Grand Committee
Aviation Safety (Amendment) Regulations 2024
(1 month ago)
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Lord Hendy of Richmond Hill
That the Grand Committee do consider the Aviation Safety (Amendment) Regulations 2024.
Relevant document: 6th Report from the Secondary Legislation Scrutiny Committee
The Minister of State, Department for Transport (Lord Hendy of Richmond Hill) (Lab)
My Lords, these regulations were laid in draft before this House on 23 October 2024. They amend existing aviation safety regulations to update certain provisions, and cover matters including: new requirements for altimeter checks; modernising fuel schemes and fuel planning; all-weather operations; improvements to flight crew training and checking; and safety management systems. These regulations will bring UK law into alignment with amendments to international law, upholding our international obligations, as well as making corrections and amendments to assimilated law.
I start by providing some background information about these regulations. As a member state of the International Civil Aviation Organization, or ICAO, the UK has agreed to implement international standards and recommended practices—SARPs—in domestic law. SARPs are technical specifications for aviation safety contained in annexes to the Convention on International Civil Aviation and adopted by the ICAO. As a member state, we are obliged to implement any amendments made to SARPs in domestic law unless impracticable to comply or not relevant to our system. Where this is the case, member states must file a difference notifying the ICAO that there are discrepancies between SARPs and domestic law. The majority of differences filed by the UK are either because legislative changes are yet to be undertaken or are in progress, are legacy differences inherited from assimilated EU regulations that we will incorporate over time, or, as mentioned, they are not appropriate for the UK system.
The draft regulations will bring UK law into alignment with amendments to Annexes 6 and 14 to the Convention on International Civil Aviation. Annexes 6 and 14 contain SARPs relating to the operation of aircraft and aerodromes respectively. The updates pertain to: enhancing fuel planning systems; widening all-weather operations—the ability of aircraft to take off and land under low-visibility conditions; improving flight crew training and checking; and updates to new and continuing airworthiness requirements around safety management systems. It also corrects and supplements amendments to assimilated law made by the Aviation Safety (Amendment) Regulations 2023. The regulations also reinstate two provisions erroneously removed by the Aviation Safety (Amendment) (EU Exit) Regulations 2020. These draft regulations were supported by the previous Government and were due to be laid in July this year. However, due to the general election, they were laid in October.
On the detail of the regulations, the draft regulations introduce the concept of fuel schemes for commercial air transport which requires fuel planning both pre and in-flight to ensure the minimum fuel level required for an aircraft to remain airborne and land safely, and provides greater flexibility for operators by moving these requirements to guidance published by the Civil Aviation Authority. It also clarifies the rules for helicopter fuel planning, including safety-related issues around refuelling with rotors running. The regulations also allow for the use of advanced technologies available to pilots, such as enhanced flight vision systems, when flying under low-visibility conditions, and improves existing mandatory crew training and checking requirements for air operators.
The draft regulations also correct errors arising from, and make further amendments to support those made by, the Aviation Safety (Amendment) Regulations 2023, which were made to implement international standards relating to safety management systems. Although the irregularities and inconsistencies in the regulations introduced by the errors have not caused a safety issue, the department acknowledges that the errors could impact the ease of use of the regulations by industry. The draft regulations therefore correct the errors to avoid any confusion that could lead to a safety issue in the future.
Turning to scrutiny from the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee, I am pleased to say the draft regulations were cleared by the Joint Committee. At the request of the Secondary Legislation Scrutiny Committee, a revised Explanatory Memorandum has been laid, which now includes a link to the Civil Aviation Authority’s consultation response document on all-weather operations, fuel planning and management.
Before turning to my closing comments, I bring attention to some minor typographical errors identified within the draft regulations since they were laid. A correction slip has been issued to amend these errors, and the corrections have been incorporated into the draft regulations.
We should continue to ensure that aviation remains among the safest forms of travel, as the safety of aviation and the travelling public is a priority to the Government. These draft regulations represent a further step in ensuring this remains the case. Some of the provisions in the draft regulations introduce new ways of using pre-existing technology, which are done with the aim of further improving aviation safety. They also correct errors to make certain the regulations are clear. Moreover, by upholding our commitments to implement international aviation safety law, we maintain not only high aviation safety standards but our reputation as a world leader in aviation safety. I beg to move.
Lord Glenarthur (Con)
My Lords, I am grateful to the Minister for his explanation of this fairly deep document and all that it contains. I should declare an interest because I have many years’ experience, both as a military helicopter pilot in the 1970s and 1980 and in the late 1970s and 1980s with British Airways Helicopters, as they were. I have been for many years involved with the British Helicopter Association. It used to be the British Helicopter Advisory Board, of which I was chairman—I forget for how long but for about 12 to 15 years—and I have been president of the association for about 14 years.
Can the Minister confirm that the BHA, the British Helicopter Association, was consulted on these matters? Can he also expand on what is in these regulations about the potential viability of point-in-space operations, which apply particularly to aircraft conducting emergency service work, often in the Highlands and Islands or out to sea? Because of the unavailability of the European satellite system—which we were able to use but, now we are out of the EU, we cannot—the facility and flexibility for helicopters, and no doubt other aircraft as well, to use these particular forms of approach is now put in peril. I know consideration has been given to this, but I very much hope that something can be done. One of the last points I should like to make is that the flexibility of the helicopter to undertake operations in that sort of way is unique. Those of us who have been involved with the emergency services and other areas would hate to see that diminished in any way, because science has moved on enormously since I became involved in it all in the late 1970s and early 1980s. I hope that the Minister can give some comfort to me on that.
