Cattle Compensation (England) (Amendment) Order 2018
(5 years, 6 months ago)
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Dr David Drew (Stroud) (Lab/Co-op)
I beg to move,
That the Committee has considered the Cattle Compensation (England) (Amendment) Order 2018 (S.I. 2018, No. 754).
I am delighted to serve under your chairmanship, Mr Pritchard. I think that the Committee will have an interesting discussion. This is round three of a four-round contest this week—we have the Agriculture Bill again tomorrow—but this is an important issue. Obviously, the Opposition have some issues with the order.
The background to the order is fairly well known. We no doubt disagree about the causes and consequences of bovine tuberculosis, but we are not here to discuss that. We are here to discuss the compensation scheme, which is very important to my local farmers and to those of a number of other hon. Members here.
The operation of the slaughter policy derives from European Council directive 1964/432/EEC, which demands that we slaughter TB-affected animals. The reason why we have prayed against the order is, as much as anything, to get clarity from the Minister about why we are reducing compensation at this difficult time and what the impact is. As I said, we may disagree about the causes and consequences of bovine TB. We will not disagree that this is a dreadful disease that has a huge impact on our farmers, so any reduction in compensation needs to be looked at very carefully.
In 2015-16, 29,000 cattle were compulsorily slaughtered under the scheme. That cost the state about £30 million, so it is a considerable financial imposition on the state, in addition to the terribly bad effect on farmers. This proposal provides for a 50% reduction in compensation where an owner brings an animal into a TB-affected herd and that animal then tests TB-positive while the TB incident is ongoing. Cattle keepers accredited under a scheme based on the standards laid down by Cattle Health Certification Standards will continue to receive 100% compensation for all compulsorily slaughtered cattle, provided that the herd is accredited at the time of the breakdown. My first question to the Minister is therefore a general one: exactly how will that work? Obviously, some will be accredited, but others may have been brought in. We know that cattle passports and so on are not always as accurate as one would want. If a TB-affected cattle carcase has to be condemned because of being so unclean that there is a real risk of bacterial contamination, it, too, qualifies only for a compensatory payment of 50%.
Under the order, owners of TB-affected cattle who choose a slaughterhouse to kill the cattle could face at least a 50% reduction. For some, that is better, because they may have not got any compensation before. Again, I ask the Minister to be clear: who will receive the compensation and at what level? This measure is of course part of the Department for Environment, Food and Rural Affairs TB eradication strategy.
Let me move on to the comments from others; I also have some questions. The proposal was not well received in the consultation: 76%—a fairly high number—disagreed with the compensation reduction, and although 47% supported reduced compensation for cattle that cannot be processed by a slaughterhouse because they are unclean, I suspect those people were clear that they stood to gain if they did things properly. The proposals have a negative impact on the cattle industry of about £0.7 million—many of these figures are in the accompanying explanatory memorandum. What impact is that likely to have on those people who are already struggling because of bovine TB?
I have a series of questions that I will go through slowly. Some of them are from the National Farmers Union, which has been quite trenchant in its criticism of aspects of the proposals. To look first at what I am concerned about: has DEFRA proved that the reduction is necessary? It is a large sum of money but, in the great scheme of what we pay out in compensation, it is a relatively small sum.
Has DEFRA considered and discussed the legal implications of the reduced compensation with the Animal and Plant Health Agency? There is some dispute over whether it is right and proper and whether it would lead to a legal challenge. If a bought-in animal becomes a reactor after entering a new herd—the timescale is as yet unknown, though the Minister might be able to say—what criteria will be used to state with absolute certainty that the animal contracted the disease from other cattle within the destination herd? At what point will DEFRA decide that an animal is no longer a migrant to the herd? That is quite a complicated issue—these are complicated matters—and that is where the Government might be subject to legal challenge.
How do the reduced levels of compensation provided for by the order compare with those available to cattle keepers in other EU states, particularly Ireland, which has its own problems with bovine TB? What is DEFRA’s assessment of the impact of this reduction on dairy farms that are forced to buy in herd replacement to meet contractual obligations? That is one of the biggest issues; it is not just a question of the loss of the existing cattle. They have to be bought in, and only from TB-affected areas. What impact would this loss of money have on that process?
What is DEFRA’s assessment of the risk to the quality and welfare of cattle that would result from the reduction in compensation, if it leads farmers to seek to buy replacement stock from the open market, or via live exports? Again, I know about the restrictions on from where to restock, but people who are suffering might look to other means to restock. That would not be any good, with the way TB is spread within the cattle stock as well as maybe from other vectors.
What is DEFRA’s assessment of the impact of this reduction in particular on tenant farmers who have no option but to restock before a breakdown has been resolved, or the impact on the stock value and the ability to assess capital for investment? As the Minister will know, that is the problem for tenant farmers who do not have spare capital: they have to borrow if they face a reduction in compensation. It already takes a considerable time to receive that money. In this case, they would not receive it, and there could be further delays.
Will cattle keepers have the option to pay the slaughterhouse to clip retrospectively where an animal is found not to meet the clean livestock requirements to protect the compensation value to the farmer and receipt value to DEFRA?
I have a couple more questions and observations from the National Farmers Union, and then I will finish. How will the decision to reduce compensation be taken in circumstances in which it cannot be determined whether cattle were unclean when they left a farm? That is the reality of abattoirs; one is always reliant on vets getting it right. The Minister will know about the number of clear cattle that go through, as well the number of cattle of uncertain status that are subsequently found to have TB.
What assessment has DEFRA made of the likelihood and cost of legal challenges? On what basis will DEFRA be able to deal with that without penalising a farmer for a third party’s actions?
Luke Pollard (Plymouth, Sutton and Devonport) (Lab/Co-op)
Does my hon. Friend agree that the changes will unfairly penalise farmers who may be in proximity to high-risk trading activity, rather than having bovine TB in their own herds because of something that they are in control of? They may receive lower compensation simply because of the proximity and activity of neighbouring farms.
Dr Drew
That is a very real point, because we still do not know enough about the transmission mechanism of bovine TB. Farmers may be innocent and the disease may have been brought in. We know from such experiences as that in Cumbria that transmission is associated with buying in stock. That certainly occurred after the foot and mouth episode, where the transmission of bovine TB was almost certainly the result of it being in the stock that was brought into Cumbria. That has happened on a number of occasions.
