Draft Financial Regulators' Powers (Technical Standards Etc.) and Markets in Financial Instruments (Amendment) (Eu Exit) Regulations 2019
(5 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Financial Regulators’ Powers (Technical Standards etc.) and Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2019.
May I first say what an enormous pleasure it is to serve under your chairmanship, Sir Gary? It certainly feels like a long time since I was your researcher 22 years ago.
As the Committee will be aware, particularly Front Benchers, the Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the European Union without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the United Kingdom. This instrument forms part of that work.
There are two components to the instrument. The main component follows on from the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, debated and made in October 2018, which transferred responsibility for fixing deficiencies in level 2 binding technical standards—BTS—to the UK financial services regulators. Consistent with the approach taken in that SI, this transfers responsibility for any new BTS adopted by the EU Commission since the previous SI was laid to ensure that those can also be fixed ahead of exit day. The second, smaller component of this morning’s SI makes minor correcting amendments to the Market in Financial Instruments (Amendment) (EU Exit) Regulations 2018 that was debated and made in December 2018 to ensure that it operates as intended if the UK were to leave the EU without a deal. The approach taken in the legislation aligns with that of other SIs being laid under the European Union (Withdrawal) Act 2018, providing continuity by maintaining existing legislation at the point of exit, but amending it where necessary to ensure that it works effectively in a no-deal context.
As I set out during the financial regulators’ powers SI debate on 10 October, as a result of the UK leaving the EU the Government had to decide how to allocate responsibility for the huge body of financial services legislation being brought on to the UK statute book by the European Union (Withdrawal) Act. A significant volume of the legislation consists of EU level 2 BTS, which run to between 7,000 to 8,000 pages. The technical standards do not take policy decisions, but set out at a granular level the requirements that firms need to meet to implement policy set out in higher EU legislation.
Common examples of technical standards are those that set out the processes for firms to provide supervisory information to regulators, including the specific form templates that firms should use. The responsibility for developing and drafting the technical standards currently lies with the European supervisory authorities—ESAs—and they are then adopted by the European Commission. The European Union (Withdrawal) Act will bring the technical standards into UK law at the point of exit in the event that we do not reach an agreement with the EU on an implementation period. Many of the technical standards will be deficient and will require fixing to work effectively in a UK stand-alone regime.
The financial regulators’ powers SI that was debated last October delegates the European Union (Withdrawal) Act power to fix deficiencies to the UK financial services regulators so that they can ensure onshored technical standards operate effectively from exit day. It sets out the procedure and requirements that the regulators must follow for amending technical standards in future. The SI listed all EU BTS that were in force at the point when the SI was laid. However, since the 2018 regulations were made, further BTS have been adopted by the Commission. It is a live process. The European Union (Withdrawal) Act will operate to bring the new BTS into UK law at exit day—automatically, as envisaged and as set out previously—and they contain deficiencies that need to be addressed to ensure that they work effectively in the UK after exit. It will be helpful for me to illustrate those deficiencies, because there will be references to the European Securities and Markets Authority versus the Financial Conduct Authority. They are not deficiencies in the functioning, but meaningful corrections to the wording will have to be made.
Responsibility for fixing any deficiencies in these new BTS needs to be transferred to the UK regulators. The draft instrument does that by adding the new BTS to the schedule of the financial regulators’ powers SI, bringing them into scope of those regulations. Specifically, it adds BTS relating to the benchmarks regulation, the European long-term investment funds regulation, the market abuse regulation, the bank recovery and resolution directive and the capital requirements regulation, all of which have been recently adopted by the Commission.
In addition, the draft instrument also makes minor amendments to the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, to ensure that it effectively addresses deficiencies in the retained EU law relating to markets in financial instruments. The changes affect schedule 3 to the regulations, which deal with the transfer of functions to the Treasury and the regulators.
Regulation 3 of the draft instrument corrects a number of minor errors. Regulation 3(a) corrects a reference to regulation 396/2014 to regulation 596/2014. One wrong digit meant that the provision being amended did not refer to the market abuse regulation, as intended, and consequently the Treasury’s power to make equivalence determinations in relation to regulated markets would not work effectively. Regulation 3(b) removes a provision relating to EU arrangements between member states, which was overlooked. It enables the Treasury to set out the criteria under which the operations of a trading venue in a host member state are to be considered to be of substantial importance for the functions of the markets and the protection of investors in that state. This provision will be redundant once the UK is no longer a member state.
