Draft Capital Requirements (Amendment) (EU Exit) Regulations 2018
Draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018
(5 years, 11 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 Capital Requirements (Amendment) (EU Exit) Regulations 2018.
The Chair
With this it will be convenient to consider the draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018.
John Glen
It is a pleasure to serve under your chairmanship, Ms Buck. As has been said before, Her Majesty’s Treasury, as part of preparations for the UK’s withdrawal from the EU, is laying statutory instruments under the European Union (Withdrawal) Act 2018 to ensure that there continues to be a functioning legislative and regulatory regime for financial services in the UK in the event of a no-deal scenario. That includes the two SIs we are debating today, which will fix deficiencies in UK law relating to the UK’s prudential regime for credit institutions and for bank resolution. As with other SIs that the Treasury has laid and debated under the 2018 Act, they are designed to provide continuity at the point of exit by maintaining existing legislation, but amending it where necessary to ensure that it works effectively in a no-deal context.
The first SI being considered today concerns the prudential rules that apply to banks, investment firms and building societies under the framework set by the EU capital requirements regulation and capital requirements directive. The second SI relates to the bank recovery and resolution directive, which sets out requirements for ensuring that bank failures can be managed in an orderly way and provides a common EU framework for firm resolution. In a no-deal scenario, the UK would be outside the European economic area and the EU financial services framework. The SIs will make amendments to retained EU law so that the legislation would continue to function effectively in a no-deal scenario.
The draft capital requirements regulations will make amendments to the retained EU capital requirements regulation and the domestic secondary legislation that implemented the EU capital requirements directive. The draft regulations will make the following principal amendments. First, they will make changes to the group consolidation regime for liquidity and capital. Current EU legislation allows EU banking groups to report a single set of figures for their activities across the EU. The SI will amend those requirements, so that they operate at UK level only. That will not affect the application of consolidated capital requirements, which are already calculated and reported on a national basis, but it will introduce an additional layer of liquidity consolidation in the UK, as liquidity is currently consolidated at EU level.
Secondly, the draft capital requirements regulations will remove the preferential capital treatment available for exposures to certain EU institutions and assets, including sovereign debt. For example, the EU capital requirements regulation does not require firms to hold capital for EU sovereign debt, because it rates those exposures with a zero risk weighting. That is to incentivise investment in certain EU asset classes. In line with our general approach, we will not grant the EU unilateral preferential treatment in the absence of an assessment of equivalence after exit day. We would therefore not automatically continue with the regime of preferential capital treatment for EU assets.
The draft capital requirements regulations will also remove the requirement for UK regulators to seek approval from EU institutions for the use of macroprudential tools to deal with systemic risk, including action that may need to be taken in a financial crisis.
Sir Oliver Heald (North East Hertfordshire) (Con)
My understanding is that during the implementation period, we will continue to take the EU laws in this area, so the CRR will be part of our law anyway, and we will look to maintain that position until we reach a new agreement. Is the Minister saying that if we had a no-deal exit, we would do something different and we would not want to retain the position in that way while we negotiated a Canada deal or something of that sort?
John Glen
I am grateful for my right hon. and learned Friend’s intervention. What we would do in a no-deal scenario in respect of CRR II, which is in flight at the moment within the EU, would be to use the Financial Services (Implementation of Legislation) Bill, which came before the House of Lords last week and will hopefully come to the Commons at some point in late January. That would give us discretion on how or whether to implement the file that would then land after our exit from the EU, or part of that file, based on what makes sense for the UK economy. We have listed in that Bill all in-flight files, and we would make a decision on the suitability of its inclusion in UK law at a future point following our exit.
To conclude on the first SI, removing the requirement to seek approval from EU institutions is necessary so that UK regulators are able to continue to exercise the macroprudential functions that Parliament has given them. Effective exercise of those functions is essential to maintaining the stability of the UK financial system.
Moving on to the second statutory instrument, the bank recovery and resolution SI will amend the Banking Act 2009 and related domestic and retained EU legislation, with the following principal amendments. First, the draft regulations will amend the scope of the UK’s third-country resolution recognition framework to include EEA-led resolutions. This will ensure that in a no-deal scenario, the same approach will be followed for EEA countries and other third countries in recognising third-country resolution actions. We have that arrangement now with the USA, for example, and we would have to treat EU countries in the same way, or similarly. The UK’s approach to recognising third-country resolution actions has been and will continue to be consistent with our G20 commitments.
The refusal of the UK to recognise a third-country resolution action is only permitted where the Bank of England and the Treasury are satisfied that one or more statutory grounds for refusal exist. Those grounds are: first, that recognition would have an adverse effect on UK financial stability; secondly, that it is necessary for the Bank of England to achieve one or more of its special resolution objectives; thirdly, that a third-country resolution action treats UK creditors less favourably; fourthly, that recognition would have material fiscal implications for the UK; or fifthly, that recognition would be unlawful under the Human Rights Act 1998.
Secondly, the bank recovery and resolution SI will remove deficient references that require UK regulators to follow the specific operational and procedural mechanisms set out in the bank recovery and resolution directive to co-operate with EEA authorities. The removal of these references will not, however, prevent UK regulators from choosing to co-operate with their EEA counterparts after exit. UK regulators will remain able to share information with EEA authorities in the same way that they currently do with authorities in third countries, such as the United States. Additionally, the UK will continue to participate in international crisis management groups, which enhance co-operation between home and host authorities of systemically important banks. Finally, the draft regulations address deficient cross-references to the bank recovery and resolution directive in UK legislation, and ensure that delegated regulations retained by the European Union (Withdrawal) Act continue to be workable following exit.
In line with the approach the Government are taking across all files laid under the European Union (Withdrawal) Act, both SIs transfer a number of functions currently within the remit of EU authorities, in particular the European Banking Authority and the European Securities and Markets Authority, to the relevant UK bodies. Those functions, such as the development of detailed technical rules on certain provisions of the regulations, will now be carried out by appropriate UK authorities, namely the Financial Conduct Authority, the Prudential Regulation Authority or the Bank of England. This is appropriate, given the regulators’ expertise in prudential and resolution policy and in the supervision of global firms. The regulators are currently undertaking public consultations on the changes they propose to make to binding technical standards. The SIs further confer regulation-making powers on the Treasury to replace delegated powers that were previously conferred on the European Commission, in line with the approach taken across other Treasury legislation.
To summarise, the Government believe that both SIs are needed to ensure that the regulatory regime applying to banks, building societies and investment firms works effectively if the UK leaves the EU without a deal or an implementation period. I hope that colleagues across the Committee will join me in supporting the regulations, which I commend to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It really is a pleasure, Ms Buck, to serve under your chairmanship. Once again, the Minister and I find ourselves in this room, as we work through the list of dozens of Treasury statutory instruments that are needed as we prepare for EU withdrawal. It is nice to see that there is a crowd this morning—there must be something else going on today, perhaps later on.
On each of these occasions, I and my Front-Bench colleagues have spelled out our objections to secondary legislation being used in this manner, as well as the challenges of ensuring that there is proper scrutiny, given the sheer volume of legislation passing through these Committees. All of this legislation is speculative, as it prepares us for a UK no-deal exit. It feels surreal to stand here discussing the finer points of financial regulation when the overall process is in total chaos.
It is near inconceivable that we are now so close to exit with no agreement in place and no vote scheduled on any such agreement. That places even greater importance on the work we are doing here, as with every passing day that this chaotic situation is not resolved, we inch closer to crashing out of the EU without a deal. That is a frightening prospect, particularly for financial services and especially for those parts of financial services that cannot operate within an equivalence framework.
Therefore, it is of the utmost importance that the statutory instruments are rigorous in their approach to ensuring the EU financial regulatory framework. The two instruments up for discussion today are of central importance to the stability of our financial system. Both the capital requirements and the recovery and resolution regime were designed to prevent the events of 2008 ever being repeated, given the catastrophic economic consequences. They required considerable co-operation across Europe, supported by wider efforts to comply with new rigorous international standards. Dismantling any element of that regime would be very ill advised, and we do not want to find ourselves in a position where Governments ever have to bail out the banks again.
