Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018
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Lord Bates
That the Grand Committee do consider the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018.
Relevant document: 38th Report from the Secondary Legislation Scrutiny Committee
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, as this is the first in a series of SIs preparing the ground for a potential no-deal scenario, it may be helpful for me to set out in more detail in my opening remarks the context in which these SIs are being brought forward. I hope that it will help the Committee in considering future SIs.
Following the UK’s decision to leave the EU after the referendum of 2016, the Treasury has undertaken a significant amount of work with respect to the withdrawal negotiations themselves and in preparing for a range of potential negotiation outcomes. The best outcome is for the UK to leave with a deal, and we have put forward a serious and credible proposal for the future relationship. While we remain confident of agreement this autumn, in the meantime we must continue to work to prepare ourselves for the event of no deal. As the department responsible for financial services, the Treasury is working to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period. This includes using powers delegated to Ministers under the European Union (Withdrawal) Act 2018 to fix deficiencies in applicable EU law that will be transferred directly on to the UK statute book at the point of exit from the European Union.
The approach of the European Union (Withdrawal) Act is to maintain existing EU-derived legislation at the point of exit to provide continuity and certainty for businesses and consumers. While the fundamental elements of current financial services legislation will remain the same after exit, it will need to be amended to ensure that it works effectively once the UK has left the EU. The Treasury is therefore in the process of laying around 70 statutory instruments ahead of exit day to ensure that the UK’s financial services regime is prepared.
A key decision the Government had to make in approaching this work was how to allocate responsibility for the huge body of financial services regulation being brought on to the UK statute book by the EU withdrawal Act. The Government have decided to allocate responsibility in a way which respects democratic accountability and the UK’s existing regulatory framework, as set up by Parliament. Legislation which has been developed at the political level—proposed by the European Commission and negotiated through the Council of Ministers and the European Parliament—will become the responsibility of the UK Parliament, while rules developed at a technical level will become the responsibility of the UK regulators.
The EU’s directly applicable financial services legislation broadly falls into three categories. The most important category is regulations, which play an important part in setting the overall policy direction for areas of financial services activity; then there are the delegated regulations, which tend to be used for setting out more detailed requirements; and the lowest level of legislation is technical standards, which are used to flesh out the most detailed and technical aspects of regulations. It is only this last level, the technical standards, which the Government propose to delegate to the UK’s financial services regulators.
The responsibility for developing these technical standards currently lies with the European supervisory authorities, before they are adopted by the European Commission. As required by EU law, technical standards do not need policy decisions to be taken but lay out the granular level of the requirements that firms need to meet to implement policy set out in higher EU legislation. The existing stock of these technical standards runs to over 7,000 pages. Common examples of technical standards are those that set out the processes for providing supervisory information to regulators, including the specific form templates that firms should use.
The job of this SI is to set out the terms on which UK regulators will exercise the proposed new function for EU technical standards. It will also delegate the EU withdrawal Act’s deficiency-fixing power so that the UK regulators are able to ensure that these technical standards, as well as domestic regulator rules, work effectively from exit day. Part 1 of the SI, which will come into force the day after it is made, is necessary so that UK regulators will be able to use the EU withdrawal Act’s deficiency-fixing power in advance of exit to ensure that technical standards and UK regulator rules are amended to work effectively from day one of exit.
Part 2 of the SI delegates the EU withdrawal Act’s deficiency-fixing power to UK regulators and sets out the basis on which they are to exercise this power. The regulators specified are the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and the Payment Systems Regulator. In delegating the deficiency-fixing power, Part 2 applies those requirements and constraints that would apply to a Minister’s exercise of that power. The regulators will be able to make changes only to the technical standards listed in the schedule to these regulations or to regulator rules in order to correct deficiencies that arise as a result of the UK’s withdrawal from the EU. The two-year time limit on using the power will also apply.
Lord Bates
I thank the noble Lords, Lord Wrigglesworth and Lord Tunnicliffe, for their questions. I guess that the noble Lord, Lord Tunnicliffe, and I are going to be spending many happy hours in this Committee over the next year, and I know that the noble Lord is always assiduous in the way that he prepares for these matters and in the questions that he puts. He is also right to say that this is an opportunity to provide scrutiny for these regulations and what is being put forward.