Regulation 3(c) corrects an incorrect cross-reference. Regulation 3(d) removes a reference to repealed legislation in paragraphs 7A(2) and (3)(a) of the schedule to the recognition requirements regulations. Regulation 3(e)(i) changes the word “notifications” to “applications”, which more accurately reflects what the relevant regulator rules do. Regulation 3(e)(ii) removes a reference to an FCA rule that has now been repealed. Regulation 3(f) removes a reference to regulation 46 of the markets in financial instruments regulations 2017, which is being repealed.
While every effort is made to avoid mistakes in legislation, mistakes happen from time to time in all Departments. I assure the committee that the onshoring SIs have been through all the usual internal and external checks that secondary legislation normally goes through. The Treasury has also worked closely with the financial regulators to develop these instruments, and industry has had the opportunity to check drafts that we have published.
Considering the volume of onshoring legislation that we have been preparing, these mistakes are not out of line with those that happen from time to time in the normal legislative process. So far, we have laid 53 statutory instruments, amounting to around 1,000 pages, and I think this is the 23rd debate under the affirmative procedure. The number of mistakes identified in onshoring SIs has been low, with most being minor and technical in nature. These drafting errors in the MIFI SI were picked up as part of continuing preparations to ensure that the UK’s regulatory regime operates effectively from exit. This SI therefore ensures that the MIFI SI will function as intended from exit day in a no-deal scenario.
In terms of industry engagement and transparency, the Treasury has worked closely with the regulators in the drafting of the draft instrument. The regulators will also undertake a public consultation on any deficiency fixes they propose to make to the technical standards covered by this SI. We have also engaged extensively with the financial services industry on the two key instruments to which the draft instrument relates.
In summary, the Government believe that the proposed legislation is necessary to ensure that recently adopted binding technical standards continue to operate effectively once brought into UK law by the EU (Withdrawal) Act 2018, and that the Markets in Financial Instruments SI effectively addresses the deficiencies in retained EU law if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the draft regulations. I commend the draft regulations to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Sir Gary. Once again, the Minister and I are here to discuss a draft instrument that makes provision for the regulatory framework after Brexit in the event that we crash out of the EU without a deal. On each of those occasions, my Front-Bench colleagues and I have spelled out our objections to the Government’s approach to secondary legislation. The Minister knows and appreciates that. This is the first of two meetings we will have today, and I will not read my speech out twice, but I will simply say that the more I see of this process, the less convinced I am that it is a good way to make such a substantive body of law.
The regulations amend the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, which, as the Minister described, simply list the EU regulations for which the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England are the appropriate regulator. In particular, they allocate the FCA a further set of EU regulations, taking its current figure by my count to a whopping 93. As we have raised in previous debates, it would be helpful to understand how it has been decided which powers will go to the FCA, the PRA, the Bank of England or the Treasury and how much resourcing will be given to those institutions. The Minister tends quite correctly to say that the functions of the Commission are going to the Treasury and those of ESMA are going to the FCA, but the picture is more complicated than that simple binary transfer of power. He knows that the Opposition are concerned about this unprecedented transfer of powers via secondary legislation, as any good Opposition would be, especially as there has been little consultation about the FCA specifically acquiring the powers.
Many bodies could take on powers of financial regulation alongside the FCA, the PRA, the Bank of England and the Treasury. Aspects of financial regulation could be seen as being within the purview of a democratic Parliament. There has been little explanation in statutory instruments about why other bodies, including Parliament, should not have principal oversight of former EU regulations. It is also not clear that the FCA has been given support or resourcing to discharge the major increase in powers it has been given. Without support or resourcing, the FCA will not be able to discharge new regulatory capacities effectively or responsibly. The explanatory memorandum confirms that the Treasury has not undertaken a consultation on the instrument, but it seems clear that some stakeholders have been consulted by necessity. Will the Minister clarify that point?
The explanatory memorandum also states:
“The financial services regulators plan to undertake public consultation on any changes they propose to make to BTS or rules made under the powers conferred upon them by the Financial Services and Markets Act 2000 using the powers delegated to them by the 2018 Regulations.”
It would be helpful to have further clarification on that, not least the statutory requirements for consultation. The words “plan to undertake…consultation” seem uncertain. According to the explanatory note, an
“impact assessment…on the costs of business, the voluntary sector and the public sector will be available from HM Treasury”.
