The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, which were laid before this House on 31 January, be approved.
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 statutory instrument being debated today will fix deficiencies in the Financial Services and Markets Act 2000, commonly referred to as FSMA, and subordinate legislation made under FSMA, which are an important part of the UK’s regulatory framework for financial services.
A key function of this legislation is to define the “regulatory perimeter” that sets out the activities and financial institutions that are in scope of UK financial services regulation. In a no-deal scenario, the UK would be outside the EU’s supervisory and regulatory framework, resulting in deficiencies in the existing legislation. Specifically, many provisions in the legislation set the scope of regulated activities based on firms being authorised and operating across the single market, or by referring to definitions in EU law, which will no longer be workable after exit.
As Members will be aware, the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which Parliament has approved, begin the process of removing legislative provisions that facilitate passporting in the UK, as well as providing for a temporary permissions regime allowing EEA firms to continue their activities for a limited period after exit day, giving them time to become UK-authorised.
While the SI being debated today does not alter the underlying policy of the UK’s legislative framework for financial services, many of the proposed changes in it are necessary to complete the task of removing passporting-related provisions and to define the UK’s regulatory perimeter as a regime operating outside the EU. Many of the definitions of regulated activities in FSMA, and in the Regulated Activities Order 2001 made under FSMA, include the EEA in their scope and rely on definitions in EU law to operate. To reflect the UK’s new position outside the EU, the SI will amend the territorial scope of those definitions where needed, so that they apply only to the UK after exit.
As well as setting the general regulatory perimeter, FSMA and subordinate legislation contain some specific provisions that are important to the UK’s regulatory regime. For example, provisions in FSMA specify certain important functions for which authorised firms must obtain approval from the Financial Conduct Authority or the Prudential Regulation Authority, under either the approved persons regime or the senior managers and certification regime. FSMA currently exempts EEA firms from elements of those UK conduct regimes, which would no longer be safe or appropriate once the UK is outside the EU’s single market. The SI therefore removes this exemption for EEA firms.
Some of the changes proposed in this SI are also necessary to ensure that UK regulators can continue to carry out their statutory functions. As I have mentioned, this SI will complete the process of removing passporting-related provisions. This will mean that some firms and fund managers may face new requirements as result of these necessary changes. The SI therefore creates some transitional arrangements to mitigate disruption to those EEA firms and their consumers. For example, some of these transitional provisions relate to certain financial instruments, financial documents or contracts that have been issued or entered into pre-exit, ensuring that they continue to operate effectively after exit for an appropriate period.
Even with the specific transitional arrangements we are making in this and other onshoring SIs, firms will still be faced with a large volume of regulatory changes that they will need to adapt to in a no-deal scenario. This could cause significant disruption to the financial services sector and consumers immediately after exit, and firms will need more time to adjust to these new requirements. To prepare for this scenario, this SI creates a temporary transitional power that allows the UK regulators to defer or modify changed requirements for firms.
This temporary power is designed to replicate the adjustment time that firms would have if the implementation period in the proposed withdrawal agreement were ratified. For that reason, the temporary transitional power would be available for two years from exit day. Any directions made under the transitional power would therefore expire at the end of that two-year period, after which firms would have to comply with all new requirements in legislation. The UK regulators are best placed to decide how to phase in onshoring regulatory changes, working with the firms they supervise and using their supervisory judgment. I am particularly grateful to the members of the Treasury Committee, who took the time to scrutinise this temporary transitional power in the recent hearing that took place on 29 January. I am pleased that the Committee acknowledged the need for the temporary power, with the Chair concluding that
“although this is unprecedented, these powers are needed in order to make sure our financial services sector works, whatever might happen”.
The Treasury has been working closely with the regulators in the drafting of this SI. It has also engaged industry on the SI through a cross-sectoral working group with representatives of the financial services sector. That group is chaired by TheCityUK and has representation from a number of different trade associations and law firms. Industry has expressed support for the provisions in this SI and welcomed the proposed transitional arrangements as prudent and pragmatic.
