Ministerial Equivalence and Exemption Directions in Financial Services for the EU and EEA
John Glen Excerpts(4 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (S.I. 2019/541), provides powers for HM Treasury, for up to 12 months after exit day, to make equivalence directions and exemption directions for the European Union and EEA member states.
On 11 April 2019, I laid before Parliament HM Treasury directions under those powers to help to ensure that the UK will have a functioning regulatory regime for financial services in all scenarios. Today, I have laid before Parliament two further directions in preparation for the UK’s withdrawal from the EU.
The Prospectus Directive and Transparency Directive Equivalence (Variation) Directions 2019 amend a previous direction made on 11 April 2019. The existing equivalence direction determines that EU-adopted International Financial Reporting Standards (IFRS) are considered equivalent to UK-adopted international accounting standards for the purpose of preparing financial statements for transparency directive regime requirements and for the purpose of preparing a prospectus under the prospectus directive regime. This decision delivered on a commitment made by the Government in November 2018, allowing overseas issuers with securities admitted to trading on a UK regulated market, or overseas issuers making an offer of securities in the UK, to continue to use EU-adopted IFRS when preparing their consolidated financial accounts for future accounting years.
On 21 July 2019, the prospectus regulation came into full application in EU legislation, and the prospectus directive, including the UK domestic legislation implementing the directive, was repealed. HM Treasury has made the Prospectus (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/1234) to ensure that there continues to be a coherent and functioning prospectus regime in the event that the UK leaves the EU without an agreement on 31 October 2019. This new equivalence direction therefore amends the existing direction to refer to prospectuses being prepared under the prospectus regulation rather than the directive. This amending direction ensures that the existing equivalence direction continues to be legally operable and does not change its intended effect.
The markets in financial instruments exemption directions 2019 give effect to the decision taken by HM Treasury, the European Union and the EEA European Free Trade Association countries to exempt central banks of certain states, including EEA states, from certain provisions under the markets in financial instruments regulation in the event that the United Kingdom leaves the European Union without an agreement. This direction is necessary because adaptations to the EEA agreement granting the relevant exemption are not yet operative for all affected EEA central banks. This direction will therefore ensure that those affected EEA central banks can continue to carry on their activities in the UK without disruption at exit.
Copies of the directions are available in the Vote Office and Printed Paper Office and will be published alongside the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 on Legislation.gov.uk.
[HCWS46]
The Economy
John Glen Excerpts(4 years, 6 months ago)
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John McDonnell
Is it not interesting that virtually every Government apart from this one are willing to undertake an impact assessment of some sort? What does that display? I am not usually a suspicious person, but I think we have our suspicions.
Let me say to the Chancellor that he has a role to play in shouldering his responsibility to provide us all with the fullest possible information on the basis of which we can make our decisions. That means publishing a full economic impact assessment and doing it fast, so that we can have a proper debate.
As the Government have a working majority of minus 45, it is obvious that the Queen’s Speech is little more than a pretty crude election stunt. In all their various comments in the House and the media, the Prime Minister and the Chancellor have depicted their programme as “the people’s priorities”. As a political artisan, I can admire a good turn of phrase—
John McDonnell
I have been here for 22 years. That is a long apprenticeship—and sometimes the apprentice can point out the truth as well.
As I say, I admire a good turn of phrase, and I congratulate the creatives in whatever PR agency the Conservative Party now uses for coming up with that one—it must have tested very well in the focus groups—but that is all it is: a slogan, a turn of phrase. The reality, as demonstrated in the Queen’s Speech, is that after something approaching a decade of harsh and brutal austerity, a few cynical publicity stunt commitments to paper over the massive cuts in our NHS, schools, policing and care will go nowhere near what is needed. A slogan will not suffice.
People know—and this is relevant to the Brexit debate—that if the economy hits the buffers again, as a result of Brexit, economic mismanagement by the Tories or both, and when a choice must be made by the Tories about who will pay, they will always protect their own: the corporations and the rich.
Ged Killen (Rutherglen and Hamilton West) (Lab/Co-op)
It is a pleasure to follow my hon. Friend the Member for Coatbridge, Chryston and Bellshill (Hugh Gaffney).
It does seem rather bizarre to be talking about a Queen’s Speech that the Government have no intention or any ability to implement, and I would not exactly describe myself as a monarchist but I do think the way the Prime Minister has treated Her Majesty through all this is shameful.
First, I want to touch on the implications for the UK. The Government say:
“The integrity and prosperity of the union that binds the four nations of the United Kingdom is of the utmost importance to my Government”
and Scotland will see a £1.2 billion cash bonus as a result of the latest spending round, but this Queen’s Speech ends freedom of movement, which will have a disproportionate impact on Scottish sectors, and even by the least damaging Brexit that would mean a reduction in Scottish GDP of 2.7%, and we know that a disastrous no-deal exit could mean a loss of economic output for Scotland of as much as £12.7 billion by 2030.
And it is not just prosperity in Scotland that is under threat from the Government; so too is the very existence of the United Kingdom itself. We have seen over a decade of austerity that Scotland did not vote for; we had David Cameron’s English votes for English laws speech on the steps of Downing Street on 19 September 2014; of course we had the Brexit referendum in 2016; and now we have this Government’s reckless deal, which tears up workers’ rights and simply delays a no-deal Brexit until the end of next year. The Conservative party, in truth, has done almost as much as the Scottish National party to undermine the United Kingdom. It is no longer the Conservative and Unionist party; it is the Conservative and Brexit party.
I was deeply disappointed, once again, to see nothing for 1950s-born women who are being denied a pension. That is a huge missed opportunity. Just as we are seeing with PPI repayments, we could have seen a boost for the economy had those women been paid what is rightfully theirs. As one of the leading members of the local WASPI branch in my area put it,
“these women are not going to be squirrelling this money away in offshore accounts.”
It will be spent in our local towns and on our high streets. However, the campaign will go on and I can assure them of my continued support.
Lastly, I want to touch on the lack of any new measures to protect free access to cash. I have been campaigning on that issue since my election. It has become increasingly clear, from the work of consumer rights groups, from international examples, from what is happening in many of our constituencies and from reports like the Access to Cash review, that this issue will not simply resolve itself. The banks have made a conscious decision to shift responsibility for running ATMs to private companies, and now they have decided that they really do not want to have to pay for that either. So the pressure they have put on LINK means that the fee being paid to the operators has been cut, and we are now seeing free-to-use ATMs closing, or turning fee-charging. That is having a particularly difficult impact in rural communities and in small towns such as those in my constituency, where businesses on the high street are already struggling and do not need any new additional barriers, such as a lack of availability of cash.
The Joint Authorities Cash Strategy Group, which the Government have set up to look at this issue, is no more than a talking shop.
Ged Killen
The Minister shakes his head, but what has that actually done since it was set up? The Government have to get real, or millions of people—some of the most vulnerable in society—will be left behind in a so-called cashless society.
