the EU in a no-deal scenario, the Government recognise the clear need for an approach that balances parliamentary oversight of financial services legislation with maintaining the flexibility and competitiveness of our regime. To that end, we will take forward proposals for a sustainable, long-term model in due course.
It is perhaps worth pointing out also that the Small Business, Enterprise and Employment Act 2015 requires the inclusion of a statutory review clause in secondary legislation that regulates business if the legislation continues to have effect five years after its entry into force. When taking forward SIs under the Bill, the Government will therefore be under a duty to make provision to undertake a post-implementation review after five years or to publish a statement that it is not appropriate in the circumstances to do so. In this light, I hope that the noble Lord will feel able to withdraw this amendment.
Lord Sharkey
In the light of the Minister’s very informative response, for which I am very grateful, I am delighted to be able to withdraw the amendment.
Lord Sharkey
“14A The European Commission’s proposal of 24 May 2018 for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment.14B The European Commission’s proposal of 24 May 2018 for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341.”
Lord Sharkey
My Lords, at Second Reading, I asked the Minister how the specified in-flight files contained in the Schedule were chosen. He replied:
“Those are the files that we believe will be the most important for market functioning and UK competitiveness in a no-deal scenario. Those in-flight files not listed on the face of the Bill include those that apply only to eurozone members, which we would never have implemented as a member state, those that the UK has opted out of, and those where there is not a critical need to implement the legislation in the narrow window of time covered in the Bill”.
I asked the question because I was curious about the Government’s thinking and because of the exclusion from the Schedule of two particular in-flight files.
Those files, which the amendment would add to the Schedule, were drawn to my attention by the UK Sustainable Investment and Finance Association. Both of them have their origin in the work of the European Commission’s high-level working group on sustainable finance and its January 2018 report on the matter. The UK was heavily involved in that. We had seven of the 20 members of the expert group; France had four and Germany had two. The files are the Commission’s proposal of 24 May 2018 for a regulation of the European Parliament and the Council on the establishment of a framework to facilitate sustainable investment and the Commission’s proposal of the same date for a regulation on disclosures relating to sustainable investments and sustainability risks.
Lord Davies of Oldham
My Lords, I, too, raised this issue at the conclusion of my speech at Second Reading. I quite understood, with the vast range of issues that the Minister had to respond to on that day, his feeling unable to go into great detail on this one. That is why I was delighted to sign up to the amendment put forward by the noble Lord, Lord Sharkey. The Minister has a real case to answer here, and I hope that we will have a constructive response.
Lord Bates
My Lords, I hope I can oblige the noble Lord, Lord Davies, with a constructive response to end Committee. I thank all noble Lords who have taken part. I understand that several Members have received representations from the sustainable finance industry. This amendment seeks to add to the Bill’s Schedule two EU files that complete the European Union sustainable finance package.
As I have mentioned already, the Government acknowledge that the power being sought in this Bill is broad. That is why it has been designed with a number of safeguards and limitations in place. One of these is for the power to be limited to a specified set of EU legislative proposals, named on the face of the Bill. In order to focus the power as narrowly as possible, the list of files in the Schedule to the Bill was determined through an assessment of the importance of files to the stability and competitiveness of the UK’s financial services sector. The noble Lord, Lord Sharkey, highlighted this as one of his concerns when moving his amendment. In short, these are the files that we believe will be the most important for market functioning and UK competitiveness in a no-deal scenario.
I will, of course, be very happy to meet the noble Lord, and the noble Lord, Lord Davies, on this issue. I think we are already going to be meeting quite a bit between now and next week. I have listened carefully to the arguments in favour of the merits of adding these files to the Schedule, and I undertake to reflect on the matter ahead of returning to it on Report. In the light of this, and of the discussions that will take place, I invite the noble Lord to consider withdrawing his amendment at this stage.
Lord Sharkey
My Lords, I am very grateful for the Minister’s answer and look forward to what may be several meetings between now and Report. As the last speaker tonight, I hope that the Committee will allow me to make a very quick, general observation. As I listened to the debates today, it seemed to me that there was a real, structural problem with the Bill. It sets out to do two things: first, to onshore approved, but not applied, EU legislation; and, secondly, to make possible the onshoring of specified in-flight legislation. The problems we are discussing tonight are largely because we are trying to do both of those things using the same mechanism. That is going to be very difficult.
It might be better to consider simply applying the strict rules of Section 8 of the European Union (Withdrawal) Act—or Amendment 7—to all those approved, but not applied, pieces of legislation listed in Clause 1(2)(a) and (b); and, separately, to require primary legislation to deal with the in-flight legislation coming our way, as suggested by the noble Lord, Lord Adonis.
I thank the Minister again for his observations on Amendment 18 and beg leave to withdraw.
Financial Services (Implementation of Legislation) Bill [HL]
Tuesday 29th January 2019
(5 years, 9 months ago)
Lords ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 143-R-I Marshalled list for Report (PDF) - (25 Jan 2019)
Lord Bates
“(1A) In subsection (1)(b) “adjustments”—(a) in relation to legislation mentioned in subsection (2)(a), (b), (c), (d) or (f), means provision to mitigate or remedy deficiencies in the legislation arising from the withdrawal of the United Kingdom from the EU, and(b) in relation to legislation mentioned in subsection (2)(e) or (g), means changes to reflect, or facilitate the transition to, the United Kingdom’s new position outside the EU, but does not include changes that result in provision whose effect is different in a major way from that of the legislation.”
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I thank all noble Lords for their engagement in this Bill not just in Committee on 8 January, when we had an excellent session looking at the Bill to see how it could be strengthened, but also when we followed that up in various interactions with Peers in the gap after that. There was a meeting on 22 January in which we shared some of the ideas at that point, and that conversation has continued. I place on record our gratitude particularly to the noble Lords, Lord Davies and Lord Tunnicliffe, but also to the noble Lord, Lord Sharkey, the noble Baronesses, Lady Bowles and Lady Kramer, and to my noble friends Lord Hodgson and Lord Leigh for their interaction. I also thank the noble and learned Lord, Lord Judge, for his impromptu legal advice in Committee.
Amendment 1 has been grouped with an amendment in the name of the noble Lord, Lord Davies, and the convention is that I cannot pre-empt what he will say. I will listen to him very carefully, and will simply move my amendment at this stage and address the concerns and issues raised in the noble Lord’s amendment at the end.
Amendment 1 is designed to perform two functions. The first change, as set out in the proposed new subsection (1A)(a), is in response to a recommendation by the Delegated Powers and Regulatory Reform Committee—I again place on record my thanks and appreciation to it for its scrutiny, published in the 42nd report of that committee, under the chairmanship of my noble friend Lord Blencathra. In its report, the committee noted that, for those files listed in the Schedule which are still in negotiation, the justification for the power to adjust is that it is not now possible to know what the final form of that legislation will be. However, the DPRRC noted that the same justification could not be used for files already agreed, and it recommended that the power to adjust be limited only to the files in the Schedule to the Bill. I can now say that the Government are able to implement the DPRRC’s recommendation. These files have been settled while the UK has been an EU member and has been around the negotiating table at all stages with a full voice. We accept the principle that this is settled law that has received UK sign-off and that, as such, an ability to fix deficiencies is more appropriate than one to make policy adjustments.
The proposed new subsection (1A)(a) therefore ensures that, for the first category, the Treasury will have no ability to make policy adjustments when these files are domesticated. These files are: the prospectus regulation; articles 6 and 7 of the central securities depositories regulation; article 4(1) of the securities financing transactions regulation; and articles 37 and 38(2) of the markets in financial instruments regulation. Instead, the Treasury will only be able to fix deficiencies in the manner of the current onshoring process under the established terms set out in the EU withdrawal Act.
Lord Davies of Oldham
Lord Davies of Oldham (Lab)
My Lords, the Minister is to be congratulated on the way in which he has handled this Bill. In Committee, we raised several significant issues and pressed him to consider our arguments carefully. He has certainly done that and has brought back to the House Amendment 1, a position with which we are in agreement.
We are mindful of the background that all these efforts are being conducted against. This very afternoon, the House of Commons is struggling to achieve a position, and the Prime Minister hopes to achieve a position in which this Bill will be utterly redundant because we will have left the European Community with an agreement. But it is obviously right that, in an area of such importance to our economy as the services industry, we have legislation in place that takes account of the extremely serious situation that would arise if we left the European Community without a deal.
The Bill would, however, play its part in fulfilling the regulatory machinery necessary for the services industry, but without doubt additional work would have to be done at that stage. Given that we have done a great deal to help create European law in this area, it would be remiss if we left the services industry without effective regulation and less equipped than it was while we were part of the European Union, if in fact we leave without a deal.
As he would expect, I join the Minister in paying tribute to my noble friend Lord Tunnicliffe, who has played a significant part in examining the Bill and producing insights into what could be done, upon which the Minister has been able to build quite successfully. I also pay tribute the noble Lord, Lord Sharkey. He has stayed involved with the Bill and has offered the best possible advice on a number of occasions. His persistence and insights on these issues have been invaluable, together with those of the noble Baronesses, Lady Kramer and Lady Bowles, both of whom have played a significant part in these discussions.
We are grateful to the Minister for the way he has handled this Bill. He appreciated the anxieties that we articulated as best we could both at Second Reading and in Committee. He has met the most crucial point of all: that the Government were initially seeking powers for the Treasury that could not be justified. Subsequently, the Delegated Powers and Regulatory Reform Committee came to share that position, as it made fairly clear in a detailed submission to the House. That obviously informed our contribution to the debate. However, the Minister has gone a considerable way to allaying the anxieties that we have expressed about the Bill and I am therefore very much in favour of his amendment.
I turn to Amendment 2, to which I am meant primarily to speak. I have only a short comment because there is not a great deal at issue. It again gives me the opportunity to appreciate the efforts of the Minister. We had a useful meeting with him that ironed out all but the narrowest of differences. There is not much in the difference between “significant” and “major” but I am strengthened by some help from the other place. Apparently, in her speech to the House of Commons this afternoon, the Prime Minister said that she would return to Brussels to seek a significant change to the Brexit withdrawal agreement. She did not use the word “major” but “significant”, a word that we are seeking to enjoin the Minister to appreciate. However, I will not press that rather minute point.