Before I conclude, I would like to draw the House’s attention to two minor mistakes that have been discovered in the SI and the explanatory memorandum that accompanied it. Unfortunately, mistakes do happen from time to time, and where they are found it is important that an explanation is put on the record. Shortly after the SI was laid, a small typographical error was discovered in regulation 202(2)(a); it refers to the “Prudential Regulatory Authority”, whereas of course it should read the “Prudential Regulation Authority”. A correction slip will shortly be made to put that right.
In preparation for this debate, a minor inaccuracy was discovered in paragraph 2.55 of the explanatory memorandum. This SI removes the exemption from the requirement for a financial prospectus to be approved by the Financial Conduct Authority if it has been approved in another European economic area state. This amendment is correctly explained in paragraph 2.55, but the paragraph also says that the SI makes transitional provision for prospectuses approved by an EEA regulator before exit day. Although there will be such a transitional provision, it is not made in this SI; it is made in the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, which were debated in the other place on 18 February and in this House on 19 February. I apologise for the mistake, but hope the House will agree that this is a very minor mistake that does not alter the substance of the explanation provided in the explanatory memorandum. However, I will be re-laying the explanatory memorandum to ensure that the mistake is corrected.
In summary, the Government believe that the proposed legislation is necessary to ensure that there is a functioning legislative framework for financial services regulation in the UK after exit.
John Glen
It is a pleasure to respond to the hon. Member for Oxford East (Anneliese Dodds), my right hon. Friend the Member for Loughborough (Nicky Morgan) and the hon. Member for Glasgow Central (Alison Thewliss). By the end of this process, we will have discussed 53 SIs for the financial services in 30 discrete debates. In each one of them, there are some common themes to the remarks. I appreciate that this is not a desirable process to go through, but it is a unique process. It is a process that we have responsibility for at this time, but I hope that we will not need to use or to rely on its outcomes. None the less, this SI is needed to ensure that we do have a robust and functioning legislative framework for financial services regulation after exit. I am determined that I will, to the best of my ability as a junior Treasury Minister, deliver this programme of SIs.
Hon. Members have raised a number of specific points, which I will now address. The hon. Member for Oxford East asked why we have chosen to transfer powers to the FCA. This is consistent with our overall approach to onshoring. Only existing EU functions are being transferred to UK regulators, apart from the temporary transitional tool. I have written to the hon. Lady with a full explanation of the consolidated text, and I will send that explanation to her shortly in addition to the other replies that I have given to her.
In response to the point made by my right hon. Friend the Member for Loughborough, in practice there is a logistical challenge in putting everything together, conducting multiple streams of consultations simultaneously and delivering in each discrete area what is required as a fix for the undesirable outcome of no deal. Despite the enormous effort by my officials in the Treasury to get this right, it would have been very challenging to set out the architecture proactively from the outset. This FSMA SI makes many consequential amendments that were needed to follow on from previous SIs, which is why it was set out late. How the FCA will use these powers will be set out later this week, providing a lot more clarity on that matter.
The hon. Member for Oxford East asked about insurance business transfer. We consulted the insurance sector on these business transfer transitionals, and it confirmed that this was the right approach and helped to develop the provisions. We have worked collaboratively with different industry sector representatives throughout.
The hon. Member for Glasgow Central raised a specific legal point—a dispute about the wording. I will have to look at the matter and write to her. In the round, we have used TheCityUK as a convening trade association to bring relevant bodies together, and it has been very thorough in its work. The regulators are already consulting the industry, and firms have responded positively. The regulators, including the Prudential Regulation Authority, will shortly be setting out the outcome of those consultations. I think that I have covered the point raised about the consolidated Bill.