In conclusion, this is a completely unnecessary Queen’s Speech, which has wasted everyone’s time and will do nothing at all for my constituents in Rutherglen and Hamilton West.
Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019
John Glen Excerpts(4 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019.
It is a pleasure to serve under your chairmanship once again, Mr Bailey. As the Committee will be aware—some Members will be too aware—the Government had previously made all necessary legislation to ensure that in the event of a no-deal exit on 29 March 2019 there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the article 50 process, new European Union legislation has come into force and, under the European Union (Withdrawal) Act 2018, will form part of UK law at exit. Further deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit.
This statutory instrument makes deficiency fixes to a new piece of EU legislation that has recently become applicable relating to the European market infrastructure regulation. EMIR implemented the G20 Pittsburgh commitments agreed in the aftermath of the financial crisis in 2009, regulating over the counter derivative markets, and in particular requiring some derivatives to be cleared in a central counterparty, known as a CCP. The European Commission reviewed EMIR in 2015-16, resulting in an update known as the EMIR regulatory fitness programme—EMIR REFIT—which came into force on 17 June 2019.
EMIR REFIT makes a series of changes so that the framework for over the counter derivatives applies in a more proportionate way. It focuses on users of OTC derivatives and does not make significant changes to the rules for CCPs. In particular, it expands exemptions from the requirement to clear trades in OTC derivatives through a CCP. As the Committee is aware, this is not the first time that EU exit legislation has been used to address deficiencies in EMIR as it will form part of UK law at exit, but this instrument is necessary to address new deficiencies that will arise as a result of the recent amendments made to EU legislation by EMIR REFIT. After exit, the UK would be outside the European economic area and outside the EU’s legal and supervisory framework for financial services. The EMIR framework that will form part of UK law at exit therefore needs to be updated to ensure that the new provisions continue to work effectively.
This instrument will ensure continuation of the new provisions introduced in EMIR REFIT and will transfer new EU functions to the appropriate UK authorities. Many provisions in EMIR REFIT do not produce significant deficiencies in UK law, and will continue to work effectively at exit. For example, this is true of the new exemption for small financial counterparties from the requirement to clear trades through a CCP. However, there are two key deficiency fixes in this instrument that are necessary to ensure EMIR REFIT is workable in a UK context. First, the instrument ensures that UK pension schemes will continue to be exempt from the requirement to clear trades through a CCP. This is an important provision for industry and consumers; an exemption for pension schemes is needed because there is currently no approach to clearing that works without subjecting pension schemes to disproportionate cost, particularly the requirement to pay margin to the CCP. The additional costs would ultimately undermine the ability of pension funds to meet their obligations to pension holders.
EMIR REFIT includes a pension scheme clearing exemption that will last anywhere between two to four years. To ensure there is no ambiguity about the length of the extension, that extension will now last the full four years in the UK. The fix is appropriate given the size and nature of UK pension schemes, the vital role that they play in pension provision, and their crucial position as long-term investors in the UK economy. The instrument will provide the time to find a solution that balances the interests of pension schemes and CCPs, which will be particularly challenging in the UK context.
The instrument enables the Treasury to extend the pension scheme exemption further, for up to two years at a time if no appropriate solution for the UK market has been found. That will give certainty to UK pensioners and industry. The instrument also ensures that EEA pension schemes will continue to be exempted in the UK, enabling UK banks to continue trading derivatives with EEA pension schemes without using a CCP, just as they currently do. Her Majesty’s Treasury committed to this action on 21 February 2019 to avoid disruption to UK businesses.
Secondly, the instrument transfers the function to suspend the clearing obligation from the European Securities and Markets Authority and the European Commission to the Bank of England. In EMIR REFIT, ESMA can recommend that the European Commission suspend the clearing obligation for three months at a time, up to a total of 12 months. We believe that the Bank of England is the most appropriate UK authority for that function, consistent with the responsibilities that Parliament has already conferred on the Bank for financial stability and the supervision of CCPs.
The Bank of England must secure the consent of Her Majesty’s Treasury and inform the Financial Conduct Authority if it needs to suspend the clearing obligation in the UK. The Bank may decide to issue a suspension lasting any period up to 12 months. Such flexibility will enable the Bank to reduce uncertainty for globally significant clearing members and clients based in the UK in the unlikely event that a suspension is necessary. Finally, this instrument ensures that all references to EMIR are up to date on exit day so that references in UK legislation after that point will refer to the right version.
The Treasury has worked closely with the Bank of England and the Financial Conduct Authority to prepare this instrument, and we have engaged with the financial services industry. The draft legislation has been publicly available on legislation.gov.uk since 24 July, when the instrument was laid before Parliament.
In summary, this instrument is necessary to ensure that EMIR will continue to function effectively in the UK after exit, following the updates made in EMIR REFIT. In particular, it will ensure that UK pension funds continue to benefit from the pension scheme clearing exemption and enable the Bank of England to take necessary action to safeguard financial stability when necessary. I hope that colleagues from all parties will join me in supporting the regulations, and I commend them to the Committee.
The Chair
The question is that the Committee has considered the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019.
John Glen
Let me say at the outset that the instrument is needed to ensure that UK firms are able to make use of the new provisions included in EMIR REFIT and that EMIR will function appropriately after exit. Without the instrument, UK pension funds would be required to clear derivatives in a CCP, and that would come at a considerable cost to UK pension schemes and pensioners.
The instrument also ensures that the clearing suspension, a key financial stability tool, operates effectively in the UK. The hon. Member for Stalybridge and Hyde characteristically went through familiar arguments, stating his party’s position on the unsuitability of this process, and I will not go over that again. As he said, we both know where we are on that. He did make some specific points, which I will respectfully try to accommodate.
On the appropriateness of the transition of powers, the Bank of England will be given responsibility for suspending the clearing obligation in exceptional circumstances, with the consent of the Treasury. Both the Bank of England and the FCA will take on the responsibility to set certain binding technical standards that currently sit with ESMA. That is a widely understood common responsibility between them.
The SI does not give any new supervisory responsibilities to UK authorities. No new firms will be subject to supervision by UK supervisors due to the SI. National supervisors across the EU already have responsibility for supervising the users of uncleared derivatives and CCPs, and we are confident that the regulators are appropriately resourced for those roles.
The hon. Gentleman made a point about the wider framework. As he knows, a review is ongoing with respect to what we term air traffic control of regulations. There will be subsequent reviews of the configuration of powers between the Treasury, the FCA and the Bank of England, so the wider point that he made was a fair one, but that will be resolved hopefully after a deal is secured.
The hon. Member for Stalybridge and Hyde mentioned impact assessments. The Treasury has considered the impact of all its financial services SIs. I did not mention it before, but I am happy to say now that the impact of today’s SI was assessed to be below £5 million. When that is the case, Government policy is not to publish a full impact assessment. For previous exit SIs where the impact was assessed to above £5 million, impact assessments were published in advance and could be scrutinised.