However, the explanatory memorandum states:
“An Impact Assessment has not been prepared for this instrument because in line with Better Regulation guidance, HM Treasury considers that the net impact on businesses will be less than £5 million a year. Due to this limited impact, a de-minimis impact assessment has been carried out.”
The explanatory memorandum continues:
“There is no, or no significant, impact on business, charities or voluntary bodies, as this instrument relates to maintenance of existing regulatory standards...The impact on the public sector is that UK financial services regulators (the Bank of England/Prudential Regulation Authority, the Financial Conduct Authority and the Payment Systems Regulator) will be responsible for fixing deficiencies in BTS so that they operate effectively from exit day, and will have ongoing responsibility for making any technical standards required under retained EU law on financial services”.
It states:
“The allocation of responsibility is therefore a manageable impact.”
Will the Minister confirm whether there has been an impact assessment? Either way, can we see the evidence base for those assertions?
It is ten years since the fall of Lehman Brothers and the beginning of the global financial crisis, and the Government need to reflect on how the imperative of ensuring financial stability will be met, or otherwise, by these arrangements. I am becoming increasingly alarmed by the Government’s unfolding approach to regulating financial services, which seems to have no overall plan, no indication of how the different pieces of legislation fit together and, ultimately, no clarity. Rather than pushing through such a large volume of piecemeal secondary legislation, it is clear we need a consolidated piece of primary legislation.
Will the Minister explain why the Government need to update the Financial Regulators’ Powers (Technical Standards etc.) (Amendments etc.) (EU Exit) Regulations 2018 and the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, which were made in October 2018? It suggests they are making decisions as they go along, rather than having a coherent plan. I listened to the distinction that the Minister made, which was that new legislation has to be covered by the regulations, but surely that is the purpose of the in-flight Bill, which we dealt with on the Floor of the Chamber recently. In addition, part 3 makes minor technical amendments to correct the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018.
The Minister was frank about the errors that have been found, and right to say that for such a large volume of legislation the amount of those errors is relatively minor. As he may remember, however, Labour voted against the regulations and called for greater scrutiny, and there are still legitimate concerns about the strength of the process.
This statutory instrument must be understood in the context of the Government’s chaotic approach to no-deal preparations, which has been characterised by significant transfers of power to the Treasury, the FCA, the PRA, and the Bank of England through statutory instruments. When Britain voted to leave the EU, I believe that was to empower Parliament to debate and make these decisions, not to concentrate them in the hands of a few civil servants and Ministers. As legislators we have to get this right. This is not just about the principle of democracy and accountability; this is about robust law-making that is clear, comprehensive, coherent, and enforceable.
Sir Geoffrey Clifton-Brown (The Cotswolds) (Con)
I welcome the Minister to his place and I have one simple question that I am sure he will be able to answer: if there is a dispute over decisions made by UK regulators during the transitional period and the EU, will that be dealt with through the arbitration procedure?
Peter Grant (Glenrothes) (SNP)
It is a pleasure to serve under your chairmanship, Sir Gary, and Members will be relieved to hear that I intend to be brief. That is not a matter of inclination—not my style at all—but a matter of necessity before my voice gives up altogether.
I did not catch the number of statutory instruments that the Minister was so proud to say have been pushed through, or how many still need to be resolved before 29 March, but coming from a Government who boast about easing the burden of regulation on businesses, that seems more than a shade ironic. None of those regulations are designed to make anything better—at best, they will keep us where we would have been had the Government’s unilateral decisions following the referendum been different.
Having set the ball rolling, set the timetable, and created the danger of a no-deal Brexit, and having identified the avalanche of legislation that will be needed to cope with that, the Government failed to timetable the legislation properly. That is why, two years after article 50 was triggered, there is such a panic to get all these regulations through, and why Parliament is sitting now when Members should be back in their constituencies working. That was done not to give time to debate regulations such as these, but to allow the clock to tick forward for another four or five sitting days, so that the regulations can legally be considered before 29 March.
It is extremely concerning, although perhaps no wonder, that major financial services, businesses and employers have already decided that they do not have confidence in the United Kingdom, London or Scotland as centres of financial services to the same extent as they did previously. That does not mean that those services will disappear but—depending on which analysts we believe—between €1 trillion and €2 trillion of assets are being, or have been moved out of the United Kingdom as a result of Brexit. It will take a long time for that confidence to be restored and those jobs to return.
