Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019

Baroness Kramer Excerpts

Tuesday 5th March 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I begin with a thank you. My noble friend Lord Sharkey and I—I know that the noble Lord, Lord Tunnicliffe, will speak for himself, as he always does so well—very much appreciated the opportunity to meet the Minister, the Economic Secretary and key staff to talk in detail about this statutory instrument. I completely concur with the comments of the Treasury Select Committee that these are sweeping powers which, under normal circumstances, I do not think anybody, in any part of this House, would dream of granting to a regulator. However, under the circumstances we would face in a no-deal scenario, it seems vital that the regulator has the ability to mitigate a crisis cliff edge for key parts of the financial services industry.

I note that in the guidance published by the Bank of England and the FCA last Friday, they will be attempting to limit the transitional period, as the Minister said, to 15 months, so that firms will manage within that 15-month period to go from where we are now, essentially—let us call it scenario A—to life outside the EU in a no-deal scenario, which we will call scenario B. It would give them some 15 months, typically, but with the capacity to extend that to two years if necessary. Also, the Bank of England has made exceptions for the bail-in rules, the stay in resolution rules and the FSCS rules, all of which relate closely to financial stability. We appreciate that it would be very hard to provide any transitional time for those rules and their consequences, but does the Minister have any comment to make around the significance of deciding on those three exemptions? Can he confirm that, if we were to have no deal and find ourselves in that reality and the regulators decided that the situation was better managed by finding some flexibility around these three rules, the regulator has given away the capacity to do so? Or does it retain an opportunity to change its mind and provide some mechanism for adjustment? One would hope that that was not necessary. Across the credit rating agency assessments, we will get only a 12-month extension, though I think all of us recognise that that is probably not problematic for any of the players.

In our discussion, as the Minister indicated, we asked for more frequent reporting than just 12 months from now. It seemed a bit like closing the stable door after the horse has bolted to wait for that period. We very much appreciate that the Treasury and the regulators have agreed that they can update us every six months: that is exceedingly helpful. We also appreciate the description that the Minister gave when he had to make a correction, which we perfectly accept is a very minor correction. The noble Baroness, Lady McIntosh, picked up the fact that the complexity here is extraordinary. It is very hard to predict, very hard to track and very hard to play through the scenarios and understand exactly how each needs to be handled, certainly in advance. So I think we might find ourselves trying to take advantage of the offer from the regulators of specific discussions if a particular issue arises. I am grateful again that the Minister has had a conversation with the regulators that led them to say that that will be open to us: it is exceedingly welcome.

This underscores the point of the noble Baroness, Lady McIntosh, about the extent to which, given all this complexity, there might be some way to provide some mapping of exactly what is happening where—what is moving and what is changing. That is a big ask at the moment, I understand, but if there could be some thought around that, it would be very useful, not just to this House and the other place but to the industry, which I am sure must be struggling with all this, although it very much appreciates the detailed engagement it has had with the Treasury, with Ministers and with the regulators. If we move to a practice of mapping under such circumstances, that might be a healthier environment to get to. It was one of our asks of the Minister that he felt he could not commit to at this point.

Our second ask was for some specific examples. My noble friend Lord Sharkey is unable to be here. He was particularly concerned to work through some specific examples in his head, so he may come back to ask for something more detailed. I particularly appreciated that the Minister gave an example of an issue that, as he knows, has exercised me: how do we manage the fact that our major financial institutions have significant exposure to EU and EEA assets and will incur higher capital ratios because they will no longer have preferred status if we leave on a no-deal basis? I was very glad that he gave us that particular example.

We very much hope that we do not have to use this, and it would be exceedingly helpful to know that we are not going to have no deal, because despite all the preparation that I understand is being done with real concentration and thought, it does not deal with the fact that there is going to be an almighty problem. I can see firms—all of them, though they are competitors—in different stages, different states with different micro-problems, all of which regulators are trying to manage so that there is no knock-on effect on financial stability or to the economy. It is going to be an extraordinarily difficult situation to manage, and anything we can do to make sure it does not happen will be extremely useful. If I can encourage anyone in this House to take no deal off the table, let me use this opportunity to do so.

[Lord Tunnicliffe (Lab)]

My Lords, I feel the need to start with my standard speech about how much I object to being here processing statutory instruments for a no-deal situation. I entirely agree with the noble Baroness, Lady Kramer, in her dislike of such a situation and the chaos that will prevail. Having said that, I am forced to say nice things about the Government and, indeed, about the Lib Dem Front Bench in this whole affair. The Treasury SIs we have passed so far have, to a large extent, despite some of the speeches, been fairly non-controversial. What I have been looking for all the way through are attempts by the Treasury or the Government to smuggle through policy changes, which they promised not to do in the original legislation, and I must say that, broadly speaking, I think the Treasury has not sought to smuggle through any of significance. However, the result of that is that our debates have been rather dry.

This SI was quite shocking on initial reading. Part 7 has such sweeping powers, with no formal parliamentary involvement, that I thought—and we spoke to our colleagues on the Liberal Democrat Front Bench about this—that we really had to take it very seriously. I once again repeat my thanks to the Liberal Democrats for coming along on this and to the Government for the positive way in which they have reacted. For the record, I will briefly run over our concerns and note that they have been largely covered in the speech made by the Minister. We were first concerned about the limitations in the power in Part 7; there is a time limit of two years, and it is important to emphasise that that limitation is not just for making directions—rather, directions must cease within two years of exit day. That is fairly clear from reading the document.

