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

Earl of Lindsay Excerpts

Tuesday 30th October 2018 Grand Committee

Finally, when the Commission was making equivalence decisions under EMIR, it was sometimes quite difficult to fit within the wording of EMIR Article 25(2)(b) because some countries simply do not have regulation and authorisation provisions. These are not the major countries, but nevertheless there may be CCPs. Due to the capital charges that apply to other bodies if a CCP is not recognised, there is an incentive for recognition of CCPs in what one might call less-developed countries in the financial services sense. It then became necessary for the Commission to consider comparable mechanisms and use a very flexible interpretation of the language of the legislation. Indeed, it had to resort to things like looking at the rules of the exchangers that were using the CCPs, with that replacing, if you like, the legal provisions. It raises the question of whether there is any language in the way equivalence is to be done that is drawn so tightly in this statute that it will become inflexible and you will not be able to recognise some of those types of CCPs, particularly where you are referencing the legal constructs that are available in the country. Those legal—in legislative terms—constructs simply may not be there, and you are looking for something else that you have to use to replace them.

[The Earl of Lindsay (Con)]

My Lords, I want to ask my noble friend a couple of questions on the CCP side to clear up any confusion, in my own mind at least. The first refers to the requirement in the Explanatory Memorandum for,

“non-UK CCPs (including CCPs established in the European Union)”,

to apply to the Bank and receive recognition from the Bank in order to continue their activities after Brexit day. The paragraph thereafter refers to the opportunity for temporary recognition, and there it refers only to third country CCPs. I assume that third country CCPs include CCPs established within the European Union, but the slightly different terminology used in those two paragraphs left a doubt in my mind as to whether there was some distinction. If indeed the temporary recognition is not available to CCP establishment within the European Union, what is the reason for that? From the way the memorandum is written, it could conceivably be that the term “third country CCPs” does not apply to European Union-established CCPs.

My second question, which reflects a question raised by the noble Baroness, Lady Bowles, is about the length of the temporary recognition timeline. If I understand it correctly, it is set initially at three years and can be extended by 12-month intervals. Is it envisaged that a non-UK CCP can, at the end of three years, still be operating under a temporary recognition regime and can continue thereafter to enjoy 12-month extensions to its—as it were—permitted activities in the United Kingdom?

[Lord Tunnicliffe (Lab)]

My Lords, I will speak to these two instruments in the order they appear on the Order Paper. I found these two instruments difficult to understand and therefore have consumed considerable intellectual effort in actually understanding them, which has left very little effort in reserve to produce an elegant speech. I would like to thank two officials: Greg Stump, for his tutorial on the CCPs, and Richard Lowe-Lauri, for his tutorials on the passporting. I have to say that the disadvantage of having an excellent tutorial is that all the questions I could have asked have largely been answered, so I will not be making a very long speech.

One of the biggest problems in understanding the instruments is that they, particularly the one on passporting, refer frequently to the Financial Services and Markets Act, which we all know as FiSMA. I do not have available a fully amended version of it to refer to so I want to ask the Minister something; I definitely do not want a reply because he will have to take this back to the ranch. Some years ago, a precedent was established when a 50-page Bill came from the Commons and left the Lords 150 pages long—it involved introducing bail-ins, et cetera—and the Treasury was good enough to provide an electronic copy of FiSMA, fully amended. That made understanding what the revisions of the instruments were doing much easier. I request formally that the Treasury does that again. Clearly the Government have a fully amended copy of FiSMA available on their machines because otherwise the creation of the instruments would be virtually impossible.

The regulations on passporting seem very simple. Basically, they say that an EEA CCP can continue trading in the UK, initially under a temporary recognition before moving into permanent recognition. It is as simple as that. As I understand it, this cannot be done unilaterally because moving CCPs into a full recognition environment will be dependent on memoranda of understanding with the host nations of those CCPs. I would value confirmation of that if it is true. Even in an extreme no-deal scenario, there will still need to be international understandings between nations in that situation.