Lord Kirkhope of Harrogate (Con)
My Lords, I want to intervene briefly. I declare my interests. I am a holder of a current private pilot’s licence and a former director of one of our airports. This is a particularly interesting set of measures. I want to ask just a couple of questions and point out one or two things.
Of course, we all welcome the improvement in technology. Technology has come to the aid of, and provides a much safer environment for, those who pilot and operate planes, the airport operators themselves and, of course, passengers. But we are currently going through an enormous shortage of commercial pilots. Training is rightly being more elaborated, but I wonder whether we have sufficient facilities for training pilots in this country. I know it is slightly off beam, but my understanding is that a number of the major operators—I think easyJet is one—are having to train their pilots elsewhere because of a lack of training facilities here in this country. That is rather worrying and not good for this country’s economy. Will the Minister make a comment on that?
The Explanatory Memorandum refers to the instrument allowing general aviation, in which I partake,
“to make use of instrument flight rules”,
which have not been available before. I think we are all aware of the fact that this country is enormously dense when it comes to flying, and there is a lot of danger, particularly in a congested area such as the south-east of England. I published a report of an inquiry I did on lower-airspace controls because of this issue. Most of us involved in general aviation do not operate under the IFR; we operate mostly on a visual basis, although some of us do have instrument capabilities. This extension, referred to in the Explanatory Memorandum but to which I cannot find further reference—perhaps I am not looking sufficiently well at the text—does not seem to have been elaborated on much. I would be grateful if the Minister could comment further on that, perhaps after taking advice.
Other than that, I must say that I am very pleased that we are producing these regulations and maintaining our international standing in aviation.
Lord Young of Cookham (Con)
My Lords, unlike my two noble friends, I do not have a pilot’s licence—I will not respond to the shortage referred to by my noble friend Lord Kirkhope by applying for one—but I was caught, as I went through the document, by Regulation 4(21). It says:
“‘fuel scheme’ means a scheme for the use of fuel or energy that is a basic fuel scheme, a basic fuel scheme with variations or an individual fuel scheme”.
That is amplified in the Explanatory Note, where apparently energy is added to fuel. It says:
“The concept of ‘energy’ is a new addition throughout the amendments to allow for the use of non-hydrocarbon-based fuels in future”.
On page 7 of the impact assessment, in paragraph 15, we have this explanation:
“In addition, this proposal also introduces the concept of alternative fuel or energy sources other than hydrocarbon-based fuels. Without this change, UK operators will not be able to take advantage of technological advances in the production of alternative propulsion sources for aviation”.
COP 29 is under way at the moment, and I understand that the airline industry is committed to net zero by 2050. It is therefore quite important that we know a bit more about these alternative propulsion sources. My understanding is that sustainable aviation fuels are already available, but is it the case that up to now it has not been legally possible to use these SAFs, because we have not made the change yet and without this change UK operators will not be able to take advantage of technological advances? My understanding is that Virgin Atlantic is trialling plant-based fuels and that recycling cooking oil is one of the alternatives. Is it the case that at the moment one cannot blend sustainable aviation fuel with conventional hydrocarbons but after this instrument we will be able to? Can the Minister say a bit more about the progress being made? Net zero by 2050 is quite a tough target because the aviation industry is one of the tougher ones in which to remove hydrocarbons, so I would appreciate hearing a bit more about what the current position is—the legality of using SAF at the moment—and the prospects of hitting our target by 2050.
Baroness Randerson (LD)
My Lords, first, I thank the Minister for his useful introduction. I stress that I perceive this SI as important because it introduces amendments to bring the UK into line with ICAO standards and practices. It will allow commercial operators to use more advanced and efficient fuel-planning systems, which will lead to the saving of fuel and lower emissions, which is in itself very important indeed, and will lead to significant savings for those operating in the business.
Secondly, this SI will also permit the use of new technology and procedures at take-off and landing in what you or I would call poor visibility but what the aviation sector calls “all-weather operations”—that is a masterful understatement—which will, of course, mean much safer aviation.
Thirdly, this SI will introduce improvements to mandatory crew training and safety checks. I have a question for the Minister: does that tightening up on safety deal in practice with the grey area between commercial pilots and leisure pilots in general aviation? I am sure that those in the aviation industry knew all about this issue, but it first became publicly known after the air crash that led to the death of Emiliano Sala, a player at Cardiff Football Club. It involved a pilot who was not qualified for commercial aviation and not licensed to fly at night. It turned out, according to the news stories, that this was a frequent blurring of the edges; there was general agreement in the House that that should be dealt with. If this SI goes as far as dealing with that blurring of the edges, I would very much welcome that.
There is a general concern that the Department for Transport may have fallen behind on updating aviation legislation, just as it did with maritime legislation, because, according to the report by the Secondary Legislation Scrutiny Committee—I am a member of that committee, although I did not attend the particular meeting that produced the report—we have been out of step with the ICAO requirements for anything from four to 12 years. According to that report, the Department for Transport says that this time lapse has not posed a safety risk. That may be questioned, I think: if one is updating safety legislation in a whole series of bits of legislation, one assumes that one is doing it to make things safer. In any event, this has put UK operators at a competitive disadvantage because, for example, the EU implemented it nearly three years ago.
The Secondary Legislation Scrutiny Committee also states that the UK has filed differences—that means that we are not in alignment with ICAO standards and regulations—in 9% of cases. That is a significant minority. The Department for Transport also told the committee that it was up to date with other international agreements. I am delighted to hear that, and I invite the Minister to confirm it here today. Maybe the department has now had time to look more thoroughly. My concern is the waste of precious time in improving fuel efficiency, but I am also concerned that the UK is not fully up to date with the latest safety techniques, especially in relation to helicopters, which are notoriously complex to fly.
