Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019
(Limited Text - Ministerial Extracts only)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019.
It is a pleasure to serve under your chairmanship, Mr Robertson. As the Committee will be aware, the Treasury has been undertaking a programme of legislation through statutory instruments introduced under the European Union (Withdrawal) Act 2018 to ensure that if the UK leaves the EU without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. The SIs made before 29 March covered all the essential legislative changes that needed to be in law by exit to ensure a safe and operable regime at the point of exit. Although the deficiency fixes in the draft regulations are important, it was not essential for them to be in law at exit, so long as they could be made shortly afterwards.
The draft regulations will help to ensure that the UK regulatory regime continues to be prepared for withdrawal from the EU. They are aligned with the approach that we have taken in previous SIs laid under the 2018 Act: 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.
Let me turn to the substance of the draft instrument, which has four components. First, an important aspect of our no-deal preparations is the temporary permissions regime, which enables European economic area firms that operate in the UK via a financial services passport to carry on their UK business after exit day while they seek to become fully UK-authorised. We have also introduced a run-off mechanism—via the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, which were made on 28 February—for EEA firms that do not enter the temporary permissions regime or that leave it without full UK authorisation.
The draft regulations will not amend the design of those regimes, but they will introduce an additional safeguard for UK customers of firms that enter the run-off mechanism: an obligation for firms that enter the contractual run-off regime, which is part of the run-off mechanism established by the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations, to inform their UK customers of their status as an exempt firm and of any changes to consumer protection. That will ensure that EEA providers must inform their UK customers if, for example, there are changes to consumer protection legislation in the firm’s home state or in the EEA that affect UK customers. Part 3 of the draft regulations will introduce similar obligations for electronic money and payment services firms in the contractual run-off regime.
The second key component of the draft regulations concerns the post-exit approach to supervision of financial conglomerates. An EU exit instrument was made on 14 November 2018 to fix deficiencies in FICOR—the Financial Conglomerates and Other Financial Groups Regulations 2004, which implemented the financial conglomerates directive in the UK. As part of an EU exit instrument made on 22 March 2019 to amend the Financial Services and Markets Act 2000, Parliament approved a temporary transitional power to give UK regulators the flexibility to phase in regulatory changes introduced by EU exit legislation.
As part of their work to apply that power, the regulators proposed that, in certain circumstances, changes to the supervision of financial conglomerates should be delayed to give affected firms time to reach compliance in an orderly way. To achieve that, a transitional arrangement needs to be provided in relation to FICOR in respect of the obligations on the regulators to supervise financial conglomerates.
The draft regulations make a clarificatory amendment to the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018. The drafting approach taken in the 2018 regulations resulted in the Financial Conduct Authority having only the implicit power to cancel the temporary deemed registration or authorisation of an EEA payment institution or account information service provider that provides account information services without the required insurance cover; the draft regulations will make that cancellation criterion explicit.
Let me address the corrections that the draft regulations will make to earlier EU exit SIs. All the legislation laid under the 2018 Act has gone through the normal rigorous checking procedures, but, as with any legislation, errors are made from time to time and it is important that they are corrected.
In the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations, certain provisions relating to run-off regimes incorrectly referred to EEA fund managers. Those references are now removed, as EEA fund managers will not be able to make use of the regimes.
In the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019, which were made on 20 January, references to European long-term investment funds were not fully replaced with the term that will be used for UK long-term investment funds. In the Capital Requirements (Amendment) (EU Exit) Regulations 2018, which were made on 19 December 2018, a redundant paragraph on EU member state flexibility in the delegated regulation on liquidity coverage was not deleted as it should have been. This statutory instrument corrects those errors.
The Treasury has worked closely with the financial services regulators in the drafting of EU exit instruments that the instrument amends. We have also engaged extensively with the financial services industry on the instruments to which this SI relates.
David Hanson (Delyn) (Lab)
Before the Minister says “finally”, will he clarify one point in the explanatory memorandum? Paragraph 7.6 states that
“If the UK were to leave the EU without a deal, the UK would be outside the EU’s framework for financial services. The UK’s position in relation to the EU would be determined by the default Member State and EU rules that apply to third countries at the relevant time. The European Commission has confirmed that this would be the case.”
