Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024

Baroness Jones of Whitchurch Excerpts

Monday 18th November 2024 Grand Committee

Moved by

[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.

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[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.

Motion agreed.