Draft Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

John Glen Excerpts

Monday 26th November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Austin. As the Committee will be aware, the Treasury has undertaken a programme of legislation to ensure that if the United Kingdom leaves the European Union without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments before Parliament under the European Union (Withdrawal) Act 2018 to deliver that. A number of these SIs have already been debated in this place and in the House of Lords. The SI being debated today is part of that programme, and has been debated and approved by the House of Lords.

The SI will fix deficiencies in UK law on the UK’s deposit guarantee scheme and certain areas of financial services legislation, such as the Financial Ombudsman Service, to ensure they continue to operate effectively post exit. The approach taken in this legislation aligns with that taken in other SIs being laid before Parliament under the 2018 Act: it is to provide continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context.

Many colleagues are familiar with the financial services compensation scheme, also known as the FSCS—the UK’s deposit guarantee scheme, which compensates savers for up to £85,000 per person when their bank, building society or credit union fails. Its role is critical in enhancing financial stability and consumer confidence in the banking system. The underlying legislative framework for FSCS protection on deposits stems from the EU’s deposit guarantee schemes directive and our transposing regulations. The EU directive sets the level of deposit protection across the EU at €100,000 and empowers the European Commission to review the protection level every five years. Non-euro countries such as ours can convert €100,000 into the equivalent amount in their national currency.

The directive stipulates that deposit guarantee schemes such as the FSCS shall protect their members’ deposits in other member states. That means that a UK bank’s operations in the European economic area will be FSCS protected, and vice versa: when an EEA firm fails, the customers of its UK business are protected by the relevant EEA scheme. An administrative arrangement in the directive builds on such co-operation. Currently, if an EEA authorised firm were to fail, the FSCS would administer compensation to UK depositors on behalf of the EEA protection scheme. This occurs only after the EEA scheme has provided the FSCS with the funds to be transferred.

In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The Deposit Guarantee Scheme Regulations 2015, which were part of the UK’s transposition of the directive, need to be updated to reflect that and ensure that the provisions work properly in a no-deal scenario.

These draft regulations make three key amendments to the 2015 regulations. First, the SI will transfer the power to set the maximum deposit protection level from EU entities to the UK’s Prudential Regulation Authority. This approach retains the principles of the current EU arrangement by giving the power to the technical body best placed to make a judgment on the necessary level of protection. The PRA is the appropriate body to take on this role, given its technical expertise, and its role under the EU framework in setting a sterling deposit protection level that is in accordance with the EU level. This mirrors the domestic process for setting the coverage level for insurance and investments, in which the regulators are responsible for deciding the compensation limit, based on their technical judgment and balancing factors such as consumer protection, financial stability and costs to firms.

Given the importance of deposit protection for the wider economy and the public interest, changes to the protection level will be subject to Treasury approval. In addition, the PRA will be required to consult on any changes to the level.

Secondly, the statutory instrument removes the obligation on the FSCS to administer compensation on behalf of an EEA protection scheme, given that EEA schemes will no longer be obliged to co-operate with the FSCS in a no-deal scenario, with the UK being treated as a third country. In the unlikely scenario that an EEA firm fails just before exit day but a UK depositor has not yet received compensation after exit day, the SI will enable the FSCS to continue to administer payments to UK depositors on behalf of an EEA scheme. That will make it easier and quicker for UK depositors to get their money back.

I reassure the Committee that this provision and the changes in the SI will not directly affect members of the general UK population, the overwhelming majority of whom hold their deposits with UK-authorised firms that are FSCS protected. Customers of firms such as Santander UK—that is, UK-incorporated subsidiaries of EEA firms that are authorised and supervised by UK regulators—will continue to be FSCS protected.

Finally, the statutory instrument also removes provisions in UK legislation that continue to impose EU obligations on the UK. One such obligation is the requirement on the PRA to notify the European Banking Authority every year of the total amount of protected deposits in the UK. It also fixes definitions and legislative references to the Financial Ombudsman Service in the Financial Services and Markets Act 2000 that would no longer work in a no-deal scenario. Those changes will have no impact on the operations of the Financial Ombudsman Service.

The Treasury has been working closely with the PRA, the Financial Conduct Authority and the FSCS on drafting the instrument, and will continue to engage with the financial services industry. The Treasury published the instrument in draft, along with an explanatory policy note, on 15 August to maximise transparency to Parliament and industry.