The Minister has consulted the financial services sector. Because of the time limit that the Government placed on themselves, I understand that there was no time for a full-scale consultation with everybody who might be affected, but it is a pity that they did not listen more to the financial services sector before they set the ball rolling in the first place. In Scotland, and in the City of London, the financial services sector is clear. If they have to do Brexit, which they do not think is a good idea, we should stay in the single market, as that would immediately ease a lot of the concerns about the application of regulations post-Brexit.
Would any of the secondary legislation that the Minister has been or will be responsible for between now and 29 March have been necessary if the Government had listened to financial institutions and agreed to stay in the European single market? After all, that would have been perfectly compatible with the referendum decision of 2016.
John Glen
I acknowledge the thoroughness of the scrutiny from the hon. Members for Stalybridge and Hyde and for Glenrothes, and my hon. Friend the Member for The Cotswolds, and I will address their specific points. I will refrain from going into a full disputation on the opening points made by the hon. Member for Stalybridge and Hyde. We have gone through this matter several times. All I can say is that we are able to bring to Committee only those statutory instruments that fit within the purview of the withdrawal Act as debated. And, despite the corrections that we are having to make today, I submit that this has been a thorough process.
The hon. Member for Glenrothes said that it was with some pride that I spoke about 53 statutory instruments. There is no pride; there is just a sense of clarity about the thoroughness and rigour of this approach, which includes 30 affirmative discussions in SI Committees.
The hon. Member for Stalybridge and Hyde asked how it was decided which BTS go to the FCA and so on; he asked about the allocation mechanism across the regulators. Frankly, they are allocated according to the functions of the regulators that were given to them previously by primary legislation, and BTS will go to the Prudential Regulation Authority in line with that. The hon. Gentleman asked about the resourcing. I am very confident that the regulators are making adequate preparations and effectively allocating resources ahead of March 2019. They have considerable experience and technical expertise in regulating the financial services sector to high standards—that is why the City of London remains, despite the unwelcome uncertainty, a vibrant place for financial services at this time—and they have actively participated in a wide range of groups developing technical policy and regulatory rules and chaired a number of committees and taskforces with considerable experience in implementing EU legislation. That means that the responsibilities of EU bodies can be reassigned efficiently and effectively, providing firms, funds and their customers with confidence after exit.
The hon. Gentleman asked a question about what role is foreseen for Parliament to hold regulators to account. Parliament will continue to be involved in every aspect of the process to onshore EU financial services regulation. All the changes that the Treasury will propose to level 1 legislation and delegated Acts will be put before Parliament to approve. Any transfer of responsibility to the regulators, including any transfer of powers to make technical standards, will be put before Parliament to approve through affirmative procedure SIs. The Treasury will continue to work closely with the Bank of England, the PRA, the FCA and the Payment Systems Regulator on how we fix deficiencies in EU financial services regulation, including binding technical standards.
The hon. Gentleman asked whether the FCA has a statutory obligation to consult. Yes, that is clearly set out in the regulators’ powers SI for future amendments. The regulators are consulting on all their deficiency fixes.
The hon. Gentleman asked why these additional binding technical standards were not incorporated in the relevant EU exit SIs and why they are only now being picked up. The mandates to produce these technical standards will already have transferred, post exit, the responsibility for them to UK regulators, but this SI transfers the responsibility to UK regulators for fixing deficiencies in new standards that have come into force since we laid the original SI. This SI is about making sure that our regulators are able to ensure that those are fixed in time for the standards to operate effectively from exit day.
The hon. Gentleman asked about an impact assessment. The reason why there is not one is the de minimis impact; there will be no impact on industry from this SI. It concerns the regulators’ functions and makes minor amendments to MIFI. That has already been impact-assessed.
My hon. Friend the Member for The Cotswolds asked about a dispute between the EU and our regulators. A process for consultation is set out in the financial regulators’ powers SI. Where regulators do not agree on a joint approach, they can each make separate provision in relation to the parts of the financial services industry they are responsible for regulating, so there is inherently some discretion there, but in the context of the accountability I set out, there are checks to that. However, through this process, there will not be any policy deviation from what has already been agreed.