Can the Minister update us on where the new Government stand on our previous withdrawal from the EGNOS satellite system operated by the EU? That is something that we have discussed in this Room on several occasions. The withdrawal from EGNOS has undoubtedly put smaller airports, such as Bournemouth and the Isles of Scilly, at a disadvantage, because they have been unable to operate safely in poor visibility. I would welcome it if the new Government were looking again at that costly decision for the aviation industry. I believe that the problems with training for commercial pilots also involved the issue of access to EGNOS. If the new Government have not addressed that issue yet, I urge them to look at it in detail.
Finally, paragraph 4.9 of the Explanatory Memorandum says that the instrument
“applies to aircraft registered in the UK wherever they are”.
Can the Minister confirm the flip side of that, if I can put it that way—that if an aircraft is operated in the UK, wherever it is registered, it will be subject to the same safety criteria? The same accident to which I referred earlier also revealed, as a result of CAA investigations, that there was a gap between the safety of those aircraft registered in the UK and the standards, for example, of those registered in the USA. Those are legitimate issues of concern.
Lord Moylan (Con)
My Lords, I shall be disappointingly brief. I thank the Minister for arranging a briefing with his officials, and I thank those officials for the time that they gave. Various pertinent questions have been raised in the course of this short debate, and I look forward to hearing the Minister answer them. I had one question that I raised with his officials, relating to the extent and effectiveness of the consultation exercise with the smaller operators in particular. I understand that, if the Minister is unable to give an answer to that this afternoon, his officials are preparing to give a written answer to that question later.
The previous Government prepared these regulations. At their heart is not a question about alignment of texts or legality but the question of safety in practice. We are all agreed that we want aviation to be, as the Minister said, one of the safest modes of travel. It has been for a very long time, and we want it to continue to be so. The Minister has assured us that these regulations represent a further step in ensuring safety in aviation and, on that basis, this side is more than happy to support them.
Lord Hendy of Richmond Hill (Lab)
My Lords, I shall attempt to deal with the questions from noble Lords who have spoken. I will do my best, but some of them will have to be answered in writing, I am afraid. I shall answer in order.
The noble Lord, Lord Glenarthur, asked whether the British Helicopter Association had been consulted. An email went to all UK parties, plus the SkyWise notification for the consultation, and all interested parties had the opportunity to participate in the public consultation. As noble Lords can work out from that answer, I cannot say whether the British Helicopter Association replied, but I am happy to write to the noble Lord subsequently. I will come on to the EU satellite issue in a moment.
The noble Lord, Lord Kirkhope, asked about the shortage of facilities for training pilots. I will have to write to the noble Lord to state the position on that. He also asked about general aviation. I am assured that this is aimed at commercial operators. I will write to the noble Lord about whether we believe there is a gap and, if so, how it should be filled.
The noble Lord, Lord Young, asked principally about sustainable aviation fuels. We discussed the statutory instrument about sustainable aviation fuel with the noble Lord, Lord Moylan, only a few days ago. The Government intend it to be used as part of the airline industry’s move to net zero. My understanding is that sustainable aviation fuel is not made legal by these regulations but can already be used. I will write to him with pleasure to confirm that that is the case. The references to fuel or energy sources are about making sure that these regulations are fit for the future and for the alternative energy sources that might be used to fuel aeroplanes.
The noble Baroness, Lady Randerson, spoke about the grey area relating to the dreadful incident to which she referred. These regulations do not apply to what she described as the “grey area”. Again, if there is a case to write to her to say how that grey area is being addressed, I am happy to do so.
The noble Baroness also referred to issues about getting up to date. I am informed that we need to adhere to international standards and recommended practices and that we have not been aligned to the standards referred to in the draft regulations for between four and 12 years, that we filed differences against all of them with ICAO and that no risks to safety have arisen from that period of misalignment. However, UK operators were at a competitive disadvantage compared with EU member states because regulations similar to those in these draft regulations were implemented there in October 2022. This now brings us up to date.
I cannot deal with the issues that were raised about the EU satellite system, so I will write to the noble Baroness and the noble Lord about them.
Finally, the noble Baroness, Lady Randerson, asked whether this applies to aircraft not licensed in the UK. It does.
I welcome the recognition by the noble Lord, Lord Moylan, of the desirability of ensuring that our airline industry and aircraft are as safe as they can be. I am grateful to him for his assurance that he is as keen on that as we are.
I again thank all noble Lords for attending the debate and for their input. I will write to noble Lords who have raised questions that I cannot answer on this statutory instrument.
Lord Moylan (Con)
Will the Minister send copies of those letters to all of us who have participated in the debate?
Lord Hendy of Richmond Hill (Lab)
I thank the noble Lord for his interjection. Yes, I will do that.
I conclude by saying—as I already have, actually—that the safety of aviation and the travelling public is a priority for the Government. The department is committed to ensuring that aviation remains safe. As part of this, the draft regulations form part of an important legislative programme that implements international aviation safety standards in domestic law. The implementation of international law ensures that the UK remains a world leader in maintaining high aviation standards and meeting our international obligations.
Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment of Schedule A2) Order 2024
(1 month ago)
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Baroness Jones of Whitchurch
That the Grand Committee do consider the Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment of Schedule A2) Order 2024.
The Parliamentary Under-Secretary of State, Department for Business and Trade and Department for Science, Information and Technology (Baroness Jones of Whitchurch) (Lab)
My Lords, this order will allow the tribunal to apply an uplift to the amount that can be awarded where employers do not meet their collective consultation obligations when dismissing employees. The tribunal will be able to apply this uplift where an employer has unreasonably failed to comply with the code of practice on dismissal and re-engagement in cases where the code applies. A tribunal will be able to increase any award made in relation to affected employees by up to 25%, which will increase the deterrent effect of the code and strengthen protections for employees.