There is no reciprocity in the instruments, as I read them. We have a situation where we are saying to EU CCPs, “Please carry on as before”, and to UK-based CCPs, “We have secured nothing to allow you to continue your business in Europe”. In the case of CCPs, not continuing on a reciprocal basis will be very difficult for both Europe and ourselves. I believe that there is some discussion in Brussels about there being reciprocity, even in a no-deal situation. I would value any news the Minister may have on the development of such a reciprocal understanding.

In the event of a loss of recognition by a foreign-based CCP, it is not clear what the enforcement mechanism would be. For instance, would the loss of recognition mean that trade contracts would become ultra vires or lead to a very messy situation? The statutory instrument contemplates the loss of recognition but does not set out how that would be managed. I would value anything that the Minister might be able to tell me about what would happen.

Equally, my understanding of the passporting instrument is, once again, that it is extraordinarily simple. It means that EEA firms can carry on trading in the United Kingdom on virtually the exact same terms as they do now. In other words, a no-deal situation has no negative consequences for non-UK firms because the mechanism for a more or less automatic granting of temporary authorisation, and then the transition to permanent authorisation, is set out in this instrument. The converse is not there; as far as I can see, it does nothing for UK firms. The Minister may put me right on this but, as far as I know, there are no effective World Trade Organization rules for services that would allow UK firms to trade in Europe.

Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Earl of Lindsay Excerpts

Wednesday 6th June 2018 Lords Chamber

[The Earl of Lindsay (Con)]

My Lords, as a member of the committee I am delighted to follow our chairman, the noble Baroness, Lady Falkner. In doing so, I echo her thanks to our excellent clerk and to our then policy analyst, who sadly is no longer with us. I should also take this opportunity to commend the noble Baroness as our chairman. She has been very effective at chairing us as members and indeed the many witnesses with whom we have engaged over the course of preparing this report.

I want to highlight two important issues raised in the report, both of which were anticipated by the noble Baroness in her speech. They are challenges, but equally they should be seen as opportunities. The first relates to what the final Brexit deal needs to achieve in respect of the future regulation of the financial services sector in the United Kingdom. The challenge as I see it is as follows. Without exception, all the witnesses we heard from, along with the submissions we received, agreed on the continuing need post Brexit for the United Kingdom to have a robust and internationally trusted regulatory framework to promote financial stability and underpin confidence in our financial services sector. Equally, all agreed that the processes of our departure from the EU and the nature of the post-Brexit regulatory arrangements must not compromise the UK’s continued participation with international standards and the globalised financial system that this country has been so instrumental in shaping. Fragmentation should be avoided as it is likely to undermine financial stability and increase costs.

Our witnesses and the evidence also agreed that the UK and the EU should seek a post-Brexit outcome that allows mutual market access in financial services between the UK and the EU 27, underpinned by broad and deep supervisory co-operation between the UK and the EU. At the same time—here lies the challenge—none of our witnesses and none of the evidence submitted could envisage that a post-Brexit outcome based on the EU’s current equivalence framework would be reliable or realistic, as the noble Baroness said. None wanted an outcome that sees the UK as no more than a passive rule-taker, given that aspects of future EU financial regulation may not be appropriate to the needs of either the United Kingdom or the global client base—including customers in the EU 27 served by the UK financial services sector.

Furthermore, our witnesses saw the merit of the United Kingdom having the ability to tailor and evolve the regulatory framework post Brexit as an important opportunity. They saw it as enabling, where appropriate, the UK to improve the design or detail of former EU regulations so that they are more efficient and effective and better aligned with UK circumstances and international standards, better adhere to the UK’s well-developed principles of better regulation and, importantly, are fit for the future in anticipating the regulatory requirements of the fast-developing fintech industry and other areas of innovation.

