Draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018
Draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018
Draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018
(Limited Text - Ministerial Extracts only)
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The Chair
I will now call the Minister to move the first motion and speak to all the draft instruments. At the end of the debate, I will put the question on the first motion and then ask the Minister to move the remaining motions formally.
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018.
The Chair
With this it will be convenient to discuss the draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and the draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018.
John Glen
It is a pleasure to serve under your chairmanship, Mr Sharma. As the Committee will be aware, the Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the European Union without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018 to deliver that, and several such debates have already been undertaken in this place and in the House of Lords. These draft instruments are part of that programme.
The approach taken in these draft regulations aligns with that in other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending it where necessary to ensure that it works effectively in a no-deal context. The three draft instruments relate to the management, administration and marketing of alternative investment funds.
Investment funds are investment products created to pool investors’ capital and invest it in financial instruments such as shares, bonds and other securities. An alternative investment fund is defined as any investment fund not covered by the directive on undertakings for collective investment in transferable securities, commonly known as UCITS. Such funds are often sold to institutional investors, such as pension funds and corporate investors, as opposed to UCITS, which are mainly aimed at retail investors.
Alternative investment funds include hedge funds, venture capital funds and private equity funds. Registered venture capital funds and social entrepreneurship funds are sub-categories of alternative investment funds. The former focus on start-ups and early-stage companies, and the latter on social enterprises. These sub-categories will also have to comply with the alternative investment fund regulations, as well as the regulations specific to them.
The issue is that, in a no-deal scenario, the UK would be outside the single market and the EU’s legal, supervisory and financial regulatory framework. Retained EU and domestic law relating to the regulation of alternative investment fund managers, European venture capital funds and European social entrepreneurship funds will therefore need to be updated to reflect this, and to ensure that the provisions work properly in a no-deal scenario. The draft regulations amend the legislation to create a UK-only regulatory framework for alternative investment funds in the UK.
I think it would be worth while to pause at this point and to reinforce the point I have made in previous debates. This is about creating a UK-only regulatory framework; it is not about innovating in any way with respect to disputes that may exist about the regulations. The draft regulations remove references to the Union and EU legislation, replacing them with references to the UK and UK legislation. That includes references to the passporting system, which the UK will no longer be part of after exit.
To ensure that a clearly defined funds regime is identifiable in the UK, the draft instruments create UK-only fund labels, which replace the European Economic Area fund labels with “registered venture capital fund” and “social entrepreneurship fund”, reflecting the fact that these funds are located in the UK and subject to UK rules.
The alternative investment fund managers regulations alter the definition and scope of alternative investment funds to reflect the UK’s position outside the EU in the scenario that I have described. Any fund that is not a UK UCITS will be treated as an alternative investment fund. The effect is that UCITS funds located in EEA countries will be treated as alternative investment funds in the UK after exit.
However, the alternative investment fund regulations were not intended for UCITS funds, which are specifically regulated funds aimed at retail investors. As I said, alternative investment funds are more complex funds, largely aimed at professional investors. Different requirements are needed for these types of funds. Therefore, treating EEA UCITS in the same way we currently treat alternative investment funds would be disproportionate. In recognition of that, this instrument removes certain regulations that were not designed for retail funds such as UCITS—for example, certain reporting requirements. That will ensure that EEA UCITS funds continue to be regulated proportionately in the UK as retail funds.
These instruments will also transfer responsibility for the regulation of alternative investment funds and their managers from EEA authorities to the Financial Conduct Authority and from the European Commission to Her Majesty’s Treasury. As the UK’s national competent authority in the EEA, the FCA is already responsible for supervising alternative investment funds and their managers and therefore has extensive experience of making rules relating to this sector. As of last month, there were 3,936 highly trained and professional individuals working in the FCA on all these areas of regulation.
Furthermore, powers are transferred from the Commission to the Treasury, as the suitable Government body. The Treasury will have powers regarding the rules and regulations in respect of investment funds. For example, it will have the power to specify the criteria used by the FCA in assessing alternative investment fund managers.
