Draft Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019
(4 years, 7 months ago)
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The Committee divided: - Ayes: 9 / Noes: 8 - 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 Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019.
It is a pleasure to serve under your chairmanship, Mr Sharma. 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 preparing for a range of potential outcomes. The best outcome is for the UK to leave with a deal, and we continue to put forward serious and credible proposals for that. Although we remain confident, we must and will continue the work of preparing for no deal.
The Committee may be aware that around the turn of the year I laid regulations before Parliament to address deficiencies arising from the withdrawal of the United Kingdom from the European Union in the fields of accounting and audit. They did not implement new policy but did grant new powers and responsibilities to the Secretary of State and the Financial Reporting Council. Continuing that process requires further regulations now. Although the fundamental elements of current UK accounting and audit regulation will remain the same after exit, legislation has had to be amended to ensure its effective working once the UK has left the EU.
The accounting and audit directives set out the requirements on the accounts and audit of most incorporated businesses, as well as a framework of standards. The directives also set out the responsibilities of the competent authorities for accounting and audit. Meanwhile, under the EU’s international financial reporting standards regulation, standards are set for accounting by parent companies of groups, which apply if those companies issue shares that are admitted to trading on regulated markets. Another regulation—the audit regulation—sets additional requirements on the statutory audit of those businesses defined as public interest entities: banks, building societies, insurers and issuers of shares or debt securities on regulated markets.
To the extent that those EU regulations are not repealed, they form part of retained EU law under the European Union (Withdrawal) Act 2018. Our aim is to ensure that the framework for accounting and audit regulation works effectively following the UK’s withdrawal from the EU, and the regulations take further steps to help facilitate that.
Under the audit directive, the European Commission has powers to grant equivalence to third countries for their audit regulatory framework, and adequacy to third countries’ competent authorities for their framework on audit regulatory co-operation. These measures facilitate international trade and investment. The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 transferred those powers to the Secretary of State and provided powers to set out the criteria and procedure for assessment, equivalence or adequacy status decisions in the future, which will be granted by regulations under the negative procedure. These regulations ensure that, irrespective of whether a withdrawal agreement is reached, the Secretary of State can make regulations after our exit from the EU to set out the framework for future assessment of equivalence and adequacy by the UK regulator. They will also enable us to grant equivalence and adequacy status to some third countries that have had their applications under consideration in the EU since March of this year.
The regulations also complete the process of extending powers to the Financial Reporting Council—the UK’s competent authority—making the final consequential amendments needed to extend the FRC’s ability to regulate third-country auditors to include European economic area auditors and Gibraltarian auditors. They also put beyond doubt that those EEA auditors who have already registered as statutory auditors in the UK will retain their status after exit.
The regulations also make an important change to the audit exemption framework. In common with the exemptions in the accounting framework for subsidiaries, the subsidiary audit exemption will not be available unless a subsidiary has a UK parent. This instrument corrects an error in the previous audit SI affecting the frequency of audit inspections required for auditors of public interest entities.
On accounting standards, the instrument revokes some EU regulations relating to the adoption or amendment of the IFRS within the EU. Without revocation, the regulations would be brought into domestic law by the EU (Withdrawal) Act. However, the International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019 have already made provision for what will be the international accounting standards for the UK at exit day. The revocations remove any duplication and potential confusion. They also reflect changes in EU adopted international accounting standards issued or identified since the earlier accounting SIs were made.
The Government have carried out a de minimis impact assessment of the instruments as the overall costs to business are expected to be small. It confirmed that the additional impact on business of the changes in the SI is a cost of approximately £930,000, which derives from the amendment to the subsidiaries audit exemption. Only limited sectors are affected by each of the changes. Such limited impact is counterbalanced by what was actually an overall beneficial effect of the changes in the first audit EU exit SI, which was assessed as saving businesses approximately £2.96 million per year.
In conclusion, the regulations aim, wherever possible, to provide continuity for businesses operating in the audit sector and to ensure that UK companies continue to benefit from global trade and investment. If the UK leaves the EU without an agreement, the measures contained within the regulations will be critical in ensuring that the audit regulatory framework in the UK works effectively. I therefore commend the draft regulations to the Committee.
Bill Esterson (Sefton Central) (Lab)
It is a pleasure to serve under your chairmanship, Mr Sharma, and to make the most of this limited opportunity to sit in Parliament. Before I go into the SI, I could not help noticing that the Government still have a majority on this Committee. The Government have nine Members, and the Opposition only eight. I wonder why that is, because the Government have lost their majority in the House of Commons over the past few weeks. Will you confer with the Clerks, Mr Sharma, as to whether the Government should still have a majority on the Committee?
The Chair
I am advised that it is not up to this Committee; it is up to the Selection Committee. I am sure the message will go back to it for future consideration if the situation is the same.