Many questions have been raised and I will go into a bit of detail in responding to each of them. The first issue is in relation to impact assessments. This statutory instrument would have no cost to business as it deals with the transfer of responsibility from the Treasury to the regulators. As a whole, these SIs will significantly reduce costs to business in a no-deal scenario. Without them, the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their business.
In making these changes we have attempted to minimise the disruption to firms and their customers and to maintain continuity of service provision. However, it is inevitable that firms will need to prepare for changes made by these SIs and the Government have committed to providing the UK regulators with the power to phase in regulatory requirements that change as a result of exit. This will substantially mitigate the costs to firms and give them more time to implement the changes.
On the issue which, I suppose, is at the heart of this initial—
Lord Tunnicliffe
It seems to me that the Minister has just given a précis of the impact assessment, which is designed to satisfy us when we do not need one. I would have been much more comfortable if the document had said, “We do not intend to produce an impact assessment because the argument is simple,” and then printed his explanation, rather than receiving a document that says, “We do not have an impact assessment because we have not finished doing it yet and we will publish it later”.
Lord Bates
We are in the process of preparing five impact assessments covering financial services and onshoring legislation. They will be considered by the Regulatory Policy Committee, the independent body that scrutinises impact assessments before they are released. As has been said many times, we are in extraordinary times in terms of what we are seeking to do with this work. I think we all recognise that the conventional form would be that the impact assessment would have been available at the same time. With that explanation about the context of the decision—
Lord Wrigglesworth
I wonder whether the Minister will mind if I emphasise the importance of this. We are dealing with thousands of businesses whose procedures are possibly going to be changed as a result of this. Not only are businesses going to be affected: millions of customers may possibly be affected. It is tremendously important that they and their customers know what impact this will have, so that if necessary they can change their forms and procedures, move their money and do whatever they want to do in the light of the impact of this. If changes are in the pipeline as a result of this, and they are going to affect businesses, it is vital that businesses know about them as soon as possible.
Lord Tunnicliffe
On the same point, I draw attention to page 33 of the statutory instrument:
“Explanatory Note (This note is not part of the Regulations)”.
The final paragraph states:
“An impact assessment of the effect that this instrument will have on the costs of business, the voluntary sector and the public sector will be available from HM Treasury, 1 Horse Guards Road, London SW1A 2HQ and published alongside this instrument”.
I apologise for this, but if we are going to get impact assessments, the Government have to realise the irritation it causes to the Opposition and our colleagues in the Liberal Democrats if we do not have them published on time.
Lord Bates
I fully accept the point the noble Lord is making. There is no need to apologise, because the point is that there should be scrutiny. I am trying to explain that this SI would not be expected to have an impact on business for the reason that I have set out. Other SIs will have impact assessments published. This SI has been published in draft form and we have been engaging in consultation with the Financial Conduct Authority and the regulators. The Financial Conduct Authority and the regulators interact most with businesses and consumers and therefore they have already commenced work on that part of the process to ensure preparedness.
On that point, the noble Lord, Lord Wrigglesworth, asked how industry will be involved in the regulators’ role. The regulators will consult on their deficiencies fixes. The Financial Conduct Authority has published its first consultation and the Bank of England will follow.
On the key issue of where the powers in the SIs are derived from, it is Section 8 of the European Union (Withdrawal) Act. That Act was subject to considerable debate in Parliament, including debate on the nature and scope of the deficiency-fixing power delegated to Ministers. Part of that debate considered whether it would be appropriate for Ministers to subdelegate the power to non-ministerial bodies. Parliament decided to leave open the possibility of subdelegation. Subdelegation of the powers is provided for in this SI so that UK financial services regulators can fix deficiencies in EU technical standards and regulator rules in time for exit. Section 8(6) of the Act provides for the transfer of EU functions to an appropriate UK body.
On the amendments to principal financial services legislation, which the noble Lord, Lord Wrigglesworth, asked about, some deficiency fixes will be put into primary legislation through SIs. These will not change policy but will be technical in nature.
On how we have consulted industry in drafting these SIs, we have not carried out a formal consultation on these particular SIs. What they can do is strictly limited by the enabling power of the EU withdrawal Act to fixing deficiencies. Therefore, there are limited policy choices. We discuss EU exit preparations regularly with the industry. This engagement has been invaluable for understanding the impact of these SIs. We share draft legislation with the industry to allow stakeholders the opportunity to familiarise themselves with our approach and to test our understanding of the likely impact. We are also, where possible, publishing draft legislation in advance of laying it.