The hon. Gentleman made some points about reassurance on the direction of travel of regulation. The context of the SI is that the UK’s pension regime relies on a higher number of defined benefit schemes than the rest of the EU. The way that those schemes need to interact with CCPs is unusual and different, so we have had an enduring dispensation not to participate in the same way. That is not a deregulatory effect, but because the pension schemes would have to hold a large amount of cash, which would be costly and uneconomic for them.
In essence, there has been enduring uncertainty around the conclusion of the process of resolution, but we have actively participated in it, given our historically different pension scheme arrangement. There is no desire not to observe the G20 Pittsburgh obligations on derivatives, and this is not some sort of deregulatory effort.
Jonathan Reynolds
It is an entirely reasonable observation that the UK pensions industry is structured differently and requires a different set of regulations and approach, but we have always known that. Is the Minister saying that, if we had not spotted this back then and left the European Union without passing the instrument, our regime would be deficient, or has something changed so that we now need to address it?
John Glen
Clearly, had we left on 31 March, the EMIR REFIT regulation would not have come in in July. What happened would have depended on the conditions under which we had left at the end of March and on whether we observed the changes naturally as part of the EU through a transition period, or if, in a no-deal circumstance, we used a different mechanism to consider ongoing legislation into which we had had some input but that was not quite finished. That is a bit of a difficult question to answer fully, but that is my understanding.
John Glen
I sense that there is a degree of frustration and impatience in the Committee, but I will respectfully address the point made by the hon. Member for Linlithgow and East Falkirk. We clearly have disagreements over the fundamental outcome that we need to secure, but all the interventions across the 58 SIs have been designed to give as much stability as possible in the event of no deal, which is in the interests of the whole of the United Kingdom’s financial services sector.
I hope that the Committee has found this morning’s sitting informative and will join me in supporting the draft regulations.
Question put and agreed to.
Prospectus (Amendment etc.) (EU Exit) Regulations 2019
John Glen Excerpts(4 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the Prospectus (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019, No. 1234).
It is a pleasure to serve under your chairmanship, Mr Paisley. The Government had previously made all necessary legislation under the European Union (Withdrawal) Act 2018 to ensure that, in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension of the article 50 process, new EU legislation has become applicable, and under the EU withdrawal Act that new legislation will form part of UK law at exit. Further deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit.
This statutory instrument amends the EU prospectus regulation and related legislation, including a previous EU exit instrument—the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, or “the official listing instrument”. The official listing instrument fixed deficiencies in the prospectus regime as it applied before 21 July 2019. This instrument will ensure that the UK continues to have an effective prospectus regime after exit, taking into account the new EU prospectus regulation, which applied across the EU from July of this year.
The EU prospectus regulation contains the standardised rules that govern the format, content, approval and distribution of the prospectus that issuers must produce when securities are offered to the public or admitted to trading on a regulated market in a European economic area state. Deficiency fixes to the new EU prospectus regulation are necessary to reflect the fact that, after exit, the UK will be outside the EU single market and the EU’s regulatory and supervisory framework for financial services. The amendments in this instrument follow the same approach as the amendments made in the official listing instrument to the UK prospectus regime as it applied before 21 July 2019.
First, in line with the approach that the Government are taking to all onshored financial services legislation, this instrument transfers functions currently within the remit of EU authorities—in particular, the European Securities and Markets Authority—to the appropriate UK bodies. Such functions—for example, the development of technical rules on certain provisions of the EU prospectus regulation—will now be carried out by the Financial Conduct Authority. That is appropriate, given the FCA’s expertise in applying the UK prospectus regime and the major role that it has already played in the EU to develop technical standards. Where the EU prospectus regulation confers a delegated legislation-making power on the Commission, the powers are converted into regulation-making powers conferred on the Treasury. Use of those powers by the Treasury will need the approval of Parliament.
Secondly, this instrument removes the obligation for UK authorities to share information with the relevant EU and member state authorities. The obligations will no longer work appropriately once the UK is outside the EU’s joint supervisory framework. For the purposes of supervisory co-operation, that means that the EU will be treated like other third countries. The FCA will still be able to co-operate with EU regulators, using the existing framework in the Financial Services and Markets Act 2000, as it currently does with other third countries on a discretionary basis. The UK is committed to maintaining a high level of supervisory co-operation with the EU and its member states after exit.
Thirdly, post exit, EEA issuers wishing to access the UK market will be required to have their prospectus, or their registration document—the part of a prospectus that contains information on the issuer—approved directly by the FCA, as any other third country issuer would. Currently, an EEA issuer’s prospectus or registration document approved by another EEA regulator can be passported for use in the UK.
This instrument introduces transitional arrangements that will allow any prospectus approved by an EEA regulator and passported into the UK before exit to continue to be used, and supplemented with additional information, up to the end of its normal period of validity. The instrument also permits registration documents passported into the UK before exit to continue to be used as a constituent part of a prospectus in the UK, pending approval of the full prospectus by the FCA after exit. For both a full prospectus and a registration document, the period of validity is usually up to 12 months after it was originally approved.
An exemption for certain public bodies from the obligation to produce a prospectus under the EU prospectus regulation is maintained, but is extended to the same set of public sector bodies of all third countries post exit. That is in line with the approach taken in the official listing instrument previously. Members of the Committee will remember that this issue was discussed during the debate on that instrument in March; I think that the hon. Member for Oxford East raised these points then. Like then, I believe it makes sense to extend this exemption more broadly to ensure that UK capital markets continue to be attractive to public body issuers.
The EU prospectus regulation allows issuers to incorporate information from certain documents that are available electronically elsewhere, by making reference to them in a prospectus. This includes information approved by the regulator of another EEA state. To provide a smooth transition, this instrument sets out that information contained in relevant documents approved by an EEA regulator before exit day can continue to be incorporated by reference in a UK prospectus going forward. Any prospectus that incorporates information in this way will still require FCA approval before it can be used in the UK.
Lastly, the instrument ensures that matters in relation to the UK prospectus regime and transparency framework will continue to apply to Gibraltar as they did prior to the UK’s departure from the EU. This is in line with the approach taken in other EU exit instruments. Throughout the drafting process, the Treasury has worked closely with the FCA and engaged with the financial services industry—TheCityUK in particular, as a convenient body to develop this instrument.
Before I conclude, I want to address the procedure under which this instrument has been made. Along with three other financial services exit instruments, it 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 that brings an affirmative instrument into law immediately, before Parliament has considered the legislation. But the procedure also rightly requires that Parliament must consider and approve a made-affirmative instrument if it is to remain in law.
The Government have not used this procedure lightly, and it must be remembered that across Departments we have already laid over 600 exit SIs under the usual secondary legislation procedures. However, 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. It would have been reckless to leave that until the last minute. Industry and our financial regulators need legal certainty on the regime that will apply from exit. Without addressing the deficiencies that will arise from the EU’s prospectus regulation, there would be significant legal uncertainty and disruption for issuers and regulators. Confidence in the UK’s role as an international hub for the issuing of securities would be undermined.