What consideration was given to other approaches to highlight the importance of clean cattle? What guidance has been given to farmers to try to ensure that we have clean cattle and wildlife clear of this dreadful disease, as we all want?
In the NFU’s consultation response—I will not labour the point, because many of the NFU’s concerns replicate points I have made—it was concerned about how the process will operate with the veterinary risk assessment that will be completed by the APHA. If DEFRA does not have sufficient confidence in the process and relationships with the state veterinary service are not always as good as they might be out on the farm, how can we say definitively that the farmer will not be the main loser? Farmers are losing money, but they are also, dare I say it, losing confidence in the process. DEFRA continually emphases its commitment to industry sustainability, and yet the order could place businesses under severe financial constraint. It would be interesting to know what the Minister intends to do to build confidence in the fairness of the process.
I have two more points from the NFU. It said that DEFRA should allow cattle keepers the option to pay the slaughterhouse in advance to clear the process. I made that point, but the NFU is clear that there needs to be a direct mechanism with slaughterhouses, rather than the current retrospective process. Finally, the NFU said that there is a need to consider that most cattle that go for slaughter because of TB are not at the stage of production or conditioning that is normal for finished animals. They may not have spent any time on dry pasture or bedding to help to clean them. The order will further penalise a cattle keeper who is already losing the production potential of an animal that is taken early.
To conclude, this debate is about technicalities, but it is also about farmers’ feeling that the process with an animal that is taken is somewhat unfair. Having dealt with the Minister, I know he is fair, but the process—in my case, the animal was a pet—is quite brutal. There is a view among farmers that they are always the ones who have to make sacrifices. They are making sacrifices with the cull, and the order creates another slippery slope by reducing yet again the compensation that they have received under successive Governments. Farmers are under huge pressure. I hope that the Minister will be able to allay a lot of those fears and keep the discourse going with the farmers’ organisations, which are not happy.
We need to deal with this dreadful disease, not make it worse. The bottom line is whether people will be tempted to take the law into their own hands if we withdraw compensation. I have always felt that one of the problems is that people under financial burdens are too often tempted to deal with those difficulties in other ways. I am not accusing farmers of any illegality, but these are desperate people who face a desperate disease and have to make very difficult decisions. If they are not compensated for the animals that they have lost, that can only add to their desperation.
Bill Wiggin (North Herefordshire) (Con)
It is very nice to serve under your chairmanship, Mr Pritchard.
Preventing cattle from being brought into herds in which there is an infection that has not been cleared up is an excellent change to the rules, but I am really disturbed by and concerned about proposed new paragraph 5A of the schedule to the Cattle Compensation (England) Order 2012, which relates to compensation payable when
“an animal is presented for slaughter for reasons of tuberculosis, and…the official veterinarian at the slaughter house is of the opinion that the animal is not in a clean condition”.
I must declare an interest as an owner of cattle, as well as drawing the Committee’s attention to my entry in the Register of Members’ Financial Interests. I am bothered by proposed new paragraph 5A because my cattle do not like being tested for TB. They get jabbed in the neck twice, and three days later the vet comes back to feel the bumps. The cows do not know what is going on or whether to expect another jab in the neck. They find the whole thing upsetting, and for a few days afterwards they are very jumpy. These are Herefords, which are the most calm, gentle and wonderful cattle—the world’s No. 1 beef breed.
That is enough plugging. Bearing in mind the pressure on abattoirs, the costs that vets incur and the pressure to make money all the time, there is an inherent temptation for vets to say that cows are dirtier than they would if there were no financial consequences. Equally, cattle cannot be clipped after they have been tested, because it is desperately dangerous. They are not happy animals, and they have four hooves that will smash your head in without meaning to. There is a genuine risk to human health if we not only insist that people have their cattle taken away against their will and with great sacrifice to their business plans when they face the misery that TB inflicts, but then say, “By the way, you’d better make sure they’re clean enough, or the abattoir will dock 50% of your compensation.” That is asking for trouble.
I am led to believe by the Government that at the moment only 20 cattle a year are deemed to be too filthy to be worth killing. However, I think the Government need to do considerably more to put my mind at rest that we are not voting in support of a change in the rules that will cause good farmers who are a bit worried to clip cattle, either before or after TB testing. We need to ensure that this is proportionate. For 20 cows a year, we are talking about £100,000 of compensation. That is not enough to risk one life; no amount of money is worth that. A terrible mistake is being made.
We need to find a different way to ensure that people give their cattle a level of care and welfare that keeps them clean. The suggestion made by the Opposition spokesman was a good one: the abattoir should receive a payment from the farmer to ensure that the animal is in a clean enough condition to be killed. If the vets are going to condemn an animal, they should have to photograph it. I would like to see some sort of appeal process so that when the system starts to proliferate, which it inevitably will, we can say to the Minister, “This is what we did today. What a mistake we made—perhaps we can revisit it.”
I would like to hear good things from the Minister about protecting farmers’ health and safety when they are going through the most traumatic and miserable thing that can happen on a farm in the course of normal business. I have been keeping cattle for quite a long time. There is not just one test a year; there are pre-movement tests as well. TB tests are not fun. My children dread them because they have to help, and we all get hurt—it is not all right. Farmers must do those kinds of things to fight this ghastly risk to human health.
The Minister for Agriculture, Fisheries and Food (George Eustice)
It is great to have the opportunity to debate this order and to set out the Government’s position on these matters. I will turn later to some specific points made by the shadow Minister and by my hon. Friend the Member for North Herefordshire.
Bovine TB is the most pressing animal health problem in the UK today. Over the last 12 months, more than 33,000 TB-affected cattle have been slaughtered in England, which is an appalling waste. The disease is damaging our rural businesses and causing much distress for farmers and rural communities. The cost of controlling the disease is about £100 million a year and a big burden on the taxpayer. To protect industry and to reduce costs for the taxpayer, it is right that the Government should continue to take strong action to ensure that we have a successful and resilient cattle farming industry as the UK enters a new trading relationship with the world.