The challenge is squaring the post-Brexit circle between the United Kingdom’s ability to evolve its own regulatory framework at its own discretion and the parallel need to maintain mutual recognition, trust and market access with the EU. To a number of our witnesses, the challenge can be resolved if the Brexit negotiations are clear-headed and arrive at an arrangement that would serve both UK and EU interests. We summarised this opportunity in the last paragraph of the summary at the start of our report:

“Furthermore, international standards could provide a bridge between the UK and the EU in defining a future relationship based on shared outcomes, rather than the literal interpretation of rulebooks. We believe that a future relationship can be secured that is to the benefit of both the UK and EU, provided that a mutual commitment to effective regulation and supervision is maintained”.


The opportunity to achieve such an eminently satisfactory and desirable relationship should obviously be the objective of the UK Government and our Brexit negotiators. Common sense suggests that it should also be an objective of the EU negotiators. The continuing importance of London and the UK financial services sector to customers and clients across the EU 27 suggests that they should have as much of an incentive to achieve that outcome as us.

Likewise, the second issue I want to raise is both a challenge and an opportunity: whether the United Kingdom has in place the right regulatory architecture and processes, the right checks and balances and the right accountability and parliamentary oversight for financial regulation post Brexit. This question falls not just to the Government and regulators—although they are key in leading the discussion and consideration —but to Parliament, the industry and its stakeholders. Underlying this issue is the need, as we have heard, for the UK to transpose the EU’s body of law relating to financial regulation into UK law. Careful and intelligent judgment is needed on how that transposition is best achieved between primary legislation, secondary legislation, regulators’ rulebooks and binding guidance. As we say in our report:

“The Government will need to adopt a nuanced approach towards the translation of EU regulation into domestic law”.


Flowing from this transposition is the devolution of significant powers from the EU to our domestic regulators, namely the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority. Pre-Brexit, those powers have been defined and overseen by the EC, various EU bodies, a relatively well-resourced European Parliament and a very strong committee structure. Should additional and better-resourced parliamentary oversight be developed in the UK post Brexit to avoid what our report refers to as,

“an unintended deficit in democratic scrutiny and accountability”?

The committee believes the answer to that question is yes and it makes three recommendations in the report to this end. In doing so, it anticipates not only the significant increase in the powers of UK regulators but the need for future changes to financial regulation in the UK to be subject to the appropriate scrutiny. The committee acknowledges that the much greater flexibility that the UK will have post Brexit to revise and reform financial regulation, regulators’ rulebooks and so forth, including regulatory enforcement, is an opportunity that none the less needs the appropriate checks and balances.

The committee was not alone in recognising this need. It was also the conclusion of a recent report from the IRSG—the International Regulatory Strategy Group, which the noble Baroness mentioned—produced with Linklaters in December 2017, just as our committee was finishing its report. At the launch of its report, The Architecture for Regulating Finance after Brexit, the IRSG stated that,

“Brexit will require the UK to update its regulatory structure for financial services, creating new checks and balances to ensure the system remains proportionate, coherent and fit for purpose”.

It is an interesting report. It sets out five principles for an effective regulatory framework and makes some useful recommendations for consideration. These recommendations cover powers, resources, responsibilities, scrutiny and oversight of UK regulators; the legislative and regulatory process; consultation and review mechanisms; and, importantly, it includes proposed checks and balances that should apply where regulatory change in the UK would produce material divergence from the EU 27.

The challenge that both our committee and the IRSG report recognise is that while the current regulatory landscape may have served the UK effectively in a pre-Brexit world, it will need to be reformed to be fit for purpose in a post-Brexit world. However, as the IRSG states in the foreword to its report:

“There is … an opportunity for targeted reform following the UK’s withdrawal from the EU in order to maintain and enhance the UK’s position as an international financial centre underpinned by a trusted and globally leading regulatory system, that delivers the best possible outcomes for customers and clients”.


Updating the United Kingdom’s regulatory landscape in anticipation of Brexit is an opportunity that the Government, regulators, Parliament, the industry and others must be thinking about now. Any necessary reforms ought to be put in place for when they are needed, not thereafter.