To conclude, this Government believe that the legislation is necessary to ensure that, if the UK leaves the EU without a deal, the UK’s prospectus regime can continue to function appropriately post exit. I hope colleagues across the Committee will join me in supporting these regulations. I commend them to the Committee.
John Glen
I appreciate the three points raised by the hon. Member for Oxford East. In typical fashion, she has got to the heart of some of the core matters of the SI. I will address regulation 32, the accounting standards and the wider point she makes about the 12-month transition. I will then deal with the points raised by the hon. Member for Motherwell and Wishaw on the broader effect of this process on the financial services industry.
On the first point—the consideration we have given to the risk of extending public bodies exemption to all third countries—we have worked closely with the FCA in the drafting of the instrument to ensure that investors remain suitably protected, and we believe this approach offers the most appropriate balance between investor protection and maintaining the attractiveness of the UK’s capital markets. It is in line with the approach taken in the previous official listing SI that we discussed.
As with all investments, there is a risk that public bodies offering securities could fail, and a prospectus might help an investor to understand that risk. However, there is generally more information available to potential investors on public bodies, such as sovereign issuers and state bodies that currently make use of the exemptions, than on corporate entities. For that reason, we feel that it is justified. We will, of course, keep the arrangements under review and consider them if they appear to expose investors to disproportionate risk—there is no complacency on that point.
The hon. Member for Oxford East made a second point on accounting standards. She raised the issue of the appropriateness of the Government to specify the accounting standards deemed equivalent to UK international accounting standards, and she asked whether we are making new decisions. Unlike the delegated Act under the EU prospectus directive, the delegated Act under the EU prospectus regulation does not explicitly state which third countries’ accounting standards have already been deemed equivalent for the purpose of preparing a prospectus. The ambiguous drafting of the EU prospectus regulation leaves the position unclear, which might create uncertainty for market participants on which accounting standards are permitted post-exit.
To ensure consistency and clarity for market participants, the instrument explicitly provides for a new article on the accounting standards that are permitted to be used when preparing a prospectus for use in the UK, and its introduction is supported by the FCA. The article does not go beyond what is currently permitted under the EU regime; it does not designate any new third countries’ accounting standards that were not previously explicitly stated in the prospectus directive, as equivalent for the purpose of preparing a prospectus. All the current equivalent regimes for accounting standards will continue to be equivalent after exit.
The hon. Member for Oxford East asked about the 12-month transition and suggested that there is a gap and an inadequacy in the long-term view, and that this impacts on the resilience of the City. I recognise that uncertainty is unwelcome, and the Government are working to secure a deal. In a situation where that is not secured, there will need to be a considerable amount of additional work in the light of the new reality. At the suggestion of many groups in the City, we have started a review that looks at an air traffic control mechanism to deal with all the regulations that exist coming in from the City. That call for evidence will conclude on 18 October, and there will be a series of further regulatory reviews, but their nature and scope will be determined by the outcome of the process that we are in during this month.
A lot of work is going on to look at the financial services industry and its competitiveness. What we need to do is get that balance between systemic stability, which all parties have been committed to ensuring since the crash, and the future.
The hon. Member for Motherwell and Wishaw referred to her party’s position on Brexit. In the interest of time and of trying to get the heart of the concerns about the financial services, I will focus on the area that I am familiar with. I have grave sympathy with her for having had to study these matters, but I guess that was her choice.
The hon. Lady refers to the $1 trillion of assets that has been moved offshore. The City has made modest and consistent contingency arrangements. There is no denying that it would be undesirable for extra costs to accrue, but in the context of this significant decision of the UK as a whole—although I acknowledge that her view on that is different—those decisions have been made.
This process actually avoids red tape, because it keeps us completely aligned with where we are as members of the EU. The fact that a de minimis assessment was made illustrates that it will not cost the industry additional sums. I take seriously the footprint of financial services across the United Kingdom—including in Edinburgh and Glasgow, where it is significant, as the hon. Member for Motherwell and Wishaw knows better than I. We will do everything we can to take appropriate measures in all circumstances to safeguard the health of the financial services industry.
In conclusion, the instrument is needed to ensure that the UK has an effective prospectus regime and that the legislation functions appropriately after the UK has left the EU. I hope that I have answered the points thoroughly, that the Committee has found the sitting informative, and that it will join me in supporting the regulations.
Question put and agreed to.
CAPITAL REQUIREMENTS (AMENDMENT) (EU EXIT) REGULATIONS 2019
John Glen Excerpts(4 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the Capital Requirements (Amendment) (EU Exit) Regulations 2019 (S.I. 2019, No. 1232).
It is a pleasure to serve under your chairmanship, Mr Bailey. As the Committee will be aware, the Government had made all the necessary legislation under the European Union (Withdrawal) Act 2018 to ensure that in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the article 50 process, new EU legislation will become applicable before 31 October. Under the 2018 Act, that new legislation will form part of UK law at exit; further deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit.
The regulations deal with one of the new pieces of EU legislation that has recently become applicable. They resolve deficiencies in the EU’s prudential regime that will be retained in UK law at exit. The regime sets out how much capital credit institutions such as banks and investment firms need to hold; these rules are currently set in the EU capital requirements regulation, as well as in UK secondary legislation to implement the fourth capital requirements directive. The CRR is a directly applicable EU regulation that has applied since 2013. A statutory instrument to correct the deficiencies in this retained law was laid before and approved by Parliament last year: the Capital Requirements (Amendment) (EU Exit) Regulations 2018.
Earlier this year, the European Council and European Parliament finalised a revised banking package, which included several amendments to the capital requirements regulation made by an amending instrument known as CRR II. This gives effect to some of the internationally agreed Basel reforms, which are the centrepiece of the post-crisis reforms aimed at making banking safer. Similar changes are expected in all G20 economies that follow the Basel guidelines. Through the UK’s membership of the G20 and the Financial Stability Board, we have committed to the full, timely and consistent implementation of the Basel III reforms.
Several of the amendments made by CRR II are already in force and will therefore become retained EU law on exit day. This retained EU law will contain deficiencies that need to be fixed and that have not been addressed by the 2018 SI because they relate to changes that have come into effect since it was made. There are three main areas in which fixes are required.
The first area is third-country treatment. Consistent with the approach taken in the 2018 SI to amend the CRR, the regulations remove the preferential treatment given to the largest banks and investment firms in the EU27 to reflect the fact that the EU and the UK will treat each other as third countries after exit. It must be stressed that this is not about the ability of EU firms to carry on doing business here after the UK has left the single market; through comprehensive temporary permissions and transitional regimes, we have done everything we can to support EU firms that already have business here to continue with that business while they become UK-authorised.