Our comprehensive strategy to eradicate TB includes commitments to strengthen cattle testing and movement controls; to cull badgers in areas where they are an important factor in spreading the disease to cattle; to support badger vaccination in the edge area of the high-risk TB area; and to improve biosecurity on farms and in trading. Adapting the way that compensation funding is used to incentivise the take-up of good biosecurity practices is an important element of the Government’s long-term TB eradication strategy. That is why we are amending the Cattle Compensation (England) Order 2012 to introduce small but important changes to the compensation regime in England. These changes will encourage more herd owners to take sensible and proportionate steps to improve their biosecurity, thereby reducing the disease threat to their own and neighbouring herds.
I recognise that, for business sustainability reasons, some TB-affected cattle farmers must be able to bring in new stock to replace the animals that they have lost, and there are no plans to stop this. However, paying full compensation for cattle brought into a herd with a known and ongoing disease problem could be a disincentive for some to take action to reduce their disease risks. That is why we have decided first to follow the example set by the Welsh Government in 2016 by paying reduced compensation for any individual animals that are brought into a herd under TB restrictions and that subsequently pick up the infection and are removed while the herd is still restricted. Cattle farmers who register their herds under the CHeCS TB accreditation scheme commit explicitly to take steps to reduce their TB risks. For that reason, I decided that we will continue to pay full compensation to farmers for herds that are accredited in that way, since they have demonstrated that they are already taking action to protect themselves and to improve their biosecurity.
Secondly, herd owners have the option of sending their TB-affected cattle to their choice of slaughterhouse and taking a payment from the slaughterhouse operator in place of DEFRA compensation, but currently they are sometimes reluctant to do so. Many tell me they would like to use their local abattoir because it is closer and it reduces the stress on the animal, but this option has been taken up rarely. Under the existing rules, the keeper suffers a financial loss if the animal’s carcase is condemned at the slaughterhouse, since they receive no compensation and no payment from the slaughterhouse. Incentivising keepers to take this option will enable some to negotiate better prices for their cattle with an abattoir that they know and reduce the cost to the Government of compensation. The order includes a new financial safety net provision so that those who opt to organise the slaughter of their TB-affected cattle locally receive compensation at the same rate as other keepers of TB-affected cattle if the animal’s carcase is condemned. We are therefore removing the risk that farmers currently face when they send their cattle to a local slaughterhouse. This measure has been welcomed by the industry.
Dr Drew
I very much welcome what the Minister has to say about that aspect of the order, but who makes that decision? Is it the vets in the abattoir, or does the farmer who brings in the animal have to put that to the abattoir as a compensation arrangement? I am a bit unclear about that.
George Eustice
The decision about whether a carcase is fully condemned because the disease is rampant and the animal has too many lesions will be made by the official veterinarian at the abattoir. Currently, a farmer who chooses to slaughter privately with a local abattoir will receive no compensation and no payment for the carcase. In the vast majority of cases, the disease is caught at an early enough stage that the number of lesions is very small, so the abattoirs are able to get salvage value from the carcase—they are able to salvage most of the meat and turn it into value. A number of farmers have told me that they would like to take that option with a local abattoir, but at the moment, the risk that they might get no payment at all is a barrier to their doing so. The decision about whether the animal is totally condemned is one for the official veterinarian. If it is totally condemned, the farmer will receive the full compensation payment.
The third and final change that the Government propose is to reduce compensation for TB-affected cattle that are so unclean that the slaughterhouse operator is unable to process them. The UK has some of the highest animal welfare standards in the world, and the Government are committed to raising them further. I believe that there is no excuse for sending unclean cattle to slaughter. Reducing compensation for cattle that cannot be processed for human consumption will send a clear message that the cleanliness of slaughter cattle, including TB-affected animals, is an important animal welfare consideration. Thankfully, the number of TB-affected cattle that have been rejected because they are too unclean to process is very low—we are talking in the region of about 20 per year.
The order targets bad practice. For example, when an animal is condemned, the farmer might not take care of it sufficiently in the 10 days or so that it might take for the lorry to pick it up and take it to slaughter. He might judge that there is no longer any interest or value to him in that animal and he will get compensation anyway. I want to discourage that sort of behaviour. My hon. Friend the Member for North Herefordshire is a breeder of Hereford cattle; my family are breeders of South Devon cattle. I, too, know what it is like to suffer TB breakdowns, and I know the trauma and distress that that causes. I can say this much: if animals are condemned, my brother takes care of them and ensures they have plenty of bedding in the week or so that it typically takes for the lorry to arrive. If the animals that arrive at an abattoir are so unclean that they cannot even be processed—if they are in the bracket of the 20 per year—it is likely that they have not been sufficiently cared for, and that other animal welfare issues pertain to that situation.
Dr Drew
The time that it takes to get cattle picked up is one of farmers’ biggest frustrations. I do not regularly get rung up about it, but when I do get rung up about a herd breakdown, the one thing I am always asked is, “Can you get these animals taken sooner rather than later?” That is the worry about this. I am not saying that neglect is in any way acceptable, but if someone has had a massive breakdown and they are told that their cattle may be taken some time over the next week to 10 days, that is not much of an incentive. Those people are really at their wit’s end. If there is one thing the Minister should take away from this, it is that we should speed up the process by which animals are taken—certainly, once they have a whole herd breakdown.
George Eustice
All I can say is that APHA does run certain programmes for that and picks up the animals as soon as it can. It usually happens within days; sometimes it can take a week.
I return to my initial point: typically, once an animal has become a reactor and tested positive to the disease, the farmer will keep it in isolation in a shed somewhere. Is it really too much to ask that farmers ensure there is full straw bedding in that shed for the week or so that it takes for the animal to be collected? My view is that it is not.
Bill Wiggin
I suspect it is because the Minister has such a kind heart that he is worried about the care shown to these poor condemned animals. However, it is an offence, which is properly legislated for, not to look after animals properly. The draft order is no substitute for proper animal welfare—it is misguided in that respect. Proper legislation is already in place. Will he think again about how he will handle the increased complaints that will inevitably follow when abattoirs work out that vets are under pressure to condemn more and more stock?