The Government believe that the proposed legislation is necessary to ensure that the rules governing the UK’s deposit guarantee scheme and the other systems mentioned function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will support the regulations, which I commend to the Committee.

--- Later in debate ---

[John Glen]

I thank the hon. Lady for her comments. All I can do in response to her opening remarks is reiterate my commitment as a Minister to continuing the rigorous process of examining the statutory instruments, bringing them to the Committee in a timely fashion, and being as thorough as possible in our impact assessments.

The hon. Lady raised two issues. First, she referred to the exchange between Baroness Kramer and Lord Bates in the other place on 6 November, concerning the level at which the PRA could set the compensation. The imperative from the directive has been to have a consistent level, and the UK has onshored, essentially, the €100,000. There are no plans to depart from the current level; frankly, there is a significant imperative to keep the levels aligned, regardless of what happens, but that will be a matter for the PRA.

[Anneliese Dodds]

Would that mean that the five-year period could be altered if there were a severe need for a change due to a fluctuating exchange rate?

[John Glen]

In a scenario of unforeseen volatility, there would be an opportunity for the Treasury to ask the PRA to examine that, or vice versa. In such a scenario, we would of course have more immediate discretion on that point.

The second point related to the need to maintain a stable prudential regulatory regime. As the City Minister, I hear lots of representations from different parts of the financial services sector for more flexibility on occasion. This is a matter for the regulator, not me, but in conversations with the PRA, I have made it very clear that the Government do not want to secure competitive advantage based on downsizing our regulatory environment. I agree with the hon. Lady’s sentiments with regard to keeping that as the driving imperative.

To conclude, the statutory instrument is needed to ensure that the rules governing the UK’s deposit guarantee scheme and the other systems covered by the SI function appropriately if the UK leaves the EU without a deal or an implementation period. I hope I have satisfactorily addressed the legitimate points made by the hon. Lady, and that the Committee will support the regulations.

Question put and agreed to.

Draft Short Selling (Amendment) (EU Exit) Regulations 2018

John Glen Excerpts

Wednesday 21st November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Short Selling (Amendment) (EU Exit) Regulations 2018.

May I say what a pleasure it is to serve under your chairmanship, Mr Robertson? It is a pleasure to be here again to introduce a statutory instrument. I thoroughly enjoyed the preparation for this debate.

In the context of the UK’s withdrawal from the EU, the Treasury has been preparing extensively for a range of potential outcomes, including a no-deal scenario. This statutory instrument forms part of the work that is necessary to ensure that there continues to be a functional regulatory and legislative regime for financial services if the UK leaves the EU with no deal and no implementation period. As colleagues are aware, we have had a number of debates in the House as part of that process. The statutory instrument is another part of that programme of legislation.

Short selling is the practice of someone selling a security that they borrowed, with the aim of buying it back at a lower price than they sold it for. Following the financial crisis, a number of countries, including the UK, acted to suspend or ban short selling due to the risks it posed to the stability of the global financial system. In response, the EU introduced the short selling regulation—the SSR—which introduced a harmonised regulatory framework for short selling and certain aspects of credit default swaps. That regulation relates to financial instruments that are admitted to trading or traded on a European economic area trading venue.

Given that the UK would be outside the EEA and the EU’s legal, supervisory and regulatory framework in a no-deal scenario, the existing legislation needs to be updated to reflect that and amended to ensure that its provisions work properly in such a scenario. The statutory instrument will therefore make a number of amendments to the SSR and related legislation, including certain parts of the Financial Services and Markets Act 2000, to ensure that they continue to operate effectively in the UK once the UK has left the EU.

First, the statutory instrument amends the scope of the regulation so that it relates only to instruments admitted to trading on UK venues and UK sovereign debt. Financial instruments admitted to trading only on EU venues will no longer be in the scope of UK regulation. Additionally, the statutory instrument amends the UK’s powers to address threats to financial stability or market confidence in the context of the SSR. Under the current regulation, the UK can take action on instruments for which it is the most liquid market in Europe or that were first admitted to trading in the UK. If the UK wishes to take action on an instrument that has its most liquid market elsewhere in the European Union or was first admitted to trading on an EU venue, it is required to seek consent from the relevant EU regulator. The statutory instrument deletes that provision so that those instruments will be treated in line with other third-country instruments. That means the UK will be able to take action against any instrument traded on a UK venue and, before using those powers, will consider threats solely to UK market confidence and financial stability.