Lord Sharkey (LD)
My Lords, we welcome all the government amendments to the Bill. We particularly welcome Amendment 1, which greatly improves the Bill’s structure and clarity. As we pointed out in Committee, it was not helpful to try to deal with two different categories of legislation via one mechanism. Amendment 1 puts that right.
Proposed new subsection (lA)(a) deals with settled EU legislation now in force in the same way in which Section 8 of the European Union (Withdrawal) Act does and narrowly restricts the adjustments that can be made. Proposed new subsection (lA)(b) deals with legislation not yet in force in the EU but under current discussion—legislation that is in flight. Here the adjustments are less constrained. I note the Minister’s comment that the legislation contained in subsection l(2)(e) dealing with the prospectus regulation may come into force before Third Reading and could therefore be moved at that stage into the proposed new subsection (lA)(a), leaving only the in-flight legislation in the schedule to be covered by proposed new subsection (lA)(b).
In their amendment, the Government have significantly tightened the meaning of the previously rather controversial word “adjustments”, as it applies to the in-flight legislation in the schedule. Their amendment sets down what in this context adjustments may and may not do. When it comes to what adjustments may do, the new wording has it right. The changes are,
“to reflect, or facilitate the transition to, the United Kingdom’s new position outside the EU”.
I think this is close enough to the restrictions in Section 8 of the European Union (Withdrawal) Act. When it comes to what adjustments may not do, the new text states that they may,
“not include changes that result in a provision whose effect is different in a major way from that of the legislation”.
I am pleased that this is a much tighter restriction than that contained in the original text but I have some concerns about the use of “major”, which is why I have added my name to the amendment in the name of the noble Lord, Lord Davies, which proposes the word significant in place of major. In the ordinary use of those words, “significant” imposes more constraint than does “major”. It seems to be entirely possible for some difference in effect to be significant without in itself being major. An OED definition of “significant” is:
“Sufficiently great or important to be worthy of attention; noteworthy”,
and seems to support this view. Unfortunately the OED also defines “major” as “important, serious or significant”.
The real issue is how the word “major” will be interpreted in practice by the Treasury, and probing that is the purpose of Amendment 2. What will it mean when applied in this context? In particular, what tests will the Treasury apply to the differences contemplated in proposed new Section (1A)(b) of the Government’s amendment to determine whether they are major? I would be very grateful if the Minister could set out explicitly what those tests will be.
Lord Hodgson of Astley Abbotts (Con)
I shall speak briefly in support of the Government and the clause as drafted, primarily because of the points just made by the noble Lord, Lord Sharkey. When I went to the Oxford English Dictionary to check, I got the results he has just described, but it seems to me that the Government’s choice of word is better than the one now being advanced by the noble Lords, Lord Sharkey and Lord Davies. I urge my noble friend to be of good courage and stick with it.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the Minister for a good set of amendments that respond across the piece to concerns that were raised in Committee. I shall probe a little further on what can and cannot be done for the purpose of clarification.
Clause 1(1) states that this is about converting,
“the provisions, or any of the provisions, of any specified EU financial services legislation”.
So the option is still there not to convert it or to convert only parts of it. At an earlier stage, I suggested that that could be adapted. I noticed that when the Minister spoke, he used the word “files” as if the files were all transposed at once, but we must recognise that some things may not be transposed. I believe that is the intention. Here, I should give my usual reminder to the House of my interests as set out in the register, in particular as a director of the London Stock Exchange. In the first set of EU legislation—that which is completed but not yet active—you could still omit some or all of it and do an EU-type adaptation, but you could not adapt it if you chose to convert it. It has got to be relatively straightforward.
For the not yet completed, there is greater flexibility. I have a few little tests of my own to see whether this would be allowed. First, what if you wanted to keep a current provision instead of having a new one? That is quite simple: you probably just leave it out and do not convert it, which falls within what is allowed. If you want to reflect more closely an international standard—let us say that the EU has embellished it in some way—could you do that? I think you probably could because you are still going back to the originating international standard, but it would be interesting to hear what the Minister has to say about that. What if you want to reflect more closely UK market data because it has been calibrated on EU data, by then absent us? I expect most of that happens in technical standards, but it would be interesting to have the Minister’s view on whether the Government could make such a change. I think it would be allowable.
What about aligning with alternative provisions made in other major international markets? That would be departing from alignment with the EU into alignment with somewhere else. Let us say that you wanted to align tick sizes with Hong Kong or the US, rather than staying with the EU regime. Would that be allowed? I think that is quite a marginal issue. The Minister does not have to use that particular example, but it would be interesting to know where that would lie in the tests. If you want to avoid disrupting the functioning of UK markets—the sort of comment you often hear—you are probably left with the option of not converting that element.
My final test is, what happens about proportionality for SMEs and SME markets? I am not sure how that would work out: if the legislation has not included proportionality, is it reasonable and within scope to put some proportionality in? That measure is probably relatively popular from a UK perspective, so it would be nice to know whether that could be covered.
Lord Leigh of Hurley (Con)
My Lords, I too refer to my declaration of interest in the Members’ register, which has not changed since I last spoke. Despite my interest, I confess that I had some difficulty understanding all of subsection (1A)(b) of the proposed new section. The noble Lord, Lord Sharkey, read out the easy bit. The difficult bit is the words,
“but does not include changes that result in provision whose effect is different in a major way from that of the legislation”.
I think I understand the intent, but I am not sure that the words are exactly as another draftsman might have chosen to put it.
I am today looking for an assurance from the Minister that the adjustments he proposes will allow the Government the flexibility needed: in particular, if there is a restriction on changes that might be significant or major, that these will not bite where change really is needed if we leave the EU with no deal. As the noble Lord, Lord Davies of Oldham, has said, this legislation will come into play only if we have left without a deal—which nobody in this House seeks as a primary option—and in those unfortunate circumstances, we might need to be as flexible as possible.
By way of example, in respect of article 2(e) of the prospectus regulation, the alleviations granted by the EU were a compromise designed to suit all member states’ markets, all of which are very much smaller than the UK’s. The Government should adjust these to make them proportionate to the scale of the relevant UK markets. For example, the threshold below which public offers—an area I am particularly interested in—are exempt from the requirement to publish a prospectus, which is a huge cost, has been set at €8 million. By the way, initially it was agreed to be €2 million, then it went up to €5 million without any issues and then it became €8 million. For the UK market alone, a more appropriate level might be, say, £20 million.
The noble Baroness, Lady Bowles, referred to the definition of SME growth markets, which is a very important term. The definition was of course a compromise designed to suit all member states’ markets, and to avoid in some instances classifying members’ entire national stock market as an SME growth market, which would be a bit unfortunate. Perhaps the Government want to adjust this to make it proportionate to the scale of the relevant UK markets, possibly increasing the maximum market capitalisation from €200 million to £500 million.
Outside of article 2(e), I have mentioned at earlier stages of the Bill some issues relating to CSDR settlement discipline which are perhaps inappropriate and, in some cases, highly damaging to the unique, quote-driven liquidity provision of the UK’s SME market. I hope that I have satisfied the noble Baroness, Lady Kramer, that short selling in those markets is not damaging or dangerous to the UK economy. This would not apply to EU-based dealers, thus putting UK market makers at a competitive disadvantage because it would apply to them.
I hope the Minister can assure me that the Government will retain the power to have the flexibility needed to allow the UK to set its own rules for our financial services market, which is very different from the EU’s. I appreciate that this provision applies only in respect of in-flight rules but it sets the tone, and hereon in we will want to create our own bespoke laws, which may well diverge from the EU’s but will be more appropriate for our market. Rather than just hanging around hoping for some small alleviations in the circumstances of a no-deal Brexit, we really will need to act in a way that suits us in these areas.
Baroness Kramer (LD)
My Lords, I am very grateful not to be the Minister, who has to respond to my noble friend Lady Bowles and the noble Lord, Lord Leigh. I can see that it is a challenge and I hope that if I talk for a few minutes, it will give the Box a little more time to get notes to him.
I think that the House knows that my underlying question has always been how we draw the line so that we know when it is appropriate for change to be carried through by an SI and when it should come to this House as primary legislation, particularly in this field. What happened in the weeks and months immediately following a no-deal exit would shape whether we were in a position to maintain access to the EU market for our most significant industry—the services sector—and indeed for the economy as a whole. I think that in the changes he has made the Minister has got us to a better place and to a much clearer understanding of the Government’s intent. If he wanted to split the difference, he could say “major or significant” and deal with the problems all in one go.
I want to say how much I appreciate the listening that the Minister did and how much we appreciate the listening, thought and effort that his officials put into responding to the queries and issues that we raised. It gives me the feeling that we in this House, including the Government, are all essentially on the same page in understanding the significance of the period that would follow no deal and how carefully and sensibly we would have to approach regulation in the financial services area because of the potential knock-on impacts and unintended consequences, which could be extraordinarily severe.
With that sense that the Minister understands when an issue should be brought to the House because it is a fundamental change of policy and critical to an underlying key sector of the economy, and when it is an issue that can rightly be dealt with under a statutory instrument, I can say that I am very happy with the changes that have been offered and, again, I thank the Minister for them.
Lord Bates
I thank noble Lords for their contributions. I particularly thank the noble Lord, Lord Davies, for moving his amendment and giving us the opportunity to comment. I very much concur with the noble Baroness, Lady Kramer, about how the officials have engaged in this process. I do not know whether it is appropriate to refer to them on the Floor of the House but I will do so anyway. I think that they too found it a very useful interaction. This Bill is beginning its journey through the legislative process in your Lordships’ House, and the ability to shape and craft it so that it will have been improved by the time it leaves this House will make the job of the other place, which has quite a lot on its plate at the moment, a little easier.
I also agree with the tribute paid by the noble Lord, Lord Davies, for the work being done by officials and, indeed, by UK Members of the European Parliament and the industry on shaping EU financial regulation over the years to make it effective and proportionate.
I believe that the intent behind the noble Lord’s amendment and behind the noble Lord, Lord Sharkey, putting his name to it was to give the Government an opportunity to put further flesh on the bones of what is meant by “major” and “significant”. They will become the new version of “corresponding” and “similar”, which we discussed in Committee. I do not want to hark back to that debate; instead, I shall focus on these key words. I will put some remarks on the record and then turn to the point made by my noble friend Lord Leigh.