Bill Esterson
Thank you for taking that point on board, Mr Sharma. I realise it was not a decision you could adjudicate on, but it is an important point because this is yet another example of how the Government operate and ignore the democracy of the House of Commons at every available turn. They should have arranged not to have a majority in this Committee. [Interruption.] The hon. Member for South East Cornwall can intervene and challenge me on that point if she does not agree, or if she thinks that a party that is 43 or 45 seats short of a majority—
Bill Esterson
Thank you, Mr Sharma.
Now, to the matter at hand. We are faced with regulations and, as ever, the Minister did her best to make them appear to be a matter of minor change, but the House of Lords Secondary Legislation Scrutiny Committee said the
“range and magnitude of the changes are significant: the Regulations make changes to 15 items of legislation and include a sub-delegation of powers to UK regulators and extend a ministerial power of direction.”
The Minister did mention that.
Bill Esterson
Well, the Minister mentioned the ministerial power of direction; I am not sure that she spoke about just how far reaching the changes are. The Lords Committee expressed its
“concern about the scale of the challenge facing financial services firms in adjusting to these changes.”
Yet when we turn to paragraph 10 of the explanatory memorandum, we find that no consultation was carried out with the financial services sector on these far-reaching changes, which will affect financial services firms. Sadly, that problem has bedevilled such statutory instruments, more than a few of which the Minister and I have considered, including the one she mentioned.
There is also a link to the 2013 report from the Parliamentary Commission on Banking Standards, which was chaired by members of the Minister’s own party. It was jointly chaired by a Member of the House of Commons—the then chair of the Treasury Committee, Andrew Tyrie—and a Member of the House of Lords. They found great concerns about the robustness of our audit regulations and called for wide-ranging changes. Those changes have not happened. The relevance of those points centres on the scandals surrounding companies the collapse of which related to a lack of audit, such as British Home Stores, Patisserie Valerie and Carillion.
The link to the regulations is important, because the Government are proposing to adopt the IFRS system, which is run by a private entity in Delaware in the United States and overseen by the European Commission. I wonder how the Government propose to accept arrangements whereby, once we have left the European Union, the European Commission will have oversight of our financial reporting standards. The Government are making a major change to those standards, tacked on to the regulations. Such a significant change clearly should be fully scrutinised, should have been the subject of consultation, and is very difficult for us to support.
I did some consultation of my own. I asked the Institute of Chartered Accountants in England and Wales for its assessment of the regulations. It confirmed the concerns I have just outlined regarding the Government’s proposed elimination of the exemption for EU companies with a UK-based subsidiary. It wants the Government to say what the timescales will be, because it is not clear from the regulations.
Beyond those concerns from the ICAEW, the proposed amendment is not just minor or technical. The controversies that I mentioned regarding audit mean that if such changes are to be made, they should be subject to much wider consideration. The consideration recommended by the 2013 report from the Parliamentary Commission on Banking Standards gives us a good place to start.
There are some significant concerns about the proposed changes, which are significant changes. It is simply not the case, as far as I can see from the commentary that I have received, that there will be no significant impact on the private, voluntary or public sectors. The lack of an impact assessment yet again is concerning. The Minister will no doubt say that the Government are preparing responsibly for Brexit, with or without a deal, but I am afraid that the lack of an impact assessment, the lack of consultation and the way in which standards have been tacked on to a set of regulations that are actually of a very different nature show that today’s statutory instrument should not have been introduced in its present form. For those reasons, we will oppose the regulations.
Peter Grant (Glenrothes) (SNP)
I am pleased to make a brief contribution. In the Chamber, several hon. Members are still paying tribute to the Speaker; shortly, there will be an application for an emergency debate to force the Government to come clean about what on earth is going on with Prorogation and much else; later, there will be another attempt to force a general election. In Westminster Hall, our colleagues are debating a petition that was possibly the quickest ever to reach more than 1 million signatures. We—the lucky few—are here talking about the Statutory Auditors, Third Country Auditors and International Accounting Standards (Amendment) (EU Exit) Regulations 2019. These regulations will not be the news headlines tonight, but perhaps they should be.
If we get this wrong—I think the Government are still getting it wrong on their second attempt—the consequences will be catastrophic for businesses, homes, jobs and the suppliers of big companies. That is why it is important for us to get it right this time. Part of the reason that we are discussing these regulations is that we did not get them right last time, because everything had to be done in such a panic-stricken rush that they were not as watertight as legislation needs to be. We should have been out of the European Union five months ago. We would have been out six months ago without a deal, if some hon. Members on the Government Benches had had their way. Even on such fundamental questions as who regulates those who regulate the conduct and misconduct of multinational businesses, however, we have still not got it right.