The second area is transfer of functions. In line with the Government’s approach to all onshored financial services legislation, the regulations transfer a number of functions currently within the remit of EU authorities to the appropriate UK bodies. Such functions, such as the development of detailed technical rules on certain provisions of the regulations, will now be carried out by the Financial Conduct Authority, the Prudential Regulation Authority or the Bank of England. That is appropriate, given the regulators’ responsibilities for prudential and resolution policy and the supervision of global firms, and the major role that they have already played in the EU to develop CRR technical standards. Where CRR II confers delegated legislation-making powers on the Commission, those powers are converted into regulation-making powers conferred on the Treasury. Their use by the Treasury will need the approval of Parliament.
The final area is updates to definitions. CRR II amended some definitions used in the CRR; the regulations correct those updated definitions so that they can operate in a UK-only context. Here, too, the approach is consistent with fixes that Parliament has already approved in the previous CRR SI.
In drafting the SI, the Treasury worked closely with the financial services regulators, and we have engaged extensively with the financial services industry, incorporating feedback from industry players that will be significantly affected.
Before I conclude, it is important to address the procedure under which the SI has been made. Along with three other financial services SIs, the SI was made and laid before Parliament under the made affirmative procedure provided for in the European Union (Withdrawal) Act. It is an urgent procedure that brings an affirmative instrument into law immediately, before Parliament has considered the legislation, but it also requires that Parliament must consider and approve a made affirmative SI if it is to remain in law.
The Government have not used that procedure lightly, and it must be remembered that, across Departments, we have laid more than 600 exit SIs under the usual secondary legislation procedures. As we draw near to exit day, however, it is vital that all critical exit legislation is in place, including legislation necessary to ensure that our financial services regulatory regime continues to function effectively from exit. It would have been reckless to leave that until the last minute. Industry and our financial regulators need—and needed—legal certainty on the regime that will apply from exit. Without addressing the deficiencies in the new CRR rules, there would be significant legal uncertainty, disruption for firms and increased risk to financial stability.
The SI is essential to ensure that the prudential regime applying to credit institutions and investment firms works effectively if the UK leaves the EU without a deal on 31 October. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.
John Glen
I will endeavour to address the points raised by the hon. Members for Stalybridge and Hyde and for Glasgow Central. The hon. Gentleman referred to our conversation on 12 December regarding preferential sovereign debt and preferential capital treatment. In the circumstances of no deal, the consequences will be the inevitable result of leaving the EU: the UK and the EU27 will no longer be part of the same overriding legal infrastructure.
It is Government policy not to provide unilateral preferential treatment, but the hon. Gentleman made a reasonable point about different scenarios that might ensue. In practice, the impact would be largely mitigated by the transitional powers that we have given through this process to regulators, enabling them to phase in the new requirements between now and 31 December 2020.
The hon. Gentleman asked about the provision of the changes with respect to the in-flight files Bill. Only legislation under the European Union (Withdrawal) Act can onshore legislation before exit. The IFF Bill would have been for new files after exit, but we are dealing with all the immediate risks prior to exit. Given that there was an evolution in the corpus of EU material and directives over the summer, it is within scope of this mechanism.
The hon. Gentleman asked about the “shall” versus “may” language, and whether action is optional for regulators. That fits with the UK’s existing regulatory framework. Parliament has already delegated responsibility to our regulators for technical rules. That approach has been accepted in the UK and is supported by industry. I am happy to look carefully at what he said and see whether there is an issue. I will write to him, but I do not think that we have changed anything from previous approaches.
Like the hon. Gentleman, the hon. Member for Glasgow Central made a number of wider political points that I will resist responding to now. However, I will try to address the specific points regarding the use of SIs. Again, it is completely consistent with the approach approved by Parliament, and it would not be feasible to use primary legislation for onshoring.
The hon. Lady asked about the future regulatory framework, and made some wider observations about the potential diminution of UK influence. Obviously, we will always be part of wider bodies globally in terms of regulation in this area, but the aim of the onshoring legislation for financial services has always been to ensure that we are at a base point in terms of a functioning regime in all scenarios. Onshoring is designed to provide continuity and to minimise disruption, as well as to provide time for the Government and Parliament to design a regulatory framework fit for the future.
The first step in that has already taken place with the call for evidence document of 19 July, which set out the context of a long-term review of the regulatory framework and the key issues that we will need to consider for a regime that operates outside the EU. The document also requests views for the Treasury and the regulators in terms of short-term changes, and how the co-ordination of UK regulatory activity can be improved to manage the combined impact of regulatory change on firms and their customers. The call for evidence ends on 18 October and is the first stage of a longer review. Obviously, the nature of our exit from the EU will determine the way that evolves in subsequent stages.
I hope that that addresses the substantive points that were raised. The Government believe that the SI is essential to ensure that prudential regulation of credit institutions and investment firms continues to work safely and effectively if the UK leaves the EU without a deal. I hope that the Committee has found the sitting informative and will join me in supporting the regulations.
Question put and agreed to.
Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019
John Glen Excerpts(4 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019 (S.I. 2019, No. 1233).
It is a pleasure to serve under your chairmanship, Mr Wilson. The Government made all the necessary legislation under the European Union (Withdrawal) Act 2018 to ensure that, in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. During the article 50 extension period, the Treasury has continued to work with UK regulators and the financial services industry to ensure our regulatory regime remains prepared for exit on 31 October. This statutory instrument ensures that our regulatory regime for insurance and reinsurance business will continue to work effectively from exit.
First, the instrument updates UK law to ensure that EU revisions to the Solvency 2 delegated regulation made since 29 March operate without deficiencies. Secondly, the instrument makes amendments to the UK’s domestic risk transformation regulations, which govern the UK’s regime for insurance-linked securities.
I turn first to the provisions that deal with revisions to the Solvency 2 delegated regulation. In January this year, the Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 were approved by Parliament. Those regulations addressed deficiencies in Solvency 2 legislation as it will form part of UK law at exit. Since then, revisions by the EU to the delegated regulation made under the Solvency 2 directive have updated aspects of the approach to setting solvency requirements for insurance firms, including the simplification of capital calculations and greater alignment of capital requirements across insurance and banking legislation. Those revisions took effect across the EU on 8 July 2019 and will form part of UK law after exit.
The substance of those revisions will not result in deficiencies after exit, and the updated provisions will continue to operate in the UK as they do now. However, routine deficiency fixes, including removing references to the EU and EU institutions, will be needed to ensure Solvency 2 regulation continues to operate effectively in the UK. This instrument also replaces references to EU law with references to relevant UK law at exit.
I turn to the amendments to the UK’s risk transformation regulations. The Risk Transformation Regulations 2017 set up a new regime for insurance-linked securities. ILS are an innovative form of risk transfer that allow insurers and reinsurers to transfer risk to a special purpose vehicle. ILS are now an important and rapidly growing part of the reinsurance market, and the new regime for ILS was introduced as part of our efforts to help ensure that the UK remains a leading global centre for specialist reinsurance business.