With that in mind, I will begin by addressing the draft capital requirements instrument. I want to flag a major concern at how this provision is being transposed into UK law, and the potential disadvantage for UK banks. Colleagues will know that the EU capital requirements regulation mandates banks and financial institutions to maintain levels of sufficient quality capital, so that they are more resilient in market downturns or distress and, therefore, less likely to collapse. Different metrics are used to assess the quality of capital, and institutions are required to hold assets in certain ratios to comply with the regulation. It appears that this statutory instrument will remove preferential treatment for EU government debt for UK banks and, therefore, put UK banks holding EU government debt as a capital buffer at a disadvantage, as the Minister confirmed in his opening remarks.
EU member states’ government debt is considered very safe by the EU and banks do not need to hold much to meet regulatory requirements. If there is no agreement on equivalence for financial assets, the capital requirements statutory instrument says that UK government debt will no longer be considered so safe by the EU itself and, therefore, the UK Government will respond by removing preferential treatment for EU debt.
The guidance states:
“Once the UK has left the EU, in the absence of an agreement and where no equivalence determination has been made, the EU27 would automatically fall into the category of a third country where EU27 exposures would no longer receive preferential capital treatment. Therefore, this SI will remove preferential treatment for EU27 exposures.”
On the face of it, that will leave UK banks that hold EU government debt suddenly at a higher risk from a pricing perspective. It will become more expensive for them to hedge their risks in a no-deal environment, where markets are likely to be extremely volatile anyway. Trade publication GlobalCapital expresses that simply as a
“hit to UK bank capital ratios at the worst time imaginable”.
Where does that leave UK banks with significant EU operations, which are likely to hold this type of debt in large quantities? The Minister has repeatedly assured us that no substantive changes are being made from a policy perspective in the transposition of the rules through statutory instruments, but it seems this risks having a real and negative impact through a decision to change the treatment of EU government debt. Will the Minister please explain how the decision was reached and how it could be remedied to prevent increasing costs for UK banks and the requirement to re-hedge their positions?
The second instrument relates to a framework closely associated with the capital requirements: the recovery and resolution regime. That relates to so-called living wills for financial institutions if they fall into credit-related difficulties. That is another mission-critical strand of post-crisis regulation that continues to evolve.
The Bank of England has announced its plan to bring in a self-assessment regime for UK banks from 2020, which will require them to demonstrate their own winding down and restructuring plans for times of distress, without causing market contagion or requiring a taxpayer bail-out.
The guidance to the bank recovery and resolution statutory instrument states that:
“HM Treasury’s approach to onshoring the Bank Recovery and Resolution Directive is to ensure that the UK’s Special Resolution Regime is legally and practically workable on a standalone basis once the UK has left the EU.”
The challenge is how we can ensure that the recovery and resolution regime continues to be effective while potentially operating in isolation. Realistically, most of the biggest firms in this country are cross-border, so close co-operation will be needed with our EU counterparts to ensure that the risk of contagion is minimised and our approach is consistent. The statutory instrument is very light on detail in that regard. Will the Minister elaborate on the Treasury’s role in ensuring that this approach is followed? Is there an existing interaction with a third country or with third-country firms that the Treasury is using as a guide?
The banking framework in the UK has evolved significantly since 2007 to the benefit of both the taxpayer and market stability. Much of that has been achieved through close international co-operation with the EU and G20. We need to make sure that any future framework enshrines that hard work, especially as banks and financial institutions are likely to be highly stressed by market conditions if we crash out without a deal. Sadly, given the chaotic back and forth of the Government this week, the reality is that the prospect of no deal is becoming likelier by the day.
Alison Thewliss (Glasgow Central) (SNP)
It is a pleasure to see you in the Chair, Ms Buck.
I want to pick up where my colleague the hon. Member for Stalybridge and Hyde left off. This week, we have lurched closer to the prospect of a no deal Brexit due to the incompetence of the UK Government and Back Benchers who are more interested in feathering their own nests than in the interests of the country as a whole. It is utterly ridiculous for my constituents to see all these shenanigans as the clock ticks and we get ever closer to the point where the UK leaves without a deal.
We have the ridiculous prospect of the Prime Minister touring EU capitals only to find, as was totally predictable and inevitable, that people are not interested in speaking to her—the deal is already done as far as the EU is concerned. All of this is a distraction at a time when we should be focusing on the economy and on those people at the very bottom who are losing out massively as a result of UK Government policies.
We are here today to look at these statutory instruments in further detail, which is hidden away in these Committees rather than being scrutinised in a more open way. It is interesting to look at both instruments and their wider implications such as the familiarisation costs, which I mentioned at a previous SI Committee. The capital requirements regulations will have a total familiarisation cost of £1.7 million, which is absolutely huge. Businesses are being asked to bear those costs as a result of a decision that was not theirs. It will have a huge impact.
The FCA estimates that around 800 businesses will be affected. The Bank of England estimate is 209, so some 1,009 businesses will be affected. I ask the Minister, as I often do, how that is being communicated to those businesses because the clock is ticking, and they need to know and make preparations. The Fraser of Allander Institute mentioned yesterday in its report that small businesses are under-prepared for the prospect of a no-deal Brexit. For a long time, perhaps we hoped that that might not happen, but who knows whether that will remain the case? The Government have a job of work on their hands to ensure that all those businesses are aware of what might happen in the event of a no deal Brexit, and what it will mean for each and every businesses across this country.
The Financial Markets Law Committee is concerned, as I am, about the regulatory burden on the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority. How will they cope with the additional work coming to them? They are concerned about the recognition in UK law as things progress, withdrawing from the shared protections we have in the EEA and the impact on the market as a whole.
Sir Oliver Heald
Under the withdrawal Act, of course, EU law just comes into our law on the day we leave, but it would be ineffective in this area because there are a lot of references to institutions that we will no longer be in. Does the hon. Lady agree that the regulations are needed?
Alison Thewliss
I do not dispute that they are needed. I am not sure that Brexit is needed, but that is a different argument for a different day. The note mentions that the FCA and PRA will be updating the rule books in time for exit day. I want to press the Minister a wee bit more about what stage the preparations are at, and whether the expectation is that they will be ready in time. What progress has been made?
As to the capital requirements and, under the CRR, the binding regulations to co-operate and share information with EEA authorities, removing them and moving to a more discretionary system within it obviously means there is a question as to how we maintain the rigour of the system. If it is going to be sharing on a discretionary basis rather than being obliged to do so as part of the system, how will we ensure that things are going to work properly and as well as they can work at the moment? How do we prevent the slide towards another financial crash in a system that is more discretionary rather than one that obliges us to do certain things?
I want to mention research from the London School of Economics, and concerns about the impact that everything that is happening has on the UK’s voice in the shaping of the regulations:
“The weakened UK voice means that opposition to greater harmonization and EU calibration of international standards may be less strong in the Council than it was over the original CRD IV negotiations. Conversely, while the UK can be expected to support the proposal to lift certain of the contested CRD IV remuneration rules from smaller and less complex firms, other Member States may be less accommodating and more influential.”
Again, that relates to the loss of the UK voice in all such matters. We end up in the worst of all worlds as a result of the decision. We become rule takers and have less influence over the things that affect financial services, which are a huge part of the economy of the UK and my constituency. I hope the Minister addresses those concerns.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their questions, and acknowledge concerns about the rigour of the process. All I can say to the Committee is that I am doing everything I can to ensure that it is as rigorous as possible.
For both statutory instruments, there was significant engagement with industry and the regulators. The draft Capital Requirements (Amendment) (EU Exit) Regulations 2018 were laid on 21 August, with an explanatory note seeking to draw out concerns. The draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 were laid on 8 October for consideration.
The hon. Member for Stalybridge and Hyde accurately characterised the global drivers of the regulations. I want to address the specific concern he raised about the directive on the change in capital requirements consequent on our leaving in a no-deal scenario. He is right to say that the capital requirements regulation specifies how much capital and liquidity firms must hold against different types of exposures. He is right that certain EU assets are subject to a 0% risk weight, meaning that no capital needs to be held against those exposures. However, in a no-deal scenario, the UK will treat the EU as a third country and vice versa.