As the hon. Member for Sefton Central mentioned, auditors tend to be anonymous most of the time, but when we look at the causes of almost all the huge corporate failures, of which Carillion is perhaps the most recent mega-failure, there are always big questions to be asked about why the auditors did not do something and how they could not have noticed. I should mention that although I am a qualified member of the Chartered Institute of Public Finance and Accountancy, which may be why I was given the privilege of coming here this afternoon, I am not qualified to conduct statutory company audits, so I do not have an interest to declare.
As well as the questions that always come up about what the auditors were doing, the inquiry almost always concludes, although it is not inevitable, that the auditors did not break any rules at the time. We have had to completely review—realign, reset and turn inside out—the structure of the institutions that regulate statutory auditors and their profession a number of times. Try as we might, we will always struggle to keep up with the multinational chancers who look for every minor loophole in any regulation to allow their misconduct to go undetected for as long as possible—and often unpunished forever.
It is therefore important to get it right this time. The hon. Member for Sefton Central highlighted some of the concerns. When there are a lot of statutory instruments to get through, there is a danger that among some relatively minor consequential technical stuff that nobody could object to, significant changes to Government policy and to legislation are slipped in, in terms that should be brought as specific items for the whole House to consider, rather than in Committee on the upper corridors of the House of Commons on a wet Monday afternoon. I understand that quite a lot of what is in the regulations needed to be put in there, but the Committee needs to say to the Government that it cannot accept the regulations as they are.
Luke Graham (Ochil and South Perthshire) (Con)
I am a member of the Chartered Institute of Management Accountants. I am on the Committee and I am happy to dig into the detail, but I am not getting detail from Opposition Members, although I am hearing opposition from them. The hon. Gentleman says that there are things in the regulations to be worried about; perhaps he could outline them for us, as is the purpose of the Committee, point by point and subsection by subsection. I am happy to sit here and go through it. We have other business in the House of Commons, but as he rightly points out, this is an enormously important issue for the whole United Kingdom—it applies to the whole United Kingdom—for my constituents and for the businesses they are in. I ask him to please outline the details, so we can go through them together in a cross-party way.
Peter Grant
The hon. Gentleman agrees with some of the points I am making. As he helpfully points out, if Government Members were all that interested in going through the regulations in fine detail, perhaps they should have asked professionals in the various accounting and auditing institutions before the Committee. I have no doubt that Government Members will rise to speak in support of the regulations. When they do so, perhaps they will tell the Committee what could have gone disastrously wrong if they had taken the time to get the policy right on their third attempt, and asked the statutory accounting and audit bodies what the regulations would do.
Mrs Sheryll Murray (South East Cornwall) (Con)
Perhaps the hon. Gentleman could help me by telling us, as my hon. Friend the Member for Ochil and South Perthshire asked him to do, which specific parts of the regulations he objects to.
Peter Grant
It has already been pointed out. As I said, if there has not been consultation with the bodies whose purpose it is to regulate the profession, why would the Government ask a group of lay people to agree the regulations?
Peter Grant
No, I will not give way again. The hon. Lady will get a chance to speak if she wishes. I would be interested to know why the Government did not have that consultation. Why are they making significant changes to policy during a process that the House agreed could be used to make technical, consequential, minor and non-controversial changes, of which there would need to be millions to get us even vaguely ready for 31 October? Why are they trying to put in much more significant and substantive changes that should have been tested on the Floor of the House before they passed into law?
Sir Oliver Heald (North East Hertfordshire) (Con)
Will the hon. Gentleman give way?
Peter Grant
I can see that lots of Members want to speak, so perhaps the best thing is for me to sit down and give them a chance to do so.
Kelly Tolhurst
I thank the hon. Member for Sefton Central for his comments, but I must pick him up on one point. He questioned whether the Government respect democracy. We have sat across from each other numerous times in Committees this year, and I point out to him that respecting democracy is exactly what we are doing. The regulations ensure we are fit and ready for when we exit the European Union. That is respecting democracy and the 2016 democratic vote. I need to point that out, and it is exactly why my Department has been doing the work that is required for us to ensure that we are fit and ready to leave with or without a deal.
I remind the Committee that the regulations are part of what will enable us to ensure that the EU retained law that comes into UK law is fit and proper for when we leave the European Union. We are ensuring that we can communicate that to business, and that the current laws will continue to operate correctly in the UK. As the hon. Member for Glenrothes pointed out, the limitations in the withdrawal agreement set out what the Government can do when bringing secondary legislation through the House. He will note that the only change in the regulations is to ensure the smooth and effective running of regulatory systems when we leave.
Members also commented on the quality of audit and on their concerns about the performance of some UK companies. As the hon. Member for Sefton Central will know, we had the Sir John Kingman review of the Financial Reporting Council, and the Government are working through that and consulting where possible to make modifications and changes within the FRC. That ongoing piece of work by Government is not necessarily completely related to these regulations.