As the risk transformation regulations were designed to follow Solvency 2 requirements, they rely on references to and definitions in EU law. This instrument fixes those by using references to relevant UK legislation and importing certain definitions into Solvency 2 as it will form part of UK law at exit, with those definitions adapted to work in a UK stand-alone regime.
Before I conclude, it is important that I address the procedure under which the SI has been made. This SI, along with three other financial services exit SIs, was made and laid before Parliament on 5 September under the made affirmative procedure provided for in the EU withdrawal Act. That is an urgent procedure that brings an instrument into law immediately, before Parliament has considered the legislation. However, the procedure also requires Parliament to consider and approve a made affirmative SI if it is to remain in law.
The Government have not used that procedure lightly. It must be remembered that, across Departments, we have already laid before Parliament more than 600 exit SIs under the usual secondary legislation procedures. However, 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. It would have been reckless to leave that until the last minute. Industry and our financial regulators need legal certainty about the regime that will apply from exit. If we did not address the deficiencies covered by the SI—particularly the deficiencies in new Solvency 2 rules recently introduced by the EU—there would be significant legal uncertainty for firms and for our regulators, with the risk of serious disruption to the insurance sector.
The SI makes relatively minor fixes to new Solvency 2 legislation and to the UK’s legislation for insurance risk transfer to ensure that the legislation continues to operate as intended after exit. It does not alter the substance of requirements in either case, and the same Solvency 2 and risk transfer rules will continue to apply to firms. I hope that colleagues will join me in supporting the draft regulations, which I commend to the Committee.
John Glen
I am happy to address the points raised by the hon. Member for Oxford East, and the point made by the hon. Member for Linlithgow and East Falkirk. The SI follows the same process as all SIs. With respect to Solvency 2, the simple reality is that the legislation was amended between the previous presumed exit date and this one. We have simply brought that up to date, and the ILS-related mechanism derived from, and made reference to, the Solvency 2 provision. As a consequence of that relationship, which was something that we authored in the UK, it made sense to update both at this time, given that they are within the same category.
The hon. Member for Oxford East asked what would happen to this SIs if we got a deal. If a deal is secured, any withdrawal agreement Bill will make provision to defer any Brexit SIs that are not needed in a deal scenario until the end of the implementation period. We expect that the Bill will achieve this through a blanket deferral of Brexit SIs that come into force on exit day until the end of the implementation period. We expect that the Bill will also ensure that Ministers can revoke or amend any EU exit SIs as appropriate, so that they deal effectively with any deficiencies arising from the end of the implementation period. In the circumstances that we are talking about, following a hopefully successful conclusion of the deal-making process, we would have a 14-month implementation period, as per the plans at the moment, in which to make provision for the enduring solution. We will ensure that onshoring regulation is not commenced if there is a deal and a transitional period is agreed with the EU.
The hon. Lady asked about the difference between EEA and non-EEA firms. The UK special purpose vehicles are already subject to the same Solvency 2-derived requirements, regardless of whether they are accepting risks from EEA or non-EEA firms. The distinction in the Risk Transformation Regulations 2017 simply reflects the fact that EU law applies only to deals that involve EEA firms. This notional distinction will no longer make sense after exit, so it is being removed, but it will not affect any deals already in place. There is no distinction for these regimes in practice—all deals must comply with UK standards, so equivalence is not necessary.
The hon. Lady referred to her question to the Secretary of State for Digital, Culture, Media and Sport and to the update of FSMA on the gov.uk website. The National Archives is working to have FSMA updated in time for exit day, and the Treasury is helping with this work. I am not more familiar with the situation than that; obviously my officials helped me answer that question, but I would be happy to examine the matter closely and come back to her on that.
Anneliese Dodds
I am grateful to the Minister for making that commitment, because his answer contradicts what his Secretary of State said in an answer to me: that the updates would be ready only at the end of this year. I welcome that, and hope the Minister can try to reach towards the date he gave, because otherwise I really worry about people trying to comply with the legislation without having it in front of them.
John Glen
I do not try to contradict my colleagues in Government, but that is the information I have received. I will provide clarification as soon as I can.
Turning to the points made by the hon. Member for Linlithgow and East Falkirk, I recognise the distinction between the Government’s perspective on these matters and his party’s. All I can say is that the financial services industry, which is significant in Edinburgh and Glasgow, is made secure by this process. He may—and indeed does—disagree with the Government about what should happen, but I assure him that in a no-deal scenario, the interests of the financial services industry in Scotland will be looked after as best they possibly can.
I thank the Committee for its consideration of this SI, and the points made by hon. Members on the Opposition Benches. In conclusion, the deficiency fixes in this SI will ensure that the UK’s prudential regime for insurance and insurance risk transfer remains prepared for withdrawal from the EU in any scenario. I hope the Committee has found this evening’s sitting informative, and will now be able to join me in supporting these regulations.
Question put and agreed to.
FINANCIAL SERVICES (ELECTRONIC MONEY, PAYMENT SERVICES AND MISCELLANEOUS AMENDMENTS) (EU EXIT) REGULATIONS 2019
John Glen Excerpts(4 years, 6 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019 (S.I. 2019, No. 1212).
It is a pleasure to serve under your chairmanship, Ms Buck. As the Committee will be aware, Parliament has now approved well over 50 exit statutory instruments for financial services. They have included three on miscellaneous provisions, which are sometimes necessary to make isolated deficiency fixes, which do not fit easily into more thematic instruments. Those miscellaneous SIs have sometimes been used to correct minor errors or omissions made in earlier exit legislation. The one before the Committee also makes some minor corrections, as well as updating some earlier exit provisions to account for the article 50 extension.
Some hon. Members have been critical of the SIs, arguing that the correction of errors shows that we are putting rushed, poorly drafted legislation before Parliament. I want to make it clear that that is not the case. Errors have been few and minor and I applaud and thank my colleagues in the Treasury—particularly Lee O’Rourke and his team—for the work that they have undertaken in difficult circumstances over many months.
Financial services onshoring has been an unprecedented legislative challenge and I think we should acknowledge the constructive and effective collaboration that has taken place between the Treasury, our regulators and our industry stakeholders. I can tell the Committee that the regulators and the industry do not think our legislation has been poorly thought through—quite the opposite. In my time as Minister responsible for financial services exit legislation, the message from our regulators and from the industry has been clear: the legislation is essential to ensure that our regime is prepared for exit in any scenario and it is vital to underpin confidence in our regulatory regime.
In contrast to the previous miscellaneous provisions instruments, the SI makes substantive changes to earlier exit legislation in two key areas: the contractual continuity and temporary permissions regimes for payment services; and transitional arrangements for financial benchmarks. Those changes are not to correct errors but to strengthen our readiness for exit, and I make no apology for that. We are continually reviewing our exit arrangements to ensure that they are as robust as they can be. In those two areas, we decided that 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.