I will now set out how this is achieved through the order. A protective award is an award which can be made by an employment tribunal when an employer does not meet its collective consultation obligations. These obligations currently apply where an employer is proposing to dismiss 20 or more of employees within any 90-day period at a single establishment. Schedule A2 to the Trade Union and Labour Relations (Consolidation) Act 1992 Act sets out the list of claims for which an employment tribunal can make a 25% adjustment to compensation if one of the parties has unreasonably failed to comply with a relevant code of practice.
The code of practice on dismissal and re-engagement will be a relevant code of practice for this purpose. The change will mean that where an employment tribunal is making a protective award in a case where the code applies and it appears to the tribunal that the employer has unreasonably failed to comply with the code, the tribunal may increase that award by up to 25%, increasing the deterrent effect of the code. This is a fair and proportionate measure that will give the tribunal greater discretion to take individual behaviours into account when making an award.
Last year, the previous Government published the code and, alongside it, laid a previous version of this statutory instrument. However, it timed out in the pre-election period. This Government are committed to going much further and have brought forward the Employment Rights Bill within our first 100 days in government to put an end to unscrupulous fire-and-rehire practices that have no place in a modern labour market. In the meantime, before the Employment Rights Bill completes its passage and comes into force and to avoid disruption for workplaces, we decided to continue with the previous Government’s code of practice, which came into force earlier in the summer. This is also why we are re-laying this legislation. It will come into force in January 2025, subject to it being debated and approved in both Houses. It will at least provide an additional level of protection for workers as a stepping stone to the much-needed reforms set out in our plan to make work pay.
I move on to the Government’s ambitions to deliver the biggest upgrade to workers’ rights in a generation. The Employment Rights Bill is the first phase of delivering our plan to make work pay, supporting employers, workers and unions to get Britain moving forward. The Bill will support the Government’s mission to increase productivity and create the right conditions for long-term sustainable, inclusive and secure economic growth by giving the British public the work, wages, prosperity, security, dignity and living standards that everyone in Britain needs and deserves. In the Employment Rights Bill, this Government are bringing forward a measure that will end unscrupulous fire-and-rehire tactics that leave workers at the mercy of bullying threats. Employers will be able to use the practice only where they genuinely have no alternative or where they are in financial difficulties that threaten their business. This means that employers will be able to use the practice where necessary to save jobs and prevent redundancies.
Additionally, in the Employment Rights Bill, we are strengthening collective redundancy rights and protections. This will ensure that the right to collective redundancy consultation is determined by the number of people impacted across the business, rather than in one workplace. This will ensure that employers must always collectively consult when proposing to make 20 or more employees redundant. This measure additionally amends notification requirements so that employers have to notify the Government when they are proposing to make 20 or more employees redundant, regardless of whether the redundancies are taking place in one establishment.
The Earl of Effingham (Con)
My Lords, as noble Lords will know, this order—the Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment of Schedule A2) Order 2024—was originally laid by the previous Conservative Government. It is short, so I will keep my remarks brief.
This order will increase the protective award for non-compliance with collective consultation requirements, meaning that where an employer has unreasonably failed to comply with a relevant code of practice an employment tribunal making a protective award may increase the employee’s award by up to 25%. Conversely, where an employee has failed to comply with the relevant code, their award may be decreased by 25%. The policy context for this is to prevent fire and rehire, which attracted significant media attention during the Covid-19 pandemic. This order will ensure that employers take all reasonable steps to explore alternatives to dismissal and re-engagement and that they do not use this as a threat or pressure tactic when implementing changes to employment contracts.
His Majesty’s Official Opposition welcome this statutory instrument. We hope that it will improve working practices in the United Kingdom, particularly for those who find themselves in vulnerable or precarious employment situations and need all the help they can get.
Baroness Jones of Whitchurch (Lab)
My Lords, I am grateful for the noble Earl’s support for these amendments to the Trade Union and Labour Relations (Consolidation) Act 1992. As I have said, this order will add the protective award for non-compliance with collective consultation requirements to Schedule A2 to the 1992 Act. This will mean that, when a protective award is made against an employer for failing to comply with their collective consultation requirements, the employment tribunal may increase the protective award by up to 25% if the employer unreasonably fails to comply with the code of practice on dismissal and re-engagement.
As I said, the Government are committed to ending unscrupulous fire-and-rehire practices through the employment Bill; we will of course return to debate that in more detail. In the meantime, I commend this order to the Committee.
Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024
(1 month ago)
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Baroness Jones of Whitchurch
That the Grand Committee do consider the Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024.
The Parliamentary Under-Secretary of State, Department for Business and Trade and Department for Science, Information and Technology (Baroness Jones of Whitchurch) (Lab)
My Lords, in moving this order, I shall speak also to the Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024.
The regulations we are introducing today will ensure that the regulatory framework for financial services is aligned with the UK’s needs following our exit from the European Union. They ensure that UK businesses and individuals can continue to access the products and services they need, even where these originate from outside the UK, and that UK authorities have appropriate control over which firms can access our markets. They also ensure that the statute book is clear, comprehensible and relevant to our domestic market.
I turn first to the instrument on collective investment schemes and central counterparties. UK investors and firms rely on a wide range of financial products and services to meet their needs, ranging from individuals saving for a rainy day all the way to multinational corporations needing to settle multi-million pound transactions. In a highly international industry, many of these products and services originate from outside the UK. Ensuring continued access for UK investors and businesses is therefore critical to the continued functioning of our economy. This instrument deals with two such areas of global market access: the ability of collective investment schemes or funds to market to UK retail investors; and the ability of overseas central counterparties to provide services to UK firms. I shall now speak to each of these in turn.
