Financial Services (Miscellaneous Amendments) Regulations 2022
(2 years, 1 month ago)
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Baroness Penn
That the draft Regulations laid before the House on 17 October be approved.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, this statutory instrument comprises two sets of provisions relating to Gibraltarian firms operating in the UK market and to securitisation. The proposed legislation will remedy technical deficiencies identified in financial services legislation that was put in place to help manage our withdrawal from the EU.
In relation to Gibraltar, this instrument will fix temporary market access arrangements put in place to ensure that Gibraltarian firms did not face a cliff-edge loss of market access into the UK when we left the EU. In particular, these amendments will complete the intended transfer of powers to the Treasury and the Financial Conduct Authority in three specific areas. This transfer will give the UK authorities powers in relation to Gibraltarian firms where operating in the UK market, consistent with their powers over domestic firms.
It is worth remembering that financial services legislation was amended on withdrawal from the EU to adjust the treatment of EEA firms; in particular, to remove passporting rights, which were a function of the EU’s single market. At this time, because Gibraltarian firms had benefited from equivalent rights, separate provisions were necessary to preserve the existing arrangements supporting market access for financial services between the UK and Gibraltar. These arrangements were always intended to be temporary. Through the Financial Services Act 2021, we are working to replace them with a new permanent regime designed specifically for Gibraltar that reflects our unique history and relationship.
The temporary regime that the Government put in place for Gibraltarian firms unintentionally prevented the transfer of powers to the Treasury and the Financial Conduct Authority being completed in certain areas, leaving gaps in UK law. This SI will exclude provisions from this temporary regime to remove these gaps in the powers available to the Treasury and the FCA. This is equitable and proportionate, as it will enable the treatment of Gibraltarian firms to be brought in line with that of UK firms. Closing these gaps will provide for a more consistent legal and regulatory environment, as intended.
This SI will have an impact on three regulations that affect Gibraltarian firms operating in our market. Under the Short Selling Regulation, the Treasury’s power to modify the reporting threshold relating to net short positions will extend to Gibraltarian firms trading shares on a UK trading venue. Under the Markets in Financial Instruments Regulation, the FCA will be able to apply technical standards relating to post-trade disclosure obligations to Gibraltarian investment firms in the UK. Similarly, under the Packaged Retail and Insurance-based Investment Products Regulation, the FCA will be able to apply technical standards to Gibraltar firms selling, advising on or manufacturing PRIIPs to retail investors in the UK.
I turn now to the second area the SI covers, securitisation provisions. Securitisation is the packaging up of assets or loans and selling them on to investors. This allows lenders such as banks to transfer the risks of assets to other banks and investors to free up their balance sheets and allow for further lending to the real economy. The UK supports the implementation of international standards to promote simple, transparent and standardised—or STS—securitisations. STS securitisations are easier for investors to understand and assess the risks of. As a result, some STS investors will benefit from lower capital requirements.
Generally, only firms established in the UK can designate their securitisations as STS. However, transitional arrangements were put in place to allow for certain EU STS securitisations issued prior to the end of 2022 to be recognised in the UK. These arrangements were extended to the end of 2024 by another set of EU exit regulations earlier this year. The instrument being debated today will simply extend the end date of two requirements for EU STS securitisations to the end of 2024, rather than 2022. This will ensure that UK investors do the appropriate due diligence checks when investing in EU STS securitisations, and that these securitisations remain exempt from clearing requirements, to prevent unnecessary administrative burden. The amendments thus maintain the current requirements as long as the transitional arrangements last. I beg to move.
Lord Jones (Lab)
My Lords, I thank the Minister for her lucid introduction. I refer to paragraph 7.26 of the Explanatory Memorandum. Will she tell us just how busy Gibraltar firms are? How many of them are there—that is, those that are
“acting as sellers, advisers or manufacturers of PRIIPs to retail investors in the UK”?
Gibraltar is a very small place. We might ask, with regard to the Explanatory Memorandum, what is going on in Gibraltar? There is a plethora of technical terms, a multitude of abbreviations in capital letters and specialist vocabulary, and it is all a blizzard of necessitous complexity, the House might agree. Of course, the Minister is a master of it all and, again, I thank her for her lucid introduction.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the Minister for the introduction. It does not matter how many times I read these kinds of explanations about what is going on, I still find them totally incomprehensible and I doubt I am alone.
I have two very short questions. First, does this mean that for a period there was a lacuna when neither EU nor UK regulators held sway and Gibraltar was doing its own thing while having access to the UK as it always had done? If that was the case, did the Gibraltarian financial services authorities know? I cannot tell whether there was such a lacuna or not.
Secondly, on the temporary permissions relating to STS—I declare an interest as an erstwhile director of Prime Collateralised Securities ASBL, which looked over such things as STS to check them out—is this how it will be for ever? Will we extend this by another two years every two years? Does this happen until the UK regulators think they need a change and do something different? It seems to me that we did an awful lot of temporary permissions. I do not like to think that we will have to do them all over again every two years, because that will take an awful lot of parliamentary time. I would like to get a handle on whether this is the way of the future or whether there will be an end to these temporary permissions.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for introducing this SI. It seems that she and I agree that it is really two SIs, covering Gibraltar and securitisation.