First, an important part of our onshoring programme is to provide a range of temporary permissions and contractual continuity schemes to minimise disruption to UK consumers and businesses currently serviced by European economic area firms. Part 3 of the instrument supplements provisions for the temporary permissions and contractual continuity regimes for EEA payments and e-money firms. A review of that legislation has identified a limited number of provisions that should be amended to ensure that the temporary regimes are as robust as possible.
The amendments fall into two categories. The first category is to ensure that EEA firms in contractual run-off can continue to carry out various payment-related activities, as intended. That will include provision of payment and e-money services by EEA credit institutions such as banks. The second category of amendments applies to the temporary regimes for EEA payments and e-money firms. Those amendments clarify and make more explicit the full range of permissions and obligations of firms that enter those regimes. For example, the amendments make it explicit that an EEA firm in a run-off regime can legally redeem outstanding electronic money. That clarifies the fact that they can return any balance on an account to UK e-money holders.
Also, in a limited number of areas, the instrument makes Financial Conduct Authority powers more consistent with the powers it has with respect to credit institutions in the run-off regimes, such as by making it explicit that the FCA may publish a register of firms in contractual run-off. Those changes ensure that the FCA has proportionate powers to take action to protect UK consumers.
The second substantive set of provisions in this SI covers changes being made to the onshored benchmarks regulations. As they currently stand, those regulations contain a transitional regime for third-country benchmarks, allowing UK entities to use non- registered third-country benchmarks up until 31 December 2019. However, since the regulations were made it has become clear that there will be a damaging cliff-edge when the 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-country 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. That 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-country foreign exchange rate benchmarks could prevent firms from carrying out important risk management functions, such as hedging their currency risk. This SI extends the period in which 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 of time to make an application under the UK’s onshored third-country regime.
I also want to explain the amendments that the SI makes to our onshored equivalence framework. Those 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 on the aspects of the UK regime for which a third country has equivalent provisions. If Parliament approves a decision on a third country having equivalent insurance regulation to the Solvency II directive, UK law will be clear that that refers to the UK’s implementation of Solvency II as it stands when the equivalence decision is made.
Before I conclude, it is important that I address the procedure under which this statutory instrument has been made. This, along with three other financial services exit SIs, were laid before Parliament on 5 September, under the “made affirmative” procedure provided for in the European Union (Withdrawal) Act 2018. This is an urgent procedure that brings an affirmative instrument into law immediately, before Parliament has considered the legislation. The procedure also requires that Parliament must consider and approve a “made affirmative” SI if it is to remain in law.
The Government have not used that procedure lightly. It must be remembered that, across Departments, we have already laid over 600 exit SIs under the usual secondary legislation procedures. 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. It would have been reckless to leave that until the last minute: industry and our financial regulators need legal certainty on the regime that will apply from exit. Without addressing the deficiencies covered by this SI, there would be significant legal uncertainty for firms and our regulators.
To conclude, this statutory instrument makes important additional deficiency fixes that will improve our state of readiness for exit. Regulators and the industry support our approach. This SI will help reinforce the message that Government and Parliament will not take any chances with the safe and effective operation of the UK’s regulatory regime. I hope that colleagues will join me in supporting these regulations, which I commend to the Committee.
John Glen
I would like to respond to the points made by the hon. Member for Stalybridge and Hyde, and I thank him for the typical courtesy and care in his remarks with respect to this process. He made a number of points around the challenges of this approach, and I think we could both agree that this has not been an ideal process. We have worked through it, as a Committee, on probably nearly 40 occasions over the last 12 months.
The hon. Gentleman raised concerns around, in essence, the mistakes. I reassure him that there is no casualness to our approach. All SIs pass through quality control procedures, and we have engaged extensively with regulators and industry, where appropriate, in drafting them. We publish them in advance of laying them, in order that a degree of familiarity can be gained. However, as with all legislation, drafting errors occur from time to time, and we put them right as soon as they are discovered. When considering the volume and complexity of the financial services legislation made under the European Union (Withdrawal) Act 2018, drafting errors have been minor and small in number. We have grouped them under the miscellaneous provisions and have worked closely with regulators to get them right.
The hon. Gentleman asked me to speculate on the nature of future amendments, should any be needed. Obviously, I cannot give an absolute assurance. He asked about the inclusion of the capital requirements regulation in this particular instrument. That is so because this is a collective, miscellaneous capturing of small and essentially legally significant but inconsequential changes.
The hon. Gentleman asked about the benchmarking issue. Not many firms have gone through the process of applying, which is why so few have gained permission. We have aligned the instrument with what we have done with many of the transitional regimes by making a three-year provision. That will allow greater certainty in the marketplace. I acknowledge his broader concerns about the process, but we have done all that we can to ensure that we are in the best possible position in the undesirable outcome of no deal at the end of October. I think that I have dealt substantively with the hon. Gentleman’s points.
I accept that the supplementary measures and provisions included in the instrument will help to ensure that the UK’s financial services regulatory regime remains prepared for withdrawal from the EU in any scenario. I recognise that considerable work will need to be done if we leave with no deal, and that we would have to bring that before the House. I hope that the Committee has found the sitting informative and will join me in supporting the regulations.
Question put and agreed to.
Draft Local Loans (Increase of Limit) Order 2019
John Glen Excerpts(4 years, 7 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Local Loans (Increase of Limit) Order 2019.
It is a pleasure to serve under your chairmanship, Mr Gray. Parliament is asked periodically to raise the limit on lending by the Public Works Loan Commissioners to local authorities. The draft order, which is being introduced under the Finance Act 2014, will raise the limit on the sum of loans that may be outstanding at one time from the Public Works Loan Commissioners, from £85 billion to £95 billion. The procedure is well established: it has been done approximately 20 times since the limit was established in 1968. The commissioners currently have £2.3 billion available to lend before they reach the existing lending limit of £85 billion. Demand for this lending can be volatile and is heightened in periods when the Government’s cost of borrowing is low, as it is now.
The draft order will ensure that councils can continue to build and maintain infrastructure and other capital projects, such as local roads and maintained schools. It does not authorise any increase in the capital expenditure of local authorities or in the amount that they may borrow. Borrowing and investment decisions are subject to statutory guidance that applies at the level of the individual authority. Decisions about whether and how to borrow are a matter for each local authority’s elected council, which is accountable to its electorate. Local authorities may borrow from any willing lender, provided that the authority’s finance director is satisfied that the borrowing complies with relevant law and is affordable from the authority’s revenues.
Whether local authorities meet their borrowing needs from the commissioners or from the private lending market, the effect on public spending, borrowing and debt is broadly the same. There are two advantages of the Public Works Loan Board, however: quick access to PWLB loans gives local authorities long-term certainty in their capital plans, and the interest paid on them stays in the public sector and is recycled into spending on public services.
I hope that the whole Committee will join me in thanking the Public Works Loan Commissioners for the services that they render, on an entirely voluntary basis, to the benefit of the citizens of this country, as well as the staff of the Public Works Loan Board who support their work.