I hope I have addressed the points that were raised. I recognise that going through all these statutory instruments is an arduous process, and I acknowledge the comments made by the hon. Member for Stalybridge and Hyde about the undesirability of the process. Of course, if we get a deal, which is the Government’s intention and policy, these SIs will not be required. However, it is important that we ensure that recently adopted binding technical standards continue to operate effectively and that the markets in financial instruments SI effectively addresses the deficiencies in retained EU law if the UK leaves without a deal or an implementation period.
I hope I have adequately responded to the points that were raised, and I hope the Committee has found the sitting informative and will be able to support the draft regulations.
Question put and agreed to.
Draft Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019
(5 years, 6 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 Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019.
It is a pleasure to serve under your chairmanship, Sir Henry. As the Committee will be aware, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018 to deliver that, and a number of debates on those SIs have already been undertaken in this place and the House of Lords. This SI is part of that programme.
The SI will fix deficiencies in UK law related to the EU packaged retail and insurance-based investment products—PRIIPs—regulation to ensure that it continues to operate effectively post exit. The approach taken in the legislation aligns with that taken in other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
Many Committee members will be familiar with PRIIPs. PRIIPs are investment products offered to retail investors, such as investment funds, life insurance policies with an investment element, and structured investment products. Retail investors may invest in PRIIPs as an alternative to depositing cash in a savings account, and PRIIPs are sold primarily by asset managers, banks and insurers.
The EU PRIIPs regulation, which came into force on 1 January 2018, aims to make it easier for retail investors to compare similar financial products through the introduction of a standardised disclosure document called a key information document, or KID. The KID must display important information about the financial product, such as performance scenarios, risks and costs, in a standardised way. Any firm selling or advising on a PRIIP to a retail investor in the EU must provide them with a KID.
Before I go into detail about the functions of the SI, let me say that the Government recognise that industry has raised several issues with the underlying PRIIPs regulation. However, the Government are not able to use the powers of the EU withdrawal Act to make any policy changes. That illustrates the constraints of the withdrawal Act in this regard. Nevertheless, the Financial Conduct Authority has taken action in relation to issues with the PRIIPs regulation. As I set out in a letter to the hon. Member for Oxford East (Anneliese Dodds) in January, the FCA launched a call in July 2018 to seek industry and consumer input on the new requirements introduced by the PRIIPs regulation. That call for input closed for responses on 28 September 2018, and the FCA is in the process of reviewing all the responses. It expects to publish its feedback statement in the next five weeks—in the first quarter of this year—and Treasury officials are engaging closely with it on these issues.
I turn to the substance of the SI. In a no-deal scenario, the UK will be outside the EU and outside the EU’s legal, supervisory and financial regulatory framework. The retained PRIIPs regulation therefore needs to be updated to reflect that and to ensure that the provisions work properly in a no-deal scenario. The draft regulations make a number of changes.
First, the SI will amend the territorial scope of the retained PRIIPs regulation to reflect the UK’s position outside the EU. The EU PRIIPs regulation applies to any firm that manufactures, advises on or sells PRIIPs to retail investors in the EU. The SI amends the territorial scope of the retained regulation so that, following exit, it will apply only to firms that manufacture, sell or advise on PRIIPs to retail investors in the UK.
Secondly, the SI transfers functions currently in the remit of EU authorities to the relevant UK authorities. Following exit, EU authorities will have no mandate to carry out such functions in the UK. The SI corrects that deficiency by transferring the functions of the European Commission to the Treasury and the functions of the European supervisory authorities, or ESAs, to the FCA. European Commission powers to make delegated Acts are transferred to the Treasury, and powers to make and correct deficiencies in binding technical standards are transferred from the ESAs to the FCA. That is in line with the approach we have taken across the financial services legislation that has been laid in recent weeks.
Moreover, the SI expands an exemption from the requirements of the PRIIPs regulation for certain securities issued by public sector bodies in the European economic area so that it covers public sector bodies in the UK and all third countries. This will ensure that no such securities fall into the scope of the regulation in the UK on exit day, and that the UK treats EEA countries in the same way as other third countries, as it is obliged to.
Furthermore, the EU PRIIPs regulation contains an exemption from its requirements for all undertakings for collecting investment in transferable securities— UCITS—funds until 31 December 2019. UCITS funds are a common type of retail investor fund and must be domiciled in an EEA state. Both UK and EEA-domiciled UCITS are sold widely in the UK. They are subject to a disclosure framework set out in the UCITS directive, separate from the PRIIPs disclosure framework, until the exemption ends. The draft instrument maintains that exemption in the UK for all UCITS funds, including EEA UCITS, ensuring that both UK and EEA funds can continue to adhere to the existing UCITS disclosure framework until this exemption ends.