Without an assessment of equivalence between the EU countries and the UK, the EU would end preferential capital treatment for UK exposures, so it has been Government policy not to grant the EU unilateral preferential treatment in the absence of equivalence, and the SI makes the appropriate amendments to ensure that EU sovereign debt is no longer treated more favourably than other assets of a similar nature.
John Glen
Perhaps I may just make the next point, and see whether it addresses the hon. Gentleman’s concern.
EU sovereign debt will none the less retain the low risk ratings that sovereign debt typically attracts. In addition, we are introducing transitional powers for the regulators to phase in the new requirements. That is up to two years, mitigating much of the impact.
Jonathan Reynolds
I am grateful for that clarification, and for the second point in particular. I understand the political case for not having a unilateral preferential regime that is not reciprocated by the EU. However, when we think about all the market volatility and stress that no deal gives us, to reclassify the capital adequacy of UK resident banks feels quite difficult, even if it is phased in over a period of two years, which is not that significant to be honest.
Mr Richard Bacon (South Norfolk) (Con)
May I say how delighted I am that the Government are taking an approach that allows discretion? That was one enormous problem at the time of the financial crash, which was also a sovereign debt crisis. The hon. Member for Stalybridge and Hyde forgot to mention who was in charge at the time. That crisis was exemplified perhaps most clearly by Gordon Brown standing outside the shiny new Lehman Brothers office when it opened, shortly before the crash. The capital regime was so inadequate at the time under that regime—
Mr Bacon
Yes indeed. Part of the problem with the sovereign debt crisis—perhaps the biggest problem—was the equal treatment of lots of different kinds of sovereign assets, such as Greek Government bonds, when in fact they were nothing like equal. That led to the distortion that helped to cause the problem.
John Glen
The Government and regulators are clear on the imperative to work closely with industry to ensure that change is not disruptive for firms. UK regulators will be given the ability to phase changes in over the next two years. We will treat all third countries similarly, which means, to answer the point made by the hon. Member for Glasgow Central, continuing to co-operate through international crisis management groups to plan and resolve issues with cross-border firms. The UK’s participation, and enthusiasm to participate, in such forums will be undiminished. Nothing in the draft regulations will change how the UK co-operates with third countries.
The hon. Member for Stalybridge and Hyde raised the bank recovery and resolution SI and concerns around the appearance of disengagement. There is no intention whatsoever for the UK Government or regulators to be isolated in any way. We will continue to participate. However, these steps are necessary to domesticise our regulations in the context of a no-deal scenario.
The hon. Member for Glasgow Central has on several occasions, and perfectly sensibly, mentioned the regulatory burden and additional costs. She is right to draw attention to the £1.7 million assessment for the capital requirements SI and the £400,000 for the bank recovery SI. I point out to her that those are one-off familiarisation costs. For the 1,000 companies she mentioned, they are one-off costs of around £1,700 and £1,200 for some of the very biggest institutions. I accept that it would be desirable for them to not have those costs, but it will be necessary in a situation in which we do not secure a deal.
Sir Oliver Heald
If we were to import all European law into our law in a form that was ineffective and hopeless, would there be costs to the City and to our financial institutions of having an ineffective system? It is all very well for the hon. Member for Glasgow Central to criticise the cost of the regulations, but without them we would not have a system that works.
John Glen
My right hon. and learned Friend is of course correct. We are creating as smooth as possible a scenario in a no-deal situation. The costs would be much greater if we did not do so. However, I stress that we seek to maintain close relationships with all third countries.
Alison Thewliss
Will the Minister tell me a bit more about how the costs have been communicated to the 1,009 businesses and the 350 businesses that will be affected?
John Glen
As I mentioned, the regulations were laid on 21 August and 8 October. There was engagement with industry during that intervening period, and those costs will have been made clear during that time. We have tried to be as transparent as possible and to engage as closely as possible with different trade bodies and, through them, with firms, so that there is an understanding of the costs.
The Government believe that the regulations are needed to ensure that prudential and resolution regimes applying to banks, building societies and investment firms work effectively if the UK leaves the EU without a deal or an implementation period. We do not want to lose the progress in establishing these regimes that we have made over the last 10 years. I hope the Committee has found this sitting informative and will join me in supporting the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Capital Requirements (Amendment) (EU Exit) Regulations 2018.
Draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018
Resolved,
That the Committee has considered the draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018.—(John Glen.)
Draft Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018
(5 years, 11 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018.
It is a pleasure to serve under your chairmanship again, Mr Austin. For most people in the UK, pensions are their largest financial asset, but that, unfortunately, makes pensions an attractive target for fraudsters. Pension scams can have a significant and devastating impact on people’s lives. Scams can lead people to face retirement with a greatly reduced income and unable to build their pension savings back up.
From recent debates in the other place, I am aware of the strength of feeling on tackling cold calling. As well as being a nuisance, cold calling is the most common method used to initiate pension fraud. According to Citizens Advice’s most recent statistics, 97% of pension fraud cases brought to it originated from a cold call. That is why the Government are taking action to ban pensions cold calling.
Before I discuss the regulations, I will briefly explain how the current system works. The Privacy and Electronic Communications (EC Directive) Regulations 2003—PECR—permit firms to cold call consumers for marketing purposes, subject to a couple of exceptions, which are where the consumer has notified the caller that they do not wish to receive such calls, or has listed their number on the telephone preference service. The current regime, therefore, permits cold calling unless a consumer has proactively opted out.
The purpose of these regulations is to amend PECR in order to much more tightly restrict firms from cold calling consumers about their pensions. The regulations do that by creating an explicit opt-in regime that prohibits all such calls unless one of two tightly drafted exemptions applies and the caller is authorised by the Financial Conduct Authority or is the trustee or manager of a pensions scheme. The exemptions mean that the ban does not have an unnecessary or disproportionate impact on legitimate activities.
It is important to highlight that the exemptions do not apply to so-called introducers, which are the marketing firms that seek to establish leads that they then pass to financial advice firms. Introducers undertake the majority of pensions cold calling. Under the proposed regulations, there are no circumstances under which introducers are permitted to call consumers about their pensions.
The first exemption applies where the consumer has given consent to the caller to receive direct marketing calls about their pension. It has been included so that consumers can seek information on pension products. The regulations are fully in line with the general data protection regulation, which sets a high standard for consent. Consent must be actively given—for example, the use of pre-ticked boxes is not permitted.
The second exemption applies where the consumer has an existing client relationship with the caller, such that they would expect to receive such calls. It means that individuals can receive information about investment opportunities from firms with which they have a client relationship.
To help to future-proof the regulations, the definition of “direct marketing in relation to pension schemes” has been drafted widely, which will help to ensure that we capture new activities that may evolve in future, as well as activities that we know scammers already use.
Martin Whitfield (East Lothian) (Lab)
On the changing approach taken by the scam companies, will the regulations cover the use of texting and contact through messaging? I know from constituents’ experiences that a response by way of text is deemed to be consent and they then get the phone call.
John Glen
I am grateful to the hon. Gentleman for making that point. The pensions cold calling ban does not include direct marketing via texts and emails, because they are already closely restricted under PECR. Under regulation 22, texts and emails are restricted unless consumers have given consent. That is an opt-in regime.
Martin Whitfield
To pursue that point, is the Minister saying that a response to a text is not deemed to be consent for a subsequent phone call?
John Glen
Those regulations deal with that matter; I am dealing today with the banning of cold calling. I will move on to enforcement, and then I will be happy to respond.
The ban will be enforced by the Information Commissioner’s Office, a world leader in the protection of information rights. The ICO’s tough enforcement powers include fining offenders up to £500,000. I am also pleased to say that from Monday next week, 17 December, directors of companies making unlawful calls may also be personally liable for penalties of up to £500,000.
Patricia Gibson (North Ayrshire and Arran) (SNP)
The Minister says that named directors “may” be liable. Will he give us clarity on what “may” means in that context?
John Glen
What I mean is that there is scope for them to be fined up to £500,000, according to the breach that they have committed. That will be a matter for the ICO to adjudicate.
