Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Baroness Bowles of Berkhamsted Excerpts

Tuesday 30th October 2018 Grand Committee

[Lord Kirkhope of Harrogate (Con)]

My Lords, I would like to intervene briefly to ask my noble friend a couple of questions. Although we all hope for a deal scenario, not a no-deal scenario, nevertheless the practical approach to these matters should perhaps be thought through a little more. My first point is a procedural one relating to the statutory instrument—I refer particularly to the EEA passport rights matter. I spent some years—not many, thank goodness—as a member of the Select Committee on Statutory Instruments in the House of Commons, which was chaired by the late Bob Cryer. He was scrupulous about determining the nature of approaches towards statutory instruments.

I am concerned that we have, effectively, a hybrid—an affirmative resolution, but nevertheless with the prospect of a negative procedure in the event of any extension of time, for registration of the various bodies that may need registration in due course. I find that rather concerning. I would like my noble friend to confirm that we are not getting dangerously close to a ban on negative approaches. Clearly that could happen when the affirmative approach is required but where there is a fee involved for a function which a UK public authority would exercise.

I believe the registration itself must by implication—although it is not revealed in this document—carry with it some financial implications; some fees will have to be paid, although they are not referred to here. If that is the case, would it not be more appropriate for affirmative resolution to be carried through to those extensions as well as to the rest of the item? That is my first point.

My second point is that while the FCA seems capable of handling quite large numbers of registrations for companies under EEA processes, the Prudential Regulation Authority does not. That is a deep concern. So far, the PRA seems able to manage only 10 or 12 applications per year. It has already indicated that it expects that there will be between 100 and 200 applications in the event of a no-deal scenario under these proposals. How does my noble friend believe this can be dealt with, without some form of massive increase in resources or powers, particularly in the hands of the PRA? I would be grateful if he would allow that.

I come to my third and final point. He has talked about the extension of the extension, which requires six months’ notice from either the PRA or the FCA as to the needs arising. To my mind, that is an almost indefinite process; we would see these extensions going on ad infinitum, or certainly for a considerable time. Surely that must be a disadvantage to the entities applying for registration and, indeed, to the position of this country in relation to the financial services in which it is at present so pre-eminent. Can he assist with that? I am grateful to him for his introduction.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for his introduction and I concur with him that these are necessary instruments. I declare my interests as in the register and, in particular, as a director of the London Stock Exchange.

Starting with the EEA passport rights regulations, I fully understand the need for temporary or deemed permissions and some flexibility, but in the longer term there are risk and competitiveness issues to consider, so I shall explore further the time periods and how the policy surrounding them might operate. There are two time periods: two years from exit before a formal application for authorisation has to be made, and three years from exit, extendable, within which the relevant regulator makes a determination. Supervisors can require a formal application to be made before the two-year period is up, and presumably that could be exercised for a variety of reasons, such as phasing in for size or complexity of entity or for other risk-based reasons. As the Minister has already mentioned, the two-year period is also potentially useful to EEA firms trying to decide what to do, getting used to UK supervision and having time to organise themselves before having to seek authorisation. It can also be that the two years is simply a waiting room until the regulators have the capacity to carry out the authorisation determinations. How is it envisaged that the two-year period will operate? What is the policy? Is it a phasing mechanism? Will the regulators be controlling that phasing? Is it wholly in the hands of the firms that want their passports replaced? Is it expected that everyone will have two years and then there will be a sudden rush of applications; or, as I asked before, will there be some kind of risk-based assessment about which applications must be brought forward in time?

I now turn to supervision, because the entities in the temporary regime will come under supervision. Can the Minister assure us about the regulator’s capacity to supervise and that significant supervision will take place? If it is envisaged that there may be an unmanageable, or at least long, queue for authorisations because of capacity issues, what is the capacity situation with supervision?

Does two years really mean a fixed two years that cannot be extended? I cannot find anything to say that it could be, and there is nothing in the Explanatory Memorandum. But just in case I might have missed something, will the Minister clarify whether the construct of the regulation stating that “Section 55U” of FiSMA “has effect as if” is a good way of keeping the two years unamendable by any power to make changes that might be embedded in FiSMA or anywhere else? I am still learning the tricks of some of the parliamentary drafting that goes on here, and that is quite a good one to remember.

As to the three-year limit allowed for determination of applications, it can be extended, as has already been said. How necessary that is might in part be determined by the policy over the preceding two years. Is extension available only if the regulators do not have the capacity to conclude within three years? I think that is what the Minister said. Has three years been set assuming a rush of applications at the two-year stage, or will an extension be inevitable if that two-year rush happens?

As the noble Lord, Lord Kirkhope, said, it would clearly not be appropriate for the extension to be used on a rolling basis to allow businesses that might not measure up to full UK authorisation standards to continue to operate in a temporary regime because there had been no determination of their application. That is one of the reasons why I share the view expressed by the Secondary Legislation Scrutiny Committee that there is a good case for an extension requiring the affirmative procedure. I do not agree with the reply from the Treasury Minister John Glen in the correspondence. It is not satisfactory to say that some affirmative permission somehow flows from this SI so that the negative procedure is enough at the time of the extension. That might have been the case if the policy on these time periods had been more clearly elaborated, but it was not. In fact, it seems to be in the hands of the regulators, and if that is the case, then I cannot see how avoiding affirmative procedure is the right way to go. If the Government had set the policy and embedded it in here, that would be different, but this does not include the policy on how it is going to be used.

