Financial Services (Implementation of Legislation) Bill [HL]

(Limited Text - Ministerial Extracts only)

2nd reading (Hansard): House of Lords
Tuesday 4th December 2018 Lords Chamber

Moved by

[Lord Bates]

That the Bill be now read a second time.

[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.

--- Later in debate ---

[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.

Bill read a second time and committed to a Committee of the Whole House.