I would like to take this opportunity to thank industry and charity stakeholders for their engagement with the consultation over the summer. As a consequence, I am pleased to say that we have a set of regulations that our stakeholders can get behind. I emphasise that the Government do not consider this ban to be “job done”. We understand that scammers are skilled at adapting to circumstances and that scams are constantly evolving. As such, we will continue our efforts to understand and take action on future scams.
Project Bloom, a cross-Government taskforce established in 2012 and currently led by the Pensions Regulator, continues its work to tackle scams and identify emerging threats. In addition, the Government are committed to limiting the statutory right to transfer, to help prevent funds transferring from occupational pension schemes into fraudulent ones.
In conclusion, the Government believe that the proposed legislation is necessary to help protect consumers from pension fraudsters, and I hope colleagues will join me in supporting the regulations, which I commend to the Committee.
Anneliese Dodds (Oxford East) (Lab/Co-op)
I am grateful to the Minister for explaining the rationale for the measures. Of course, we have talked in previous Committees about other statutory instruments arising out of them. This is a significant problem; I understand that more than 11 million pensioners, in particular, are being targeted annually by cold callers, with fraudsters making 250 million calls a year, which is the equivalent of eight per second. That is a huge problem, and behind those figures there is a significant human impact on some vulnerable people.
As the Minister will be aware, during the Committee stage of the Financial Guidance and Claims Act 2018 the Labour party called for the FCA, rather than the ICO, to be given functions in respect of the ban on unsolicited direct marketing relating to pensions. The FCA has much stronger powers than the ICO and can strike off members who contravene the rules. We also called for an offence to be created for the use of information obtained through cold calling.
Will the Minister explain his response to those points? I have looked through the accompanying material and it is not crystal clear to me which body will be responsible for enforcing the ban, or whether the respective powers of the FCA, as against those of the ICO, have been taken into account in this determination.
I am concerned about the restricted powers of the ICO. I am sure that the Minister is aware of the views of various representative bodies. In particular, the Fair Telecoms campaign has intimated that the ICO has restricted means of ensuring compliance. I recall sitting on a previous Committee examining delegated legislation related to other parts of the Act, where we discussed transferring authority to the FCA precisely because it is a more powerful and authoritative body. It would be useful to hear more about that.
Secondly, it would have been helpful to ban the use of information derived from cold calls. That would have resulted in firms that provide financial services covered by the FCA being banned from using information gathered by introducers, thereby breaking that part of the chain. I know that that idea was not accepted by the Government, but has the Minister considered other means of dissuading such forward use of that information?
Thirdly, perhaps I have not got to grips with the relevant part of the legislation, but it is not clear to me exactly who the draft regulations will cover with respect to the telephone preference service register. The Fair Telecoms campaign maintains:
“This change in regulation will only affect the behaviour of callers who are currently checking numbers on the TPS register before making calls. For those who do not it simply adds to the cases that may be the subject of action by the ICO, rather than making any significant change.
Targets with their numbers on the TPS—the basis for many of the statistics given about the volume of calls alleged to be covered—are not affected in any way by this measure. It is understood that 80% of UK households have their number recorded on the TPS. At best, this measure can only affect the remaining 20%.”
Will the Minister clarify whether the draft regulations are focused on those not covered by the telephone preference service? If so, is it the Government’s view that the service is sufficient? It would be helpful to hear the Government’s thinking on the matter.
Fourthly, the Minister states that the draft regulations are in line with GDPR requirements, but some have suggested that their consent provisions are weaker than those in the GDPR. It would be helpful to understand where the exact language used about consent in the draft regulations has come from and why it is formally different from the language used in the GDPR.
Fifthly, as I understand it the regulations are drafted to cover only cases in which there is specific reference to
“funds held, or previously held, in an occupational pension scheme or a personal pension scheme”.
Cases in which a caller fails to make specific reference to the source of the funds that may be used for an unwise investment will therefore not be covered. Is the Department aware of that potential loophole? We can all imagine a particularly inventive and devious caller simply manipulating their sales script to comply with the letter but not the spirit of the draft regulations by talking in general terms without referring to a specific existing personal or occupational pension scheme.
Finally, may I push a little harder on the issue raised by my hon. Friend the Member for East Lothian? Would a response to a text message that was legal under PECR be sufficient to enable future cold calls within this regime?
Anneliese Dodds
The Minister shakes his head, helpfully. I will take that as a no, but it would be great to get a response to my other questions.
Patricia Gibson
I welcome the proposals, as far as they go. The Minister may be aware that I have long campaigned against the whole culture of cold calling on the grounds of the distress, disturbance and alarm that it causes and the door that it leaves gapingly open to scammers of all kinds.
I was interested to hear the Minister say that the UK Government will implement my Bill to make named directors responsible, the Unsolicited Marketing Communications (Company Directors) Bill—in September, I think he said. The Government exactly reprinted and resurrected my Bill in the name of one of their own Back Benchers; that was ironic, given that one of the Bill’s goals was to deal with scammers, but its implementation is very welcome. However, there is a very serious point to be made.
If all consumers are to receive welcome protection from cold callers on receipt of their pension, surely the Government must concede that cold calling, in and of itself, leaves all consumers open to fraud or heavy-handed sales techniques. So far, at least, it seems that protection from cold calling is not to be extended to all consumers. I know that that issue is not in the Minister’s remit today, but it is an interesting point. Will he explain why the Government are not extending that protection? There has been a delay of more than two years in the important policy of using named directors’ responsibility to protect not only those with pension pots, but all consumers.
I welcome the common-sense approach outlined by the Minister under which the consumer will be able to receive marketing calls about their pension if they have explicitly consented to that. Of course, explicit consent cannot mean just ticking a tiny wee box at the bottom of a page of very small writing; it has to be more robust than that. People should not opt in to receive pension marketing calls by accident. Opting in must be clear and explicit. What assurances can the Minister give about that?
We are told that the general data protection regulation
“sets a high standard for consent”.
Will the Minister give us more detail about what that high standard looks like and what it involves?
I have concerns about the ICO being able to take action against organisations that contravene the regulations. We know that, in the past, companies that faced heavy penalties from the ICO for various breaches simply closed down and reopened with the same staff and premises under a different name. That is why named director responsibility matters so much. I welcome the Minister’s comment that it will be enshrined in law in September—
Patricia Gibson
Excellent. I am very pleased to hear what the Minister has to say, and I welcome that. I have waited a long time for it. There has been a delay over named director responsibility. We want it not just for people with big pension pots, important as they are, but for all consumers in all industries. The two-year delay was a wasted opportunity. I wonder how many people have been swindled while we have waited.
The ICO can take any enforcement action it likes, but without named director responsibility it is a paper exercise because companies simply phoenix and evade their responsibilities. Penalty notices without named director responsibly are pie in the sky; they will not deter scammers.
I welcome these measures, and I am very pleased to hear about the December deadline that the Minister set out. I think he understands my reservations about this not being extended across every industry. For pension pots, this will stop scammers calling people without fear of reprisal and, when they receive a notice of penalty, simply putting it in the bin because it does not mean anything.
I urge the Minister to go back to his colleagues and make the case for real protection for all consumers in all industries. The Government supported named director responsibility for this measure, but we need to stop scammers across the board, not just in the area of pensions.
John Glen
I thank the hon. Members for Oxford East and for North Ayrshire and Arran for their points, which I will try to respond to as fully as I can. I will start with the last point, about the delay. All I can say is that, since I have been in office, this is something I have focused on. It came out of the legislation that was introduced in the spring. I am pleased that we are at this point. I cannot account for the delay fully, but I am glad we are at this point today.
The hon. Member for East Lothian asked whether, if someone has opted into receiving text messages, they are opting into receiving calls. The answer is no, because the GDPR requires granular consent to something clear and specific. Consent to receiving a text is not consent to receiving a call.
Martin Whitfield
Just to clarify, the experience that I am aware of is that a text message was used, which itself invited consent. The caller used the consent given by the response to the text message to phone again. The measure talks about the specific line that the caller has been authorised to use, but I wonder whether the Minister understands that, in the regulations, the consent to approach a person has to be for the telephone number/line, in which case the text messaging system would not be consent at any time.
