Draft Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024
Draft Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024
(1 month ago)
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The Economic Secretary to the Treasury (Tulip Siddiq)
I beg to move,
That the Committee has considered the draft Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024.
The Chair
With this it will be convenient to consider the draft Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024.
Tulip Siddiq
It is a pleasure to serve under your chairmanship, Mr Efford.
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 that they need even when 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, comprehensive and relevant to our domestic market.
First, let me turn to the Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024. 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 multimillion-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 crucial 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 will speak to each of these areas in turn.
The Government previously introduced a new route for overseas funds to become recognised for marketing to UK investors—the overseas funds regime, which the Committee will be familiar with. In July 2024, the first equivalence decision under that 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 EEA had been able to passport freely into the UK prior to the UK’s exit from the European Union and a temporary regime was introduced to allow those funds to continue doing so. These temporary arrangements will 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 to 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, we are conscious that 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. If they fail to apply or become recognised under that route, they should lose their ability to market freely to UK investors. The instrument also makes technical changes to ensure that is the case, and that sub-funds within the temporary regime are treated appropriately depending on their characteristics.
The 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.
Let me turn to the second set of changes delivered by this statutory instrument in relation to overseas central counterparties. Central counterparties, or CCPs, are vitally important 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 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 those 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 right now, a CCP within 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 the European Securities and Markets Authority and the relevant national regulator of the overseas CCP. This statutory instrument therefore removes continued 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 our 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 growing growth in the UK economy, as we discussed in the Chamber yesterday, and insurance is a fundamental contributor. Effective and proportionate regulation is key to this, we believe, and 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 regulator 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 itself. It also 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 euro. The scope of the exclusion on the distribution of sterling-denominated insurance policies will no longer be dependent on changing exchange rates.
Finally, this instrument removes references to regulations made under the insurance distribution directive from the Financial Services and Markets Act 2000 (Qualifying Provisions) Order 2013. These provisions gave the Financial Conduct Authority powers to investigate and remedy breaches relating to the insurance distribution directive —powers which are no longer required now that the directive no longer applies in the UK. The amendments made by this instrument may be technical, but they are important in bringing the statute book up to date. Failing to make them could cause confusion as to the relevance of EU law to domestic regulation.
In closing, these statutory instruments make mostly technical changes, which are necessary to ensure that our statute book remains up to date and adequately reflects the UK’s exit from the EU. They also make important provision regarding the provision of services into the UK, either by ensuring that UK firms and investors can access the products and services that best suit their needs, or by giving UK authorities appropriate control over when certain services can be provided. I hope the Committee will join me in supporting these regulations, and I commend them to the Committee.
Mark Garnier (Wyre Forest) (Con)
Thank you, Mr Efford, for chairing these proceedings.
I thank the Minister for going into quite a lot of detail on what is highly technical stuff. The Opposition welcome the changes. They continue the important work started by the previous Government to ensure that our legislative framework is fit for purpose after Brexit. Removing redundant EU references and aligning our investment fund regulations with UK priorities, we are streamlining oversight and maintaining stability in our financial markets. More of interest to the industry will be the clarity given in extending the temporary marketing permissions regime before the roll-out of the overseas funds regime.
As I said, we absolutely welcome the changes; but I do have a couple of questions, the first of which is on the application process for the funds. We are introducing landing slots for UCITS funds transitioning from the TMPR to the OFR. What steps are the Government taking to ensure that fund operators are fully prepared and supported to meet the deadlines to avoid any disruptions?
The other thing that is important for the future of the City and the growth agenda of the City is reciprocal access. While this is all about allowing access for European operators to come into the UK post Brexit—this may be a wider point to do with the growth agenda—what measures will the Government be taking to try to get reciprocal access for UK products to be marketed in the European Union?
Aside from those two questions, we are very happy with this move and will be supporting these measures.
Tulip Siddiq
I thank the Opposition spokesperson for his points. He knows this area well and I am glad he supports the work that we are doing. We will keep an eye on the timeline, as he says, but regulatory and supervisory frameworks of the UK and other jurisdictions can change over time, so it is important that the Government monitor that; we will be keeping an eye on it. We want to ensure that the changes that happen in the UK and regimes in the EU and other overseas regimes are compatible with the existing equivalence determinations with an outcomes-based approach. So he is right to say it is important for the growth of the financial services sector. I have already taken proportionate steps to monitor any changes over the timeframe pertinent to existing equivalence determinations, but I will keep an eye on the deadline and the wider growth. The FCA has made the process very clear for funds, and it is working closely with the firms as well.
Further exact timings can be found on the FCA’s website. I am also happy to write to the hon. Gentleman if he would like. All UK equivalence decisions are taken on their own merits, following a technical, outcomes-based assessment of the other country or territory’s regulatory and supervisory regime. So the Government will make equivalence decisions when it is in the UK’s interests to make them—I am sure he is aware of that—but any decisions regarding the granting of equivalence decisions for the UK are a matter for the European Commission. However, I did meet Commissioner McGuinness, the outgoing Commissioner, and I have plans in the diary to meet the new Commissioner. I will raise this subject when I go, because I do think it is important, for the growth of financial services, as the hon. Gentleman says, and for the wider economy.
I hope you found the debate informative, Mr Efford, and I hope hon. Members will join me in supporting the regulations.
The Chair
I was hanging on your every word.
Question put and agreed to.
DRAFT INSURANCE DISTRIBUTION (REGULATED ACTIVITIES AND MISCELLANEOUS AMENDMENTS) REGULATIONS 2024
Resolved,
That the Committee has considered the draft Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024.—(Tulip Siddiq.)