John Glen
I want to say from the outset that the draft order does not affect the amount that local authorities can spend or borrow. It simply makes money available for the Public Works Loan Commissioners to lend if local authorities wish to borrow. The service is valuable and the Government recommend that it continues to be available.
The hon. Gentleman made two substantive points and I am happy to respond to then. He made a general point about the resource needs of local authorities, and then, in an era of seeking a yield, he referred to the research paper on property and other investments. The Government are helping to support the financial sustainability of local councils. The spending round a few weeks ago in respect of the local government settlement provided the largest increase in spending power since 2010, increasing core spending power by £2.9 billion, or 4.3% in real terms. It includes an additional £1 billon of grant funding for adult and children’s social care on top of maintaining £2.5 billion for existing social care grants.
As I have made clear, the SI relates to the rules of capital expenditure through the Public Works Loan Board. Borrowing can be used only for capital investment. Both I and my right hon. Friend the Chief Secretary keep the expenditure of local government under close review.
On the hon. Gentleman’s assertions about where the search for yield can go, local borrowing and spending decisions are made at a local level. They are subject to the prudential code of the Chartered Institute of Public Finance and Accountancy and to statutory guidance from the Ministry of Housing, Communities and Local Government. That guidance was updated in 2018 and makes clear that local authorities that borrow more than, or in advance of, their needs solely to generate profit are not acting in accordance with the prudential framework. MHCLG is currently reviewing the impact of the revisions to the prudential framework.
When local authorities borrow, they must have regard to the prudential framework as set out by the aforementioned bodies. Borrowing and capital spending decisions are devolved to local councils, but it is expected that they should not take on disproportionate levels of financial risk, especially where it is funded by additional borrowing. PWLB finance continues to play a critical role in helping local authorities transform services and realise broader objectives, such as local growth regeneration via their capital strategies. I hope that those two clarifications meaningfully meet the concerns raised by the hon. Gentleman, and I hope the Committee has found this morning’s sitting informative and will join me in supporting the draft order.
Question put and agreed to.
Bilateral Loan to Ireland
John Glen Excerpts(4 years, 7 months ago)
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The Economic Secretary to the Treasury (John Glen)
I would like to update Parliament on the loan to Ireland.
In December 2010, the UK agreed to provide a bilateral loan of £3.2 billion as part of a €67.5 billion international assistance package for Ireland. The loan was disbursed in eight tranches, and the final tranche was drawn down on 26 September 2013. Ireland has made interest payments on the loan every six months since the first disbursement.
On 30 September, in line with the agreed repayment schedule, HM Treasury received a total payment of £406,324,326.08 from Ireland. This comprises the repayment of £403,370,000 in principal and £2,954,326.08 in accrued interest.
HM Treasury has today provided a further report to Parliament in relation to the loan as required under the Loans to Ireland Act 2010. The report relates to the period from 1 April 2019 to 30 September 2019. It reports fully on the three principal repayments received by HM Treasury during this period, and sets out details of future payments up to the final repayment on 26 March 2021. The Government continue to expect the loan to be repaid in full and on time.
A written ministerial statement on the previous statutory report regarding the loan to Ireland was issued to Parliament on 1 April 2019, Official Report, column 29WS.
[HCWS1849]
Oral Answers to Questions
John Glen Excerpts(4 years, 7 months ago)
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The Economic Secretary to the Treasury (John Glen)
The UK has an extensive and internationally enviable free ATM network. We know that many people still use cash day to day, and we have committed to safeguarding cash for those who need it. I am delighted that UK Finance and LINK are leading industry efforts to protect free cash access. That culminated in UK Finance launching the Community Access to Cash initiative just yesterday.
Mrs Hodgson
The Minister says that, but news that NoteMachine is to convert 3,000 of its 7,000 free-to-use cash machines to pay-to-use machines is of great concern to my constituents. According to Which?, we have lost 15% of our free-to-use ATMs over the past year alone. The previous Labour Government formed an agreement with ATM operators and the Treasury to plug gaps in financially deprived areas where people had to pay to access their cash, so what are this Government going to do to prevent people being charged just for trying to access their own money?
John Glen
Use of cash has reduced significantly faster than expected over the past 10 years. I am meeting UK Finance and LINK tomorrow to ensure that their mechanism is good for the current situation. The new initiative to which I referred in my previous response will give communities up and down the country the opportunity to engage with UK Finance on better and new solutions.
Several hon. Members rose—
Sir Gary Streeter (South West Devon) (Con)
Is not the closure of ATMs linked to the decision by high street banks to close their branches left, right and centre? Will the Minister, in his regular meetings with the chief executives of high street banks, remind them that they do have some duty to elderly customers and small businesses?
Emma Hardy (Kingston upon Hull West and Hessle) (Lab)
Hull’s high street is still very cash-reliant, and I am really worried about the blow that this reduction will give to an already struggling high street. Will the Economic Secretary please speak directly to the Payment Systems Regulator about what further measures can be taken to prevent the reduction in free-to-access cash machines?
John Glen
Yes, I am very happy to continue to engage with the regulator, and I noted the hon. Lady’s urgent question application earlier today. Digital payment alternatives improve local cash recycling and support cashback initiatives. Mastercard and Visa have a number of initiatives under way, and I am determined to see progress in this area.
Mr Philip Dunne (Ludlow) (Con)
With a third of banks, many of which had ATMs, closing in rural areas, and with very poor mobile connectivity in those areas meaning that digital payment schemes are not possible, I was very pleased to learn of yesterday’s announcement by UK Finance on Community Access to Cash, to which the Economic Secretary referred. That is the way forward, but what can he do to reassure business providers that if they provide ATMs, they will be safe from break-in?
John Glen
We have to ensure that there is a wide range of options in rural areas. A number of trials are under way to provide solutions, underpinned by the investment in gigabit infrastructure that my right hon. Friend the Chancellor announced yesterday, which will ensure that we have even better connectivity in remote rural areas.
Neil Coyle (Bermondsey and Old Southwark) (Lab)
Kevin Hollinrake (Thirsk and Malton) (Con)
I welcome the introduction of the new business banking resolution service that will start to hear cases of historical problems later this year. In the previous Chancellor’s letter of 19 January, he stated that that scheme should carefully consider all cases that come before it. How is that possible when the research of the all-party parliamentary group on fair business banking determined that 85% of cases are excluded?
The Economic Secretary to the Treasury (John Glen)
I thank my hon. Friend for his question. He is a powerful advocate for this redress scheme and I thank him for the work that he has done. In our conversation on 10 September, I reiterated the Government’s position that the scheme should not reopen complaints that have sometimes gone multiple times through the courts, but I welcome the fact that the new scheme will give access to 99% of those claims going forward, and I will continue to engage with him where I can to provide solutions on individual cases.
Sarah Jones (Croydon Central) (Lab)