The hon. Gentleman will know that the IFRS is a high-quality, internationally accepted and supported set of financial reporting standards that is regarded as a benchmark throughout the world by listed companies.
Peter Grant
The Minister seems, rightly, to be recognising the importance of that organisation of experts. Why will the Government not listen to other organisations of experts in their consideration of the Brexit proposals?
Kelly Tolhurst
I am here to speak to the regulations that are in front of us. I assure the hon. Gentleman that the experts in the Department for Business, Energy and Industrial Strategy, as well as our stakeholders and partners across the sectors, have been spoken to. I challenge him to name the organisations that I have ignored or chosen not to speak to.
Peter Grant
The Minister will be aware that there are six recognised chartered accounting bodies in the United Kingdom. Can she name the ones that were consulted over these regulations, or is she saying that those organisations are not experts?
Kelly Tolhurst
As part of our ongoing engagement with stakeholders across all the Department’s responsibilities, we have regular dialogue with those organisations, whether it be on this statutory instrument or on any of the Department’s other business.
Sir Oliver Heald
Is it not correct to say that the hon. Member for Glenrothes has not pointed in detail to a single complaint about these regulations, and his speech is just a general waffle? Does my hon. Friend agree that as the Scottish National party receives £1.2 million in Short money to do research on things like this, we should have a rebate?
Kelly Tolhurst
My right hon. and learned Friend is quite right. The hon. Member for Glenrothes has not mentioned the particular point that we have made more expressive, as the ICAEW asked us to do, in these amended regulations. That is a clear example of where we have listened to the professionals in the industry and chosen to respond to their requests as clearly as we can.
Luke Graham
I will perhaps try to articulate some of the points that the hon. Member for Glenrothes was trying to make. The regulations are designed to ensure that international accounting standards are still operational in the UK on EU exit day, incorporating the aspects of EU law that we are meant to incorporate. Essentially, the regulations fill in the gaps.
I ask my hon. Friend two things. First, if she does not have it with her today, will she make available the gap analysis that the Department undertook—between the IFRS, the IAS and the UK generally accepted accounting practice—to make sure that there are no gaps, and that the regulations are sufficient to satisfy all the professional bodies around the UK?
Secondly, has there been consultation with the International Accounting Standards Board, which is the governing body for IFRS? My hon. Friend is quite right to say that bodies in the UK have been consulted; it has been made explicit that the ICAEW has been consulted. It would be good to know whether the Institute of Chartered Accountants of Scotland has also been consulted, because, as a United Kingdom, we have a united internal market.
I would be quite happy to receive the answers to those questions as a follow-up, because I know that there is a lot of detail in the regulations. Opposition Members have completely failed to raise specific points that constitute a substantive opposition to this statutory instrument.
Kelly Tolhurst
I will happily provide my hon. Friend with any advice that we have available. I point out to hon. Members that these regulations constitute an amendment to, and an extension of, the statutory instrument that was laid before and passed by this House at the beginning of the year. They particularly focus, as I outlined in my opening speech, on aspects to do with subsidiaries. They also correct an omission of three words, which it was important to do to ensure that the regulations expressed the true intention behind the original statutory instrument.
I emphasise that as part of the Department’s role in preparing for EU exit and making sure that we are in the best possible place to leave the European Union, with or without a deal, we have engaged continuously with stakeholders. Quite rightly, as Ministers, we have challenged our officials within the Department and our stakeholders, when we have had the opportunity to do so.
Bill Esterson
That is interesting, because I have a briefing note from the ICAEW here. It raises concerns, which I went through earlier, about regulation 4, on the loss of EEA subsidiary exemption, and regulation 6, on EEA qualification for auditors; I did not spend as long on that earlier. I mentioned some other concerns that had been raised with me by professional bodies. It does not seem, from anything that the Minister has said, as though she has had those discussions with the ICAEW. It does not seem to me as though she has had that note from the ICAEW, or those concerns have been raised with her. Perhaps she could clarify the situation for me. Did she receive those concerns from the ICAEW before this meeting?
Kelly Tolhurst
I can confirm that officials in the Department have been speaking to the ICAEW. As I outlined in my response to my hon. Friend the Member for Ochil and South Perthshire, we have made something explicit in these regulations on the back of our conversations with the ICAEW. Those conversations are ongoing and will continue, as I laid out in my opening speech, because we are to bring forward the assessment framework in a further statutory instrument.
The hon. Member for Sefton Central asked how we would cope with the fact that the European Commission was no longer making these opinions or decisions. The statutory instruments that we have made give these powers to the Secretary of State, thereby enabling parliamentary scrutiny of decisions and the ability to delegate responsibilities.
The hon. Gentleman is quite right that we have had many conversations about impact assessments in our debates on statutory instruments as part of the EU exit programme. He will notice that a de minimis assessment took place, because the level of impact was below £5 million. As I outlined in my opening remarks, the overall benefit from the statutory instruments will be a reduction of £2 million per year.