The Government previously introduced a new route for overseas funds to become recognised for marketing to UK investors—the overseas funds regime. In July this year, the first equivalence decision under this regime came into force. This means that certain retail schemes from the European Economic Area will be able to market to UK investors on an ongoing basis. Funds from the European Economic Area had been able to passport freely into the UK prior to the UK’s exit from the European Union; a temporary regime was introduced to allow these funds to continue doing so. These temporary arrangements were due to end in December 2025.
The overseas funds regime represents a more permanent solution. However, it will take time to transition the more than 8,000 funds with temporary access to the new regime. Therefore, this instrument extends the temporary regime for a further year, until 2026, to allow for a smooth transition and avoid any cliff-edge risks. It is important that the temporary regime continues to work as intended for those funds still using it—namely, those funds not in scope of the Government’s equivalence decision. At the same time, the temporary regime should wind down in an orderly fashion. This means that funds in scope of the equivalence decision should be directed towards the overseas funds regime and, if they fail to apply or become recognised under that route, they should lose their ability to market freely to UK investors.
This instrument also makes technical changes to ensure that that is the case and that sub-funds in the temporary regime are treated appropriately depending on their characteristics. These two changes combine to ensure that the Government’s decision under the overseas funds regime and the transition from the temporary arrangements will be implemented smoothly, without unintended consequences for investors or fund operators.
I turn to the second set of changes delivered by this SI, relating to overseas central counterparties. Central counterparties, or CCPs, are vital market infrastructure firms that help make markets safer and more efficient. They sit between the buyers and sellers of certain financial instruments, providing assurance that contractual obligations will be fulfilled. The process of transacting through a CCP is known as clearing.
During EU exit, the Government set up the temporary recognition regime, or TRR, which allowed overseas CCPs that were recognised by the EU before the end of the transition period—and which, therefore, had market access to the UK—to continue to provide services to UK firms. This allowed UK authorities the time to start putting in place longer-term market access arrangements for these overseas CCPs after EU exit. The TRR has largely functioned well and ensured that EU exit did not disrupt the provision of clearing services into the UK.
However, as it stands, a CCP in the TRR automatically loses its right to remain in the regime if its EU recognition is withdrawn. This has meant that, since EU exit, several CCPs have exited the TRR and moved into the UK’s accompanying run-off regime, as a result of decisions taken by authorities outside the UK. There are a variety of circumstances that could lead to EU authorities withdrawing EU recognition from overseas CCPs, but these circumstances may not always be relevant to the UK. For instance, EU recognition has previously been withdrawn because co-operation arrangements have not been agreed between ESMA and the relevant national regulator of the overseas CCP. This statutory instrument therefore removes EU recognition as a condition for remaining in the TRR. This, combined with the Bank’s continued ability to move a CCP out of the TRR for financial stability reasons, ensures that UK authorities have appropriate control over which overseas CCPs can provide services to UK firms.
I now turn to the Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024. The UK’s financial services sector is central to driving growth in the UK economy, and insurance is a fundamental contributor. Effective and proportionate regulation is key to this; therefore, we must ensure that domestic regulation is clear and not burdensome to understand. This statutory instrument makes technical legislative changes that remove or amend references to insurance-related EU directives. It is no longer necessary to refer to them now that the UK is not part of the EU and now that the regulatory regime for insurance distribution is set out entirely in UK law and regulatory rules.
This instrument amends the Terrorism Act 2000; the Proceeds of Crime Act 2002; the Counter-Terrorism Act 2008; and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. It replaces insurance distribution directive-related references with references to the equivalent provisions in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
This instrument makes similar amendments to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. It changes the monetary threshold in Article 72B of that order below which a person whose main business is not insurance distribution is excluded from regulation by the Financial Conduct Authority. This instrument provides that the threshold will now be denominated in sterling rather than the euro. The scope of the exclusion on the distribution of sterling-denominated insurance policies will no longer be dependent on changing exchange rates.
Baroness Kramer (LD)
My Lords, I will be relatively brief because these are highly technical instruments, but there are some comments that I would like to make.
I shall start with the collective investment schemes and central counterparties order and begin with collective investments schemes. I ran this one by my noble friend Lady Bowles of Berkhamsted, who is the ultimate guru in our party on collective investments schemes and, I suspect, one of the experts on them within the House, and her report was “It’s absolutely fine, let it go”, so I will happily take that position on the necessary tidy-up of the changes in the language for collective investment schemes.
However, the second part of that order is far more interesting and raises some questions, about not the language but the broader issue of central counterparties and the hint that this regulation may contain. Everyone in this Room understands that central counterparties became an instrument for countering the fallout of the 2008 financial crash when liquidity seized up across the financial services sector because, within that huge area of derivatives—I think derivatives outstanding typically exceed something like $60 trillion at any one time—the outside world did not know who owed what to whom and therefore who was at risk from which failure and whether there would be domino effect. Indeed, liquidity then seized up and we went from a contained financial crisis into a wholesale financial crisis. Now, vanilla transactions and derivative arrangements that go beyond the vanilla pass through central counterparties so that there is a middleman, if you like, that can hold the risk so that if one party fails, the counterparty takes the risk, not the person who holds the mirror transaction on the opposite side.
I think everyone has always recognised—I could quote Andy Haldane, but I have done it too often before—that, in a sense, the central counterparty is an accumulation of risk. One could almost think of it as an unexploded bomb. Serious levels of risk are contained with the central counterparty and, if anything goes awry, the shock to the financial system would be global. The Committee will know that many of the counterparties share common ownership. They may look like completely separate organisations, but they feed back and the same parties, in a sense, make up their various memberships and ownerships. Cross-contamination is always a huge risk when dealing with central counterparties.