Finally, the draft instrument deletes provisions in the retained PRIIPs regulation that will become redundant once the UK leaves the EU. The draft instrument deletes references to EU regulators and to administrative sanctions powers for national regulators, which have already been brought into UK law and granted to the FCA through UK implementing legislation. The draft instrument also deletes obligations in the PRIIPs regulation for the FCA to co-operate with EU counterparts. UK authorities will instead be able to share information with EU counterparts through existing domestic provisions for co-operation and information sharing under the Financial Services and Markets Act 2000.
The Treasury worked closely with the FCA in drafting the instrument and also engaged the financial services industry on the draft instrument’s approach to correcting deficiencies. On 22 November 2018, the Treasury published the draft instrument, along with an explanatory policy note, to maximise transparency to Parliament and industry ahead of the draft instrument’s being laid. As mentioned, the draft instrument is only able to fix deficiencies in the PRIIPs regulation arising from the UK’s exit from the EU. Any change to the underlying policy cannot be considered as part of this onshoring process.
In summary, the Government believe that the proposed legislation is necessary to ensure that the disclosure framework for PRIIPs sold in the UK can operate effectively, and that legislation can continue to function appropriately, if the UK leaves the EU without a deal or implementation period. I hope that Committee members will join me in supporting the draft regulations. I commend the draft regulations to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Sir Henry. For the second time today, the Minister and I are discussing a draft instrument that makes provision for a regulatory framework after Brexit in the event that we crash out of the EU without a deal. On each occasion this happens, my Front-Bench colleagues and I have spelled out our objections to the Government’s approach to this process. It is fair to say that those concerns have not changed since this morning.
As the Minister said, the draft instrument relates to the packaged retail and insurance-based investment products regulations, known as PRIIPs. The discussion on regulating such products began a decade ago, and we believe that the legislation introduced subsequently has played an important role in consumer protection. The biggest part of that is the key investor information document, known as the KID, which was an important step forward as it obliged providers to provide retail investors with a succinct, easily understandable summary of no more than three pages telling investors of the main risks involved. The Opposition are therefore supportive of transposing this regulation and ensuring that there is no relaxation of applicable standards should we leave the EU without a deal.
However, we believe that an ongoing review of this area of regulation is needed, to ensure that the regulation is sufficiently robust. As the original EU regulatory background note stated, these areas are often complicated and lacking in transparency and the information provided can be overly complex and difficult to use for comparisons between different investment products. It also said that institutions selling these products advise investors, and therefore that conflicts of interest may arise. However, I note the Minister’s saying that a wider review is not possible under this process, which is a fair point. I look forward to the Government’s future proposals in that regard.
I particularly note the exemption applied to UCITS funds that the Minister just described, which I attribute to the fact that a KID is now an integrated obligation of the latest version of UCITS. I would be grateful if the Minister could confirm—perhaps in writing if it is not possible to do so now—whether that is the case, or whether it is simply a technical deficiency in the draft instrument? How will that affect the onshoring plans and the statutory instruments relating to UCITS that we have already passed?
I put on the record the Opposition’s objection to the decision to transfer functions to the FCA from the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, and from the European Commission to the Treasury, with little consultation or transparent explanation. We would appreciate greater consultation. As I have said in such Committees before, the Opposition believe that an implicit policy judgment is being made by allocating powers to both institutions without parliamentary consultation on future resourcing and the balance of powers.
I also highlight that regulation 2(4) amends the Financial Services and Markets Act 2000, essentially to require that policy statements by the FCA and others are more detailed. This is a rather general amendment that should be in primary legislation and for which we would like to ensure that the FCA is adequately resourced into the future.
I conclude by reiterating my comments from last week’s financial services Bill debate, when I questioned how much consultation there had been with the asset management sector on these issues. It seems from a couple of stakeholders that have contacted me that there is some confusion about process, given their lack of familiarity with the secondary legislation process, and subsequent concerns about how their businesses will be able to function in the long term. I would like the Minister to provide some clarity on these points.
Alison Thewliss (Glasgow Central) (SNP)
It is nice to see you in the Chair, Sir Henry, and to be with all my colleagues again as we hurtle towards Brexit. It is a joy.