The hon. Member for Glenrothes asked why we are bringing this forward now, and why we did not do it in the original statutory instrument earlier in the year. The regulations before us were not needed for exit day, but because we have had the opportunity to extend our leaving date to 31 October, we have been able to consider them prior to exit day.
As the UK exits the EU, we are committed to maintaining the integrity of the UK system for regulatory oversight of audit. The regulations contribute to that by clarifying and building on the approach to oversight of the audit profession following our withdrawal from the EU that we began to set out in the original regulations at the start of the year. Like those regulations, this statutory instrument does not introduce a change in policy, as I have explained. The fundamental elements of the current statutory audit legislation will remain the same after exit. These regulations make only a small number of further amendments that are necessary to ensure that audit legislation remains operable in the UK following our withdrawal from the EU.
The regulations will mean that the UK system for regulatory oversight remains coherent and understandable, and they will enable us to do more on this over the coming months, irrespective of the outcome of the EU exit negotiations. I regret that the Opposition have decided that they are not prepared to support the regulations, which would give business and stakeholders consistency and clarity about how the market will work as we leave the European Union. I commend the regulations to the Committee.
Question put.
Draft Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 3) Regulations 2019
(4 years, 7 months ago)
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The Committee divided: - Ayes: 9 / Noes: 8 - Question accordingly agreed to.
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. 3) Regulations 2019.
It is a pleasure to serve under your chairmanship once again, Sir Edward. The Government previously made all the necessary legislation under the European Union (Withdrawal) Act 2018 to ensure that, in the event of a no-deal exit on 29 March 2019, there would have been a functioning legal and regulatory regime for financial services from exit day. Following the extension to the article 50 process, the Treasury has used the additional time to review existing EU legislation, in line with the Government’s commitment to take all necessary steps to ensure our regime remains prepared for exit.
The statutory instrument fixes deficiencies in new EU legislation that will become part of UK law at exit on 31 October and amends some EU exit provisions that have been made already to account for the extension. The review identified a number of minor errors in earlier EU exit instruments, which are corrected in this SI. I note that the Secondary Legislation Scrutiny Committee’s report on 25 July highlighted this SI as an “instrument of interest” for what it called the “range and magnitude” of changes it makes. The Committee also expressed concern about the scale of the challenge facing financial services firms in adjusting to the changes being made to financial services legislation generally.
Although the SI amends 15 pieces of legislation, the number of amendments is modest and the nature of the amendments is minor. They follow the same approach to fixing deficiencies in EU legislation as approved by Parliament in previous financial services EU exit SIs. They do not change policy or alter requirements on firms. The SLSC is right to raise the challenge that financial services firms will face in adjusting to changes introduced by exit legislation, but I can reassure the Committee that minimising this challenge for industry has been central to the onshoring project from the beginning.
Under other SIs approved by Parliament, the Treasury has introduced a variety of measures to smooth the transition for businesses in adjusting to changes in EU exit legislation, and to changed circumstances generally. Those measures include a range of temporary permissions and transitional regimes for European economic area firms and funds. Parliament has also granted the UK financial services regulators powers to phase in requirements that change as a result of EU exit legislation, giving firms the time they need to adjust in an orderly way. The regulators have consulted on their approach to phasing in these requirements, which involves broad use of their transitional powers, and have received a very positive response from the industry. We have also engaged with the industry on the development of all our SIs, to give it as much time as possible to become familiar with the legislation. Given the minor and technical nature of the amendments in this SI, I will not cover every provision in my opening remarks, but I am happy to take questions on any of the individual provisions.
The provisions in the SI cover three broad areas. First, the instrument amends a number of pieces of EU legislation that have become applicable in the period since the article 50 extension and will therefore form part of UK law on exit day, but that are not substantive enough to warrant separate additional instruments. For example, the European Commission recently introduced measures to further promote the use of small and medium-sized enterprise growth markets. Those trading platforms are subject to more proportionate regulation, making it easier for SMEs to raise finance. The SI makes minor amendments to the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, to fix deficiencies in the new EU legislation and ensure it continues to function in UK law after exit. Following the approach approved by Parliament in previous financial services exit SIs, this SI gives UK regulators the job of fixing deficiencies in the new technical standards that have been adopted by the EU since 29 March.
Secondly, the SI amends existing EU exit legislation that is required to take account of the article 50 extension process. For example, the instrument makes a change to the Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 by amending the date from which the Prudential Regulation Authority will be obliged to publish certain technical information that insurance and reinsurance firms must use to value their liabilities. Previously, the PRA had been required to begin publishing this information from 10 April 2019. The SI amends that date, so that the obligation on the PRA does not commence until an appropriate date after the UK has left the EU.