I acknowledge that FSMA is an important part of the UK’s framework for financial services regulation, but amending FSMA using secondary legislation is standard and happens several times a year. I accept the remarks of the hon. Member for Glasgow Central concerning the unusual nature of this—it is necessarily so because of what we are trying to do to prepare for a no-deal situation—but EU directives have been implemented using secondary legislation since the UK joined the EU. For financial services, that has often involved amending FSMA. Parliament approved the secondary legislation powers in FSMA itself to task the Treasury with keeping the FSMA regime up to date, such as the power to amend the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
Let me turn to the points made by my right hon. Friend the Member for Loughborough, who chairs the Treasury Committee. I welcome the opportunity to be scrutinised many times by her Select Committee. Regarding the methodology for calculating the familiarisation costs, there is a cross-governmental set of guidance from the Cabinet Office, but I will write to my right hon. Friend with specific details. Clearly, the cost per word varies but we have a method for describing that across Government, and we have used that method. We have drawn on the better regulation guidance and we have consulted on the impact assessment across Government.
My right hon. Friend asked whether the Government will provide regulators with powers to make the commencement of cliff-edge risks consistent. This is exactly what the temporary transitional power is for: the regulators will be able to phase in the vast majority of changes consistently. I said before the Select Committee that it would be important to lay any directions in the House of Commons Library and the House of Lords Library, and that I would ensure that the Treasury Committee was notified.
The hon. Member for Oxford East mentioned the point made by Lord Lexden. Lord Lexden used to work with me at the Conservative Research Department, and he was always very good at picking out errors. I shall look carefully at his remarks and see whether there is an appropriate response.
The hon. Member for Glasgow Central raised the issue of charging fees and the powers given to the regulator. The fee-setting powers and controls in this instrument reflect the existing powers that the regulators have in legislation. There is no meaningful change in the powers; the extension is consistent with the current role of the regulators. The hon. Lady also asked why the House has not been given enough time properly to scrutinise this legislation. I respectfully say that we have done as much as we can in the time available. We have engaged constructively with firms and we published these SIs well in advance of laying them before the House. It has been a significant iterative process. I do not describe it as a perfect process, but it has been quite thorough.
Overall, this SI will ensure that we have the necessary functions and powers in the Treasury and in our regulators in the event that the UK leaves the EU without a deal or an implementation period. This has been a tough process. I pay tribute to my opposite numbers on the Opposition Front Benches.
Joseph Johnson (Orpington) (Con)
I recognise that my hon. Friend is doing valiant work, but does he acknowledge that this process of moving to a new regime is proving extremely unsettling for players in the financial services sector? A recent report by Ernst & Young estimates that £800 billion-worth of assets and people have moved to other jurisdictions since the referendum as a consequence of our decision to move to a precarious, patchy and one-sided regime of equivalence that is a very poor substitute for our current system of passporting. What assessment has he made of news from the Amsterdam regulator last week that it is boosting the resources of the Dutch Authority for the Financial Markets by 10% to cope with the additional work that it is receiving as a result of our painful decisions?
John Glen
The process that we have gone through with these no-deal SIs has been as thorough as possible in the circumstances. My hon. Friend is making a wider point about the desirability of being in this situation and the need actually to secure deal. During the implementation period, we will have maximum opportunity to determine the method for securing equivalence, which we envisage would be by June next year. I recognise that there is uncertainty, but despite some pretty grim suggestions over what would happen with jobs, the City of London is resilient. Although it has made contingency arrangements, as would be expected, we have not seen large numbers of jobs drain away from the City as some would have anticipated. We need to secure the deal and then work through the issues with regard to the implementation period.
I pay tribute to the work of the hon. Members for Oxford East and for Glasgow Central, and the scrutiny of the Select Committee, throughout this process. I know that we still have a number of SI debates to go, with two on Wednesday and several more next week, but I hope that I have explained the rationale for this particular SI and that the House will be able to support these regulations.
Question put and agreed to.
Resolved,
That the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, which were laid before this House on 31 January, be approved.