I will pick up where my colleague on the Labour Front Bench, the hon. Member for Stalybridge and Hyde, left off: the consultation process is not clear. The draft explanatory memorandum to the draft instrument says:
“HM Treasury has not undertaken a consultation on the instrument, but has engaged with relevant stakeholders on its approach to Financial Services legislation under the EUWA—
EU withdrawal Act—
“including on this instrument”.
Does the Minister have a list of those he has consulted, and is he able to share it with the Committee? It would be useful to get an idea of just how broadly the Government have consulted, to see if anything has been missed or if there are other organisations that would have liked to contribute to the drafting of the instrument. Without a formal way for the Government to tell us those things, we have to take their word for it that it has been done as thoroughly as it could have been, as I have said before.
As the Minister probably expects—it is my usual refrain when more powers are moved to the FCA and the Treasury—it will be useful if he can tell us how many staff are involved in this and what the scrutiny mechanisms for MPs will be as we go forward. It is not really taking back control if we take powers back from ESMA and from the EU and hive them off to the FCA and to the Treasury, with MPs losing any kind of control over the process. That is not adequate at all.
According to the explanatory memorandum, first, changes for firms resulting from the UK PRIIPs KID regulation are expected to be minimal, and secondly, the UK regime will be operationally equivalent to the EU regime, so that firms manufacturing or advising on PRIIPS for sale to UK investors will continue to be subject to the same obligations as currently. The Government propose to achieve that by making minor, technical amendments to UK PRIIPs KID regulation to make it effective in the UK and to limit its scope to PRIIPs made available to UK retail investors.
However, there will be minor differences in the content of the KID between the two regimes. For example, the UK regulation specifies that references to the “competent authority” of the PRIIP manufacturer in the KID is deleted, and that the mandatory statement on the impact of tax legislation on the investor’s pay-out must specifically refer to UK legislation, as opposed to a more generic reference to the retail investor’s home member state. It also seems likely that the difference between the two regimes will widen with the passage of time after exit day. How does the Minister intend to continue alignment in the years ahead? Maybe there will be more clarity on that when the consultation comes back.
For that reason, it appears that, after Brexit, PRIIP manufacturers will need to prepare two KIDs for the same PRIIP where there that PRIIP is made available to retail investors in both the UK and the EU, which seems to me to be additional red tape. The Brexiteers railed against all this terrible red tape, but here we are tangling ourselves up in yet more of it. In some ways, it seems an overly onerous requirement for businesses. I am also worried about any dilution of measures designed to improve fair competition and consumer welfare.
It is ridiculous that the Government continue to play Brexit out and move us closer to the cliff edge, with the Prime Minister unable to give a date for when she will bring anything—in whatever form—back to the House. Meanwhile, we continue to plan for a no-deal Brexit, which seems to get closer to reality by the day. I urge the Minister to use what I am sure is his considerable influence in Government to act in the national interest and extend article 50 until more robust plans are in place.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their thorough examination of the matters. I will endeavour to give them a thorough response.
I acknowledge the concerns that both hon. Members expressed about the consultation or engagement process with industry. I cannot fortify the Committee with a list of individual companies that have been consulted, but it is worth explaining that engagement process.
Although we did not formally consult on the measures, we established a cross-sectoral working group with representatives from the financial services sector to discuss the European Union (Withdrawal) Act 2018 and financial services onshoring issues. That group is chaired by TheCityUK and has representation from several trade associations that cover different parts of the financial services sector across the United Kingdom. It also includes a number of law firms.
In the time I have been doing this job, my strong determination has been that TheCityUK is a highly respected trade association—it is really a trade association of trade associations—so is well placed to co-ordinate the group, given that its remit covers all sectors of the financial services and related professional services industry, including banking, insurance, asset management, legal services, advisory, market infrastructure, private equity and wealth management. We are confident that through that engagement through TheCityUK, we have reached all the major sectors of the financial services sector.
Alison Thewliss
The Government’s impact assessment says that
“between 3,000 and 4,000 PRIIP manufacturers (UK, EU and third country) operate in the UK on a regular basis”.
That is a considerable number. Is the Minister certain that they are well covered in the organisations that he mentioned?
John Glen
Yes I am. The green impact assessment, which was issued on 8 February, also identifies that the familiarisation costs will be £150 per firm and that there will be a range of costs between £510,000 and £680,000.