Finally, I will address the corrections that this instrument makes to earlier EU exit SIs. All the legislation laid under the European Union (Withdrawal) Act 2018 has gone through the normal rigorous checking procedures. However, as with any legislation, errors are made from time to time and it is important that they are corrected. Previously, when we found errors in financial services onshoring SIs, we sought Parliament’s approval to correct them as soon as possible, and we are doing the same now.
Although it is always regrettable when errors in legislation are made, it is important to keep them in perspective. The financial services onshoring effort has been an unprecedented legislative challenge for the Treasury, involving 53 SIs that make amendments to more than 500 pieces of EU and UK financial services legislation. These SIs have been positively received—indeed welcomed—by the regulators and industry, and they have provided reassurance that the UK financial services regime will continue to operate effectively from day one after exit day. In that context, the errors that we are seeking to correct are extremely minor and very small in number.
For example, the SI makes an amendment to the Criminal Justice Act 1993 to ensure that UK individuals trading financial instruments in the European economic area or Gibraltar are not guilty of insider dealing, which is a criminal offence, if they are compliant with the market abuse regime as it applies in those territories. This is not changing the criminal offence of insider dealing, but ensuring that the scope of the offence remains the same and operates effectively in UK law after exit.
As I explained in my opening remarks, the Treasury and Parliament have already completed the vast bulk of the legislative work that is necessary to ensure that our financial services regulatory regime is ready for exit. However, in line with this Government’s commitment, we continue to do all we can to ensure that our regime remains prepared. This SI makes additional fixes that will improve our state of readiness.
I know that regulators and the industry support our effort to address every legislative deficiency, and the SI helps to reinforce the message that the Government and Parliament will not take any chances with the safe and effective operation of the UK’s regulatory regime. I hope that colleagues will join me in supporting these regulations, which I commend to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is always a pleasure, Sir Edward, to see you in the Chair.
We now know that this is one of the last chances the Opposition will have to be heard on the matter of a no-deal Brexit, given the Government’s decision to prorogue Parliament this evening. The Opposition’s concerns about our crashing out without a deal are well known. That is why we have spent the small amount of time available to us since the summer recess working hard across parties to prevent the Government from imposing that outcome on the UK.
What will also be well known to those who have served on such Committees before are the Opposition’s objections to the use of statutory instruments to prepare us for no deal through an opaque and rushed process. The Minister and I stood opposite each other in Committees considering dozens of instruments in the run-up to the original exit date in March 2019. Today, we stand closer to the cliff edge than ever before, with a Prime Minister who is seemingly prepared to sacrifice our economic stability and perhaps even the rule of law.
I believe that the instrument in front of us tonight, which is a patchwork of tidy-ups and corrections, shows that we were vindicated in our criticism of the Government’s approach. I am sorry to say that I do not believe the Government have always treated this process with the care and respect it demands. That is in no way a personal criticism of the Minister, who I think is one of the relatively few members of the Government who understands what is at stake, but it is a criticism of the Government as a whole. I say that because we now stand here looking at this legislation in a different way; we stand here on the cusp of no deal occurring, which the Government now believe is a perfectly acceptable outcome.
I just look at this SI and reflect that our country’s economy is 80% services and that our financial sector is the envy of much of the world. We are about to lose market access to all EU member states and, crucially, under no deal we will lose the good faith required to overcome that. That is 10% of the revenue from our most important sector. Although we all acknowledge that the single market in services is not what it could be, as Sir Ivan Rogers has repeatedly pointed out it is more integrated in the single market than it is, for instance, between different US states or between different Canadian provinces. Crucially, no deal will put us years away from correcting those problems in a trade deal.
However, the in-flight Bill was pulled at the last minute in March and has never returned to the Chamber. The then Financial Secretary to the Treasury even addressed the House that evening without addressing why. Does this statutory instrument correct that? I do not think it does. Now that the House is being prorogued, that Bill will surely fall, so how can the Government possibly argue that we are in a position to leave without a deal when there are such significant legislative gaps in our contingency plans?
It is not just the Opposition who have outlined these concerns. The House of Lords Secondary Legislation Scrutiny Committee—I think the Minister mentioned it, but he perhaps undersold its criticism—said:
“These Regulations are the third time HM Treasury…has made changes to existing financial services legislation, and the Committee hopes that HM Treasury has not under-estimated the challenge which is posed to financial services firms in taking on board so many amendments to the core legislation for the sector…the range and magnitude of the changes are significant: the Regulations make changes to 15 items of legislation and include a sub-delegation of powers to UK regulators and extend a ministerial power of direction. The Committee reiterates its concern about the scale of the challenge facing financial services firms in adjusting to these changes.”
