Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019

Baroness Bowles of Berkhamsted Excerpts

Wednesday 16th October 2019 Grand Committee

[Lord Bethell (Con)]

My Lords, as the Committee will be more than aware, Parliament has now approved well over 50 EU exit SIs for financial services. That includes three miscellaneous provisions SIs, which are sometimes necessary to make isolated deficiency fixes that do not fit easily into more thematic instruments. These miscellaneous SIs have sometimes been used to correct minor errors in or omissions from earlier exit legislation. This instrument makes some such changes and updates some earlier exit provisions to account for the Article 50 extension. As I have explained to the House previously, the errors in our exit legislation have been minimal. Of approximately 1,300 pages of financial services instruments, miscellaneous instruments have accounted for only 60, with these miscellaneous instruments used only partially to correct errors.

However, this instrument also makes substantive changes to earlier exit legislation in two key areas: first, to the contractual continuity and temporary permissions regimes for payment services; and, secondly, to transitional arrangements for financial benchmarks. These changes are not to correct errors but to strengthen our readiness for exit. We are continually reviewing our exit arrangements to ensure that they are as robust as they can be. In these two areas, we decided it is right to do more to protect UK consumers of payment services and to prevent disruption to firms and markets that rely on financial benchmarks.

An important aspect of our no-deal preparations is the temporary permissions regime, which will enable European Economic Area firms that operate in the UK via a financial services passport to carry on their UK business after exit day while they seek to become fully UK-authorised. We have also introduced run-off mechanisms via the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, which were made on 28 February, for EEA firms that do not enter the temporary permissions regime or that leave it without full UK authorisation.

Part 3 of this instrument supplements provisions for the temporary permissions and contractual continuity regimes for EEA payments and e-money firms through changes to underlying payment services and e-money legislation and previous EU exit SIs. A review of this legislation has identified a limited number of provisions that require amending by this SI to ensure that these temporary regimes are as robust as possible. The amendments fall into two categories. The first is to ensure that EEA firms in contractual run-off can continue to carry out various payment-related activities as intended. This will include provision of payment and e-money services by EEA credit institutions such as banks. The second category applies to the temporary regimes for EEA payments and e-money firms. These amendments clarify and make more explicit the full range of permissions and obligations of firms that enter these regimes. For example, the amendments make explicit that an EEA firm in a run-off regime can legally redeem outstanding electronic money, making it clear that it can return any balance on an account to UK e-money holders. In a limited number of areas, the instrument makes FCA powers more consistent with the powers it has with respect to credit institutions in the run-off regimes, for example by making explicit that the FCA may publish a register of firms in contractual run off. These changes ensure that the FCA has proportionate powers to take action to protect UK consumers.

The second substantive set of provisions in this instrument covers changes being made to the onshored benchmarks regulations by the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019, which the House debated in February. As they stand, these onshored regulations contain a transitional regime for third-party benchmarks, allowing UK entities to use non-registered third-party benchmarks until 31 December 2019. However, since these regulations were made, it has become clear that there will be a damaging cliff-edge impact when this transitional regime expires at the end of 2019, a point highlighted by the Secondary Legislation Scrutiny Committee in its report published on 3 October.

Very few third-party benchmark administrators have made applications to be registered, and only two equivalence determinations have been made by the European Commission, covering only seven third-country benchmarks. If we leave the EU without a deal on 31 October, benchmark administrators outside the UK will have insufficient time to make an application under the UK regime by 31 December 2019. This would mean that UK firms would no longer be able to use those benchmarks for new contracts and products, causing considerable market disruption. For example, loss of access to third-party foreign exchange rate benchmarks, such as the Indian spot FX rate, could prevent firms carrying out important risk-management functions, such as hedging their currency risk. Equally, the inability to use equity benchmarks, such as the Nikkei 225, may make it more difficult for UK investors to gain or hedge equity exposures. These instruments extend the period that the transitional regime applies by three years, from the end of 2019 to the end of 2022, ensuring that benchmark administrators outside the UK have an appropriate period to make an application under the UK’s onshored third-country regime.

Finally, I want to explain the amendments that the instrument makes to our onshored equivalence framework. These amendments are purely for legal clarity and do not change the policy approach to equivalence that Parliament has already approved. When making an equivalence determination after exit, the law needs to be clear about on which aspects of the UK regime a third country has equivalent provisions. For example, if Parliament were to approve a decision on a third country having equivalent insurance regulation to the Solvency 2 directive, UK law will be clear that this refers to the UK’s implementation of Solvency 2 as it stands when the equivalence decision is made.

Before I conclude, I should point out that this instrument was made and laid before Parliament on 5 September, under the made-affirmative procedure provided for in the EU withdrawal Act. This is an urgent procedure which brings an affirmative instrument into law immediately, before Parliament has considered the legislation, but this procedure also requires that Parliament must consider and approve such a made affirmative instrument if it is to remain in law. As I explained to the House last week, the Government have not used this procedure lightly and it must be remembered that, across departments, we have already laid over 600 exit instruments under the usual secondary legislation procedures. Indeed, of the 58 SIs that the Treasury has put before Parliament, only four have been made using this procedure. But as we draw near to exit day, it is vital that we have all critical exit legislation in place, including legislation necessary to ensure that our financial services regulatory regime continues to function effectively from exit. Industry and our financial regulators need legal certainty on the regime that will apply from exit if we leave the EU without an agreement.

I have spoken of my gratitude for the hard work that has gone into preparing our regulatory regime for exit in previous EU exit SI debates, and I repeat that thanks. I know that the Bank of England, the FCA and industry have greatly appreciated the Treasury’s constructive, collaborative approach to this task. The legislation we have put before Parliament has been very positively received by the industry and has done a huge amount to provide confidence and reassurance that the UK’s regulatory regime will continue to work effectively in all scenarios. Once again, I thank all those involved. I hope colleagues will join me in supporting these regulations. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for this introduction and also for sharing with us a draft of his speech. I appreciate that he us trying to be as helpful as possible, because this House is of course not involved in the various consultations. It is industry that gets the benefit of that. A point that I have made about when we get into non-Brexit legislation in future is that I think we need to have more consultation at the same time as industry.

As this is a financial services matter, I declare my interests as in the register. As the Minister said, this is a miscellaneous provisions SI, which have been thankfully rare from the Treasury. I repeat what we have said before: in general, the Treasury has done a very good job of converting the EU legislation into UK law and following a formula that we can generally see on all the documents as they come forward. I agree that it adds clarity and is a useful extension to previously defined transition periods.

I broadly welcome the provisions, in particular regarding the contractual run-off. It seems a very useful provision for the FCA to be able to list firms that are in contractual run-off, and it is very useful for consumers. I do not expect consumers to be wandering around the FCA website—I might do that and it is hard enough for me—but there are various consumer-oriented organisations, some of which make useful broadcasts to alert consumers to things.

They would find a use for that kind of information in circumstances where a consumer needs to be alerted: for example, if some provision is coming to an end or if the time is right for them to have to switch away from a provider that will not continue forever. It says that the FCA “may” do this; this is one of those occasions where I wish it said “shall”, because I regard this as essential and hope it is written with that spirit in mind.