It is obviously sensible now that, sadly, we have left the EU, that regulation which tied into EU directives should drop away, but I am concerned that this does not become an excuse for playing the game of regulatory arbitrage. We hear constantly about the significance of growth. I do not deny that, but I am concerned about the gradual understating of risk that sits alongside loosening and changing regulation to create the animal spirits that will create growth.
The potential to play a regulatory arbitrage game around central counterparties must be raised in this context. When we required recognition by more than one regulator—ESMA as well as its UK equivalent—we had the constraint of two sets of significant eyes looking at a particular situation. Now there is one set of eyes only. While we always acclaim the importance and, as I often hear, the great superiority of the British regulators in this area, I would very much like some assurances that there is at least some degree of oversight and monitoring in recognising the potential of trying to loosen up regulation around the central counterparties.
Both prior to our exit from the EU and today, the dominant European clearing house—one might say the dominant global one—was LCH. It is no longer called the London Clearing House and its party in Paris is now known as LCH Paris. It is still dependent for about a third of its clientele on recognition from ESMA. ESMA has given it temporary equivalence, but that could be adjusted or changed in future and there could be limitations on European institutions from doing more than a certain percentage of their clearing through LCH or other UK clearing houses. Can the Minister update us on that issue? Is there any sense that the steps we are taking could trigger a more adverse decision from ESMA in reference to UK-based CCPs?
I will very briefly deal with the insurance distribution regulations. Some in this Committee will know that I hate the concept of a regulatory perimeter whereby we regulate activities on one side but not on the other. I gather from the Explanatory Memorandum that some companies which were outside the regulatory perimeter will now be drawn inside it. That can be only a good thing, but there has always been a tendency for companies in the UK to game the regulatory perimeter. They grow to a size that puts them just outside sight of the regulation. Will a significant number of companies be affected by this adjustment in denominating the assets from euros to sterling? Will we see a cluster around the regulatory perimeter and have any concerns been triggered in looking at this set of changes?
Baroness Neville-Rolfe (Con)
My Lords, I take great pleasure in returning to the Front Bench to debate Treasury matters, albeit now in a shadow capacity. Although I do not have current interests to declare, I hope that my past experience as Commercial Secretary to the Treasury and as a member of the EU Financial Affairs Sub-Committee will stand me in good stead. Until 2022 I served as a non-executive director of a challenger bank and, of course, I have served in business more generally. I thank the Minister for her clear explanation of these two instruments and their obvious complexities. I am glad of the opportunity to work with her across the House and I look forward to hearing the answers to the observations made by the noble Baroness, Lady Kramer, especially about risk.
Our investment schemes and central counterparties are without question the backbone of the United Kingdom’s financial services industry. They enable our country to attract global capital, support pensions and, ultimately, benefit people and businesses up and down the country. As the Minister said, it is important that the rules and regulations are not needlessly bureaucratic. The removal of EU recognition is welcome. We now have domestic arrangements for oversight and I believe we should not be double-banking, so I am in a slightly different place to the noble Baroness, Lady Kramer, on that.
I wish to make two wider points. I am particularly grateful to the Minister for including a de minimis impact assessment with the first SI. I note that it has also been through the better regulation unit. I have always been a huge supporter of impact assessment and wider cost-benefit analysis of all legislation, but I have two questions. Can the Minister confirm that it is the policy of the new Government to require de minimis assessments of this kind on all SIs—unless the impact is negligible, as with the insurance distribution SI? She can perhaps answer for the Treasury today. I note from GOV.UK that her ministerial role also relates to business regulation more widely. Although she may need to write, I would appreciate a wider answer, as such a requirement would help deliver value for money across government and limit the negative effect on growth of new regulation.
My other concern is the glacial pace at which we are leaving the EU financial services regime behind. The collective investment SI provides for a year’s extension of a temporary regime. Although this may be well and good for the reasons the Minister has clearly explained, I have no idea when the UK will have completed the task of replacing EU financial services law with our own. I was trying to advance this process in 2017 when I was at the Treasury so that we would be ready when Brexit day arrived; as it happened, it did not arrive until January 2020. I believe the transition was well debated during the passage of the Financial Services and Markets Act 2023, but I have two other related questions. Do the Government, with the help of the regulators, have a plan for completing it and taking advantage of any new freedoms and simplifications that are now possible? Will the Minister agree to send me a list of the missing regulations and a timetable?
Although it is a demand, I mean that as a constructive question. Our financial services sector is so important to UK growth, and we need to make sure that these changes are completed, take effect and help our financial services sector, which has so much to contribute to UK growth, productivity and prosperity. Having said that, I am very happy to support the two sets of regulations.
Baroness Jones of Whitchurch (Lab)
I thank both noble Baronesses for their comments. I very much welcome the noble Baroness, Lady Neville-Rolfe, to her new role—I am sure that she will carry it out extremely well. I am pleased to hear that the noble Baroness, Lady Bowles, approves of something we are doing, for a change. Getting approval from her takes some doing, so it is good to hear.
The noble Baroness, Lady Kramer, made some more serious points, which I will have a go at addressing. First, she asked whether risk was being compromised here. We agree that we do not want to deregulate in this area; if anything, the UK Government have committed to maintaining and strengthening our high standards for CCP regulation. Of course, the Bank of England regulates these firms anyway, in accordance with its financial stability objective, so there are checks and balances already in place. We do not believe that risk is being compromised. On equivalence being a unilateral decision for the EU, we have been clear that we are committed to high standards and that we do not believe this SI gives the EU any cause for concern or reason not to extend CCP equivalence further.