If this statutory instrument is being discussed tonight, with mere hours to go before Parliament is suspended, how can the proper consultation have taken place with the financial services sector? As the Lords Committee noted, there is a significant extension of ministerial power, which bestows on the Treasury the power to grant MiFIR—markets in financial instruments regulation—exemptions to EEA central banks. It has to be alarming that this is suddenly being swept in at the last moment. Why, Minister, has it not been addressed before now?
What other omissions will there be? One stakeholder has already raised with us the fact that neither the statutory instrument that establishes the temporary permissions regime in relation to the Financial Services and Markets Act 2000, nor the statutory instrument in relation to the Electronic Money Regulations 2011 and the Payment Services Regulations 2017 appears to apply to payment services provided by an EEA bank in the UK. “Regulated activities”, as referred to in the EEA passport rights regulations, do not include payment services. It therefore seems that there is no authorisation for that to continue, which will be enormously disruptive—unless the Minister can provide some assurances to the contrary today or perhaps in correspondence.
There is in this statutory instrument a whole list of items of retained EU law that are now irrelevant or surplus to requirements. My question remains: how are we only identifying those items now?
Therefore, the Opposition cannot support this statutory instrument today and will vote against it. We have argued against using secondary legislation in this manner since the no-deal process began, and this instrument serves to validate our criticism. The Opposition refuse to use the Government’s final few hours of parliamentary time before the undemocratic Prorogation of Parliament to further enable any no-deal scenario. We will do everything in our power to prevent such a disastrous outcome, which we believe would be so damaging to the UK’s core national interests.
Alison Thewliss (Glasgow Central) (SNP)
It is a pleasure to see you in the Chair, Sir Edward.
I agree very much with the hon. Member for Stalybridge and Hyde. This is chaos. It should not be happening that we are in this room again, with hours to go before Parliament is prorogued, to correct mistakes that we were assured would already have been picked up. The last time that we were in this room discussing similar business, the Minister said, “Oh, these things happen. Errors happen when drafting legislation,” yet here we are again, closer and closer still to another Brexit deadline, with a raft of things that the Government have not got quite right. How were these errors identified? Is it just that the Treasury had slightly more time to mark its own homework, so it was able to go through the measures and find what it had previously missed, or were the errors brought to the Department’s attention by some other means? It would be interesting to know if they were picked up by external organisations, which realised that what had been put in front of them would not actually work or was not fit for purpose.
It is interesting to look at all these things. I am still not quite sure that we have seen the end of all the statutory instruments, with Prorogation coming up tonight. Hon. Members may not have been here for business questions on Thursday, when the hon. Member for Walsall South (Valerie Vaz) asked what would happen about statutory instruments, because they do not fall in the same way as legislation falls with Prorogation. The Leader of the House said:
“On the ability to leave on 31 October, all the legislation that is needed is in place. We have 580 statutory instruments to make sure it will all happen smoothly. That is all done. It is ready. It is prepared. Her Majesty’s Government have been a model of efficiency and efficacy in preparing this. My right hon. Friend the Chancellor of the Duchy of Lancaster is perhaps one of the most impressive administrative Ministers this country has ever seen.”—[Official Report, 5 September 2019; Vol. 664, c. 394.]
But we have all these corrections—pages and pages of corrections to statutory instruments that the Minister has already laid and the House approved in good faith because we were told that it was the right and appropriate thing to do. Despite the Opposition’s protestations that we needed to look at them in greater detail, that we needed more time and that the process needed to be better, this is what we have. The Government cannot say that they were not warned.
To pick up just one concern, relating to the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, this instrument would appear to suggest that the UK share trading obligations can be met through trades of UK systemic internalisers but not of EU systemic internalisers. Is there a risk of reduced regulation? My concern has always been that we cannot have less regulation as we come out of the EU. Since the financial crash, more regulation and more safety has been put in place in the system. We cannot end up with less robust systems in place in any of these areas.
The Minister talked about fixing deficiencies in new technical standards as they come from the EU. Perhaps he can tell us in a bit more detail what that process will look like. Will we forever be scrambling to catch up with the EU as we make regulations and become rule takers? I am sure all the Brexiteers in the room would rail against that. We will be trying to fix all these deficiencies in the desperate attempt to continue to have a functioning financial services industry in this country. We will continually be trailing behind the EU and trying to patch up our systems, rather than being the integral part of building the systems that we once were. That looks to me like how this will be.
Will the Minister give further detail about the PRA and an appropriate date? Does he have an appropriate date in mind. April was suggested in earlier drafts of the legislation, when we thought we would leave in March. What will the date be if there is a no-deal Brexit at the end of next month?
This whole process has been, as I think the Minister said previously, sub-optimal. It continues to be sub-optimal. We will rue some of the decisions we have come to. There is a huge financial services sector in Scotland—in Glasgow—that does a huge amount of skilled work and gives people good, high-quality jobs. If it is harder for those people in those jobs in Glasgow, Edinburgh and everywhere else to do the work they have so diligently been doing, it will be to the cost of all of us. I will do all I can to see that that does not happen.