George Eustice
Vets have a very objective approach to condemning unclean animals. They do that already, whether it is for TB compensation or for commercial animals. It is worth noting that if a farmer sent a steer to an abattoir to be slaughtered for food consumption in the normal way and it was condemned as too unclean even to process, he would get no payment for that animal. Under this scheme, he would get 50% compensation.
It is important also to recognise that when an animal is condemned, it has no salvage value to the Government. At the moment, we pay full compensation to farmers for the value of their animals, and we try to recoup some of that cost through those animals’ salvage value. Where animals are condemned, there is no salvage value.
Bill Wiggin
I am sorry to interrupt the Minister, but the wording of the draft order is not “the meat is condemned” but
“the animal is not in a clean condition”.
That is why I think he is wrong.
George Eustice
As I said, at the moment the official veterinarians apply a clear, objective set of criteria. I am more than willing to share the full detail of those criteria with my hon. Friend, but they are applied very objectively by official veterinarians who work for the Food Standards Agency and have a great deal of experience of this work. As I said, we are talking about just 20 animals a year—a very small number.
Luke Pollard
The hon. Member for North Herefordshire raised a really interesting point about what happens in the event of a dispute about whether an animal is unclean. It does not look like the draft order provides for an appeal process. If there is concern that this measure will be used to reduce compensation for farmers, it seems logical that there should be an appeal process. Will the Minister deal with that?
George Eustice
The approach will be exactly as it is now. The official veterinarian makes the decision about whether to condemn an animal for being too unclean to process. We have just passed legislation to have CCTV in slaughterhouses, and the official veterinarian collects photographic evidence to demonstrate that an animal was unclean. The OVs have processes to manage this. Ultimately, the FSA is independent and the OVs on the ground will make the decision, as they do on many other such issues.
The shadow Minister asked why we are making these changes. My approach to changes to compensation is clear: I have always rejected such changes simply for the purpose of saving money. In my view, we should change compensation arrangements if that will change behaviour. He also asked about the legal implications. I point out that we are doing exactly what the Labour Administration in Wales did in 2016. We are simply bringing England into line with the approach that has already been adopted in Wales, which has been successful and has not led to legal challenges.
The shadow Minister asked how we would determine whether a breakdown was due to a disease that an animal contracted before it entered the herd or when it entered the herd. We do not intend to make that distinction, since we are trying to incentivise caution among farmers about the animals they buy in. We want to make clear that if farmers are trying to go clear, they should not buy in animals that are at high risk of having TB. If it is possible for farmers to delay re-stocking and be more cautious about the way they do that, they may choose to do that.
I was very clear—we changed the order from its original draft to reflect this—that I want to ensure that any farmer who signs up to the CHeCS-accredited scheme to demonstrate that they are taking biosecurity seriously and taking proactive action to reduce the exposure of their herd will still qualify for 100% compensation. Any farmer who might be affected by this 50% reduction by bringing animals into the herd when they have an ongoing breakdown can mitigate that immediately simply by signing up to the CHeCS accreditation scheme. Anyone can join CHeCS; they have that option.
The second option, which should be seen in the context of earlier points, is that if a farmer has a breakdown or an animal is brought on, he would now have the option to go for private slaughter and get the salvage value under one of the other provisions that we are introducing. Even if a farmer said, for entirely ideological reasons, “I refuse to do biosecurity because I believe badgers are to blame, and I am not going to do biosecurity; I won't sign up to checks,” he still has the option to get a salvage value by sending that animal to a local abattoir of his choosing.
My final point is on scale. About 1% of cattle herds bring animals on to their herds when they are under a restriction. They tend to be predominantly dairy herds. We suspect that around 250 herds might be potentially affected by this measure, but every single one has the option to join the CHeCS scheme and to immediately mitigate that risk. That would be a positive step forward.
George Eustice
The CHeCS scheme is a United Kingdom Accreditation Service-accredited scheme that certifies that farmers are adopting proactive measures to improve their biosecurity. That could include, where necessary, putting additional fencing and protection on yards to stop badgers getting into contact with animals. It can involve adopting a particular risk-based approach to the way they trade. It can also involve investment in special drinking troughs so that badgers cannot get access to them, and so on and so forth.
I often hear from the hon. Gentleman and the Labour party that we should not be doing a badger cull and that we should be doing biosecurity, vaccination and other things. My answer is that we need to do all of those things. In the two areas where we first started the badger cull, we have seen a 50% reduction in the incidence of the disease, but that is not enough on its own. We also have to improve biosecurity and we have to continually refine our cattle movement controls. If the Opposition are serious about this, they must recognise that we must take biosecurity seriously too. That is what we are seeking to do.
Bill Wiggin
I am using this opportunity to check on the CHeCS. The Scottish Agricultural College does not appear on the CHeCS website, yet I believe it is a CHeCS-accredited scheme. The Department needs to have a little look at exactly how the scheme is working. I have been CHeCS-accredited from the beginning, and the tuberculosis bit does not really work. I hope that the Minister will have a little look at that. Could he also ensure that the 20 cattle that are condemned every year are photographed?
George Eustice
On the latter point, yes. I will ensure that that instruction is given to the OVs. I suspect that they would probably do that anyway for their own internal procedures.
On my hon. Friend’s first point, I do not think that is directly relevant to this set of regulations, but I am more than happy to have that discussion with him. The CHeCS system has worked well on other diseases, such as bovine viral diarrhoea. The TB version of it was launched in 2015 with the support of the National Farmers Union and others. It is something that we want to get behind and support.
Dr Drew
We will not push the question to a vote, because we are largely satisfied, but I hope the Minister will keep this under review. Cattle-to-cattle transmission is still, according to all the scientists, about 75% of the causation of TB. I do not want to get into badgers and all that. Anything to bear down on biosecurity is very important. Counterintuitively, my argument is that farmers under pressure would do the very opposite to that which the Minister is asking them to do. It may only be 20 cows, but the danger is that there are other things going on out there that we know should not be going on out there, and the Minister needs to keep reviewing this if we are ever to get on top of this dreadful disease.
On the basis of that understanding, we will not push this to a vote, but we will look very carefully at how these things are going to operate. Farmers need to have confidence in the scheme. If they do not have confidence in the scheme, it will not work.
Question put and agreed to.