Finally, to offer continuity for EEA funds and the UK consumers they service, the alternative investment fund managers instrument delivers a temporary marketing permissions regime for EEA alternative investment fund managers currently passporting into the UK. This was part of the announcement made by the Government in December 2017 in relation to creating a temporary permissions regime for EEA firms and funds. That was something that the Government did proactively to ensure maximum continuity. For alternative investment funds, it will allow EEA fund managers who currently have a marketing passport to continue to market their funds to UK customers, as they could before exit day, for a period of up to three years. Following an assessment by the FCA of the effect of extending or not extending the period, the Treasury will have the power to extend the period for a maximum of 12 months at a time, in line with the position under other transitional regimes that we have been putting forward through such SIs. The SI that will extend the regime will be subject to the negative procedure.
At this point, I want to refer to concerns expressed in the other House during the debate on the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. In response to those concerns, which I think came from Baroness Bowles, in particular, but probably also from Lord Tunnicliffe, the Treasury has committed that any extension of this or any other such temporary regimes will be preceded, at an appropriate interval of time, by a written ministerial statement issued to both Houses of Parliament, to facilitate closer scrutiny of the decision to have an extension. The statement would give Parliament notice of the Government’s decision to extend the temporary permissions regime ahead of the extension SI’s being laid.
By the end of the temporary marketing permissions regime, fund managers will be directed to notify the FCA under the national private placement regime, the current mechanism for non-EU, third country fund managers to market alternative investment funds into the UK.
In drafting this instrument, the Treasury worked closely with the FCA, but it has also engaged closely with the financial services industry and, in particular, the Investment Association, and it will continue to engage very closely. In September and October 2018, the Treasury published the instruments in draft form, along with explanatory policy notes to maximise transparency to Parliament and to the industry. That significant engagement has given us positive feedback. The reaction is that people are pleased that we have taken the measures proactively in advance of, and ready for, all outcomes.
I would also like to note that an amendment to the alternative investment fund managers regulations will be brought forward separately and additionally under the related Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019, which were laid before Parliament on 17 December 2018. It will amend part 1 of the alternative investment fund managers regulations to bring forward the commencement date of the temporary marketing permissions regime to the day after the 2019 regulations are made. That will ensure that the FCA has the powers it needs in time to have systems in place to implement the temporary marketing permissions regime. Specifically, it will give the FCA power to process notifications before exit day. That is consistent with the other temporary permission regimes that have been introduced.
In summary, the Government believe that the proposed legislation is necessary to ensure that alternative investment funds continue to operate effectively in the United Kingdom, providing continuity for UK investors, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.
John Glen
I thank my hon. Friend the Member for Basildon and Billericay and the hon. Members for Oxford East and for Glasgow Central for their exhaustive scrutiny of what I said and some of the issues. I put on the record my great respect for the assiduous way in which Opposition Front Benchers have conducted themselves during this process; I concede that it has not been optimal, in terms of the level of engagement and impact assessments. I will now try to faithfully respond to all the points; when I cannot, I shall write to the relevant Members.
Before I come to the issue of the level of engagement and impact assessments, I will address the point that the hon. Member for Oxford East raised. There were long discussions during the passage of the EU withdrawal Act, but that legislation does not give the Treasury the ability to make major changes to policy or legal frameworks beyond those appropriate to ensure basic continuity. We are acting within the spirit of that and doing so as professionally as we can, with as much work to consult and engage with the industry as possible.
We have not conducted a formal consultation on these SIs, but we have engaged closely with industry to ensure that there is a functioning legal framework in a no-deal scenario. That hints at the points raised, which I will come on to more substantively in a moment, about the fact that there are contested spaces in this area and that, in a no-deal scenario, there would be a significant imperative for a bigger corpus of legislation to set the industry fair in this country. Obviously, though, we anticipate and hope—well, not hope, but believe—that we will secure that deal.