Sir Robert Syms (Poole) (Con)
I have sat on many of these Committees. It is not unusual to have civil servants come forward because minor mistakes have been made, and the normal procedure in this type of Committee is to put them right, rather than to reject and vote against the instrument. The Treasury civil servants have done a really good job in difficult circumstances to onshore these regulations. They have used the opportunity of the extension, which I was against, to go back through the regulations to see whether they could be improved further. What we have today is the civil service acting in a sensible manner to see whether it can get things as right as possible.
It is highly irresponsible to vote against the instrument today. We may well end up with no deal at the end of October. I was under the impression that the financial services industry in Edinburgh is quite important to the Scottish economy, so I am surprised that the hon. Member for Glasgow Central is happy to vote against, leaving defective regulations in place. I support what the Government are doing. I think it is perfectly sensible, and I commend the Minister’s statement.
John Glen
I acknowledge the dissatisfaction of the hon. Members for Stalybridge and Hyde and for Glasgow Central with this process. As I have always stated when I bring these statutory instruments to the Committee, we have tried throughout to ensure that we are in the best possible state in the outcome of no deal. As my hon. Friend the Member for Poole rightly set out, my colleagues in the Treasury have used the time during the extension to address the elements that were deemed to be defective. We have worked with the regulators and industry and we are continually testing our exit preparations. Both industry and the regulators are reassured that only minor errors have come to light, and this process is about correcting those errors.
I will address the specific points raised by Opposition spokesmen. On the principle of amending so many pieces of legislation in one instrument, although the SI amends 15 pieces of legislation, the number of amendments is not high and their nature is minor. I have set out the categories, and the amendments are routine and minor deficiency fixes, which are required to ensure that the UK regulatory regime for financial services continues to be ready for exit. For that reason we brought them together in this single SI this afternoon.
The hon. Member for Stalybridge and Hyde raised the issue of legislative gaps in the contingency plans: for example, in the in-flight files. I assure him that the Government have ensured that all cliff-edge risks are addressed in exit legislation. There is now no immediate need for further in-flight files legislation. He also asked about the extension of ministerial direction and power. European central banks are exempt from EU regulations under the markets in financial instruments directive—MiFID. In the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, Parliament approved a power for Treasury Ministers to determine that the EU would be equivalent or exempt under the equivalence regimes that will form part of EU law at exit, including equivalence or exemption under MiFID. Because the agreement between the EU and the European economic area on the implementing of MiFID has not been fully ratified, any UK decision would not cover EEA central banks or Norway and Iceland, so this SI also ensures that the new EU MiFID equivalence decision for Singapore made by the Commission in April works as intended in UK law after exit.
The hon. Gentleman talked about the impact on and substantive challenge for industry. As I tried to outline in my opening remarks, minimising the challenge of adjustments to industry to the changes brought by these SIs has been central to the onshoring project. We engaged extremely closely with industry representatives, particularly CityUK as the convening body, and the regulators on the development of the SIs. We published on the website numerous SIs in advance of laying them, to give as much opportunity as possible for feedback and so that firms could become familiar with them. We also introduced a variety of measures to smooth the transition for business, including a range of temporary permissions and transitional regimes for EEA firms and funds; those measures have been approved by the House. Parliament also granted powers to the regulators to phase in requirements on firms, again to minimise disruption and to ensure that any adjustments would be carried out in an orderly way, and that has been hugely welcomed by industry.
The hon. Member for Glasgow Central raised the issue of longer term challenges. I recognise that there is urgent work to do to optimise the competitive positioning of financial services, which, as she rightly said, is a hugely important industry across the United Kingdom, but this SI is not concerned with that. The hon. Gentleman made a point about the authorisation of payment services firms. Firms that enter the temporary permissions regime will be able to continue to provide the full range of services that they do now. That is the purpose of the scheme. On the hon. Lady’s point about how we will update legislation in the future, the aim of the onshoring legislation has always been to ensure that we have a functioning regime in all scenarios. Onshoring is designed to provide continuity and minimise disruption at exit, as well as to provide for Government and Parliament to design a regulatory framework fit for the future, and that remains the case. The Treasury introduced a call for evidence document on 19 July. It set out the context for a long-term review of the regulatory framework and the key issues that we will need to consider for a regime that operates outside the EU. The call for evidence closes on 18 October, and we will report back on that.
On the PRA and the appropriate date, I sought to make the point that we moved the date from 10 April because that related to the previous exit point. The PRA will publish the dates in due course, based on the date on which we leave the EU, which is yet to be determined.
I hope that the additional measures and corrections in the instrument will ensure that the UK’s financial services regulatory regime remains prepared for withdrawal from the EU in any scenario. I hope that I have responded adequately to the points raised and that the Committee will support the regulations.
Question put.