It is clearly important that we find a way of limiting this power appropriately, and I am very grateful for the proposal in Amendment 2, moved by the noble Lord, Lord Davies. However, the noble Lord’s amendment could have the unfortunate and unintentional effect of rendering the power and therefore much of the Bill almost unworkable. The reason the Government settled on the term “major” rather than “significant” in drafting this amendment was the greater clarity provided by the term “major”.
Lord Davies of Oldham
My Lords, the Minister’s reply puts me a little on trust in that, until I read Hansard tomorrow, I am not too sure I will be able to follow the detail with sufficient accuracy. I was somewhat appalled as I was thrust back to my old tutorial days as a rather vulgar split infinitive came right in the middle of one of the denser parts of the Minister’s text. But I know that he has set out to meet the challenges that we have put in our questions to him, so I will more than give him the benefit of the doubt—I beg leave to withdraw my amendment.
Lord Bates
(a) ”
Lord Bates
My Lords, I again thank noble Lords for their contributions and in particular my noble friend Lord Hodgson. Our debate on the previous grouping focused on what limitations would apply to the power under this Bill. This grouping looks at the complementary subject of reporting to ensure that the Government are as transparent as possible in the exercise of the power. The Bill, as introduced, placed a duty on the Government to publish a report annually on their exercise of the power. It was clear in Committee, however, that there was some room for improvement. I am again grateful and indebted to noble Lords from across the House for their work in Committee and in the period between Committee and Report.
I turn to Amendments 3, 4 and 5. The noble Baroness, Lady Bowles, proposed that, where adjustments or omissions are needed when implementing the files, the Government should publish a report beforehand setting this out in detail to make sure that Parliament has sight of this, and can consider the merits of the proposals. Given the exceptional nature of the Bill and the powers being sought, it can only be right that the Government are clear with Parliament and the industry about how they intend to implement these files. The Government therefore propose introducing a new requirement, as set out in Amendments 3 and 4. These would ensure that, before laying any statutory instruments before Parliament under the affirmative procedure, the Government must first publish a document detailing the proposed text of the regulation with an accompanying report. The report would have to outline what, if anything, has been omitted from the original EU legislation, where there had been any adjustments to the original EU legislation, and provide justification for these adjustments.
As I noted in Committee, the three-month requirement could risk being too long. The essence of this Bill is the speed with which it will allow the UK to keep its regulation up to date and responsive to the uncertainty of a no-deal scenario. The amendment therefore proposes a one-month deadline. However, the Government will of course commit to publishing these documents earlier where possible.
On Amendment 5, in Committee my noble friend Lord Hodgson suggested a more regular reporting cycle than the yearly proposal in the Bill as introduced, and that these reports should set out the Government’s reasoning for why any adjustments might have been necessary. I again reassure noble Lords that it was always the Government’s intention to set out such a justification. This underpins the spirit behind the proposed new subsections (8) and (9) in Amendment 5. This requires the introduction of a more regular requirement for the Treasury to report—now every six months. It requires the Government to specify both how the power has been exercised over the previous six-month period and how they intend to exercise it over the coming six-month period.
This change has the further benefit of clearing up an inconsistency helpfully highlighted by the Delegated Powers and Regulatory Reform Committee in its 42nd report. Previously, the reporting deadlines were set out on calendar dates, whereas the power was to be commenced with reference to “exit day” as defined in the European Union (Withdrawal) Act. This amendment now tidies up the drafting to ensure that the reporting periods are set with reference to the commencement of the power itself. I again convey my thanks to the Delegated Powers and Regulatory Reform Committee.
Finally, proposed new subsection (9A) in Amendment 5 responds to the suggestion from the noble Lord, Lord Adonis, and the noble Baroness, Lady Bowles, in Committee. Here we propose to introduce the same requirement for the financial regulators—the Bank of England and the Financial Conduct Authority—to report on their exercise of any powers sub-delegated to them through the Bill. This follows the model established in the EU withdrawal Act. We agree that it is right that, as they will be implementing much of the legislation contained in this Bill, Parliament and the public should be kept informed of how their functions are being discharged.
I hope these amendments demonstrate the extent to which we believe it is vital that Parliament can properly assess and consider legislation taken forward under the Bill. These amendments on reporting, alongside clearer limitations of the power itself, substantially improve the safeguards that apply to the Bill. I hope these will provide the reassurances that I know the Committee sought.
Baroness Bowles of Berkhamsted
My Lords, I thank the Minister for listening to everything said in Committee. There really is little else to say other than that he has taken on board three of my amendments. I am very pleased to see them there. I accept that he has cut down the timescale in the pre-legislative report, if I can call it that, to one month from three months because it might be necessary to do things more rapidly.
If I can pick out a theme from the several speeches I made before, it is that Parliament should not be surprised by what the Government intend to do and do. This suite of amendments, including the more frequent reporting suggested by the noble Lord, Lord Hodgson, makes it very clear: we are told before and afterwards. In fact, we might be told before twice by the two reports—the generic one, if I might put it that way, and the precise one. We will also know where things are so that the diligent individual, possibly when dealing with things in the Moses Room in Grand Committee, will not have to search around wondering where things have or have not gone.
I thank the Minister. He has served me and us very well in this.
Lord Hodgson of Astley Abbotts
My Lords, I add my thanks to my noble friend and his officials for Amendment 5, which in large measure answers the points I tried to raise in Committee. I am extremely grateful to him and to the Government.
An epochal event such as Brexit will obviously require a certain degree of statutory flexibility. That is why I support the principle of the Bill, but that does not mean that the powers under it should be exercised below the radar. I am therefore extremely grateful to my noble friend for having set the reporting periods, when he made it clear that it is not just a question of reporting: it is a question of why it is being used, as well as that it has been used. That is important to maintain confidence.
Baroness Kramer
My Lords, with that provocation I say to the noble Lord, Lord Hodgson, that perhaps we should look at the quality of enforcement. I would far rather that we had too many warning signs, but captured a large part of the wrongdoing, than missed major wrongdoing because there were so many options where people could avoid early warning signs. I suspect we have an enforcement problem, and often in this House we have heard that echoed. It sits entirely outside what we are dealing with today. For goodness’ sake, let us be very wary of the seductive argument that where we fail to enforce we should not even investigate.
Lord Tunnicliffe (Lab)
My Lords, I support Amendments 3, 4 and 5. They are the product of ideas from all parts of the House: from the noble Lord, Lord Hodgson, and particularly from Lib Dem Members. Amendment 4 strikes me as a very important innovation. Other parts of the Administration may want to ponder what should be done here, because while it will all be down to the Government how they use it, it creates a mechanism by which we get will close to being able to amend an SI. Clearly, no great measures are going to fall because we have no great power to influence them and we all know that we are not going to vote on such SIs.
However, to be able to discuss an SI with the Government—obviously not on the Floor of the House but perhaps by approaching Ministers on particular issues—before it is laid would be an important step forward. Proposed new paragraph (b)(ii) and (iii), inserted by Amendment 4, is also important for making how such an SI is generated much more structured. I hope this will give real transparency to SIs, which can at times be very complex. I end by thanking the Minister for his efforts on the Bill and almost by celebrating, for want of a better term, the extent to which we have been able to come to consensus.
Lord Bates
I thank the noble Lord, Lord Tunnicliffe, for his last intervention. In effect, I think he was saying that in the way we have been working together we have perhaps somehow pioneered a new way of approaching financial secondary legislation. I am pleased that he feels that.
I am grateful to my noble friend Lord Hodgson for his support for the amendments. He was tempting the noble Baroness, Lady Kramer, to rehearse the vigorous and full debate which took place in Committee on these provisions. Perhaps I may step out of the middle simply to reiterate that the Bill is not the Government’s proposed long-term solution for all financial services legislation. The Government will take forward their proposals for a sustainable, long-term model in due course, when there will be lots of opportunities to discuss the important issues which have been raised.
Lord Bates
(b) that draft was laid more than 1 month after the Treasury published a document (which may be one published before the passing of this Act)—(i) setting out what is proposed (subject to any revisions prior to laying for approval) as the text of the regulations,(ii) detailing which provisions (if any) of the particular EU Directive, or EU Regulation, would not be covered by the regulations, and(iii) detailing any adjustments that would be made by the regulations in reliance on subsection (1)(b) and giving the reasons for considering those adjustments appropriate.”
“(8) For the purposes of subsection (9)—(a) there are 4 reporting periods,(b) the first begins with the passing of this Act and ends 6 months after exit day, and(c) each subsequent reporting period is the 6 months beginning with the end of the previous reporting period.(9) No later than 1 month after the end of each reporting period, the Treasury must prepare and publish a report—(a) on the exercise of their powers under subsection (1), or by virtue of subsection (4), in the reporting period,(b) on their proposals for exercise of the powers in any future reporting periods, and(c) tabulating, in relation to regulations made under subsection (1) in the reporting period— (i) the provisions of specified EU financial services legislation to which the regulations relate, and(ii) any adjustments made by the regulations in reliance on subsection (1)(b) and the reasons for considering those adjustments appropriate.(9A) Paragraph 32 of Schedule 7 to the European Union (Withdrawal) Act 2018 (annual reports on exercise of sub-delegated powers) applies also in relation to exercise of any rule-making power given to the Bank of England, or the Prudential Regulation Authority or the Financial Conduct Authority, by regulations under this section.”
Lord Bates
“14A The European Commission’s proposal of 24 May 2018 for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment.14B The European Commission’s proposal of 24 May 2018 for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341.”
Lord Bates
My Lords, I again thank noble Lords for their contributions. The noble Lord, Lord Sharkey, made a contribution in Committee in which he expressed concern about the omission of some files from the Schedule and Clause 1. At Second Reading and in Committee the omission of two sustainable finance files, which complete the EU’s sustainable finance package, was raised. I am pleased to confirm to the noble Lord and the House in general, and to the sustainable finance industry, that the Government are happy to add these two files to the Schedule via this amendment. I thank him for pointing that out and I beg to move.
Financial Services (Implementation of Legislation) Bill [HL]
Wednesday 6th February 2019
(5 years, 9 months ago)
Lords ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 143-R-I Marshalled list for Report (PDF) - (25 Jan 2019)
Lord Sharkey (LD)
My Lords, very briefly, I should like to ask the Minister a question to do with the in-flight EU prospectus regulation, which has passed all its legislative stages but has not yet been gazetted, as I understand it, and so cannot be treated as settled legislation and is therefore treated in the Bill under the amendment provisions in Clause 1(2)(b). If the legislation is gazetted while the Bill is in the Commons, do the Government intend to move it into the category of settled legislation, governed by Clause 1(2)(a)? What happens if the legislation is gazetted after the Bill has left the Commons but before 29 March? How will the Government make sure that the power to make adjustments is not applied to the now settled piece of legislation?