Resolved,
That the Committee has considered the Cattle Compensation (England) (Amendment) Order 2018 (S.I. 2018, No. 754).
Draft EEA Passport Rights (amendment, Etc., and Transitional Provisions) (EU Exit) Regulations 2018
(5 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Austin. The Treasury is in the process of laying around 70 statutory instruments under the European Union (Withdrawal) Act 2018. That is being done to ensure that a functioning legislative and regulatory regime for financial services is in place should the UK leave the EU without a deal or an implementation period. This is the second debate in the House as part of that programme, and I look forward to several more in the weeks ahead.
The overriding objective of that work is, as far as possible, to maintain continuity at the point of exit by maintaining legislation as it currently exists. Where existing EU legislation would not operate properly in the UK context, we need to amend it to ensure it works effectively after we leave. We are therefore using powers delegated to Ministers under the withdrawal Act to fix deficiencies in applicable EU law that will be transferred directly to the UK statute book at the point of exit, and to fix existing UK law to ensure that it is not deficient on and after exit day.
Ian Murray (Edinburgh South) (Lab)
I am grateful to the Minister for giving way so early in his contribution. I hope he will tell us before he finishes what projections the Treasury has made of the number of potential job losses in the financial services sector if the UK leaves the EU without a deal.
John Glen
I will be very happy to address that point in due course, either in my introduction or when summing up.
That work will provide the UK’s financial services sector with much-needed certainty about regulatory requirements in the event of no deal, and ensure that firms can continue to do business in the UK. That is consistent with the Government’s position that, although the best outcome is for the UK to leave with a deal, in the meantime we must—and we will—continue preparing for no deal. I want to underscore the point that the tabling of this statutory instrument was a planned activity that was widely anticipated by the regulator and industry.
Thelma Walker (Colne Valley) (Lab)
Has the Minister ever seen a Treasury matter of comparable scope and importance debated in a Delegated Legislation Committee?
John Glen
No—I acknowledge that this is a significant event. What we are doing today is wholly necessary, and I cannot at the moment envisage anything of comparable significance.
Many of my esteemed colleagues will be familiar with the passporting system, which allows a firm in a European economic area state, such as a bank or an insurer, to offer services in any other EEA state on the basis of the authorisation granted by its home state regulator. That system relies on a set of reciprocal agreements between EEA member states, which are implemented in domestic legislation, in this case under schedules 3 and 4 to the Financial Services and Markets Act 2000. My Department had to make a key decision about how to deal with those existing EEA passport rights in UK law in the event of no deal.
In such a scenario, the UK would be a third country, outside the EU financial services framework and therefore outside the passporting system. The provisions agreed between EEA states would cease to apply in the UK, meaning any references to EEA passport rights in UK legislation would become deficient at the point of exit. As a result, the Government will need to repeal provisions in the 2000 Act implementing the EEA financial services passport, meaning that any EEA firms currently operating in the UK via a passport would lose their permissions to do so on exit day, just as UK firms would lose their permissions to passport into other EEA states. Instead, firms would need to obtain authorisation from the UK’s regulatory authorities—the Prudential Regulation Authority and the Financial Conduct Authority—by exit day if they wished to continue doing business in the UK.
Mark Garnier (Wyre Forest) (Con)
Has the Minister done an analysis of what that would mean in terms of income for regulators and the extra requirement for them to be the direct regulators as opposed to just having oversight?
John Glen
I cannot give my hon. Friend a precise figure, but it would be a considerable change in the way that the regulators operate and would need a considerable reconfiguration of resources in an ideal scenario. Having had conversations with Sam Woods and Andrew Bailey at the PRA this morning, it is a scenario for which they have made contingency provisions.
The volume of applications received by the UK regulators is expected to increase significantly, as many hundreds—perhaps thousands—of EEA firms submit applications for UK authorisation. That will include applications from large and complex businesses with a substantial UK presence. To minimise the disruption faced by EEA firms and UK businesses and consumers due to the loss of EEA passporting rights in a no-deal scenario, the draft regulations fulfil the Government’s commitment, made on 20 December last year, to introduce legislation to establish a temporary permissions regime.
Ian Murray
The Minister said a few moments ago that the regulations would allow UK financial firms to continue doing business as regulated businesses in the UK. Can he say whether they would be allowed to continue doing business in the EU?
John Glen
I am sorry if I made a mistake in what I said; the regulations actually allow EEA firms to continue operating in the UK. The reciprocal right of UK firms to operate in the EEA does not exist at the moment. That is a reciprocal decision that we hope will be in the interest of EEA states to make with respect to the comfort of their citizens, who receive financial services from UK firms, but that is not something that has happened yet.
This regime would enable EEA firms operating in the UK, via a passport, to continue their activities in the UK for up to three years after exit day, allowing them to obtain UK authorisation or transfer business to a UK entity as necessary. The regulations would also give the Treasury the power to extend the regime, which is crucial to alleviate the potential scenario in which some EEA firms cannot be authorised within the three-year period. The Treasury would not be able to extend the regime as a matter of course, but only if it considered it necessary to do so. The use of the power would also need to be based on a robust assessment from the FCA and PRA regarding the effects of extending or not extending the period. The length of the regime could only be extended by 12 months at a time. The instrument that would extend the regime would be subject to the negative procedure, and that has been drawn to the special attention of the House of Lords by the Secondary Legislation Scrutiny Committee Sub-Committee B, in a report published last week, on 18 October.
My officials and I judged that choice of procedure to be appropriate, given that the power to extend the regime is conferred by the draft regulations under discussion today, which are subject to the affirmative procedure. I reassure hon. Members that we take parliamentary scrutiny seriously, and although this affirmative instrument introduces the power to pass regulations via the negative procedure, the Treasury believes that if similar provision were to be made by an Act of Parliament, it would also be via the negative procedure, not least because the power is so tightly drawn.
The temporary permissions regime would ensure both that firms can continue servicing UK businesses and consumers for a temporary period after exit day, and that they have appropriate time to prepare for and submit applications for UK authorisation and can complete any necessary restructuring. The PRA and the FCA can manage the expected applications for UK authorisations from EEA firms that were previously operating in the UK via the passport in a smooth and orderly manner.