John Glen
As I say, text messages are not the subject of these regulations, which relate to the PECR. I am relying on box notes to clarify the point. I will have to take this away and write to the hon. Gentleman. I understand the specific example that he has raised, and I will not leave him in any ambiguity on that point. Currently, my understanding is that one cannot opt in to receive cold calling by text message, but I will write to him as soon as I can on that matter.
The hon. Member for Oxford East raised issues relating to the ICO and the FCA. I will not rehearse those points again, as we have already have discussed them, but I will respond to the concern about the effectiveness of the ICO as an enforcement body. The ICO will enforce restrictions on unsolicited electronic direct marketing under PECR, and it is appropriate that the planned ban is enforced through that existing framework. As we have discussed, the ICO has tough enforcement powers, including a fine of up to £500,000. There would be a risk of confusing consumers and industry if we had different cold calling enforcement regimes for different sectors. If the Committee agrees to introduce the ban, the FCA will work closely with the ICO where breaches of the rules by FCA-authorised firms are identified and, crucially, the ICO will be able to enforce bans on introducers that are outside the FCA’s remit, because they are not FCA-authorised firms.
The hon. Member for Oxford East also talked about the telephone preference service. This statutory instrument would change it from an opt-out to an opt-in regime, which makes restrictions on pensions cold calling much tighter. In addition, although not all consumers are aware of the TPS, those listed on it would still be protected by the ban.
The ICO’s guidance is indeed clear that consent under PECR is to be understood in accordance with GDPR. Although the FCA is not prohibiting the use of personal data collected by third parties through cold calling, the Government and the FCA will keep the proposal under review as the effectiveness of the ban is monitored. An authorised firm that accepts business from an introducer must meet the FCA’s regulatory requirements, including carrying out due diligence on the introducers they transact with. If customers are given unsuitable advice by an introducer, the authorised firm may be held responsible and subject to regulatory action. The FCA has alerted investment advisers and authorised firms to their responsibilities when accepting business from unauthorised introducers or lead generators. Organisations are already required to process or handle personal data in accordance with the Data Protection Act 2018 and GDPR.
I assure the hon. Members for Oxford East and for North Ayrshire and Arran, and the Committee as a whole, that the Government are engaged in an ongoing process. As I said in my opening remarks, this is not “job done”. I recognise that there are a range of concerns from consumer organisations and different parts of the industry about whether further restrictions or bans should be in place. One of the reasons for the draft instrument is that, in future, we can introduce additional restrictions more speedily should they be required.
Kerry McCarthy (Bristol East) (Lab)
On a slightly different topic, in 2015, a constituent of mine, 92-year-old Olive Cook, committed suicide by throwing herself over the Avon gorge. That hit the national headlines because she had been inundated with calls from charities. She was on the databases of 99 different charities, and a lot of them would trade in her details. To stop cold calling now, has the Minister considered the lessons that we tried to learn and the work of the Charity Commission to try to stop cold calling following that incident?
John Glen
I am extremely sorry to be reminded of that case. The regulations introduce a ban on pensions cold calling, but I would be happy to look into the matter and see what the collective conclusion of Government was on that particular case and its implications. I am happy to examine that in the context of my previous remarks.
The hon. Member for North Ayrshire and Arran spoke about a more comprehensive cold calling ban. As I tried to indicate, pensions cold calling is a special case where levels of consumer detriment are particularly high. The Government are committed to taking action. I accept that, for some, action has not been taken as quickly as it could have been, but a balance has to be struck between ensuring that consumers are adequately protected and providing the right conditions for legitimate direct marketing industry to operate.
Patricia Gibson
Nobody wants to stop businesses going about their lawful work, but if we had named director responsibility across every sector, that would allow legitimate businesses to thrive, while the scammers and the cowboys would be the ones to suffer.
John Glen
I am happy to look at appropriate additional measures, in the light of the evidence presented. I would like to draw the Committee’s attention, for example, to situations where utilities companies use calls to prospects to secure a switch to their service, or where the publishing industry uses calls to consumers who have indicated some affinity with the brand. Many national newspapers and magazine publishing houses use that approach. I am not, in this response, indicating that the Government are closed off to any further moves, but it has to be done on an evidential basis.
Patricia Gibson
The examples that the Minister has given are of legitimate businesses going about their normal work. We are not talking about that sort of business; we are talking about the ones that phone up, pester, scare, disturb, annoy and scam people.
John Glen
Fraud is fraud, and with actionable fraud the police can be contacted in such circumstances. With respect to the cold calling mechanism, I have said all I can on that. The Government are open on the basis of evidence to move forward.
The hon. Lady also raised the issue of how the Government will ensure that consumers do not accidentally give consent through ticking a box on a form. To give clarity on what GDPR sets out, it is a high standard of consent, requiring a positive opt in. Any default method, such as a pre-ticked box, does not constitute consent under GDPR, as I made clear in my opening remarks. Guidance to firms on complying with GDPR highlights that that request for consent must be prominently displayed, clear and specific, and separate from the terms and conditions.
I hope that that deals—
Anneliese Dodds
I am sorry to interrupt the Minister, who has been generous and helpful in his responses. I have one question remaining, which might fit into the rubric of what he has said about Government being open to further tightening, if necessary. I have handed over my speaking notes, but I recall that the legislation refers specifically to occupational or other pension schemes, and how a scammer or somebody selling inappropriately could use general talk of pensions to get into that conversation, and thus creatively comply. Will the Minister’s Department look at that carefully?
John Glen
I am clear that this is about pensions cold calling. I understand what the hon. Lady is saying about loopholes, in the sense that that conversation could hide that intent. It would be appropriate for me to reflect on that and write to the hon. Lady and the Committee. She raises a fair point, and the last thing we want to do is leave such ambiguity out there.
To conclude, this legislation will make a real impact in tackling pensions scams, deterring pensions cold callers by making their actions illegal and signalling to consumers that legitimate companies will not cold call them about their pensions. I hope the Committee will have found the sitting informative and will join me in supporting the regulations.
Question put and agreed to.
Draft Accounts and Reports (Amendment) (EU Exit) REgulations 2018
(5 years, 11 months ago)
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The Committee divided: - Ayes: 9 / Noes: 6 - Question accordingly agreed to.
The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Kelly Tolhurst)
I beg to move,
That the Committee has considered the draft Accounts and Reports (Amendment) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Davies. Since the UK’s 2016 referendum decision to leave the EU, the Department for Business, Energy and Industrial Strategy has undertaken a significant amount of work on the withdrawal negotiations, preparing for a range of potential outcomes. We have been working, and must continue to work, to prepare for a no deal scenario.
The regulations aim to address failures of retained EU law to operate effectively, as well as other deficiencies arising from the withdrawal of the United Kingdom from the European Union, in the field of accounts and reports of UK corporate bodies. The law in the UK on the preparation and filing of accounts and reports for corporate bodies is compliant with the EU accounting directive. There is also a directly applicable EU regulation that relates to the preparation of accounts in accordance with international accounting standards—the so-called IAS regulation. Both the accounting directive and the IAS regulation apply throughout the European economic area. The Department intends to introduce a separate statutory instrument that will address how we intend to deal with the deficiencies presented by the IAS regulation after the UK’s withdrawal from the EU.
The fundamental elements of the current companies’ accounts and reports legislation will remain the same after exit. However, that legislation still needs to be amended to ensure that it works effectively once the UK has left the EU. An important component of the accounting directive, and therefore the UK’s company law, relates to reciprocal arrangements for company group structures—for example, exemptions permitted to businesses from producing consolidated accounts if the parent is registered anywhere in the EEA and is producing consolidated accounts that are compliant with EU law. In the absence of a negotiated agreement regarding the economic relationship between the UK and the EU, it would be inappropriate to continue with preferential treatment for EEA entities, or UK entities with EEA parents.
The statutory instrument will mean that businesses registered in EEA states will be treated in the same way as those from third countries. UK businesses with EEA parents will therefore no longer benefit from the exemption from having to produce consolidated accounts because their EEA parent company produces consolidated accounts. However, UK businesses with parent entities registered in the UK will not be affected by the changes.