What does that actually mean in practice?
David Hanson
The current Prime Minister—it is quarter to 3, and I think she is still in post—has indicated that she does not want a no-deal scenario. The next Prime Minister, whoever he or she may be, may well run the clock down until 31 October, when there would be a no-deal scenario. Before the Minister sits down, will he clarify what paragraph 7.6 of the explanatory memorandum means in practice if a no-deal scenario comes to pass?
John Glen
Like any Minister at any point in time, I can speak only for the Government I represent at this moment in time. The assumption behind the right hon. Gentleman’s question is one that I cannot take on board, because that is a hypothetical scenario that I am not, at the moment, privileged to answer.
David Hanson
If the assumption is hypothetical, why is paragraph 7.6 in the explanatory memorandum?
John Glen
As has been indicated throughout the process, the explanatory memorandums set out the situation in the event of a no deal. The right hon. Gentleman wants me to explain where we will be at a certain point in time, but I am not able to answer him at this point.
Finally, during the debate on this instrument in the other place, Lord Young committed the Treasury to reviewing the explanatory memorandum for this instrument. Although the original was factually correct and followed the guidance issued to Government Departments for the drafting of EU exit instrument explanatory memorandums, I accept that it could have provided a clearer and more accessible explanation of the provisions in the instrument, which is why I submitted a revised version of the explanatory memorandum to Parliament on Thursday 16 May.
As I explained in my opening remarks, it was not essential for the additional measures and corrections, including this instrument, to be in law by the original proposed exit day of 29 March. That is why the instrument was not considered earlier by the Committee. Now that the article 50 process has been extended by six months, we can ensure that the provisions are in place and that the UK’s regulatory regime will continue to be prepared for withdrawal from the EU in all scenarios. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.
John Glen
I am grateful for the points that Members have raised, which I will be happy to go through. The additional measures and corrections in the instrument will help to ensure that the UK’s financial services regulatory regime continues to be prepared for withdrawal from the EU in any scenario, but I recognise the context of the multiple debates we have had and the concerns expressed by multiple Members on the process that has got us to this point and how it needs further elucidation, which I will try to do now. I start by saying that we have used the provisions in the legislation and that the changes did not impact materially on any meaning of thousands of pages of legislation. We always intended and expected that this mechanism would be required in the context of that volume of SIs.
I will now try to give some more detail. In a no-deal scenario, for which any responsible Government must be prepared, EU law and regulators will not have jurisdiction in the UK, so any relevant functions will be taken on by UK authorities and UK law will apply. The hon. Member for Oxford East made reference to Andrew Bailey’s recent comments on deregulation. It is important to contextualise that the European Union (Withdrawal) Act 2018 does not give the Government power to make policy changes beyond those needed to address deficiencies arising as a result of exit.
The hon. Lady tempts me to enter into a wider discussion of the future of regulation.
All I will say on that is that I do not believe that enduring competitive advantage can be or will be achieved in any jurisdiction by deregulation. It means for the UK at the moment that, as far as possible, the same rules that apply pre-exit will apply immediately post-exit. However, it is necessary to make changes to reflect the new third-country relationship between the UK and the EU, and to transfer functions currently carried out by the EU bodies to the appropriate UK body, in the context of this provision of a no-deal scenario.
Our onshore regime will be safe and workable until we have the opportunity to consider long-term reforms to our regulatory framework. The hon. Members for Glasgow Central and for Oxford East make a fair point about the clarity of that long-term arrangement. It obviously needs urgent work by the Government to establish that.
Alison Thewliss
The Minister says that it will need “urgent work”. When will that “urgent work” be done?
John Glen
We are talking about urgent work in the context of no deal, which is not the current Government’s policy. There are so many hypotheticals there that I cannot give the hon. Lady an answer to that question, because it would be dependent on the attitude of the EU to us. So there are a number of unknown issues there.
The issue of the Keeling schedule has come up several times; it was raised by the hon. Member for Oxford East. It is not normal practice for the Government to provide consolidated texts for secondary legislation debates, and changes to legislation are set out in the explanatory memorandum that accompanies the legislative text. My understanding is that the Keeling schedule was essentially an effort to assist and facilitate understanding, but it proved to be quite an unedifying means of doing so, because it just created more confusion given the complexity of the work. So it was not that there was wilful intent to obscure; it was just that the Keeling schedule was not an edifying mechanism to use in itself.