The draft regulations are a pragmatic response to a complex problem, and are needed to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. I note that the Secondary Legislation Scrutiny Committee report has acknowledged the importance of the regulations in achieving that objective, and I emphasise to the Committee how widely desirable they are both to the industry and to the regulators.
It is also important that industry understands what we are doing, how it will work and why it is necessary. To aid that, the regulations were published in July in draft form along with an explanatory policy note to maximise transparency and understanding before their introduction. The regulators responsible for the authorisation and supervision of financial services firms are now in the process of consulting industry to ensure that the rules that would apply to firms in this regime function properly when the UK leaves the EU.
To conclude, the regulations are essential to ensuring that we have a functioning financial services regime in a no-deal scenario. They provide reassurance for EEA financial services firms, UK businesses and the customers they serve that they will continue to be able to operate here, no matter what the outcome of the negotiations. The City’s success is based on being the most open and dynamic financial centre in the world. Ensuring that EEA financial services firms can continue to operate here after exit day will help to maintain that status, protect jobs and preserve tax revenues to fund our vital public services. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is a pleasure to see you in the Chair, Mr Austin. This Committee marks the 13th time I have done a Delegated Legislation Committee for the Opposition in my role as a shadow Treasury Minister. In that time, I have seen Committees on issues of varying significance and impact. The Minister and I have done everything from the post-financial crisis regulatory regime to formally dissolving the British Potato Council, but I do not think anyone would deny that the piece of legislation before us today is on a completely different scale because of its importance and the issues of substance that it covers.
As is well known, the Government took a decision to undertake the bulk of the legislative preparation for our EU withdrawal through secondary legislation. As an Opposition, we have voiced our concerns about that on many occasions because of the transfer of power to the Executive that it entails. I very much appreciate the work that has been done by the Minister and his staff in the civil service to brief us on the process, but it is unquestionable that, in a normal environment, changes such as this should be dealt with through primary legislation, given the scrutiny that that would bring. The sheer number of Treasury regulations and the speed with which they have to come forward is deeply concerning in respect of holding the Government fully accountable. As the Opposition, we commit to making every effort to do that, but it is undoubtedly a constitutionally unprecedented and tremendously resource-intensive task, and it leaves room for error.
It is disappointing that we have reached the stage where such contingency measures for a no deal scenario must be laid before the Committee. The UK is very close to our EU exit date, and financial services firms need certainty about the shape of things to come, which has been sorely lacking. As a result, financial institutions have already begun to enact their own contingency provisions such as moving subsidiaries and assets to the EU. They began that process many months ago.
I repeat my thanks to the Minister and his staff for taking the time to ensure that we have as much clarity as possible on what the measures mean, but the extent of the regulations paints a bleak picture, most notably with the consequential amendments, which show what we will be giving up if the negotiations do not progress, including co-operation with the EU on the implementation of sanctions and asset-freezing.
I begin by asking for the Minister’s reassurance about the presence of such clauses and their intended use. We have taken it on trust that the regulations simply provide for a functional statute book in the event of no deal, but in the interests of ensuring full transparency, will the Minister confirm that for the record? We would be failing in our duties if we were not to get that on the record.
Moving from the principle to the substance of the regulations, I want to ask the Minister specific questions about the potential temporary permissions regime and how it would operate. Given that the TPR would underpin the full regime for passporting financial services into the UK, it is a possible fundamental building block of our future regulatory regime. Will he make clear to the Committee what the Government’s current negotiating objective is in relation to the passporting rights for EU financial services firms given that it is the backstop contingency measure? What is the ideal scenario? How will legislative provision be made for it?
Adding to the democratic deficit in the process, elements of the draft legislation seem to bestow significant discretionary powers on the regulators—both the FCA and the PRA. Regulation 6(6)(a) appears to give the FCA and the PRA powers to set landing slots of any length and any notice period for which an EEA firm passporting into the UK must apply for full UK authorisation. Should those landing slots have a minimum duration so that financial institutions are given a minimum notice period before being required to submit an application? In practice, such applications can take weeks or months to prepare and firms will need as much time as possible.
It appears that regulation 6(7) extends the period for which the regulators are able to delay a decision on whether to grant UK authorisation from the current six to 12 months to three years from exit day. That seems disproportionate and unfair to companies, which will endure a long period of uncertainty about whether they will be granted UK authorisation. Will the Minister clarify the reasons for that? We recognise that increased regulatory workload is likely to increase approval times, but surely they should be closer to the current timescale—perhaps they should increase from six months to nine, or from 12 months to 15. Clearly, there must be no outstanding applications awaiting approval at the end of the three-year transition period.
The Opposition argue that regulation 6(8) should include a minimum notice period to tell firms that their UK authorisation has been declined. A refusal will necessitate the winding down of operations and may present a risk of disruption to customers. It is essential that a firm’s withdrawal from the market is as orderly as possible. Firms need time to prepare. Obviously, that has to include a three-year cut-off at the end of the transition period.
Finally, the Opposition suggest regulation 19 should be looked at again. That regulation would give the FCA and the PRA powers to enforce the requirements of a passporting EEA firm’s home state regulator on that firm. However, that creates new practical issues related to the ability of UK regulators to act on an extraterritorial basis. We suggest that alternatives could be looked at. It was suggested to me that co-operation agreements could be set up with local EEA regulators for relevant member states so they retain enforcement powers for breaches, but I am mindful that Ministers and the regulators will have discussed other options. I am interested to hear the Minister’s view about whether it is possible to reconsider regulation 19 with other types of remedial measure.
Those issues show the scope and complexity of what we are dealing with. I am aware that we are under significant time pressure, both with exit day looming and given the volume of secondary legislation that must be passed in the coming months. However, for the sake of one of the UK’s most important economic sectors, we must not let that stand in the way of proper scrutiny and consideration.
Ian Murray
It is a great pleasure to serve under your chairmanship, Mr Austin, to consider what is, in the Minister’s words, one of the most significant pieces of secondary legislation he has known.
Ged Killen (Rutherglen and Hamilton West) (Lab/Co-op)
Does my hon. Friend agree that given that, in the Minister’s own words, there is nothing of comparable significance to this statutory instrument, it is extraordinary that no Scottish National party Member is here to stand up for Scotland’s financial sector?