--- Later in debate ---

The noble Baroness, Lady Bowles, asked whether there is a contradiction between Regulations 12 and 19 about when the application needs to be made. The central counterparties may apply before exit day but are not required to. They have up to six months after exit day to apply for full recognition.

[Baroness Bowles of Berkhamsted]

Regulation 12 states:

“A central counterparty established in a third country”,


that,

“intends to provide clearing services … on and after exit day”,

has to make an application and that the application “must” be submitted before exit day. I do not think that is quite what the Minister said. I realise that time is short now, and there are quite a few things that the Minister has had to gloss over. I hope he will review what I have said, and I would welcome a written response.

[Lord Bates]

We may have misunderstood the point that the noble Baroness was making. I am very happy to undertake to write to her on that specific point and copy it to members of the Committee.

The noble Baroness asked why a CCP might not have been recognised within the initial period. While the Bank of England has credible working estimates of the number of CCPs that will apply to it for recognition, there is an unavoidable degree of uncertainty about this.

My noble friend Lord Lindsay asked whether third-country CCPs includes EU CCPs. EU CCPs will be treated as third-country CCPs post-exit. EU CCPs and third-country CCPs will be eligible for the temporary recognition regime if they were permitted to operate prior to 29 March 2019.

My noble friend Lord Kirkhope asked whether the regime could be extended continually each year. It is in everyone’s interest for firms to transition from the current system of EEA passporting rights to full UK authorisation as quickly and efficiently as possible. There would be no circumstances in which it would be desirable for the regulators or the Treasury to extend the length of the regime on a continuous basis. He also asked whether the negative procedure is an appropriate instrument. I respect the work of the Secondary Legislation Scrutiny Committee, whose report we have before us today. I addressed this in my opening remarks. We believe that the choice of procedure is appropriate, given the overall powers being scrutinised now through this affirmative instrument. The negative procedure would just be an extension of that. The power to extend the time period is not a provision which relates to fees and so would not, if made alone, attract the affirmative procedure under Section 8 of the Act, to which my noble friend referred. He also spoke about the process for registration with the PRA and its ability to deal with the volume of applications. I reiterate what I said to the noble Baroness, Lady Bowles: I am confident that the PRA and the FCA are making adequate preparations to deal with the scale of the challenge which they face, but it is a significant challenge.

The noble Baroness, Lady Bowles, asked whether the regulators may ask firms to apply for authorisation sooner than the two-year deadline set out in the statutory instruments if they so choose. The EEA Passport Rights (Amendment, etc., and Transitional Provision) (EU Exit) Regulations will give regulators the ability to direct firms to make an application for authorisation during a specified period within two years from exit day if they have not already applied for authorisation. This will help regulators manage the flow of applications in a smooth and orderly manner. I draw the Committee’s attention to the FCA’s recent consultation paper published on 8 October, in which it set out its intention to allocate each firm a three-month landing slot within which that firm will need to submit its application for UK authorisation. It plans to issue a direction shortly after exit day setting out which firms have been allocated to which landing slot.

The noble Baroness, Lady Bowles, asked how the two-year application period will operate. I dealt with that earlier but I did not cover one specific point: the two-year deadline for applications to be received cannot be extended.

The noble Lord, Lord Tunnicliffe, asked whether this is a one-sided arrangement and whether there will be any reciprocation. The Government are only able to take legislative action in relation to EEA firms’ passport rights to the UK; they cannot through unilateral action influence the status of UK firms. That is why we are seeking to agree a deep and special partnership with the EU, as well as an implementation period, so that important preparations can take place in an orderly manner.

The noble Lord asked what the impact on the financial services sector would be if there is a no-deal exit. Reaching a deal is in the mutual interests of both sides. We are focusing on the negotiation of the right future partnership based on a proposal published in the White Paper on 12 July. That White Paper outlined the Government’s position on financial services and Brexit. We propose a framework for financial services that will provide stability for the EU-UK ecosystem, preserving mutually beneficial cross-border business models and economic integration for the benefit of businesses and consumers in the UK and the EU.

The noble Lord asked what it says about the regime if a firm is denied authorisation. Once we leave the EU we cannot rely on this co-operation continuing and therefore we are making these preparations. It is important that these regulations go ahead so that consumers in this country have confidence in the financial services put forward here.

I have addressed the Financial Services Compensation scheme and I will now deal with one or two points relating to central counterparties. The noble Lord, Lord Tunnicliffe, made a point on the memorandum of understanding with the host state. Yes, there are a number of necessary steps for a non-UK CCP to be recognised in the UK. These include that the Treasury must determine that the relevant third country’s regulatory and supervisory framework is equivalent to EMIR; the bank must agree supervisory co-operation agreements or memorandums of understanding with relevant competent authorities of the CCP applicant; and the non-UK CCP’s application for recognition to be assessed by the bank must include information on its financial resources, internal procedures and various other relevant information.

The noble Lord asked what would happen if the central counterparty is not recognised. If a non-UK CCP were to continue to provide clearing services to UK firms without recognition, it would be in breach of a general prohibition under the Financial Services and Markets Act, which prohibits anyone carrying out a regulated activity unless they are authorised or exempt. The CCP would be guilty of an offence and subject to a fine or imprisonment. However, further legislation will be laid at a later date to enable such firms to wind down their activities in an orderly manner by being treated as being recognised for a short period.

I hope that has addressed many of the questions.