Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019

Debate between Baroness Kramer and Lord Davies of Oldham

Tuesday 1st October 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I agree with my noble friend Lady Bowles that the Explanatory Memorandum needs to be updated to reflect the current circumstances and the current attitude towards our future relationship with Europe. Frankly, that is necessary in order to be fair to the industry, which will be reading all this with a great deal of attention, because the various aspects of this statutory instrument obviously have a very big impact on its businesses, what they are able to do and how they need to adjust to cope with any kind of Brexit, should it happen. I want to pursue a slightly different direction from my noble friend, however, and ask about the divergence that seems to be embedded in this statutory instrument. I ask for a very particular reason: your Lordships will be well aware that the London Clearing House is now well set up in Paris as well as in London; that there has been a major shift by many of the big banks to centre a lot of their trading activity through Paris; and that undoubtedly, should Brexit happen, that will be enhanced and there will be increased activity in Paris covering essentially the same business range when it comes to derivatives and over-the-counter derivatives. There will be an equivalent central counterparty functioning almost as a rival body, so the embedded divergence in this statutory instrument becomes important, perhaps as a bellwether for the future, and I would like to probe the Minister on it.

It strikes me, first, that paragraph 2.8 explains:

“Some of the provisions of the REFIT amendment to EMIR do not become applicable until after 31 October 2019 … Therefore, this instrument does not make amendments to those provisions”,


to incorporate those changes, as it were. I would love to know the content and significance of those amendments and how they will impact the shape of the industry. The CCPs or the regulators will need to behave in a different way if we have an embedded divergence that would come into effect in a matter of days. I would find that information rather helpful and perhaps the Minister would be kind enough to enlighten me.

That brings me to paragraph 2.16. As my noble friend Lady Bowles said, it states:

“EMIR, as amended by REFIT, allows the Commission to suspend the clearing obligation for up to twelve months in three-month increments”.


The new equivalent power, to be handed to the Bank of England, chooses to allow the Bank to suspend for up to 12 months—in other words, not following the pattern of three-month increments. It sounds like a minor difference, and it possibly is, which raises the interesting question: why choose to embed a divergence? Could it leave us in the rather peculiar situation that one CCP in Paris—ironically, under the same ownership as the CCP in London—could be operating under different rules when it comes to suspending obligations? Is that a situation we want to see? Is this to be an area of competitive rivalry? What will the impact be? It seems to me that encouraging companies or funds to play regulatory arbitrage is never the healthiest strategy to pursue. Perhaps the Government could explain, because I would just like to understand it better.

There is another odd area where apparently, inconsistency will remain in the future. Paragraph 2.17 explains that within the European Union,

“Any suspension of the clearing obligation that impacts classes of derivatives with a trading obligation must result in the trading obligation also being suspended to avoid a conflict”.

That seems entirely logical, but apparently that is not going to carry over into the UK. There will be no automatic suspension of the trading obligation. It sounds like the FCA will then be responsible and the Bank will then have to notify the FCA of its intention to make the clearing obligation suspension, rather than the link being an automatic one. It strikes me as cumbersome and inefficient and I wonder why it is being chosen.

Perhaps the Minister, as he finishes, will just explain this. Although the embedded divergencies are minor, they certainly can be played by financial institutions. Given the rapid growth of Paris, picking up business that was almost exclusively being done through London, it is probably best for this House to understand.

[Lord Davies of Oldham (Lab)]

My Lords, I apologise to the noble Lord, Lord Bethell, and to the House for having missed the first couple of minutes of his significant words, but I think I could pick up from the way in which he developed his theme exactly the position of the Government on this complex area. The Minister’s answers to the questions and anxieties of the two noble Baronesses from the Liberal Democrat Benches will certainly help us to understand his position.

I hope that the noble Lord is enjoying his Front-Bench debut on the EU exit SIs. It has been a fairly onerous task. As far as my own contribution is concerned, my noble friend Lord Tunnicliffe, who normally joins me in economic debates, is unfortunately not able to be here today, otherwise he would have added to the absolutely excellent work that he has done over a long period of time in successive discussions on these almost endless SIs. However, I thought it right that he should have a certain amount of time off, and he has gone to an event at which his wife is a star figure who is being given an award, so I am not surprised that he is on duty there rather than here today. However, he has had the advantage of having scrutinised about 50 of these Treasury SIs—and of course the Minister will have taken steps to catch up with all that.

This instrument makes several changes to both the Financial Services and Markets Act 2000 and relevant pieces of retained EU law to ensure consistency with the UK’s obligations under the EMIR REFIT regulation, which came into effect earlier this year. We do not regard these changes as controversial, and therefore we support the instrument. However, we will look for elucidation and clarification of certain parts of how it will work. I am grateful to the noble Baronesses who have already spoken for having identified important areas in which the Minister needs to respond.

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Baroness Kramer and Lord Davies of Oldham

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Lord Davies of Oldham]

My Lords, I can be brief because we have already had at least four debates this afternoon on the exact issues that this amendment and Amendment 11 in my name and that of my noble friend Lord Tunnicliffe deal with. It all revolves around the fact that we are not prepared to give the Government and the Treasury primary powers over issues that would normally require primary legislation just because this Bill has some exceptional qualities to it. It does indeed have exceptional qualities, as has been pointed out on all sides. It is meant to have a lifetime of a bare two years. The vast majority—I will withdraw that remark; I cannot qualify it. Some people who have spoken today have sought to make some improvements to the Bill but I do not have the slightest doubt that they hope that the Bill will never be necessary and that we will not crash out of the European Union without an agreed position.

Two debates ago, the noble Baronesses, Lady Bowles and Lady Kramer, did exactly what we seek to do with this amendment—that is, to identify just where our limits are with regard to the intention in the Bill and to point out that it is misconceived because it attributes to the Treasury powers that we ought not to allow it to have. We thought that we had spotted the area where the debate would flare up most significantly in Henry VIII powers terms, but in fact these issues have already been discussed without the need to mention that moniker too often.

I therefore move this amendment on the basis that the Committee and the Minister know only too well the strength of feeling on all sides that this Bill cannot be a Trojan horse to allow the Treasury and the Government to introduce measures that they would ordinarily introduce through primary legislation but which they are trying, through the enabling quality of this Bill, to introduce through statutory instruments and Treasury adjustments. We have debated this matter long and hard. We all know where we stand and I therefore beg to move, although I do not expect too much in the way of contributions in support.

[Baroness Kramer]

I will just say from these Benches that we agree.

--- Later in debate ---

[Baroness Kramer]

I want to make one very quick comment to add to those of the noble Lord, Lord Sharkey. There is a real danger that the pattern within this Bill becomes a precedent, and that for future financial legislation we in effect see this process of Treasury decision enacted through statutory instrument. This sunset clause would make that impossible. It would make sure that this was, in effect, a one-off, and that there was a return to normal practice following the end of four years.

[Lord Davies of Oldham]

My Lords, it is time to be kind to Ministers when one gets to this end of the Bill. My advice to the Minister is to indicate what a logjam of SIs there would be four years on from the consequences of this strategy. I understand entirely, and sympathise very much with the intent behind the amendment, but if I were the Minister I think I would point out a few of the practical difficulties.