Ian Murray
I am delighted that we managed to contrive that intervention to put on the record that there is no one here from the third party of this House. Under the normal procedures of a Committee of such significance, it gets the right to respond, but has decided to pass up that opportunity. Given what the Minister said about the significance of the statutory instrument, there perhaps should be someone from that party here.
That does not take away from the fact that the statutory instrument says everything we need to know about the Government’s stance on Brexit. They are having to put through a statutory instrument to ensure any EEA firm that does business in the UK will be able to continue to do so after we leave the European Union in the event of no deal. There is utterly nothing from the Government about what will happen in the event of no deal. With the Prime Minister being stabbed in the back and hanging from the noose—in the words of Conservative Back Benchers—it looks increasingly unlikely by the day that we will end up with anything other than no deal or something close to it. What will happen to UK financial services firms that operate in the European Union?
I intervened on the Minister to ask whether he would expand on the fact that the Treasury is doing a significant amount of work. It should be commended for that work, but the Minister was questioned at least a dozen times in the House this week about the impact on jobs and this country’s GDP of a no deal scenario, or indeed a Chequers scenario or a Canada plus plus plus scenario. He fundamentally refused to answer that question.
In my earlier intervention, I asked whether the Minister could tell us the impact on jobs in the financial services sector in the event of no deal, which is what the statutory instrument is about, and he said he would answer in his summing up. I suspect that, by the time he gets to his summing up, he will not have a figure from the Treasury analysis, either because he does not have one, or because it is one that the Government do not want people to hear.
I hope the Chancellor comes to the Dispatch Box on Monday with a copy of the report from the Office for Budget Responsibility and lays out the impact of staying in the European Union, a no deal scenario, which is what the statutory instrument is about, a Chequers scenario, a Canada plus plus plus scenario, an hon. Member for North East Somerset (Mr Rees-Mogg) scenario, and the former Foreign Secretary’s scenario. For our financial services sector, it is merely a couple of reporting quarters away. I hope the Chancellor lays out the impact on jobs of leaving the European Union under all those plans, and everything in between, even if the Government give us just a range.
The Conservative party can fight internally all it wishes about who should have the keys to No. 10 and No. 11 and who should be doing the Brexit negotiations, but my constituency of Edinburgh South relies on financial services. We are talking about tens of thousands of jobs across Edinburgh and Scotland and the United Kingdom, billions of pounds in tax revenue to the Treasury every single year, and the underpinning of this country’s entire exporting system. Even if it were to come to pass, the Chequers plan, which looks as if it is just about as dead as the dodo, does not even mention the services sector. It is 80% of our economy, and it is not even mentioned in the Chequers plan.
The Chair
Ian Murray
The order is about the ability of EEA companies to continue to trade in the UK in a no deal scenario, but makes absolutely no mention of how UK financial services companies will be able to operate in the EU if we end up in such a scenario, and the statutory instrument has to kick in. It is important to highlight that the Government are doing an awful lot of work preparing for a no deal scenario in one way, but they are not doing it in the opposite way in terms of what the financial services sector has said.
The Chancellor said in a speech last March that he wanted full regulatory alignment between Britain and the EU for financial services post Brexit, which would mean that the statutory instrument would be redundant. However, he has been overruled because that is not what is on the table, either from the EU or from the Prime Minister in terms of her negotiating position in Brussels. If the Chancellor has now been overruled, perhaps the Minister can tell us what the Government’s position is with regard to UK financial services post Brexit in any scenario and the impact that leaving will have on financial services.
Is it possible even to deliver what is being asked for in the statutory instrument? The regulators are hardly well known for their efficiency and speed at the moment in dealing with minor issues regarding some of the scandals and overhangs of the financial services sector disaster in 2008. Paragraph 12 of the explanatory memorandum states:
“The impact on business, charities or voluntary bodies is that firms that currently operate in the UK on the basis of an EEA financial services passport will require a legal expert to examine the new legislation and understand its implications.”
They do not just need a legal expert; they need somebody of a much higher authority, probably a bit closer to God, to understand what the Government’s position will be with regard to the European Union.
Today’s statutory instrument is yet another that I have scrutinised in this place that is packed full of Henry VIII powers—no recourse to Parliament, no recourse to the people, and no recourse to the financial services sector. Has there been any consultation with the financial services sector on this statutory instrument? I expect there has been very little. Has anything been done on whether the regulators can actually deliver some of the stuff in a no-deal scenario? Today, in reports coming out of the Cabinet meeting, the Government are saying that Government-run ships might be needed to bring medicines and goods into the UK in a no-deal scenario—we may need to nationalise the shipping industry. That is coming from a Conservative Government, not the Leader of the Opposition. That is the kind of impact we are going to have if the Government continue on this trajectory of preparing for no deal and turning a blind eye to the interests of this country.
I say to the Minister what I have said to previous Treasury Ministers. I would like him to stand up and promise to my constituents that not one of them will lose their jobs in financial services as a result of the Government’s deal, no deal or otherwise, when we leave the European Union. I would like him to stand up and promise that to my constituents and the country, but I suspect he cannot. The reason is that the Government are jeopardising the whole sector and every single other sector. That is not just my words, but the words of the sector itself. One headline reads: “Finance industry tears into British Government’s Brexit trading plans” with regard to services and financial services. The Government have to go back and reflect on whether they are doing this in the interests of the country or in the interests of their party, and give me a cast-iron guarantee that none of my constituents will lose their jobs.
I am sure we will not be voting against this statutory instrument today because it is incredibly important—hopefully it will be unnecessary. Perhaps in the next few months, the Minister and some of his colleagues will realise that the Government and the country are heading towards the single biggest act of self-harm that the country has ever implemented, and they will put any deal back to the people and get the people to decide whether this is what they want for the future of this country. Anything else would be a total and utter dereliction of duty.
John Glen
First, I congratulate the hon. Member for Stalybridge and Hyde on his 13th statutory instrument. I assure him that we will have to celebrate at least his 30th together, in this room or one down the corridor.