The regulations do not create new criminal offences. However, the scope of the pre-existing criminal offences will be extended, in that some companies that previously benefited from an exemption will no longer do so. They will be exposed to the possibility of committing a criminal offence in a way that they were not before. Also, some businesses with links to the EEA will now fall within the scope of existing criminal offences in the UK for failure to file accounts and reports. For example, dormant companies with parent entities listed in the EEA will no longer be exempt from preparing and filing accounts with Companies House. Failure to do so would mean that they would be committing an offence, and they would be liable to incur fines and penalties. That is consistent with the approach for similar companies with parents outside the EEA.
Ian Murray (Edinburgh South) (Lab)
Will the Minister tell the Committee whether she anticipates, or has anticipated, more parent companies moving to the EEA from the UK as a result of the UK leaving the European Union?
Kelly Tolhurst
I do not have any indication of the number of companies that have stated that they would leave the UK after EU exit.
The accounting directive sets out the requirements for businesses to report payments to Governments worldwide relating to the extraction of natural resources by way of logging and mining. Alongside that, it provides a power for the Commission to grant equivalence to third countries for their systems of reporting payments to Governments regarding logging and mining activities. This statutory instrument transfers that power to the Secretary of State.
The Government have carried out a de minimis impact assessment of the regulations, because the overall costs to business were expected to be small. That confirmed that the impact on business would be minimal and that the resulting costs would be in relation to the company’s size. There is a small chance that certain second-order impacts may arise from changes to one of the exemptions. Currently, the ability to switch between accountancy frameworks—the requirements for the preparation of companies’ annual accounts—is limited to once every five years, unless the company de-lists from any regulated market in the EEA. The change made by this statutory instrument will mean that a company can only satisfy that condition by de-listing from the UK market.
Although we think the amendment is a minor one, it may provide an incentive for companies to de-list from the UK markets. Companies list their securities on capital markets primarily to access a larger capital and investor base—for example, because they are considering growing their businesses. They do not take de-listing decisions lightly. Given the scale of the changes introduced by this statutory instrument, it is very unlikely that they would do so to try to circumvent the reporting requirements.
The Government have worked closely with business and regulatory bodies to ensure that regulations achieve continuity wherever possible, while addressing the deficiencies arising from the UK’s withdrawal from the EU. My officials have benefited from the wisdom of our many stakeholders, and the statutory instrument incorporates their views. In the event that the UK leaves the EU without an agreement, the regulations will be critical in ensuring that UK accounting law continues to provide transparency and certainty to investors. The regulations will also ensure that companies operating in the UK have clear guidance for preparing and filing their accounts. I commend the regulations to the Committee, and I ask the Committee to support and accept them.
Bill Esterson (Sefton Central) (Lab)
It is a pleasure, as always, to serve under your chairmanship, Mr Davies. Yet again—for the third time in a week—we are here to discuss the consequences of no deal and the changes that are needed to regulations. Yet again, we are told in the explanatory notes that they are relatively minor, but when we dig deeper we find that they affect quite a large number of pieces of legislation and that in combination, they are significant. The combined effect of these SIs, along with many other aspects of the way Brexit is progressing, demonstrates just how important it is that the Government rule out any prospect of no deal as urgently as possible. Businesses are crying out for that certainty. The more of these SIs we consider, the more uncertainty is created.
In this case, the reporting requirements will change significantly, in particular—but not exclusively—for companies where the parent company is in the EEA and subsidiaries are in the UK. The advice note produced last month by specialists Linklaters contains the heading:
“Brexit set to increase accounting requirements for UK entities with EEA parents or subsidiaries”.
That is not something that any Government or any business would want to read. It summarises the fact that this SI, along with the others, will lead to great potential difficulties for businesses and the economy.
I think the Minister quoted from paragraph 2.11 of the explanatory memorandum, which states that
“it is inappropriate to continue with preferential treatment for EEA entities, or UK entities with parents or subsidiaries from EEA States, or entities listing on EEA regulated markets, because that would amount to unreciprocated preferential treatment.”
I do not deny that that would be the case in the disastrous event of no deal, but we must be trying to avoid that. That prompts some questions, which I would like to explore with the Minister, about the impact of this SI.
Paragraph 7.4 sets out in a little more detail what is anticipated. It talks about the changes to the Companies Act 2006—at least, I think that is what it refers to:
“Section 399 CA06 set out conditions under which UK subsidiaries with EEA parents were exempt from the requirement to file group accounts. That exemption has been reduced in scope so that it applies only to UK subsidiaries with UK parents.”
How many companies are going to be affected? What proportion of the economy will be affected? I asked a similar question yesterday and I do not think we ever quite got the answer. Perhaps the Minister can have another go today. She may not have had the answer yesterday, and if she does not have it today, I am happy for her to say so and to write to me separately.
That also applies to the point about an impact assessment. As with previous SIs, the Government say that it is not relevant because of the limited impact. Let us get an honest assessment of the impact of the changes. How many companies will be affected? What size are those companies? What proportion of the economy will be affected?
My hon. Friend the Member for Edinburgh South asked an interesting question about the potential for businesses to move from the UK into the EEA after Brexit. What assessment has been made of that? What came back from the consultation about the prospect of that happening? Presumably, if a company that is registered in the UK at the moment wants to avoid additional reporting requirements, it would be tempted, if it has an EEA parent, to re-register in the EEA. What are the consequences if that happens?
What consequences have the Government considered, in terms of the feedback from the consultation and any assessment they have carried out? If no assessment has been carried out, why on earth not? This could have quite serious consequences. I can think of a very sizeable business located in my hon. Friend’s constituency that might be affected by such a desire to shift registration, and I can imagine the consequences of shifting that registration and the business operations associated with it. Some answers would be very much appreciated, if we are to do justice to our scrutiny of the regulations.
How was the consultation carried out? How many businesses were consulted? What business organisations were consulted? What were their responses? Paragraph 10.2 of the explanatory memorandum describes it as an informal consultation, but that does not give an indication of its scale or scope, or what the responses were. In order to make sure that we are properly assessing the impact, scale and consequences of the regulations, we need answers to those questions as well.
I have made the point about the Government’s decision that the regulations do not justify a full impact assessment. Frankly, if this is of a more sizeable scope and if the potential for businesses to relocate is significant, there will be a significant impact. I am surprised that the Government have decided that an impact assessment is not required.
I turn to other matters. How will the new arrangements operate? What will the arrangements be for companies listed in the EEA that have subsidiaries in the UK? What will be the reporting arrangements to replace what happens at the moment? It was not clear from the Minister’s initial remarks how that will work, so perhaps she can confirm that. Will Companies House be sufficiently resourced to address the additional accounting requirements that Linklaters refers to in its analysis? For that matter, will businesses be sufficiently resourced to address the additional work? Will additional funding be required for Companies House, or will it just have additional responsibilities without extra resources to discharge them?
Specifically, will the Minister describe the impact of the regulations on extractive industry companies registered in the EEA? How will they be affected? I understand from the explanatory notes and analysis that there is a particular issue about the effect of the changes on country-by-country reporting by extractive companies, such as those in the mining sector. As Linklaters tells us, there will be significant issues in respect of the exemption from the requirement to prepare consolidated accounts. There will also be significant impacts when it comes to the exemption from the requirement to prepare a non-financial information statement, the ability to change accounting frameworks on de-listing, the dormant company exemption from producing accounts, country-by-country reporting by extractive companies in mining, qualified partnership accounts and overseas company regimes.
Those significant changes go substantially beyond what the Minister said in her opening remarks about the scale and scope of what we are being asked to approve. Will she give that her detailed attention, with any support that her officials can deliver this afternoon? Will she write to the Committee to answer the questions that I have raised?
On their own, but especially with the other statutory instruments we have been asked to approve, the regulations are an indication that significant changes are being made to the legislative framework of this country as a result of no deal planning. I accept that we have no choice other than to address the regulations this afternoon, but that does not mean we have to do so without adequate scrutiny.