The noble Baroness, Lady Kramer, asked about the role of ESMA. Of course, a variety of circumstances could lead to ESMA withdrawing EU recognition from overseas CCPs. These circumstances may not always be relevant to the UK; therefore, UK authorities may not wish to take similar action. This might be the case if, for instance, ESMA withdrew recognition because it had not agreed co-operation arrangements with other relevant national authorities. Whatever the reasons for withdrawing, the Bank is able to remove a firm from the TRR, if it deems that the CCP presents a financial security risk.
The noble Baroness also asked whether insurance companies would fall outside the regulatory perimeter. There is no policy change here. Premium thresholds will be denominated in sterling rather than the euro. The current exchange rate was used, with denominations rounded to the nearest £25; this is just to make it easier and clearer for people using the services. We will keep the operation of these thresholds under review, but this measure was simply to make the process more simplified.
I thank the noble Baroness, Lady Neville-Rolfe, for her welcoming of many of the proposals before us. She asked about impact assessments. They are standard practice; if we do not have an impact assessment, there must be a very good reason why that is the case. The noble Baroness will know from her past experience of the sorts of cases where that might occur. These measures are all covered by the better regulation framework anyway, if the impact is more than £10 million—so we think that, one way or another, they are covered.
The noble Baroness asked about us taking out all references to the EU. All I can say is that that is a work in progress. We would probably like to do it more quickly than we are, but we are working on it. We are looking back at the legislation. The purpose of this particular piece of legislation was to make it clearer to people. I do not think there is a legislative danger in the current wording, if it already exists in other bits of legislation; this was just to avoid confusion. We all want to do that, of course; where we can, we will. If we revisit bits of legislation in any way, that will be an ideal opportunity to correct these references so that they do not cause confusion in future.
I have a feeling that I probably have not answered all the questions asked by the noble Baroness, but that is my best stab at it. I thank both noble Baronesses.
Baroness Neville-Rolfe (Con)
My question about the impact assessment was actually about the de minimis impact assessment. Proper impact assessments have to be done at about £10 million, or whatever the level now is, but I was congratulating the Minister on having done an impact assessment for something that was in effect smaller. I would like to know whether that will be adopted by the Treasury, which I think has an interest in it, and whether it will be adopted more broadly by other departments. Perhaps the Minister could follow up on that, especially on the broader point, given her role on legislation.
As for the point about the plan going forward, it would be good to know whether there is a published source of what is still to come and what amount of time that will take. People will be very glad to know that we are nearly at the end of this process of bringing in our own regime on financial services, so that our excellent sector can feel that the roundabout has stopped and that it can get on with serving Britain. London is still such an important centre for financial services, and I am very keen to support the Government in supporting that.
Baroness Jones of Whitchurch (Lab)
I thank the noble Baroness for that question. I can confirm that it is standard practice for the Treasury to produce de minimis impact assessments—I have got a nod from the team behind me, so I say that with some confidence.
The noble Baroness asked about the next steps for repealing assimilated law. The Government are committed to securing the benefits that the repeal and replacement of assimilated law can bring, creating a more agile and responsive regulatory regime. That means progressing work on files such as the European market infrastructure regulation and alternative investment fund managers directive. To be more specific, we will write to the noble Baroness to clarify any further information that we have on this. With that, I hope that noble Lords will approve the regulations.
Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024
(1 month ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Jones of Whitchurch
That the Grand Committee do consider the Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024.
Building Societies Act 1986 (Modifications) Order 2024
Baroness Blake of Leeds
That the Grand Committee do consider the Building Societies Act 1986 (Modifications) Order 2024.
Baroness Blake of Leeds (Lab)
I was going to start by welcoming the noble Baroness, Lady Neville-Rolfe, to her place, but I see that she has moved along the Bench. However, I am sure that we will have the opportunity in future.
The Government have committed to modernising the Building Societies Act 1986 to ensure that building societies, which are mutually owned financial institutions, primarily offering savings and mortgage products to members, can compete effectively with retail banks. This order forms part of this commitment, by amending the Building Societies Act 1986 to remove some unnecessary burdens on the sector by aligning certain corporate governance requirements with the same flexibilities afforded to companies under the Companies Act 2006. This aligns within the Government’s wider ambition to unlock the full potential of the mutuals sector, recognising the sector’s potential to drive innovation and economic growth across the country through its emphasis on support for members and communities.
Specifically, this order modernises the 1986 Act by amending and deleting the relevant provisions in Sections 60 and 61, which currently impose a normal retirement age of 70 for directors, which in turn enables building societies to provide a compulsory retirement age for directors in their rules. By amending these provisions, this order will provide building societies with greater flexibility in appointing directors and end blanket age-based restrictions, modernising the 1986 Act in line with the Companies Act 2006.
Moreover, this order will amend Section 80 of the 1986 Act to alter the requirement for the balance sheet of a building society to be signed by two directors and the CEO and instead allow one director to sign the balance sheet on behalf of the board. This removes an unnecessary burden for building societies and aligns the legislation with that for companies, which requires only one director to sign their accounts.
Overall, these amendments make small but important updates to the 1986 Act by removing outdated corporate governance requirements and providing building societies with the same modern flexibilities as retail banks operating under the Companies Act 2006.
Furthermore, I understand that these changes will be welcomed by the sector. For example, the prospect of an amendment to allow one director to sign a building society balance sheet on behalf of the board was welcomed during a consultation published by the previous Government in December 2021. Although the removal of the retirement age for building society directors was not proposed in the 2021 consultation, it was suggested by the Building Societies Association and another large building society in their responses to the consultation, as published in the consultation response in December 2022.