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, that is a good question. We had hoped that it would be gazetted before then, in which case we could then have made the amendment that we talked about. I was grateful for the noble Lord’s suggestion on that. I cannot say that we have had an explicit conversation about this aspect, but it is going to arrive. Providing that it passes your Lordships’ House, it will be heard in the Commons I think on Monday next week. The same principle would apply—that if it is gazetted we will put it in there. That was certainly the spirit of what we agreed. I will make absolutely sure that the Economic Secretary and the Financial Secretary, who are dealing with this in the other place, are apprised of the commitment that I gave and which we will seek to honour.
Lord Davies of Oldham (Lab)
My Lords, I am grateful for that answer, which shows that the Government are on top of the issue—against a background where we must all recognise that time is somewhat short with regard to this legislation. The SI relates to a service industry that is a crucial part of our economy. We could not afford any situation in which a gap occurred; I am sure that the Minister is seized of that fact.
We are all aware of the fact that there are not many days left to the point where we are due to leave the European Community, yet there is still a very large number of SIs to be considered. Slips such as this, which are minor, can be remedied reasonably quickly by appropriate action, as the Minister indicated. But slips such as this could be costly if we are right up against the wire with regard to the legislation we are seeking to pass. We must all be conscious of the fact that the Government’s programme between now and the end of March is pretty demanding, to put it mildly. So, although I accept entirely what the Minister said and am reassured by the promptness of the Government’s response, this is an indication that there is many a slip between cup and lip, and the Government do not have much time for a monumental programme.
Lord Adonis (Lab)
My Lords, when the Minister spoke on 4 December at Second Reading, he said that the Bill was part of a package of measures and statutory instruments to ensure that the financial services industry would be covered in the event of no deal. He said specifically:
“That stability and continuity is being delivered by the 60 or so statutory instruments that Her Majesty’s Treasury is introducing under the European Union (Withdrawal) Act 2018”.—[Official Report, 4/12/18; col. 934.]
Will the Minister tell us how many of those 60 or so statutory instruments have been laid before Parliament, and would he be in a position to write to me to tell me what the timetable is for laying those that have not yet been laid before Parliament before 29 March?
Lord Foulkes of Cumnock (Lab Co-op)
My Lords, before the Minister answers those questions, may I ask one of my own in relation to the report of the Delegated Powers and Regulatory Reform Committee? Will the Minister tell the House whether and how the recommendations in paragraphs 8, 16 and 19 of that report have been dealt with?
Baroness Kingsmill (Lab)
My Lords, before the Minister responds, will he give me some assurances about how these regulations and this legislation, when it becomes legislation, are going to have any particular impact on online financial institutions? I think that they are the ones where the future is going to lie. I declare an interest as a former chairman of Monzo, an online bank. It is important that the Minister gives some reassurance about the particular impact that this could have on a completely different form of financial institution.
Lord Bates
I thank the noble Lord, Lord Davies, for his comments. As he has set out, the schedule that we are up against here is pretty demanding. All of us on the Front Benches are in solidarity in recognising the demands of the work going on. It is also demanding on some of the committees of your Lordships’ House, which are having to do an incredible amount of work. I am thinking of the Secondary Legislation Scrutiny Committee and its sub-committees, under my noble friend Lord Trefgarne and the noble Lord, Lord Cunningham of Felling, which is doing a tremendous amount of work.
The noble Lord, Lord Adonis, asked about the progress being made. We have agreed that we will provide regular updates. We have approximately 60 pieces of secondary legislation that need to come through. Around 45 are subject to the affirmative procedure and, of those, 22 or 23 have made their journey through the House, with some benefiting from the scrutiny of the noble Lord himself. That is basically where we are: about half way. We have some 31 sitting days before Brexit, so it is a pressurised and demanding situation.
I turn to the point made by the noble Lord, Lord Foulkes, about the Delegated Powers and Regulatory Reform Committee. I thank that committee in particular because it has done an excellent piece of work. In fact, we almost took the committee’s script to express concerns about the extent of the Henry VIII powers, some of the wording and some of the files that were in flight and which we have just been talking about. I am pretty sure we have addressed all those concerns. If that is not the case, I will write, but from recollection we wanted to address all the points.
The noble Baroness raised the online community. Of course a number of pieces of legislation relate to online financial regulation. I cannot be specific about which ones are relevant but it is a crucial point. We have had many long discussions in Grand Committee in the Moses Room about statutory instruments that have a strong online financial services element to them and make a significant contribution to the success of UK financial services. We want that to continue once we leave the European Union.
Lord Tunnicliffe (Lab)
My Lords, perhaps I may say a word or two to put this discussion into perspective. This side hates the idea of a no-deal exit and so on, but the Bill is an outstanding example of co-operation by the Government. The Bill has changed massively from the one introduced at Second Reading. The Government facilitated discussions with the Minister and officials. It is now a much better Bill and, given its task, which we abhor, it is nevertheless a good Bill.
Baroness Bowles of Berkhamsted (LD)
My Lords, I remind the House of my interests as set out in the register. I also express my thanks to the Minister and his officials, along with other noble Lords who tabled amendments. We have a more than satisfactory outcome. We now have much greater transparency, some new procedures under which the Government will report on what is going to happen and tables to show us where things have gone. I hope this will perhaps lay the ground for how some other things, in what may be more fortunate circumstances than Brexit, could continue in the future. On behalf of these Benches, I thank the noble Lord and the officials.
Lord Foulkes of Cumnock
I will ask a supplementary question to follow up the excellent contribution of my noble friend Lord Tunnicliffe about perspective and co-operation. The Bill, with the excellent co-operation of the opposition parties, has taken a number of weeks to get through this House, as the Minister knows. We are now dealing with the Trade Bill, the Healthcare (International Arrangements) Bill, the Agriculture Bill, the Fisheries Bill, the immigration Bill and the withdrawal Bill. Could the Minister, for whom I have great respect because he has a lot of experience here and in the other place—perhaps he has more wisdom than the previous people of whom I have asked this question—give me some indication of how these Bills, of which there are at least six, can be dealt with between now and 29 March?
Lord Bates
The noble Lord knows, having stood where I stand, that the Motion before the House is that this Bill do now pass. To be frank, most of us on the Front Bench are taking it one Bill and one SI at a time, so I will sidestep that question. I am sure my noble friend Lord Young, who has provided excellent assistance throughout on this, and is a member of the Government Whips’ Office, will have heard the remarks. I also thank the noble Baroness, Lady Bowles—
Lord Foulkes of Cumnock
That is really helpful. Is the Minister now saying that the noble Lord, Lord Young, for whom I have equally great respect, will answer that question?
Lord Bates
If my noble friend Lord Young were so inclined, he would probably want to give me a kick from the side and suggest that I keep moving on.
I turn to the point made by the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Bowles, because it was a good one: there is a great deal of expertise in this House, which could be brought to bear. We even had some free legal advice from the noble and learned Lord, Lord Judge, to help us on our way. When we work constructively and recognise that the Government have a right to make progress with legislation, we can do some good work. Certainly, we can ensure that this legislation leaves your Lordships’ House much more fit for purpose and in better shape as it moves to the other place. That will, we hope, assist in expediting it through its procedures. I beg to move that the Bill do now pass.
Financial Services (Implementation of Legislation) Bill [Lords]
Monday 11th February 2019
(5 years, 9 months ago)
Commons ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 143-R-I Marshalled list for Report (PDF) - (25 Jan 2019)
19:19 - The House divided: - Ayes: 293 / Noes: 248 - Question accordingly agreed to.
The Financial Secretary to the Treasury (Mel Stride)
I beg to move, That the Bill be now read a Second time.
I should begin by paying tribute to my noble Friend Lord Bates for piloting the Bill through the other place so successfully. I am sure that the House will recognise the importance of supporting our financial services industry no matter what the outcome of negotiations on leaving the European Union. The UK’s position as a world-leading financial centre is critical to our prosperity. In 2017, the financial sector contributed £131 billion to the UK economy. It employs over 1 million people across the country, two thirds of whom are outside London, including in the thriving financial centres of Edinburgh, Belfast, Manchester and Cardiff. UK exports of financial services were worth over £77 billion in 2017, which highlights the importance of the sector on the global stage.
Mary Creagh (Wakefield) (Lab)
I am sure it was an oversight, but in his list of UK financial services centres the Financial Secretary neglected to mention the Yorkshire centres of Leeds and Halifax—of course where the Halifax bank was born—and the many building societies that remain in our area.
Mel Stride
I thank the hon. Lady for that very appropriate intervention. She is quite right to mention the local presence of financial services across the United Kingdom.
My right hon. Friend the Chancellor of the Exchequer has already set out the Government’s long-term vision for the future success of the UK’s financial sector, based on world-leading positions in the markets of the future, whether in green finance or in FinTech, and we are pursuing an ambitious global financial partnership strategy to cement our trading relationships with key partners.
However, we also need to ensure that we have appropriate regulations in place, with the right balance between protecting stability and fostering competitiveness. We aim to be the safest and most transparent place to do business, leading the race to the top and always championing high regulatory standards in financial services markets. The Bill will ensure that, in a no-deal scenario, the UK’s regulatory landscape will not fall behind its international counterparts.
The Government have been clear that we do not want a no-deal scenario, but it remains the role of a responsible Government to continue to prepare for all possible outcomes. That includes the event that we reach 29 March without a deal. In those circumstances, we will have brought on to our statute book the vast body of EU legislation that needs to be operative at the point of exit. However, the powers under the European Union (Withdrawal) Act 2018 relate only to legislation operative immediately before exit day. A number of pieces of EU legislation will not be covered by the powers conferred under the withdrawal Act. They include proposals that are either already agreed but which have not yet been implemented, or those that are soon to be agreed beyond our exit from the European Union.