To take Gibraltar first, as far as I can tell, the SI simply clarifies the application of UK regulation to Gibraltar. The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 set out a new list of high-risk third countries in relation to which enhanced due diligence requirements apply under the principal money laundering regulations. Gibraltar has been added and Malta removed; the changes apply from 12 July 2022. Will this SI assist Gibraltar in getting off the high-risk list? If so, how will the UK regulatory authorities be involved? I am trying to understand this; how different will the regulation of financial services firms in Gibraltar be from, for example, the regulation of a financial services firm in Birmingham?
The second part of this SI seems solely about extending the present transitional arrangements for a further two years. The clearest statement of this is in the de minimis assessment—I like the assessments, when I get round to reading them, because they tend to be written in easier language:
“This SI is required to address this misalignment of dates in order to prevent looser due diligence requirements for EU STS securitisations than UK ones. This SI will also prevent additional administrative burdens on firms which could arise from the absence of an exemption for EU STS securitisations from the clearing obligation. This instrument will help”—
I would quibble with that word—
“bridge this gap until a permanent framework for designating equivalent jurisdictions with regard to securitisation regimes is in effect and an assessment of the EU can be undertaken under it.”
Am I right in my precis? When and how will
“a permanent framework for designating equivalent jurisdictions”
be determined?
Lord Teverson (LD)
My Lords, I apologise for speaking slightly out of order. As part of the European Union Committee, I took a great interest in the Gibraltarian situation. As the Minister will know, Gibraltar was not covered by the trade and co-operation agreement. At the moment, negotiations are still going on between the UK and the EU on Gibraltar’s status—I think we are on round nine. Can the Minister be clear on whether financial services are included in trying to reach a final agreement between the EU and the UK on Gibraltar and its relationship with the EU? If that is the case, will these SIs become redundant and be replaced by another regime completely? I would be interested to understand that from a strategic point of view.
Baroness Penn (Con)
My Lords, I thank all noble Lords for their contributions to this debate. With this SI, the Government aim to remedy technical deficiencies identified in financial services legislation arising from the UK’s withdrawal from the EU. Nevertheless, a number of pertinent questions were asked.
To give the noble Lord, Lord Jones, a better picture of Gibraltarian firms operating in the UK and their involvement in our financial services sector, data from the Government of Gibraltar highlights that approximately 95% of Gibraltar’s financial services business is with the UK. From the other end of the telescope, around 29% of motor insurance policies in the UK—some 8.5 million—are provided by Gibraltar-based insurers. According to 2022 data from the FCA, over 100 Gibraltarian firms are operating in the UK, including insurance firms, banks, asset managers and e-money firms. The number of firms that might be affected by this SI is roughly 18, but in practice we think it will be fewer. Although there is large-scale involvement of Gibraltarian firms in UK financial services, the impact of this SI would be more limited.
The noble Lord, Lord Tunnicliffe, asked whether this SI will assist Gibraltar in getting off the high-risk list from the FATF. This statutory instrument will not have a direct bearing on Gibraltar’s status in that respect. The UK is a supportive and strong member of the FATF and the Government are committed to making the UK a hostile place for illicit finance and economic crime. We are also committed to supporting Gibraltar to achieve full implementation of the FATF standards by addressing the weaknesses in its regime to tackle illicit finance.
The noble Lord also asked how different the regulation of financial services firms in Gibraltar will be compared to the regulation of financial firms in the UK—for example, in Birmingham. As members of the EU, Gibraltar and the UK implemented the same EU rules on financial services, so we start from the same place. The current temporary regime maintains market access on that basis while we implement the new regime provided for in the Financial Services Act 2021. That will require alignment with UK law and practice. In effect, firms in Gibraltar and the UK will be subject to the same rules under the new system.
Baroness Penn (Con)
I will double-check that for the noble Lord. I believe so, but I would prefer to write and confirm it.
In the noble Lord’s precis, he asked whether this simply extends the status quo for two years. Yes, that is the correct interpretation of this SI. The noble Baroness, Lady Bowles, asked whether we are in a process of extending it in another two years, and then another two years after that. The Financial Services and Markets Bill, which has just finished Committee in the other place, has introduced a permanent equivalence regime to allow the Treasury to recognise STS-equivalent securitisations issued by firms in other countries. The temporary recognition of EU STS will help bridge the gap until we can undertake assessments under this new regime in the Bill currently going through. We have a plan and the legislation is passing; we fully expect that the extension to 2024 would be the last such extension and that we would have a new regime up and running by that point.
The noble Baroness asked about the regulation of these firms in the intervening period. I will write to her on that point to ensure that I do not get anything wrong, and I will also write to the noble Lord, Lord Teverson, on his question. To reassure the noble Baroness, looking at the data in terms of the specific regulations in this area, about five Gibraltar firms could fall within the scope of the 0.1% reporting threshold in the short selling regulation, the SSR. We are giving the regulators here the power to change that threshold to align with the EU. It is a small number. No Gibraltar PRIIPs manufacturers operate in the UK, so the power we have to change the provisions there currently would not bite. Five Gibraltar firms in the UK are using branch passports under MiFIR. I know that does not directly answer the noble Baroness’s question, so I will write to her. However, to give a sense of the scale of the gap—if there was any such gap—we believe it to have been small.
Lord Tunnicliffe (Lab)
Will the Minister ensure that all letters are copied to all participants?
Baroness Penn (Con)
I will ensure that all letters are copied to all participants in the debate and placed in the Library of the House.