I concede that this is an unique exercise in preparation for an outcome that the Government do not wish to have, and I hope that it will not need to be used. We had to take a view, however, about how to do it efficiently in a relatively compressed time period and I am convinced that we have done the best that we could have done in the circumstances.
We have shared working drafts of the legislation as it has progressed to identify any unintended consequences and to help industry to understand how the sector would need to respond. We have published almost all our statutory instruments before they have been laid on a dedicated section of our website with contact details for stakeholders to contact us. I am not saying that it is perfect, but I draw the Committee’s attention to the remarks of Miles Celic from TheCityUK, who noted that there is an industry-wide recognition that all parties—industry, Government and regulators—are operating in an uncertain and time-constrained environment where doing nothing is simply not a feasible option, and that these are exceptional circumstances that require a unique response.
On some of the other points, there was sensitivity about the transfer of functions to the FCA. As the national competent authority, the FCA has been instrumental in making strong representations on PRIIPs. It formally rejected the early iterations and delayed the implementation of the first draft that came out in 2016, so it was implemented on 1 January 2018. I set that out in detail to the Front-Bench colleague of the hon. Member for Stalybridge and Hyde. Frankly, the FCA is capable, as it is now doing, of responding to last year’s call for evidence, looking into the key concern of the industry around the methodology for calculating the information displayed in a KID—particularly relating to performance information and risk estimation, as well as transaction costs—and coming forward with suggested changes.
On the hon. Gentleman’s point on equivalence and the appropriateness of the changes to the Financial Services and Markets Act, in a situation in which we leave the EU without a deal, we cannot favour EEA countries of the basis of our close proximity. We will have to treat all third countries the same way. The hon. Lady’s point on the need to resist duplicate but different regulatory requirements is wise. Whatever happens, it is my determination to try to avoid that, because the common framework that exists in this area holds a lot of value for the industry.
I also point out that EU national competent authorities collaborated fully in the construction of these regulations, and the FCA was one of the leaders in that. Any amendments to fix the exit deficiencies would have to be made known to the Treasury, and any new binding technical standards derived from this ongoing review will also have to come from the Treasury and will have to be laid under the affirmative procedure.[Official Report, 18 March 2019, vol. 656, c. 4MC.]
I think I have covered most of the other points made. The FCA’s resources have been covered in previous Committees, but for the record the FCA set out in its 2018-19 business plan the proportion of its resources to be used for forthcoming exit work. As of December 2018, it has 158 full-time employees working on Brexit. I cannot break that down, because I do not think that the FCA has, but that is a significant increase from 28 nine months earlier. It will bring forward a new plan in 2019-20.
Jonathan Reynolds
We have addressed this in lots of similar Committees. Part of our contribution to the EU budget covers, among many things, a contribution towards the EU regulatory bodies that affect our economy. On those people working on the Brexit withdrawal process, it is surely reasonable, as we re-domicile that remit, to put some of the money currently spent through our contribution to the EU budget into our own regulators, which will have so much more to do.
John Glen
The hon. Gentleman, as always, makes a reasonable point. The challenge is to understand on what terms we will leave. Clearly, if we secure a deal, we will enter an implementation period and so will have 20 months to determine the dynamic with European regulators and how we will discern equivalence decisions going forward. In a no-deal scenario, we obviously face a very different world, which will necessitate considerable legislative intervention in the next parliamentary Session. The disruption and uncertainty of that, and the uncertainty about the level of disruption, cannot be fully examined through this SI onshoring process.
The hon. Member for Glasgow Central asked me to provide a list of companies. I cannot, but I will examine what more granularity I can offer on that TheCityUK-convened work. The hon. Member for Stalybridge and Hyde asked about UCITS funds. PRIIPs can be products other than UCITS funds, such as insurance policies with an investment element. UCITS funds qualify as a PRIIP but are currently exempt from PRIIPs regulation.
The hon. Gentleman also asked about how the legislation will be affected by changes to PRIIPs regulation in the future. Any changes beyond what we are doing here today, which is simply onshoring, will be a matter for another day and will depend to some extent on our future relationship with the EU. I offer the reassurance that the FCA handbook gives us an enduring insurance policy, if you like, with its insistence that information on financial products must be sufficient, clear and not misleading.
I think I have covered the points raised. I conclude by saying that the draft instrument is needed to ensure that the PRIIPs disclosure framework can operate effectively in the circumstances of a no deal. I hope that Committee members have found this sitting informative and will join me in supporting the draft regulations.
Question put and agreed to.