Finally, I shall touch briefly on future considerations. Earlier this year, the Building Societies Act 1986 (Amendment) Act 2024 achieved Royal Assent. This allows for real-time virtual participation at building society general meetings and provides the Government with the powers to introduce subsequent amendments further to modernise the 1986 Act. The Government will introduce these remaining changes in due course.
In conclusion, and as I have outlined, this order makes necessary amendments to the Building Societies Act 1986. Crucially, it will support building societies by aligning certain corporate governance requirements with the same flexibilities afforded to retail banks. This is an important step in progressing the Government’s commitment to unlock the full potential of the mutuals sector. It is my pleasure to bring these amendments to the Committee, and I hope that noble Lords will endorse these important reforms.
Baroness Kramer (LD)
My Lords, I will make my comments brief. Like the Minister, I am a strong supporter of the mutual sector, but the values of many of our retail banks have sometimes sent them chasing profits when they should have been serving customers. Mutual societies at least argue that at their base there is a different ethos that makes them far more aware of the needs of both their members and the community. I would very much like to see a significant expansion of the mutual sector, particularly to try to deal with the many unmet needs in the financial services sector.
However, I am a little uncertain about these two changes, although I am not going to oppose them. I think it is a good idea for organisations to refresh, and by removing a retirement age, there may be a temptation, particularly because people develop a certain personal loyalty to particular directors who have been there for a long time, or a hesitancy to refresh than we would have seen if there were a retirement age. Will the Minister comment on that because it is generally good practice? I understand that a hard and fast retirement age creates all kinds of ageism issues, but is there is going to be any kind of mechanism to encourage that look at refreshment from a corporate governance perspective?
The other issue is having one signature rather than three. Again, I have some hesitancies here. In the modern era, it is so easy to provide a signature electronically that one wonders why it should be so desperately cumbersome. I am certain that most directors of mutual societies are people of great integrity and would never allow a falsified statement to go forward. Within financial services, however, we have all been disappointed from time to time by a sort of creeping abuse in one sector or another. I am just concerned that a very natural check may be removed by going from three signatures down to one.
Lord Altrincham (Con)
My Lords, I note my interest as a director of the Co-operative Bank, which has agreed to be acquired by the Coventry Building Society. I agree with the comments from the noble Baroness, Lady Jones, on the advantages of the mutual sector. I possibly hesitate to agree with the comments of the noble Baroness, Lady Kramer, given that the Co-operative Bank is not the best example of the virtue of the mutual sector as opposed to capitalising banks under the Companies Act in the normal way and funding them in public markets. These things can be looked at in different ways.
Building societies have long been the backbone of local communities. They embody the principles of mutuality and prudence, offering a model of finance that places people before profit. Yet, as our economy evolves and the needs of homeowners and savers shift, so too must the regulations that govern these vital institutions. This draft order amends Sections 60 and 61 of the 1986 Act to remove all references to the normal retirement age or the compulsory retirement age for directors. It will update that Act in line with the Companies Act 2006, under which there are no longer corresponding restrictions for company directors following the repeal of Sections 293 and 294 of the Companies Act 1985 by Section 1295 of and Schedule 16 to the 2006 Act.
The draft order also amends Section 80(1) of the 1986 Act so that the current requirement for the balance sheet of a building society to be signed by two directors and the CEO is changed to allow one director to sign the balance sheet on behalf of the board. We would support that on these Benches. This amendment will modernise the 1986 Act, aligning the provisions with Section 414 of the 2006 Act and, on these Benches, we welcome it. This order would reduce a small but unnecessary burden on building societies, providing them with the equivalent accounts sign-off procedures for companies.
It makes sense to modernise the 1986 Act, or at least to bring it in line with the Companies Act 2006. As Conservatives, we will not oppose a measure that will ease unnecessary burdens on businesses and financial institutions, and thus I welcome this order.
Baroness Blake of Leeds (Lab)
I start by thanking noble Lords for their attention on this important matter. As I stated in my opening speech—I hope this gives some reassurance to the noble Baroness, Lady Kramer—the Government are committed to supporting the mutual sector, which we see as a key component in delivering inclusive growth across the country. I refer noble Members to the Mansion House speech delivered by the Chancellor of the Exchequer just last week, when she announced multiple new measures to unlock the potential of the mutuals sector. I do not need to go through all the specific points that were made then, but that speech amounted to a very strong commitment and recognition of just how important their contribution is and how much more could be achieved.
I specifically refer to the comments that the noble Baroness, Lady Kramer, made about the change to one director being allowed to sign off the balance sheet. I repeat that the amendment will not impact on the reliability and accountability of the process. The full board of the building society will still be required to approve the annual report and accounts, and the director’s responsibility is not enhanced by this change. Additionally, all building societies are public interest entities and are regulated by both the Prudential Regulation Authority and the Financial Conduct Authority, meaning that building societies are required to comply with the regulatory obligations of these entities, ensuring that their accounts are appropriately checked and scrutinised. In addition, Section 60(11) and (13) of the 1986 Act will specify, after the amendment of the SI, that all directors must step down after three years, regardless of age, although they may be re-elected. Therefore, wider members will still be able to scrutinise the performance of all directors.
There is really no justification for preserving age restrictions for building society directors when these have indeed been removed for companies. I thank the noble Lord, Lord Altrincham, for his comments and support for the proposals that are being considered today. It is our strong belief that these will update certain outdated and unnecessary provisions in the Building Societies Act 1986 and will therefore ensure that building societies can benefit from a legislative regime that is fit for the 21st century. I am sure that noble Lords will join me in supporting these amendments.