The engagement has involved talking to asset management trade associations, representative bodies such as the Investment Association and wider financial services bodies such as TheCityUK, to get technical input to inform our work. That is across the United Kingdom as a whole. I chair the asset management taskforce and I had three or four meetings through 2018 where many of those concerns were also taken forward. I draw attention to the words of Chris Cummings, the chief executive of the Investment Association, who said on 7 December last year:
“In a possible no deal Brexit, HM Treasury’s commitment to remain open to international funds ensures that the UK will remain a world leading asset management centre and that UK savers will continue to have access to a full range of investment opportunities.”
We have worked to satisfy him, and other stakeholders like him, through this process.
I turn specifically to the issue of the impact assessment. The challenge in some areas has been that multiple statutory instruments will apply. We have grouped them together and taken them to the Regulatory Policy Committee to be looked at in the round, so it can then provide a more meaningful assessment of the impact.
I recognise that, as the hon. Member for Glasgow Central said, it is sub-optimal not to have it at this point, but the impact assessment that covers the SIs being debated today has been prepared and is going through the normal clearance and scrutiny procedures. We hope to have it published shortly. It will then cover the balance of those statutory instruments that we will be debating subsequently in these Committees over the next eight weeks, so I hope I will not need to make this apology again.
I emphasise that the point of this legislation is to minimise disruption to firms and their customers and maintain continuity of service provision as a whole. As such, these SIs will significantly reduce costs to business in a no-deal scenario, as without them the legislation would be defective. That is the principle on which we are doing this: we are doing it because the industry wants us to deliver it.
On the point made by the hon. Member for Oxford East about the temporary marketing permissions and the volume of notifications to the market, earlier in the year the FCA launched an online survey for EEA inbound passporting firms and funds, to help inform its preparations and identify firms for which a temporary permission may be relevant. In 2018 there were around 2,060 EEA alternative investment funds that had been notified via a passport to market into the UK. It is not expected that those firms will enter into the temporary marketing permissions regime.
The hon. Lady asked about the specific requirements on depositories. Authorised UK AIFs will be required to have a UK depository as a result of amendments to be made in a related collective investment schemes SI. Transitional arrangements are included in that SI to ensure that firms have sufficient time to make preparations, and unauthorised AIFs will be allowed to have an EEA depository.
The hon. Lady went on to ask about something that has often been raised: the cost to the sector. Again, we will need to see the overall cost, based on that impact assessment. UK investors will maintain their rights to funds in which they are already investing, and will continue to have access to funds currently marketed under a passport and enter the temporary marketing permissions regime. The main cost to firms that we have identified are familiarisation costs of the new legislation and transition costs, because of changes in legal definitions and reporting requirements for firms using the temporary marketing permissions regime. In due course, I think that will be seen to be a very modest sum.
Both Front-Bench spokesmen referred to the FCA resourcing. I will seek to provide more clarity on that. I managed to get the number of full-time equivalents, but I knew that if I gave some information, more would be requested, so I will seek that out. In its business plan it is funded by a levy and it would be able to move quickly, should it need additional resources.
With regard to UK fund managers passporting into the EEA, the Government are only able to take legislative action in relation to EEA fund managers who passport into the UK; we cannot determine the outcome the other way around. However, again, for the comfort of the Committee, I draw attention to the statement made by the chair of the European Securities and Markets Authority on 3 October 2018, in which he said:
“In the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators…ESMA has co-ordinated the preparations for such MOUs together with the EU27 NCAs.”
That is also supplemented by the remarks of Andrew Bailey of the FCA to the Treasury Committee last December, when he estimated that the cost of EU withdrawal for the FCA has been less than initially expected, thanks in part to the temporary permission regimes that the Government have enacted, and which the alternative investment fund managers SI and a number of others have set up.
Mr Baron
I take on board that the Minister has just quoted ESMA and all the rest of it. The trouble is that investment trusts are not well understood within the EU. It is all right for them to say, “We are happy with things,” but if they are inherently deficient, we have to step up to the plate.
John Glen
Let me just finish with the points made by the hon. Member for Oxford East and then I will come to my hon. Friend’s points.