Kelly Tolhurst
I thank the hon. Member for Sefton Central for his usual thorough reading of the statutory instrument and preparation for the debate. I want to finish by reminding the Committee that the SI is being brought forward for a no deal scenario. As a Government, we are still working towards a deal, and that is what we hope we will have as we leave the European Union.
Ian Murray
I would hate to get into a debate about Brexit, because I am sure you would call me out of order, Mr Davies, but would it not be much better for the Government to rule out a no deal scenario? We could then spend most of our time in the House dealing with what we need to deal with, rather than preparing for no deal.
Kelly Tolhurst
Actually, I think it is quite right that as a Government we are preparing for no deal, and we will continue to do so. That is why I am here presenting a statutory instrument—so that in the event of no deal we will be able to give business confidence and clarity on what the outcome will be, whether it is liked or not, in a no deal scenario.
I will try to answer some of the questions that the hon. Member for Sefton Central posed about the statutory instrument. He asked about the total number of companies that might be affected. There are approximately 3.8 million active companies on the UK register as it stands, and 98.5% of them happen to be micro or small businesses. There are approximately 35,000 medium-sized businesses and 20,000 large entities on the register. We have assessed that fewer than 20,000 companies will be affected by the statutory instrument, with a range of sizes and set-ups.
I was asked what assessment we have made of de-listing. As I have outlined, we did not carry out a full assessment, because we established from the data we have that the burden and cost to business will be below £5 million. The burden on business will relate to the potential costs of having to file accounts and make preparations, where they had been exempt. Obviously, that is a small cost to a limited number of organisations.
Obviously the de-listing is very difficult to assess. It is very difficult to assess how many companies would take the decision to leave the UK based in a no deal scenario. As I have said, as a Minister I have not been made aware of any companies that have registered an interest in leaving the UK, based on the changes that we are considering. We estimate that the number of organisations that might decide to de-list would be very small, but it is a very difficult number to assess.
Bill Esterson
The Minister said that nearly 20,000 businesses would be affected by the regulations. The explanatory memorandum states that there is “no significant” impact on business. I just wonder whether she can tell me how many businesses it would take for the Government to decide that it was a significant number worthy of an impact assessment.
Kelly Tolhurst
As the hon. Gentleman knows, because I have just outlined it, we are talking about approximately 20,000 businesses that would be affected, out of the current 3.8 million businesses that are registered in the UK. That is a small number of businesses in relation to the total number of registered companies. However, we are talking about the cost, and the burden will relate to the potential extra costs in relation to accounting and reporting.
We must remember that, as Members will have read and as I have mentioned, dormant companies for example have been exempt. They will no longer be exempt, so there will be a cost to that under the regulations in a no deal situation.
Ian Murray
To follow on from my hon. Friend the Member for Sefton Central, there is an impact assessment that says that the cost to business is negligible, but will the Minister’s Department be producing an impact assessment of the cumulative cost to business of all the SIs that are going through in preparation for a no-deal Brexit, and when will we see it?
Kelly Tolhurst
I thank the hon. Gentleman for his question. We are assessing the impact as a Department in all ways, and we are doing that informally. We do it through working with stakeholders. These SIs are not just dreamed up. As I said in response to an earlier question, we have consulted our officials and worked with stakeholders. We have spoken to auditors and accountants—the people who will be responsible for imparting this information to the companies they work for and for understanding the true cost to business—so we are always assessing the impact of everything we do. Especially as a business Minister, one of my priorities is to make sure that when we do things around business, we reduce the burden when we can. The actual answer is that we need to prepare for scenarios, and in doing this we are aware of the potential outcomes and risks, which would affect 20,000 businesses.
Ian Murray
The Minister is being incredibly generous, and I am grateful to the Chair for indulging me on this point, but it is incredibly important. The Minister quite rightly says that the Government have not just dreamed these SIs up. Of course they have not, because there is a process that has to be run through if the Government decide that they wish to go down the route of a no deal Brexit. What is the cumulative effect on business of all the SIs that are currently before her Department? They have not been dreamed up, but they are there, they are measurable, and they can be added together to show the impact of the SIs that are currently on the table and their cost to business.
Kelly Tolhurst
I will try again to answer the hon. Gentleman’s question. There is no policy change in this SI: it is correcting deficiencies in the retained EU law. If he is asking about the impact of no deal, I refer him to the work that has already been done by Government on the impact of a no deal scenario versus a deal scenario, rather than these individual statutory instruments. As he will know, there are a number of statutory instruments across all Departments that may well affect businesses in different ways, which do not come under my responsibilities as a junior Minister in the Department for Business, Energy and Industrial Strategy.
Nick Smith (Blaenau Gwent) (Lab)
I just want to press the Minister on this point about the overall cost to business of the no deal planning that she has talked about. My hon. Friend the Member for Sefton Central has mentioned the specialist media coverage of the accounting requirements that have already taken place in one sector of the economy, and this is the third Delegated Legislation Committee on this topic in this week alone. By when will we receive from the Minister the true cost to business of these extra responsibilities and regulations from her Department?
Kelly Tolhurst
As the hon. Gentleman well knows, the assessments of the effect on business have been well reported. With this particular SI, we are talking about the impact on a very small number of businesses, compared to the 3.8 million that are registered. The vast majority of UK-registered companies will not be affected by the SI at all, because we are not changing the policy; we are correcting deficiencies so that we are legal and can operate correctly and efficiently in the case of a no deal scenario. Quite rightly, if we are able to establish a future relationship with the European Union—if we are in a situation where we have a deal—this is one of a number of elements that would be part of those ongoing negotiations. However, I am unable to give the hon. Member for Blaenau Gwent clarity on the direct question he asked regarding the total cost to business for all the SIs that have been passed or are coming up.
Kelly Tolhurst
If the hon. Gentleman is referring to accountancy, we are talking about the accountancy SI today.
Kelly Tolhurst
I am going to carry on, because I have given as full an answer as I am prepared to give.
As I highlighted in my introduction, and as I have reiterated, we are not changing the way in which we ask companies to report. We will work with Companies House, as we do already, to ensure that we identify all the companies that are affected by not having the exemptions, that we have the data, and that any guidance that is needed is issued well before the SI comes into effect.
On the extraction industries, the hon. Member for Sefton Central is right that currently the EU Commission has the power to grant equivalency to third countries. We are not changing any of the criteria for that; rather than the EU Commission having that power, the Secretary of State would have the authority to make those decisions in a no deal situation. As I outlined, the SI will correct the deficiencies in EU retained law.
Bill Esterson
I think my hon. Friend has anticipated my question. Will the Minister explain what the scrutiny process will be for the Secretary of State’s decision making in the event of no deal?
Kelly Tolhurst
I thank the hon. Gentleman for that question. As I outlined, the European Commission has the power to grant equivalency, and we are not changing any powers here. Having looked at this, we believe that it is small enough for us to have it in an Executive power. If the European Commission has those powers currently, it is right they would be transferred to the UK Secretary of State in a no deal situation. Scrutiny would operate exactly as it does currently.
Kelly Tolhurst
Absolutely, because the Secretary of State would make those decisions and grant those powers. Granting equivalency to third countries is obviously a small part of it.
Effective financial reporting underpins the success of every business. It helps to inform decision making, to improve performance and to promote confidence in a company’s future. As the UK exits the EU, it is paramount that we maintain the integrity of the UK system of accounting and reporting. The regulations will ensure that it remains coherent, operable and understandable for companies, users of accounts, and the general public, who rely on the transparency that it provides. I commend the regulations to the Committee.
Question put.
Draft Merchant Shipping (Recognised Organisations) (Amendment) (EU Exit) Regulations 2019
(5 years, 11 months ago)
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The Parliamentary Under-Secretary of State for Transport (Ms Nusrat Ghani)
I beg to move,
That the Committee has considered the draft Merchant Shipping (Recognised Organisations) (Amendment) (EU Exit) Regulations 2019.