The noble Lord, Lord Tunnicliffe, asked how the regulatory changes will be put in the public domain. The regulators are committed to a fully transparent process for fixing deficiencies in EU technical standards. The FCA has already issued its first consultation on this. The regulators are required to publish all the instruments in which they will make regulatory changes to ensure that they are brought to the public’s attention. In practice, they will do so by publishing them on their website.
The noble Lord also asked whether there was any requirement for the regulators to report on how they are exercising these powers. All regulatory deficiency fixes will need to be approved by the Treasury. I accept the point he made about the circumstances and tests, and whether there was an impact on the Exchequer, but the EU withdrawal Act requires an annual report on the exercise of the powers under the Act. The regulators will provide this on their use of the deficiency-fixing power and on their post-exit responsibility for technical standards. Parliament will be able to scrutinise and question the regulators on the use of these powers through the Select Committee system, as it does now across a range of regulatory functions.
Lord Tunnicliffe
I do not know whether the Minister feels that he has answered the question, but does the Treasury have a supervisory responsibility other than through or in relation to the two reasons he just outlined?
Lord Bates
I have an answer to that and it will be ready in just a couple of minutes. It was on how the powers will be used.
The noble Lord also asked how regulators would co-ordinate with EU regulators after exit. This statutory instrument does not deal with the co-operation arrangements between the UK and EEA regulators. However, if the UK leaves the EU without a deal, the UK will fall outside the EU’s legislative framework for supervisory co-operation. The EU has confirmed that the UK will be treated as any other non-EEA country in this scenario. Common legislation will no longer be the basis for co-operation between UK and EEA regulators, but the UK’s firm intention is to maintain the current high level of co-operation that we have with EEA authorities. UK statutory powers have this under the FSMA. As some of the world’s most important regulators, the Bank of England and the FCA are well-established co-operation partners with non-EEA regulators.
The noble Lord asked what would happen to the statutory instrument in the event of a deal. These regulations will come into force on the day after they are made. This will allow regulators to prepare for exit day by making these changes. However, if we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law, including binding technical standards. It will also generally not be necessary to fix deficiencies in regulators’ rules until the end of the implementation period. The withdrawal agreement Bill will include provision to delay, amend or revoke SIs made under the powers of the EU withdrawal Act.
On the supervisory point the noble Lord asked about, the regulators may make an instrument to fix deficiencies using the powers delegated by this statutory instrument and an EU exit instrument only with the approval of the Treasury. In this case the Treasury can approve the EU exit instrument only if it is satisfied that the instrument makes appropriate provision to fix deficiencies arising from the UK’s withdrawal from the EU—in other words, that the EU exit instrument is not doing anything which could not appropriately be done by the Treasury using its own powers under Section 8 of the EU withdrawal Act. Similarly, the regulators may make an instrument to exercise any powers to make technical standards transferred to them by other SIs made under the 2018 Act only if the instrument is approved by the Treasury. For standards instruments, the Treasury may refuse to approve a standard instrument only if the regulators believe it would affect public funds or the instrument would prejudice international negotiations.
On the point which was made about resources—clearly we are placing a heavy responsibility on the regulators—the Treasury is confident that the financial services regulators are making adequate preparations ahead of 2019 and have an appropriate level of resources to manage their new responsibilities. We have worked extremely closely with the regulators in preparing this legislation. The current business plans of the FCA and PRA set out their priorities in preparing for EU exit and their plans for ensuring operational readiness. The regulators have considerable experience in this area. This means that the responsibilities of EU bodies can be reassigned effectively and efficiently, providing firms and their customers with confidence after exit. The FCA has published its first consultation on the changes it proposes to make using these powers.
The noble Lord asked about the sunset clause. Under Section 8 of the EU withdrawal Act, no government department would be able to make any regulations after 11 pm on 29 March 2021—that is, two years after exit day. Under regulation 3(3) of these regulations, Section 8(8) also applies to the regulators, so they will not be able to make any EU exit instruments to fix deficiencies after this date. This relates to a question which I dealt with in my previous remark. However, in supervisory situations—I have said this—regulators may make an instrument to fix deficiencies using the powers delegated by this SI only with the approval of the Treasury.
I hope my responses have gone some way to addressing the points and concerns raised by noble Lords in the course of this debate. As I said, this is the first of many debates on these issues, but this first statutory instrument is crucial and I commend it to the Committee.