On the point about regulations on UCITS, I think the hon. Member for Oxford East was asking whether removing the AIF-related reporting requirements for the EEA UCITS, despite their being defined as alternative investment funds, will reduce transparency, in essence. It will not. This instrument carves out reporting requirements on alternative investment funds for funds that obtain recognised status from the FCA, to be sold as UK retail investments. As a result of that recognition process, the FCA will already receive all the information necessary for the effective supervision of the funds.
I want to come to the points made by my hon. Friend the Member for Basildon and Billericay. He kindly offered me the device of writing to him by letter, but in essence he set out a series of concerns, which he raised previously in a similar Committee in October, about the distinctions between the investment trust and the unit trust, and the application of key information documents and how they can be misleading. He drew my attention again to the concerns of the different industry bodies. For the edification of the Committee, I wrote to him, as he pointed out on 26 October. In Q1 2019, the FCA will publish its feedback.
My hon. Friend’s point about the obligation of the Government versus the regulator is very fair. I will reflect on his comments and have a regular dialogue. I met the chairman of the FCA this week. I have regular conversations and meetings with the chief executive, and I will make those points to him. That has to be set within the context that I am not licensed by this process to innovate, although I recognise that we must also accept that over the last 10 years we have reached a level of authority and reputation, when it comes to regulatory breadth and depth of oversight, that is commonly welcomed.
My hon. Friend has quite reasonably drawn attention to the lack of familiarity in the EU framework with some of the instruments in some jurisdictions outside the UK, which means that the appropriateness of those conclusions has sometimes been contested. I very much understand the issue.
Anneliese Dodds
I am grateful to the Minister for giving way; he is being very generous overall. Might I gently suggest that, as a Committee, we surely need to know whether the Government raised these kinds of issues at any point in their capacity in the Council, in their relations with MEPs in the Parliament or in their relationship with the Commission?
Of course, as the Minister mentioned, this is a separate process that the Government are undertaking. The UK has frequently drawn attention to the specificities of the British financial sector during the creation of many of these regulations; I experienced that regularly as a Member of the European Parliament. I am not clear whether the British Government made any entreaties about how the KIDs were set up and whether they appropriately covered investment trusts, but surely that would have been the stage. If we start to say that they should be changed at this stage, without having made those entreaties, I think that would raise eyebrows—to put it mildly.
John Glen
I respect the deep—deeper than my own—personal experience of both hon. Members who have spoken about that matter. In terms of the previous engagement of the British Government through their representations as the documents were constructed, I cannot account for that now, but I am happy to write to the hon. Lady about it.
The point that my hon. Friend the Member for Basildon and Billericay is making is that, in the future, when we leave the EU, we will have to take account of the combination of responsibilities to broadly align with common expectations in like-minded investment communities and to attend to real challenges that lead to perverse investment decisions and outcomes for investors, which my hon. Friend is very familiar with.
I hope that has covered the points raised. If there are other points that I have not answered, I will be happy to write to hon. Members.
Mr Baron
May I remind the Minister of the sense of urgency that is required? It is not just that the date of the 29th is looming, but that the FCA, if one were being charitable, has been slow out of the traps—that is not just my opinion, but that of a number of trade bodies—and appears somewhat slow in coming to review the whole situation. Pressure from the Government would help.
John Glen
I accept that. In the context of Q1 of this year, with respect to no-deal preparations, the Financial Services (Implementation of Legislation) Bill on in-flight files is going through the other place at the moment to put in place a mechanism to have discretion to onshore, or not, files that are live. They have to be the priority at the moment, but the point is well made and I have heard it. I will make representations.
I hope I have demonstrated that the regulations are needed to ensure that alternative investment funds continue to operate effectively in the UK if the UK leaves the EU without a deal or an implementation period. I hope that the Committee has found the debate informative and will now be able to support the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018.
draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018
Resolved,
That the Committee has considered the draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018.—(John Glen.)
draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018
Resolved,
That the Committee has considered the draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018.—(John Glen.)