We have published drafts of legislation online in advance of laying them before Parliament, and we have provided links to all laid and made legislation on the same website. So we have tried to make the legislation easily accessible, so that it can be found in one place. I will just also note that the National Archives will publish an online collection of documents capturing the full body of EU law as it stands on exit day, and it will gradually incorporate and retain direct EU legislation into the Government’s official legislation website, which will include a timeline of changes to retained EU law, both pre-exit and post-exit.
The hon. Lady asked—I think others did, too—why these drafting mistakes were not spotted earlier and how can we trust the quality of other EU exit SIs. As I said in my speech, they passed through the usual quality control procedures and we have engaged extensively with the regulators. We have also published EU exit SIs in draft in advance of laying them, for industry to familiarise itself with the legislation.
All I can say is to repeat what I said before—these drafting errors do occur from time to time. I hesitate to say this, but I think that they would happen under all Governments. Obviously, however, if the Opposition are making the case that they would be perfect, then that is potentially for the future to see. [Interruption.] I do not intend to give them a chance, no. [Laughter.]
The hon. Lady went on to ask why such errors were not made in earlier instruments. The Government made a clear commitment to ensure that a fully functioning regulatory regime for financial services would be in place in time; it was. However, we delivered that via a programme of SIs, which ensured that those legislative changes were made by 29 March. These are not essential but desirable things to correct, but the additional measures provided for in this SI will nevertheless help to ensure that the UK regime continues to be prepared for withdrawal from the EU in all scenarios.
We have gone over the issue of the resourcing of the FCA multiple times, but there are no new functions transferred to regulators as a result of this SI. The business plan of the FCA is sufficient for the resources that it has. I have frequent meetings with Andrew Bailey, the chief executive of the FCA, and his colleagues. Andrew Bailey has said that he expects to hold FCA’s fees steady for a year or two, assuming there is an implementation period. However, the FCA can increase its fees should it need to, without reference to Government.
I have already addressed the point made by the hon. Member for Glasgow Central about the further errors. I can only apologise. We published the instruments in draft in advance, and errors happen from time to time. I am not relaxed about that. When fine colleagues from the Treasury come to see me and point them out to me, they get a smile, but it is not the easiest conversation. However, these things happen.
On the process, we continually keep our legislation under review, with the regulators and industry feeding into our analysis. To the point the hon. Lady made—or perhaps it was the right hon. Member for North Durham—about businesses emailing the Treasury, that does happen. TheCityUK—the trade body for the City—has expressed confidence in the preparations that we have made for a no-deal scenario.
The right hon. Member for North Durham asked about the application of the SIs to overseas territories, as he has previously in Committee. The overseas territories are outside the EU so will not be affected. The exception is Gibraltar, and our onshoring SIs made provision for the UK’s regime to work effectively with Gibraltar’s regime after exit.
The right hon. Gentleman correctly drew attention to the provision around the de minimis impact assessment and the net cost to business being less than £5 million. We do not expect the SI to have a significant impact on business given that it does not introduce new substantial requirements for firms. He made a point about previous impact assessments; however, they were considered in the light of the statutory instrument discussed at the time. These are minor amendments that will not materially affect the substance.
In the 33 Committees I have been on regarding this matter—there may be some more to come—I have never said that this is a perfect solution. The Government have tried to consult widely and work with the regulators to come up with a suitable solution for the context of no deal. I have been faithfully introducing the instruments, and bringing transparency around the process.
The revision of the explanatory memorandum was a direct response to points made by those on the Opposition Front Bench in the Lords, to try to make it simpler. I thank Lord Tunnicliffe for his comments. The new explanatory memorandum has to contain, by law, a large amount of material, but paragraph 2 now offers a full explanation. It is improved, it is in one place, and it does not use the template that we used previously. It now functions as a stand-alone document, so I thank the Opposition for their input.
I hope that the Committee has found this afternoon’s sitting informative, and can join me in supporting the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019.