It is more difficult to grasp the scope. One of the useful things we discussed at our meeting with John Glen, the Economic Secretary to the Treasury, was scope. Scope is difficult to get into words, and we thank the Minister for the detailed examples in his speech, which will, we hope, be useful for practitioners in understanding it. In particular, we had some concerns over whether it might be used in crisis circumstances, and received a very strong assurance that separate legislation would be used in such circumstances.

I come finally to the lack of any parliamentary involvement in the process. This was clearly also the concern of the Treasury Select Committee; being a big, powerful committee, using its own mechanisms, it can rapidly draw Ministers to account. It did that with the Economic Secretary to the Treasury, and got assurances from him, as I understand it, that whenever the power was used to create a direction it would be advised. Clearly, it was then able to summon a Minister to hold the Government to account on its use. We did not have such a parallel situation, so we asked, and then got this assurance in the speech, that whenever such a notification went to the Treasury Select Committee, a copy would come to representatives on both our Front Bench and the Liberal Democrats’. The second part of that, in a sense, was an assurance that we would get access. I do not mean to suggest the Minister is not an important person, but at the end of the day his interest is in DfID. He simply speaks for the Treasury here. It was good that the Economic Secretary to the Treasury said that he would make himself available to answer any of our questions about how the power had been used. That was very reassuring.

Embedded deep in the SI and the Explanatory Memorandum is the fact that certain directions may have to be secret. We were concerned that when any organisation has the option of making something secret it tends to do so. We would like to know when and for what reasons that is used. That was also acknowledged in the speech. Clearly this has to be post facto—obviously it has to be when it is no longer embarrassing—but it is important that the use of this power is fully understood.

Lastly, we felt that 12-monthly reports on a power that was going to last for only two years would be insufficient. Assuming it is for the previous 12 months, the report takes a couple of months to write and so on, and then you are half way through the second year. The acceptance of six-monthly reports is extremely welcome. I repeat my thanks to the Government for co-operating in the way they did; it has allowed us to create a mechanism for an involvement of this House in the use of this power and, with those conditions attached, we accept the logic that says it is necessary.

[Lord Bates]

I thank my noble friend Lady McIntosh, the noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, for their contributions and engagement through this whole process. I am particularly grateful to my noble friend Lady McIntosh for participating in the debate and for opening it up with some perspectives on this. She said it was unclear what the post-exit requirements for derivatives were. We have made several onshoring SIs relevant to trading and issuing of derivatives already. I think we are currently up to SI number 40. Within that batch of 40, there were some specifically on that. I will certainly write to my noble friend to explain exactly how this regime will operate post exit.

She also asked about the direction of the transitional power. The power is available to regulators for two years from exit. It is then for the regulators to propose appropriate delay or phasing in of requirements within the two-year period. She also asked about the impact assessment—I applaud her for her scrutiny in getting to that level of detail in the specific tables. Let me populate some of the information from them. As outlined in the impact assessment, while the overall familiarisation costs were estimated at £110 million, the cost per firm was estimated at £1,900. The number of firms affected was based on the fact that FiSMA applies to all firms regulated by the PRA and FCA, which amounts to approximately 58,000 firms. It is also estimated that there will be an additional 1,200 firms entering into the temporary permissions regime, which then brings the total to 59,200. While FiSMA applies to all firms regulated by the PRA and FCA, many of the effects of this SI result from the loss of passporting rights at exit. I note that the remarks she made were drawn from considerable experience of how hard-fought those rights were. Of course, that is a consequence of decisions taken ultimately by the British people. This means that changes made by the SI will, in terms of the number of firms affected, predominantly affect those 1,200 firms entering the temporary permissions regime.

Moving to the remarks made by the noble Baroness, Lady Kramer, I again thank her for her input on this. She asked whether we could map all the onshoring changes. She made that request at the meeting with the Economic Secretary to the Treasury. Although we recognised that there were some challenges in doing just that, we felt that it was a very reasonable request when we met last week. I can confirm that we are working on this and will be in touch, I hope with a positive mapping exercise to share with her.

[Baroness Kramer]

I thank the Minister; that is good and welcome news.

[Lord Bates]

I am very happy to do that. I should also say that all these changes are being made because of the quite brilliant Economic Secretary to the Treasury, John Glen. He is an outstanding Economic Secretary, and takes his duties very seriously. As a more senior person, I find it encouraging to see young Ministers who are so diligent in the way they engage with Parliament and the department. He is an example to others in how he does it. The noble Lord, Lord Tunnicliffe, found a polite way of saying that he found it refreshing to be talking to the butcher, not the block. I absolutely get the point, and he could not be engaging with a better metaphorical butcher in this regard.

The noble Baroness, Lady Kramer, asked me to comment on the significance of the Bank of England exemptions regarding the FSCS rules. The regulators have judged that bringing in these requirements immediately is important for the financial stability. The Treasury was consulted and agrees with this. We do not anticipate that this will change.

On the point made by the noble Lord, Lord Tunnicliffe, on the use of unpublished directions, on which again, we had a substantial and useful discussion, it should be stressed that the Treasury and the regulators would want to avoid unpublished directions as the power is to be used broadly across a large range of firms. Unpublished directions would not be effective—as I read that out I thought that the noble Lord was ahead of us in that he was not asking for the unpublished directions but was rather seeking an engagement on matters after the fact. I certainly know that the Economic Secretary is taking that seriously.

I thank noble Lords again for their engagement on this, particularly my noble friend Lady McIntosh. I also thank the Opposition and Lib Dem Benches for the constructive way in which they have engaged with the Government on this, as a result producing a better outcome for regulation.