Mary Creagh
The Minister talks about the in-flight legislation and the proposals as they appeared in the other place. When they first appeared in the other place, they were missing a couple of bits relating to the taxonomy of environmentally sustainable activities that would allow companies to green-check their revenue streams, and to new disclosure requirements for asset owners such as pensions schemes, which is of great concern to the Environmental Audit Committee. Can he explain why those two proposals were left off the list? The Bill has now been amended in the other place, but why were they originally missing?
Mel Stride
I think this is an example of Parliament carrying out its process and legislation being improved as a consequence. The most important point is where we have ended up. Having listened to the arguments put forward in the other place, the Government chose to embrace the amendments that brought those two particular files into the scope of the Bill.
The Bill provides a mechanism through which the UK will be able to implement in-flight financial services legislation. They fall into two categories. The first category of files relates to those that have been agreed while we have been a member of the European Union, but will not apply or be in force prior to the UK’s exit from the EU on 29 March. In a no deal and in the absence of the Bill, there would be no effective way to implement those files in a timely manner, as each would require primary legislation. The Bill allows the Government to domesticate each of these files in whole or in part via an affirmative statutory instrument. It further provides a power to fix deficiencies within them.
Robert Neill (Bromley and Chislehurst) (Con)
Will my right hon. Friend give way?
Mel Stride
I will give way first to my hon. Friend the Member for Bromley and Chislehurst (Robert Neill), but wait with great anticipation for the intervention of my right hon. Friend the Member for Loughborough (Nicky Morgan).
Robert Neill
I am very grateful to my right hon. Friend for giving way. I entirely support the thrust of what is sought to be done here, as does the financial services sector. None of us wish that it should ever be necessary, but given that we are seeking to set out these safeguards, can he help in relation to one matter of in-flight legislation? In clause 3(1)(e), there is specific mention of the inclusion of
“delegated acts under the Prospectus Regulation”.
The financial services sector very much welcomes that being included, because it is important. On the other hand, for another important piece of in-flight legislation, the Securities Financing Transactions Regulation referred to in clause 1(3)(f), there is no use of the words “delegated acts”. It is anticipated that under both examples level 2 legislation, as it is called, might be desirable, so can the Minister help by explaining why the distinction has been drawn in that way?
Mel Stride
I thank my hon. Friend for his question. He is quite right, although the reference to the Securities Financing Transactions Regulation is, I think from memory, in clause 1(12), line 35 or thereabouts—the fourth file although the fifth measure in the list, the earlier two being combined. As to the main point on which he seeks clarification, the Bill will bring into effect those measures, as amended or otherwise, by affirmative statutory instrument at the time they are brought in. It will then be a case of the way in which those measures are dealt with in terms of the delegated powers to which he refers.
Nicky Morgan
I thank the Minister for giving way. In his letter to colleagues last week, the Economic Secretary stated that the Bill will allow for the Government to choose to implement only those EU files or part of those files which they deem beneficial for the United Kingdom. The Minister talks about whole or parts of legislation. Is he able to set out which of the files or parts of legislation the UK does not intend to implement, and how they will make the decision about what is or is not beneficial to the United Kingdom?
Mel Stride
I would make two points. First, where we will end up with the various files that are the subject of the Bill will, to some degree, be determined by where we end up shortly after or after any no-deal exit. I would imagine that at that point the EU would also wish to be negotiating with us on those measures. Secondly, the files themselves, under the schedule as opposed to clause 1, are being negotiated at the moment. We therefore do not have clarity on the exact form they will take.
The second category of files, as I explained, are those that are still in negotiation. These are files that the UK has, in many cases, played a leading role in shaping, and that could bring significant benefits to UK consumers and businesses. The Bill also allows the Government to domesticate these files, in whole or in part, via affirmative statutory instrument. Given that the UK will not be at the negotiating table when the files are finalised, we will be unable to advocate for the interests of the UK’s financial services sector during those negotiations. The Bill therefore provides the Government with the ability to make adjustments to the files that go beyond the deficiency fixing powers for the agreed files. These powers are clearly defined and proportionate.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
I am extremely grateful to the Minister for giving way. As he has outlined, these are powers that would only be used in the event of a no deal. As a Treasury Minister, I would imagine he is probably losing more sleep than most Government Ministers at the prospect of a catastrophic no-deal situation. Will he outline what reporting mechanisms will be introduced by the Treasury for how these powers are used, either by the Treasury or by Treasury-affiliated bodies such as the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority?
Mel Stride
I am pleased to report that the Bill, as amended in the other place, allows for reporting in respect of the statutory instruments on a six-monthly basis—that commitment is in the Bill—and that there will be four periods in total. The first period of six months will commence from the moment the Bill receives Royal Assent. The report will both look backwards at the powers that have been exercised up until that point and forwards to those powers that may be exercised in the coming period. As to other organisations, such as the Bank of England, there will be a requirement for annual reporting on the basis of the measures undertaken by those regulatory organisations.
Robert Neill
The Financial Secretary is being extremely generous, but it may actually speed things along. Can he help me on one matter relating to the second class of legislation, the level 1 files? He set out a list of files that are included in the second category. Is it intended that that is entirely exclusive? The Bill deals largely with the procedure for dealing with these files. I have in mind, for example, the proposals that are being developed by the Commission on non-performing loans and on business crowdfunding services—again, areas where the UK has had a good deal of input into initial discussions but that are not actually listed in the Bill. Is it intended to deal with those? If so, in what way?
Mel Stride
I can confirm to my hon. Friend that the list is exhaustive in the terms he was discussing. In the case of non-performing loans, these matters were considered but it was decided that the number of these in relation to the number within the EU was relatively low and that existing tools that are available were adequate to deal with those particular matters. Hence, that particular issue does not feature within the scope of the Bill.
Changes cannot be made in such a way that the implemented files depart in a major way from the effect of the original legislation. However, the Government will have some flexibility to make adjustments in order to take account of the UK’s new position outside the European Union. As a result of amendments to the Bill during its passage through the other place, the Treasury will be required to publish a draft statutory instrument at least a month before laying it, alongside a report detailing: any omissions from the original EU legislation; any adjustments from the original EU legislation; and the justification for those adjustments.
The Treasury will be further required to publish six-monthly reports on how the power has been exercised and how it will be exercised in the following six-month period. Following contributions in the other place, the Government have also introduced a requirement for the financial regulators, the Bank of England and the Financial Conduct Authority, to report annually on their use of any powers sub-delegated to them as a consequence of the Bill.
Having gone through the Bill’s various provisions and outlined its importance both to our future financial stability and to making sure that we are in the right place in the unlikely and undesirable event that we face a no deal, I commend the Bill to the House.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I am someone who believes in Parliament—I believe in it not just as a way to pass the laws under which we are governed and to hold Ministers to account but, crucially, as a way of reconciling the different and competing interests that a complex and sophisticated country such as ours inevitably encompasses. Like many colleagues, I find our politics at the moment increasingly bitter and angry and lacking in respect and empathy for opposing points of view. For me, the House of Commons and, to an extent, the House of Lords have historically given this country the means to have the conversation that it needs to have with itself to begin to resolve differences of this kind.
I say that in opening to explain that it is a genuine source of sadness to me that, so far, Brexit has represented not the return of greater powers to Parliament, but the greatest accumulation of power to the Executive that we have ever seen in peacetime. That reality is before us again today. The Minister has clearly laid out the basis of today’s legislation. We are now so close to our EU exit day without a deal—just 34 working days, to be precise—that ensuring that we have a functioning regulatory system after Brexit is an urgent priority.
Leaving without a deal would be so problematic for this country that it is hard to believe that it has ever been much more than a thinly veiled threat to try to force Parliament into supporting the Government’s rejected Brexit withdrawal agreement. However, we have had to take appropriate steps to ensure that we have a functioning system in the event that that does happen. The Bill transfers significant powers to Government to deal with EU financial legislation that is in flight at our time of departure, meaning that we have been involved to some extent in shaping it but that it does not yet form part of the law applicable to the UK.
It is a welcome change to have the opportunity to substantively debate a major piece of legislation such as this. Until now, the Government have chosen to transpose the existing EU financial regulatory framework through secondary legislation. Ministers, my colleagues and I have now debated dozens of statutory instruments with just a handful of colleagues in the corridors of this place, passing legislation on huge items of EU regulation, containing many thousands of pages. I will spare our colleagues the excitement of referring to each of them in detail, but they provide all sorts of vital consumer protections and market safeguards.
Financial regulations are like the intricate parts of an engine: we do not need to understand them all or even to know about some of them, but we benefit from them being there and we will soon know when they go wrong. The regulations that we have dealt with include those that mandate the provision of clear, succinct information to people before they invest in particular products. They include the protections that ensure that people are not charged exorbitant fees for paying by credit card when they book a flight for a holiday, and those that allow insurers to operate across the UK and the continent, providing products that people depend on to give themselves security and protection. At a macro level, we have dealt with regulations that form part of the package that was designed to fix the enormous flaws in our global financial system that caused the 2008 crisis, including those that specify the bank capital requirements and which put in place the new market infrastructure designed to make derivatives trading more robust and more stable and lower the risk of contagion in a market downturn.
So far, all these have been debated by up to 17 Members each time in Committee Rooms in the House. The Opposition have requested debates on the Floor of the House on a number of them, all of which have been refused until very recently. Tens of thousands of pages of regulation have simply been ported across in a way that I do not think any Member, on either side of the House, has found fully satisfactory.
The Government have assured Parliament that no policy decisions are being taken as part of this process. However, it is vital that all colleagues are aware that porting across EU regulations into British law does not mean that we have been legislating for the status quo. Sometimes, the very act of taking out a reference to “the European economic area” and replacing it with a British one results in a material change. For instance, a no-deal Brexit would immediately mean that we assess the capital reserves of financial institutions differently, because we would no longer be giving preferential treatment to the sovereign debt of EU member states. Similarly, there would be no limit on the fees applied if a UK citizen used their credit card to buy something from an EU member state after a no-deal Brexit, because the reciprocity that we have now cannot be provided for. This point—that the withdrawal process cannot guarantee the continuity of the status quo—is one that I feel very few people understand, and I cannot stress it enough.
In addition, this process inevitably involves matters of judgment and raises questions about capacity and resourcing. For example, simply substituting “the European Securities and Markets Authority” for “the Financial Conduct Authority” and “the European Commission” for “the Treasury” creates a new relationship between those institutions that has not existed previously. It creates questions about the checks and balances between them, especially when new powers are being bestowed, and about which decisions will instead go to other bodies such as the Bank of England and the Prudential Regulation Authority. These decisions should not be taken unilaterally and simply presented for rubber-stamping in a Delegated Legislation Committee. That is relevant because the Bill effectively sets up the same process, but for the next two years of new financial services legislation.