As he always does, the hon. Gentleman has raised some very important matters and I will do my very best to respond. The first substantive point is whether these matters should be dealt with through primary or secondary legislation. This instrument and many others are affirmative instruments and we rightly have the opportunity to discuss this one today. That process was a matter of considerable debate during the passage of the Bill and was agreed by Parliament as the only practical way of proceeding. That sets the context for why we are doing that here.
The hon. Gentleman made a number of points about the regime and how it will work, including landing slots. The regulators will have the ability to set landing slots if they so choose. We have been working closely with the regulators on that and expect them to organise and schedule the landing slots in an orderly manner. They are limited because they have to be in a two-year period from exit day. I will come on to the specific points made by the hon. Member for Edinburgh South, but I would stress that these are arrangements for a no-deal scenario. The Government are fully committed to securing a deal—and a deal on financial services that is in the best interests, as I fully acknowledge, of the financial services sector, which has a considerable footprint across the United Kingdom.
The amendments to domestic legislation, both primary and secondary, are consequential amendments to provisions of domestic legislation that reference the EEA passporting system, which will no longer be in effect after exit day. This is essentially a clean-up exercise to remove redundant references to passporting arrangements on the UK statute book. It does not result in any policy change. Provisions in any onshored EU legislation that reference the EEA passporting system will be similarly amended in the relevant individual exit statutory instruments that will be laid as part of the ongoing onshoring programme.
The hon. Member for Stalybridge and Hyde raised the issue of the extension period of around six to 12 months to three years. The extension is necessary to ensure a smooth transition for firms moving from the current system of passporting rights to full UK authorisation. It will bring the statutory deadline set out under the Financial Services and Markets Act 2000 in line with the overall three-year duration of the regime and will help to ensure the overall application process can be managed in an orderly manner. It will not disadvantage firms, as every firm in the regime will be able to undertake the same activities they were entitled to undertake before exit day.
Ultimately, the Government are committed to ensuring a smooth transition for EEA passporting firms to UK authorisation. The determination of the three-year window was made in close consultation with the PRA and FCA, based on estimates that they made of the number of applications they would be likely to receive for authorisation. We believe this is good news for firms. It will not give them uncertainty; it will give them assurance. UK businesses and customers will welcome that.
The hon. Gentleman asked about applications for authorisation that are rejected. I can tell him that we will have further statutory instruments laid later on to enable such firms to wind down their UK-regulated activities in an orderly manner. On the Government’s negotiating objectives for passporting, the Prime Minister has made it clear that Brexit will mean an end to passporting. The temporary permissions regime is about managing that transition. We have set out a proposal for an ambitious future relationship in our negotiations. I will set that out in a moment.
The hon. Member for Edinburgh South raised the issue of an impact assessment of a no-deal scenario. As he readily acknowledges, the Treasury is undertaking a wide range of analyses in support of the negotiations and preparation. He cited various scenarios, all of which have different assumptions according to the people citing them as being desirable. In a no-deal scenario, there are a range of outcomes. We could make assumptions about a degree of hostility or a degree of co-operation from our friends and neighbours in the EU. EEA members would not serve their consumers very well if they did not offer a reciprocal regime. It is impossible to make a meaningful financial or jobs calculation because it is conditional on a range of assumptions and is not possible to set out.
Ian Murray
I just do not accept that excuse. The Treasury does projections on every single aspect of its work every single day. Indeed, the financial services sector itself has said that up to 10,000 jobs could go on day one if there is no access to the single market, so let me make it easy for the Minister, as I tried to in the Chamber earlier this week. Will unemployment, as a result of any of the scenarios, go up or down?
John Glen
I have stated my and the Government’s position. We are working towards a deal that is in the best interests of the United Kingdom as a whole. There was an awareness of this measure on 20 December last year. It was laid on 11 July. The head of the PRA came to the Select Committee on 11 July and set out how desirable it was. With respect to the wider question of the economic consequences of different outcomes, it would be beyond the scope of this Committee if I set that out here and now. However, I can say that we must have a deal that is right for financial services and allows us flexibility going forward, but this measure is about making sure that we have adequate certainty for consumers who benefit from the financial services of EEA firms, and that is what this is about.
As to what will happen to UK firms that passport into the EEA , the Government, as I said, can take legislative action only in relation to EEA firms that passport into the UK. We cannot, through unilateral action, influence the status of UK firms operating in the EEA. However, as I said, it is hugely desirable for their consumers for them to do it. That is why we really want to avoid that situation and agree a deep and special partnership with the EU, as well as an implementation period, which is important for both.
Jonathan Reynolds
I think the Minister is saying that the Government’s objective is still for mutual regulatory recognition for—essentially without the existence of the passporting regime—similar arrangements to those we have now after we leave. I think most people would acknowledge that that is quite a difficult thing to propose without negotiating a new relationship with Europe that would include such things as being part of a new customs union, as the Labour party has proposed.
Is it not possible that, if the Government agree what we might call the Chequers package—a common rule book on goods—even though a deal might be agreed we should still be using the measures we shall agree today? Even though a deal of some sort was agreed, because it did not cover the financial services sector, we would still be using the regulations that are before the Committee.
John Glen
Of course, the outcome of the negotiations will determine what we do. If we get a deal, clearly the implementation period will take effect. We would then have to look at what new legislation was optimal, from a financial services point of view, to keep us competitive; but such decisions have to be deferred until we get to that point.
I do not want to detain the Committee unduly, but there were other points I wanted to address. On the point about the FCA and the PRA powers to enforce home regulator powers or breaches, it is not an extra-territorial measure, but it has effect in the UK only. It merely preserves requirements imposed by an EU regulator so that the EU regulator does not have to impose such requirements itself. Once in the regime, the UK regulators will be able to disapply the requirements if they choose.
I think I have probably addressed all the points that were made. I am grateful for the number of points that have been fed to me from my left. I do not think that I have addressed all the scenarios to the satisfaction of the hon. Member for Edinburgh South, and I acknowledge his dissatisfaction. All I can say is that the Government are fully committed to delivering the best possible deal on financial services. I visited Edinburgh over the summer recess and I acknowledge the importance of financial services to the hon. Gentleman’s constituency, and to jobs throughout the country. We hope that we shall not need provision for a no-deal scenario, but it is appropriate that we make provision for it today.
Question put and agreed to.
Resolved,
That the Committee has considered the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.