It is a pleasure to serve under your chairmanship, Sir Christopher. Recognised organisations play an important part in ensuring that ships are built and maintained so that they can operate in compliance with national and international standards on safety and the prevention of marine pollution. ROs are organisations with experience and expertise in the surveying, inspection and certification of ships. They carry out those functions on behalf of maritime nations such as the United Kingdom.
Globally, the International Maritime Organisation develops rules on ROs. The IMO introduced the recognised organisations code, which updated and consolidated existing requirements, and entered into force in 2015. The code contains criteria against which ROs are approved, authorised and assessed, and gives guidance on how flag states should monitor ROs. As in many other areas, the European Union has adopted legislation to harmonise the way in which member states implement IMO requirements. EU regulation 391/2009 and related legislation established a system for approving ROs, criteria for assessing RO performance based on IMO criteria, monitoring measures, and remedial measures if ROs are underperforming, including fees, penalties and, finally, the removal of RO status.
The regulations before the Committee are made under the European Union (Withdrawal) Act 2018. The Department expects to lay approximately 65 EU exit statutory instruments. The Act retains EU legislation that is directly applicable in UK law, such as that on ROs.
Michael Fabricant (Lichfield) (Con)
Does my hon. Friend—[Interruption]—yes, and possible future Prime Minister, as my hon. Friend the Member for Wyre Forest says—believe that these regulations are a good example of contingency planning in the event of no deal, but also the planning that has to go ahead following our withdrawal from the EU?
Ms Ghani
I thank my hon. Friend.
The regulations make provision under section 8 of the 2018 Act to correct deficiencies in such EU legislation as arise from the UK leaving the European Union. We need to amend retained EU legislation on ROs for the legislation to function correctly in future. The regulations will therefore amend EU regulation 391/2009 and subsidiary EU legislation, which comprises Commission regulation 788/2014 on rules for fines, penalty payments and the withdrawal of recognition, and Commission decision 2009/491 on criteria for member states to use when judging whether an RO’s performance is unacceptable. The regulations also revoke Commission implementing regulation 1355/2014.
Under EU legislation, member states may delegate the inspection and survey of ships to EU authorised ship inspection and survey organisations, or EU ROs. At present, there are 12 EU ROs, six of which have been authorised to act on behalf of the UK. The regulations will make the necessary changes to adapt an EU system for ROs to one that can function as a UK system after exit. It is the Maritime and Coastguard Agency’s intention that the six EU ROs that are currently authorised on behalf of the UK would continue to remain authorised and recognised as UK ROs following our exit from the EU.
To enable the legislation to continue to work as part of UK law, the regulations will change references to “the member state” and “the Commission” to “the Secretary of State” or “the United Kingdom” where appropriate. Changes to definitions and other wording in the legislation have been made to reflect the UK’s position outside the EU, and redundant reporting requirements have been removed.
Certain powers have been transferred from the European Commission to the Secretary of State for Transport. That will enable us to keep up to date with changes to the IMO rules that apply to ROs in relation to standards and the criteria for assessing RO performance. Those criteria are used to measure the effectiveness of the rules, procedures and performance of recognised organisations in relation to safety and the environment.
The regulations will also enable the Secretary of State to make rules in relation to the imposition of fines and penalties and the withdrawal of recognition; the establishment of criteria for assessing ROs’ performance and the effectiveness of their rules; the amendment of the criteria that ROs must follow and the interpretation of those criteria; and the amendment of the criteria for use of port state control inspection data for assessing unacceptable levels of performance by ROs. Other changes include transferring powers to review fines and penalties from the European Court to the UK courts by way of a statutory appeals procedure.
The regulations will be accompanied by merchant shipping notice 1672, which provides information to the industry on the standards that ROs apply and on requirements for recognising, authorising and assessing ROs. I should also mention directive 2009/15, which governs the relationship between states and ROs and includes the authorisation of ROs. That directive was implemented administratively through formal agreements between the Maritime and Coastguard Agency and each RO. The directive will not be saved in UK law after exit, but the MCA will put in place new agreements with each RO when the regulations come into force. Those arrangements will be very similar to the previous agreements between the MCA and the ROs but will reflect the changes made in these regulations.
The regulations make necessary changes to ensure that the existing regulatory framework for recognition, authorisation and monitoring of recognised organisations is retained and operates effectively. They will ensure that the law on recognising, authorising and monitoring ROs continues to function after the UK’s withdrawal from the European Union, enabling the UK to continue to comply with its international obligations as established by the International Maritime Organisation. The regulations are fully supported by the Government and I commend them to the Committee.
Karl Turner (Kingston upon Hull East) (Lab)
It is a pleasure to see you in the Chair, Sir Christopher. I will be brief.
As the Minister outlined, the regulations bring a series of EU Commission decisions and regulations on merchant shipping marine pollution into UK law under the Government’s European Union (Withdrawal) Act 2018. They aim to ensure that international criteria for the performance of private sector companies—so-called recognised organisations—contracted to survey regulatory compliance in merchant shipping continue to apply after Brexit.
The areas of compliance are the five key UN conventions underpinning international maritime regulation. Those various regulations and decisions were implemented to tackle marine pollution. Studies show that ships contribute between 2% and 3% of the world’s greenhouse gas emissions. Roughly 14 million annual cases of childhood asthma are estimated to be related to global ship pollution using current fuels. I am sure the whole Committee agrees that that is shocking. We welcome steps to deal with that problem.
Mr Robert Goodwill (Scarborough and Whitby) (Con)
Is the hon. Gentleman aware that under IMO rules there are annex VI areas, including many of the affected coastal areas in our country, where heavy marine fuels cannot be used and ships have to switch to diesel? The problem has been mitigated by the IMO in many sea areas, including the English channel and the Baltic sea.
Karl Turner
I am grateful to the right hon. Gentleman for his intervention. I accept that there are some mitigations, but the research clearly shows that this is still a real problem.
The Opposition are supportive of this instrument and do not intend to divide the Committee, but I would like to put on the record and raise some points with the Minister. As ever, I certainly do not expect a detailed answer now, given the constraints of the Committee. I would, however, be grateful if she responded in writing in due course.
First, will the Minister clarify the post-Brexit arrangements with the European Maritime Safety Agency for access to its inspection database ahead of the new IMO restrictions on the sulphur content of shipping fuels coming into force on 1 January 2020? Although we of course welcome action aimed at reducing sulphur emissions from shipping for environmental and health reasons, there are significant challenges for short sea shipping and ferry operators. What recent discussions has the Minister held with UK ferry operators and shipping companies on meeting those restrictions?
Secondly, I would be grateful if the Minister clarified how the international convention on standards of training, certification and watchkeeping for seafarers and the maritime labour convention are included in the responsibilities for the ROs authorised by the Maritime and Coastguard Agency to carry out inspection and survey work on its behalf. Also, how does all that tie in with the Government’s 25-year environment plan? I have a note with those questions that I am happy to hand to the Minister and her civil servants and I would be very grateful if they responded to these points in due course.
Ms Ghani
I am grateful to the hon. Gentleman for his contribution to this morning’s debate, and to the Opposition for their support. This debate has shown that the Committee appreciates the important part that ROs play in ensuring maritime safety and environmental protection.
The regulations will ensure continuity for ROs and the shipping companies that rely on their services. It is not our intention to make changes to how ROs operate, or to the relationship between the MCA and ROs. The regulations only adapt a system for ROs designed on behalf of the EU member states into a UK system. The MCA has already taken steps to promote continuity in discussions with the ROs.
The regulations are essential to ensure that legislation on ROs, which are a crucial part of the regulatory framework for shipping, continues to work effectively in the UK from day one after our EU exit. I am grateful that the hon. Gentleman will allow me to respond in writing to some of the issues that he raised. However, I remind him that we are part of the high ambition coalition driving the IMO’s standards not only on greenhouse gas emissions but on other emissions into our waters.
I am in the middle of preparing the Government’s 30-year strategy, “Maritime 2050”, which will look not only at the training and rights of seafarers but at environmental impacts. I am more than happy to give more detail as I take that forward. I established the clean maritime council to ensure that we not only deliver on our country’s ambitions but lead the way in the world. I hope the Committee has found this morning’s sitting informative and will join me in supporting the regulations.
Question put and agreed to.