We are extremely grateful to the Minister and the civil service for taking the time to fully brief us about their approach, but the Opposition plan to vote against the Bill today, and I want to explain the three reasons why. First, as I have touched on, we believe that the Government’s approach is fundamentally undemocratic. Simply diverting the process for the scrutiny of future EU legislation to secondary legislation Committees risks a major democratic deficit.
As we have seen with the no-deal statutory instruments, it is entirely within the Government’s gift whether time is granted on the Floor of the House to debate these instruments further. We will effectively be bestowing power on the Treasury to decide our future compliance with EU financial regulation. Given the concerns that the financial sector has about being a rule taker, that is an enormous step to take. When Britain voted to leave the EU, I believe that it was to empower Parliament to debate and make those decisions, not to concentrate them in the hands of a few civil servants and Ministers. Of course, the big change from a sovereign point of view is that, for some of these, we would no longer have had any input at the EU level.
Secondly, the approach of splitting in-flight files and existing regulations into a patchwork of statutory instruments lacks coherence. We are debating the Bill today. Numerous other, related statutory instruments will proceed in Committee this week, one of which we are sitting on tomorrow. We have already discussed some of the legislation referred to in this Bill in Committee, yet the updates on it and the next stages of these directives and regulations are now included in the Bill as being in flight. We need a single overview to identify what the post-Brexit framework will look like. Approaching it piecemeal risks having items fall through the gaps as well as creating clashes and inconsistencies. Significant powers are being transferred to the Bank of England and our regulators, yet there is no single item of legislation that demonstrates the extent and scope of the powers.
To be frank, given that the legislation is itself only a stop-gap, none of us really knows what the Government have planned for financial regulation after Brexit. This opaque and confusing process is inaccessible not just to legislators, but to those outside Parliament. I have received correspondence from two different asset managers in the past fortnight, for example, seeking insight into what is happening in this place regarding the collective investment regime because they have found the SI process so confusing to follow and are worried about the future.
Thirdly, we must acknowledge the systemic importance of what is included in the Bill. Nobody wishes to see a repeat of the events of the global financial crisis in 2008. That is why an extensive package of regulation emerged in the aftermath of the crisis, designed to protect against a repeat of those mistakes. Many of those pieces of regulation had their origins in the 2008 and 2009 G20 summits. There was a co-ordinated global effort, of which we were part, intended to make our financial markets safer and better able to withstand stress, hopefully protecting the public purse in future.
I genuinely hear no appetite for a bonfire of EU regulation when I speak to people in the UK finance sector but, in truth, we simply do not know what the future holds or where pressure may come from to relax or tighten regulations. However, the Bill risks enabling the Treasury to make wholesale changes to our regulatory regime with little recourse available to Parliament to have a say on that, other than through the secondary legislation process, which, as we have all seen, can severely limit the chances for scrutiny. I believe that the current Treasury would approach that process in good faith, but Ministers and Prime Ministers change and we do not know who ultimately will be entrusted with these powers.
Some of the fundamental pillars of the post-crisis financial regime, such as the capital requirements directive V and the bank recovery and resolution directive II, as well as other items of regulation designed to strengthen the financial market infrastructure, are included in the Bill. The capital requirements directive, for example, sets out the asset buffers that systemically important financial institutions must hold and in what ratios. Given the costs involved to banks, these regulations often involve significant negotiation and lobbying. We saw in the US last year that a concerted lobbying effort secured major concessions from the Basel committee on capital requirements. It is simply a fact that such legislation involves the management of large and competing interests, and it does not seem right to the Opposition that the Treasury could be lobbied on such a matter and subsequently implement a statutory instrument that is subject to limited scrutiny compared with primary legislation.
It is for these reasons that our reservations outweigh our understanding of the need to pass the Bill. We very much want a strong and successful financial sector after Brexit, but we reiterate that the best way of ensuring that we have that is to negotiate a deal that the House is willing to vote for. We acknowledge that in the event of no deal a whole raft of emergency legislation would need to be passed, but at present we cannot sign up to handing over these powers to the Government without any guarantee about how they will be used. It is our intention, therefore, to oppose Second Reading and divide the House.
Alison Thewliss (Glasgow Central) (SNP)
It is a pleasure to be in the big room today, rather than up in a small Committee Room, debating these important issues of financial regulation.
I would like to correct the Financial Secretary slightly. He mentioned lots of cities but not my home city of Glasgow and its contribution to financial services. It was a shocking omission, not least because I am sitting across from him and because of its importance to Glasgow and to Scotland. Scotland’s financial sector outstripped London’s last year when it came to jobs growth. It grew by 6.6%, to 161,000 employees in Scotland. Many of my constituents, as well as others across Scotland, rely on the sector for their jobs and businesses, as do many secondary businesses.
The financial sector is also important because of the increased tax base it brings to Scotland. All citizens in Scotland benefit from the funding for public services to which the financial services sector contributes. It makes up 8.9% of the Scottish economy and provides a crucial source of funding for schools, hospitals and local government. It is vital that the sector is allowed to continue to flourish and that the appropriate regulatory safeguards are upheld to ensure we do not see a repeat of the 2008 financial collapse.
It is important to understand the context in which the Bill is operating. The in-flight legislation is part of regulatory reform that resulted from the 2008 crisis and its purpose is to prevent history from repeating itself. We in the SNP cannot allow any watering down of regulation as a result of Brexit, and I am concerned that the Bill may be too broad and sweeping and could leave gaps that could be exploited by those who wish to do so.
I appreciate that we are, in effect, doomsday planning here this afternoon in the event of a no-deal Brexit but, as we see with the continuing chaos in the UK Government, that doomsday clock is getting a good deal closer to midnight every day. Applying rushed legislation to a bad scenario will not help matters. We need to get this right and, if there is not time to get it right, the Government must face the reality of the situation we face. It is within their power to avoid a no-deal Brexit by extending article 50 and ruling out a no-deal Brexit until adequate protection is in place.
There is a good deal of vagueness in the Bill—this point was made in the Lords and has been made again today—because it grants UK Government Ministers worryingly wide scope to legislate. Clause 1(1)(a) grants the Treasury the power to make provisions “corresponding, or similar, to” provisions in EU financial services legislation. Which is it—is it corresponding or similar to? The phrasing leaves space for policy changes beyond the scope of what secondary legislation should be able to do.
Clause 1(1)(b) gives the Treasury powers to make adjustments to the specified legislation it considers appropriate. What criteria are being used to scrutinise and judge the appropriateness of a policy? The wording also leaves the door open for unscrutinised discretion on the part of Ministers and organisations that they may delegate these powers to. The standard is not good enough, given the importance and impact of the Bill and what it is trying to achieve.
The Bill gives Ministers wide latitude to make policy changes using delegated legislation. That conflicts with the position laid out in the EU withdrawal Act, which prohibits such changes because they greatly reduce the opportunity for Parliament to scrutinise policy. The Government have acknowledged that passing legislation without a substantive debate in Parliament is undesirable. We cannot allow this to slip past.
There is a legitimate concern that the Bill leaves scope for regulators to diverge from European technical standards, which could ultimately contribute to the undermining of the EU principle of equivalence. Many businesses rely on meeting these requirements to access EU markets. The Financial Markets Law Committee has raised that issue directly with the Treasury, along with wider concerns about the potential market uncertainty caused by the unreliable nature of British technical standards as a result of this legislation. The Treasury has attempted to address some of those concerns in its policy note, which outlined the safeguarding mechanisms for the Bill, but sadly those still fall woefully short of what is expected.
Subjecting SIs to the affirmative resolution procedure is no substitute for bringing primary legislation before Parliament because there is no scope to amend them. The Treasury has also committed to engaging with key stakeholders, but, as the Opposition spokesperson mentioned, if previous efforts are anything to go by, this is not reassuring. We have all sat in Delegated Legislation Committees where it feels like the only stakeholder engagement is asking the opinion of a select few. We cannot ignore the needs of businesses and the wider public at such a precarious time.
More care should be taken to gather the experiences of the business community and the wider population before making decisions that could impact on them. It has been difficult throughout this process to gather evidence because statutory instrument Committees cannot take evidence, and we will not be taking evidence on the Bill either, meaning that we will lack the ability to scrutinise this in many different respects.
It has been said many times inside and outside the House that leaving the EU is the will of the people. That is definitely not the case in my constituency or the rest of Scotland, which voted 62% to remain, but even if it were, I would find it difficult to accept that people who voted for Brexit want this—there are gey few Brexiteers here today trying to defend this policy. Tory Ministers are being given unfettered power to legislate with no parliamentary scrutiny, which is way outside any mandate the Government feign to have.
The Bill makes a mockery of the leave campaign promises of taking back control, because this Parliament and each of us as MPs will have less control than we had before. It allows for the creation of new laws via statutory instruments, but these will be adjusting or augmenting primary legislation passed not by this House but by the institutions of the EU. The Chair of the Treasury Committee made an excellent point in her letter about the measures in the Bill that will allow the Government to choose to implement only those EU files, or parts of those files, that they deem beneficial to the UK and to make adjustments to legislation to fix deficiencies and take account of the UK’s new position outside the EU. That sounds like a policy choice—choosing to implement only those files, or parts of files, deemed beneficial to the UK. It would involve the Government deciding which files are beneficial to the UK and so allow them to do what they said they would not do.
After Brexit, the UK Government will have no seat at the European table, as these in-flight directives proceed, on issues that will impact on businesses across these islands. Weirdly, we are delegating scrutiny of these policies to the EU when we are not going to be members any longer. We have heard in Delegated Legislation Committees about how the UK is a great leader in financial services with great expertise, and we have heard how influential and involved our officials have been in making regulations for financial services—the Economic Secretary referred to this in his letter—but this influence is being chucked away for glib slogans on the side of a bus.
We will be losing influence on matters that will disproportionately affect financial services in this country, adopting legislation from another jurisdiction that we have chosen actively not to be a part of and then leaving it up to the Treasury to decide what we take and what we leave, and perhaps not even the Treasury—perhaps the Financial Conduct Authority or some other organisation whose work we are even less able to scrutinise. It is completely unacceptable, and I see no Brexiteers here willing to defend it—not one bit of it. Where are they now?
The UK Parliament, and our own elected representatives in this place, will not have a say in the detail. We are passing into the hands of Treasury officials the ability to determine the position at some point in the next two years. If we want to continue to operate in the EU market, we will have to comply with those rules. Nothing, absolutely nothing, that we introduce—deal or no deal—will be as good, as seamless and as hassle-free as the passporting deal that financial services have now, while the UK is a full member state of the EU. The Treasury cannot deny that fact.
Scotland has worked hard to get to where we are now. In Edinburgh, in Glasgow and in places throughout Scotland, financial services firms are working hard, investing and doing so much to promote their talents. There is no doubt in my mind, and in the minds of the hundreds of constituents who have emailed me, of their concerns about Brexit. They believe that things would be better all round if the Government acted in the best interests of the country, and revoked article 50.
I strongly agree with the hon. Member for Stalybridge and Hyde (Jonathan Reynolds). The principled position is to oppose the Bill. The Government are taking plenty of powers unto themselves, which is outrageous in the context of “taking back control” and all the other glib utterances that we heard at the time of the EU referendum. They say, “Just trust us, and it will be fine.” I am sure I can trust them, and perhaps it will be fine, but we cannot be assured of that. We should not give up our own role as Members of Parliament, which is to scrutinise all these matters.
Mary Creagh (Wakefield) (Lab)
It is a pleasure to follow the hon. Member for Glasgow Central (Alison Thewliss), who made an excellent speech.
Today’s debate has focused on Brexit and financial services. I want to focus on why the Bill is so vital to our budding green finance industry, what the EU is doing to promote green finance and what our own country is doing in that regard, and what the Government can do to end uncertainty for an important and growing part of our economy. I shall refer to the sixth and seventh reports of the Environmental Audit Committee, “Greening Finance: embedding sustainability in financial decision making” and “Green finance: mobilising investment in clean energy and sustainable development”.
In 2015, the United Kingdom signed up to the Paris agreement on climate change and the UN’s global goals for sustainable development, which set out ambitious targets to transform our world. In the three years since then, we have learnt much more about climate science. As was made clear in a report published by the Intergovernmental Panel on Climate Change in October 2018, if we are to avoid the catastrophic effects of uncontrolled climate change we shall need radical and unprecedented changes in all parts of the economy, which will require trillions of pounds—or dollars—to be invested in clean energy and cleaner transport infrastructure.
I pay tribute to the Government for some of their work in that regard. The Bank of England’s Task Force on Climate-related Financial Disclosures looked into strategy, risk and targets. The Government then set up the Green Finance Taskforce, whose report made a series of recommendations, one of which was that the Government should establish a sovereign green bond to kick-start investment. The Government have yet to respond to that report, but I hope they will do so soon. We have seen the green growth strategy, and, in the City of London, $22 billion of investment has been raised in seven currencies for more than 72 green bonds. I fear that the Bill could potentially disrupt some of the progress that we are making, and interfere with London’s place as a centre for green finance.
We have done well in our own country. We have moved quickly to decarbonise the power structure. However, we have done very little to deal with our agricultural and transport-related emissions, and almost nothing to decarbonise our heating emissions. When people tell me that things will be easier, I always ask, “How are you going to transform 31 million gas boilers over the next 10 years?” According to the IPPC’s report, we have just 12 years in which to tackle damaging carbon emissions. We need to think big, and think globally, if we are to rise to that challenge.
My Committee’s inquiry found that the privatisation of the Green Investment Bank and the reduction in European Investment Bank lending following the referendum may have played a part in the 56% reduction in investment in green energy projects in the UK. We could not work out whether that was a blip or a trend, but I look forward to seeing this year’s figures and finding out which it was. Our “Greening Finance” report states that climate change poses material threats to our economy, our investments and, of course, our pensions, which provide the funding for these companies.
There are three climate-related financial risks. There is the physical risk posed by more heatwaves such as the one that we experienced last year, more droughts, which will threaten the water industry, wildfires, which we have seen in the Arctic and in California, extreme rainfall, rising sea levels, and flooding. That risk will affect investment in food, farming, infrastructure, house building and insurance. In a 4° world, my Committee was told, the insurance market would cease to exist. London’s position as a global insurance centre would be destroyed, and the jobs along with it. There is also the risk posed by the transition to the green economy. Companies that do not make a timely low-carbon transition could face costly legal or regulatory action, and some will be left behind by innovative firms with cleaner, greener, more efficient technologies.
Issuers—banks, insurance companies, asset managers and owners, and a range of other financial institutions—must assess and report climate-related financial risks. That is particularly important in relation to pension funds. I welcome the National Employment Savings Trust, but by the time a young person auto-enrolled in the scheme retires, we could be living in a world radically transformed by climate change and society’s response to it. According to the latest Met Office prediction, in a high-emissions scenario our summers will be 5° warmer than they are now. That has implications for the water that we drink and the homes in which we live.
It is vital that our pensions, investments and savings are able to weather those changes, which is why my Committee called on the Government to introduce mandatory reporting of climate-related financial risk. We also wrote to the chairs of the 25 largest pension funds asking them what they were doing to mitigate that risk. We think that improved reporting would help to divert more capital to more sustainable ends, because what gets measured gets done. That would increase investment in the new green infrastructure that we need, and would mean that our savings did well while also doing good. We are pleased that the Government have clarified the fiduciary duty of pension trustees in trust-based schemes, which will come into force on 1 October 2019, and we are waiting to hear from the Financial Conduct Authority what it intends to do.
Let me now turn to why the Bill matters in relation to sustainable finance. I asked the Minister—and I was grateful to him for giving way—about “in-flight” legislation. The EU has proposals for financial services legislation that would promote sustainable finance. It is debating proposals for a framework for low-carbon benchmarks which would allow investors to harmonise their portfolios with the Paris agreement on climate change. The benchmarking is important, because only by seeing what is happening in other companies can investors work out whether they are doing well or badly, and make the strategic changes that may be necessary. It is also discussing the possibility of a taxonomy of environmentally sustainable activities which would allow companies to “green-check” their revenue streams, and new disclosure requirements for asset owners such as pension schemes, as well as asset managers, banks and insurers. My Committee had called for that.
When the Bill was introduced in the other place, I was disappointed to note that the EU proposals for benchmarks and disclosure requirements were not included in the list of “in-flight” legislation in the schedule. The Minister said that this was Parliament doing its job and amending legislation, but it is not clear to me whether those proposals were left out accidentally or deliberately. Do we think that we are already doing those things so brilliantly that we need not bother to pursue the proposals? The Minister has not made that clear.
I welcome the amendments made in the other place to include all the EU’s sustainable finance proposals. However—this is important—the Government have no obligation, but only the option to adopt those valuable measures. Will the Minister reassure the House that the Government will adopt them, and that the UK will not fall behind when it comes to EU action on sustainable finance? If we diverge from the EU’s regulations on sustainable finance it would harm large financial institutions with investment in green financial products in Europe. It could harm our budding sustainable investment industry. We are at the moment a world leader in finance; we know the difficulties Brexit will cause to be faced across our economy, but we have the opportunity to be a world leader in sustainable green finance and we must not let that opportunity pass us by.
Anneliese Dodds (Oxford East) (Lab/Co-op)
My hon. Friend the Member for Stalybridge and Hyde (Jonathan Reynolds) set out very clearly and comprehensively the problems with this Bill in his opening remarks. I do not want to repeat them all, but I will summarise the core reasons why the official Opposition cannot support the Bill.
The Conservative Government often mix their metaphors when presenting their Brexit process. This Bill, for example, part of what the Government have described as an onshoring process, is presented as dealing with those so-called in-flight measures that have not yet landed. In my brief remarks, I want to explain why many of us are confused about the identity of the pilot of this plane, quite how far and fast the plane will go, and indeed whether it should be on the runway in the first place. I suppose that it is at least a relief that the Transport Secretary is not in charge, given last weekend’s revelations.
First, who will decide which parts of in-flight EU legislation will be implemented? This is straightforward for those Bills that have already been passed at EU level but not yet implemented—those taxiing on the runway. In that case, the Bill commits itself to implementation in the UK, not least given that UK Ministers and MEPs would have been fully involved, one would hope, in all aspects of that legislation, with Government only able to fix deficiencies in that legislation.
The picture is, however, far less clear for legislation still under discussion at EU level, and thus to a certain extent still up in the air. In that regard, we are informed that this Bill will enable
“the Government to choose to implement only those EU files, or parts of those files, which it deems beneficial to the UK”.
They will be able to
“adjust the legislation as it is brought into domestic law to fix any deficiencies or, in the case of files still in negotiation, to ensure that it reflects the UK’s position outside of the EU.”
How exactly they might do so, and what that reflection might encompass is left unclear. The right hon. Member for Loughborough (Nicky Morgan), Chair of the Treasury Committee, rightly raised this earlier in an intervention on the Minister, and I am disappointed that she did not receive a sufficiently clear response to that question; I will return to that point later. Indeed, there is no indication here that that deviation from EU practice will even be flagged up to this place, let alone go through a different decision-making process as a result. Instead, it is expected that, as usual with this Government, sadly, statutory instruments will be used. Clause 1(1)(b) even states that the Government can make
“any adjustments the Treasury consider appropriate”,
a power that was initially open-ended but that, quite rightly, was amended in the other place.
The point remains that it will be difficult for Parliament to be aware of any deviations from EU practice. The Conservatives may well respond by stating that industry would be quick to point them out. Frankly, I am grateful for industry’s engagement with this process, to the extent that it has been able to input, and it is essential that, as mentioned by my hon. Friend the Member for Stalybridge and Hyde, we preserve our strong and successful financial services sector, and our regulations must reflect that. However, I reiterate a point I have made before: there is no organisation in the UK with an explicit mandate to promote financial stability and the consumer interest in financial services, a role which is filled within the EU by the Finance Watch. It is unsurprising therefore that Finance Watch has put on the record its concerns that the current approach to Brexit could be used as a means to undermine financial regulation, pointing to, for example, the Chequers agreement’s phraseology of the UK pushing for greater liberalisation of financial services, investment and procurement markets post Brexit.
The second reason to reject the Bill concerns its peculiar status among the rest of the so-called onshoring process. The flight path here is bedevilled with interactions with numerous other legislative processes, from those embedded in the 40 statutory instruments that have already been laid before Parliament to the additional 20 yet to go, and with only 34 working days between now and 29 March, as rightly underlined by my hon. Friend the Member for Stalybridge and Hyde.
By contrast, with the extraordinarily rushed process being adopted here, the Government’s powers under this Bill can be exercised for up to two years—yes, two whole years after Brexit. That is in a context where the Government have no clear plan for financial services regulation post 29 March. Rather than this confusion of legislation—short-term, long-term and of indefinite duration; primary, secondary affirmative and secondary negative—we surely need to have some consolidated legislation covering this area. This confusion is of course part of a pattern, sadly, over recent years from Conservative Ministers, with Acts in 2012, 2013, 2014 and 2015 having to correct or amend existing provisions. Indeed, we have been informed that there may well be correcting amendments to be considered even after the 60 statutory instruments and this Bill are passed.
Of course we had a good example of the deficiencies even within this Bill, as rightly pointed out by my hon. Friend the Member for Wakefield (Mary Creagh), in relation to the legislation governing environmental indicators and reporting, which was initially missed off the schedule. I pay tribute to her for raising this essential issue of green finance and greening finance and how it was initially missed out of these proposals.
I found the Minister’s response to the hon. Member for Bromley and Chislehurst (Robert Neill) rather peculiar; I note that the hon. Gentleman is no longer in his place, but I felt he made an important point. He asked whether the UK would keep in step with emerging provisions from the EU, such as in the area of non-performing loans. The Minister suggested in response that alignment in this Bill was rejected due to the content of those proposals, when his Bill, however, was presented as inclusive of all financial services legislation that was in-flight aside from those elements that we had specifically opted out of, such as those relating to banking union, which we do not participate in of course and which is presumably the real reason why non-performing loans legislation is not included here.
My hon. Friend the Member for Wakefield highlighted in her remarks the non-scientific nature of the assessment by this Government of which measures will be deemed in-flight or otherwise. We have had no indication of the criteria to be used for that from Government. The discussion we have had, albeit in this brief debate, has pointed up that all we have as a Parliament currently as an indication of this Government’s approach to regulating financial services in the future is this Bill and the no-deal SIs—no overall plan, no indication of how the different pieces fit together, and above all no clarity around how we will be able to keep in step with the EU27 in relation to emerging issues like green finance and cryptocurrencies.
Sir Greg Knight (East Yorkshire) (Con)
On the issue of no clarity, can the hon. Lady tell the House why her party did not oppose the Bill in the other place or suggest any changes to it there?
Anneliese Dodds
It is my understanding that there was significant challenge from my party in the other place, and in fact changes were made, including for example a clearer indication of the circumstances under which those adjustments could be made by the Government. Initially that was very open-ended, but we supported and pushed for much more clarity on that. We would have liked to have seen change in other areas, and perhaps clarification in additional areas. We have not had that, however, which is why it is necessary to oppose the Bill at this stage.
Finally, this legislation is of course only required because of the Conservative Government’s recklessness in persisting with a commitment to keep no deal on the table, as rightly underlined by the hon. Member for Glasgow Central (Alison Thewliss). We have seen very clearly today from the preliminary estimates of GDP growth for the final quarter of last year how this determination to prioritise ideology over national interest is harming our country. The contribution to GDP from business investment was negative for the fourth quarter in a row; that is a clear sign that uncertainty surrounding the Government’s Brexit strategy is acting as a real drag on the economy. The construction sector actually contracted this quarter, and after two consecutive quarters of negative growth, the UK manufacturing sector sadly is now officially in recession. So 2018 had the worst annual GDP out-turn since the then Chancellor’s disastrous 2012, and economists are forecasting that even worse could well come.
The flight into the buffers that would be represented by a no-deal Brexit is still being countenanced. Any responsible Government would take that plane off the runway once and for all.
The Economic Secretary to the Treasury (John Glen)
I thank all Members for their contributions to the debate. As my right hon. Friend the Financial Secretary to the Treasury set out earlier, the Government do not want a no-deal scenario, but our job as a responsible Government is to prepare for all possible outcomes, including reaching 29 March without a deal. The Bill forms an important part of those preparations. In a no-deal scenario, it would ensure that we could maintain the UK’s reputation as a global leader and that the competitiveness of our financial services industry would be maintained. The UK has in many cases played a leading role in shaping these proposals over a number of years, and they will bring benefits to UK consumers and businesses once they have been implemented. I want to talk about the four or five themes that have been raised in the debate, after which I will address the points made by the hon. Member for Wakefield (Mary Creagh).
Mr John Baron (Basildon and Billericay) (Con)
I refer the House to my entry in the Register of Members’ Financial Interests. The Economic Secretary to the Treasury will be aware of our exchanges in Committee regarding EU regulations as they relate to key information documents and how KIDs are adversely affecting the assessment of investment trusts. The trade bodies oppose them, including the Association of Investment Companies, which has suggested that the investors’ response to them should be to “Burn before reading”. Can the Minister report back on his deliberations with the Financial Conduct Authority, which has been rather slow out of the blocks? Ultimately, it is the Government’s responsibility to get this right.
John Glen
I am happy to respond to my hon. Friend’s intervention. I acknowledge his expertise in this area and his excellent article in the Investors Chronicle this week. I would point out that, just last summer, the FCA issued a call for input and sought industry views on the next steps for packaged retail investment and insurance products—PRIIPs. That consultation closed on 28 September and the FCA is reviewing the responses carefully. It will publish a statement in the first quarter of this year. When I next see the chief executive of the FCA, I will challenge him on that publication date.
Let me turn to the substantive thrust of the concerns raised in the debate. The first relates to the desirability of no deal. As I have said, we do not want a no-deal scenario, but we need to be responsible and to plan for all eventualities. Our priority remains getting approval for the deal that we have negotiated with our European partners, which will deliver on the democratic choice of the British people.
Turning to the other preparations, we have now laid 50 statutory instruments before Parliament. The allegation from the hon. Members for Oxford East (Anneliese Dodds) and for Stalybridge and Hyde (Jonathan Reynolds) was that there had been no coherence to the Government’s work, but as the hon. Lady will know, we will have had 53 statutory instruments. We have more debates tomorrow and on Wednesday, and I think several more next week. We are addressing the deficiencies in all the major EU files and the relevant domestic legislation. This will ensure that we have a functioning financial services regime at the point where we leave the EU in a no-deal scenario. Our aim throughout this work has been consistently to minimise disruption for firms and their customers and to provide a smooth transition when we leave the EU.
The hon. Member for Glasgow Central (Alison Thewliss) made a point about the breadth of the power in this legislation. We have worked hard to ensure that this is a clearly defined power and that changes cannot be made such that the implemented files depart in a major way from the original legislation. However, the Government will retain some flexibility to make adjustments to take account of the UK’s new position outside the European Union. The amendments proposed by the Government require the Treasury to publish draft SIs at least one month in advance of laying, as well as a report detailing where there have been omissions and changes and giving the justification for those changes. We believe that the report will allow parliamentarians to scrutinise the changes before the SIs are laid. If the UK were forced to take on EU legislation either in whole or not at all, it is likely that we would be able to domesticate very few of these files in good time, so even the positive aspects of the reforms would be delayed. This is a pragmatic measure to deal with the reality of a very undesirable situation, and our approach has been endorsed by the industry, with which we have engaged in the preparation of the Bill.
Alison Thewliss
The Minister talks in his letter about how things are deemed to be beneficial for the UK, but he and I will have very different opinions on what would be beneficial for the UK, or indeed on whether Scotland should be part of the UK, so how can he say that that is not a policy decision?
John Glen
We are talking about a no-deal scenario, which we cannot fully anticipate or set out in legislation. However, there would be a full discussion and additional legislation in those circumstances.
For the benefit of the House, I want to clarify the industry engagement that has been undertaken on this Bill. The Treasury engaged with industry ahead of the introduction of the Bill, and the financial services industry has been expecting many of the files for some time. For example, the industry will be generally supportive of the changes that will be implemented with the European market infrastructure regulation regulatory fitness and performance programme—EMIR REFIT—file, which introduces changes to regulations for clearing and reporting requirements, to make them more proportionate and to provide further clarifications. We have been engaging to deliver what the industry expects.
With respect to accepting EU laws after exit, the Bill is not about accepting such laws wholesale. We will be able to implement only those pieces of legislation that are beneficial to the UK, because we will be able to choose the files, or specific provisions within those files, that we are going to implement. For those files that we have already agreed at EU level but not yet implemented, we will be able to fix deficiencies similar to what was done in relation to the European Union (Withdrawal) Act 2018. For those files on which negotiations will be ongoing at the point of exit, we will be able to make some adjustments to them to take account of the fact that we will not be around the negotiating table when they will be finalised.
Moving on to the model for financial services regulation more generally, the Government of course recognise that this legislation should apply only for an interim period while we consider a sustainable, longer-term approach that balances the need to ensure appropriate parliamentary oversight of financial services legislation after leaving the EU with the need to maintain the flexibility and competitiveness of our regulatory regime. That is why the model in the Bill would apply only for a temporary, non-extendable two-year period post exit, specifically in a no-deal scenario, and to specified EU files only. The Government will take forward our approach for a sustainable long-term model in due course.
Turning to the points made by the hon. Member for Wakefield, the UK has publicly led on the development of sustainable finance, as she set out, and the Government are committed to the sustainable finance agenda and are a leader in green finance. That is why we have included these files in the Bill. We recognise that the files form part of the EU’s response to the Paris climate change agreement and the UN sustainable development goals. The Government support the aims of the files and do not consider them harmful to industry at their current stage of development. As such, we were pleased to add them to the schedule to the Bill, and we thank the noble Lords who recommended their inclusion.
I stress again that this legislation involves a temporary measure, with the delegated power limited by a two-year sunset clause and subject to the affirmative procedure in each and every instance of its use. Following constructive engagement in the other place, the Bill is clearer about the power contained within it and has much stronger reporting requirements than at its introduction.
I thank all right hon. and hon. Members for their contributions to this debate. I am sure that we can agree on the importance of continuing to support the UK’s world-leading financial services industry in any future scenario. I look forward to discussing the Bill further in Committee, and I commend it to the House.
Question put, That the Bill be now read a Second time.