Secondly, the statutory instrument transfers to the appropriate UK bodies functions that are currently carried out by EU authorities. For example, there will be a transfer of powers, such as the power to specify when a sovereign credit default swap transaction is regarded as hedging against a default risk, from the European Commission to the Treasury. Powers will also be transferred to the Financial Conduct Authority from EU supervisory bodies. Those include powers that will enable the FCA to make technical standards and take action on all instruments admitted to trading on a UK venue. The FCA is the appropriate regulator to which to transfer those functions because it has the necessary technical expertise to make technical standards, due to its existing supervisory responsibilities in relation to short selling.

Thirdly, the statutory instrument deletes provisions that facilitate co-operation and co-ordination across the European Union. Currently, regulators in member states must notify their counterparts in other member states before taking action to restrict short selling, with other regulators subsequently determining whether to apply similar restrictions. This instrument removes those provisions, along with the powers of the European Securities and Markets Authority to intervene in exceptional circumstances.

The statutory instrument makes technical amendments to existing UK legislation, particularly part 8A of the Financial Services and Markets Act 2000, to ensure that the UK can continue to respond to overseas regulators’ requests for information. It is the intention of the UK to preserve as far as possible a mutually beneficial working relationship with the EU, in the same way as we currently co-operate with non-EU regulators under existing provisions in the 2000 Act.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

What assessment has the Treasury made of the likely increase in the volume of activity at the Financial Conduct Authority and whether the resources are sufficient to deal with that?

[John Glen]

I can confirm that the Treasury worked very closely with the FCA before publication of this SI on 9 August. Over the two months before the regulations were laid on 9 October, we took feedback from industry and the regulator, and we are confident that they are in a very strong position to deal with the requirements that they would be given in the context of a no-deal outcome subsequent to the SI.

Let me make some progress—I am nearly there. The instrument maintains a number of existing exemptions. The current regulation provides exemptions from certain reporting requirements, restrictions on uncovered short selling for shares that are traded primarily in a third country, and the buy-in regime. Those will be maintained, and the FCA will now take on responsibility for publishing a list of relevant third country shares that are subject to the exemption—a responsibility that currently rests with the European Securities and Markets Authority. To ensure continuity at the point of exit, the FCA will recognise the ESMA list for two years following exit day, so that there will be no change to the exemptions.

Additionally, the SI maintains the exemption for market makers and authorised primary dealers under SSR. This exemption enables firms to carry out certain primary market operations and market-making activities without the requirement to disclose their net short position. Moreover, provided that they meet certain thresholds, those operators are not required to comply with relevant restrictions on uncovered short selling. Market makers will be required to join a UK trading venue and notify the FCA at least 30 days before exit should they wish to benefit from the exemption. However, the operators that have already done that will not experience a change.

The instrument deletes the conditions in the current regulation that must be met to be able to correlate sovereign issuer positions to sovereign debt. To determine sovereign debt correlation under SSR that can be used to offset the positions of sovereign issuers, those conditions are currently used. The deletion reflects the fact that the UK will be the sole sovereign issuer in question post-exit. The instrument will also provide the Treasury with the power after exit to set the relevant thresholds.

The instrument makes amendments that will enable UK credit default swaps to be used by market participants to hedge correlated assets and liabilities anywhere in the world, rather than solely in the EU. That will ensure that UK firms can continue to use UK sovereign credit default swaps to hedge correlated liabilities or assets issued by issuers in the EEA and, in future, across the rest of the world, too.

In summary, the Government believe that this SI is necessary to ensure that the regulatory regime relating to short selling and certain aspects of credit default swaps works effectively if the UK leaves the EU without a deal or an implementation period. I sincerely hope that colleagues will join me in supporting the regulations; I commend them to the Committee.

--- Later in debate ---

[John Glen]

I will seek to address the specific points raised, but in response to the hon. Members for Stalybridge and Hyde and for Glasgow Central it is worth repeating that the Treasury is taking this exercise very seriously, and a lot of work and rigour is going into the SIs and the consultation process that goes with them. It is obviously exacting to get on top of all the details about what needs to happen, but each SI is taken seriously and there is a process of engagement, in this case with trading venues such as the London Stock Exchange, the FCA, the Bank of England and those who participate in the market. In response to the first question from the hon. Member for Stalybridge and Hyde, a considerable amount of work was done over that two-month period before the SI was published. An impact assessment has also been made, which will be published later today.

[Rushanara Ali (Bethnal Green and Bow) (Lab)]

Usually, impact assessments are provided for these Committees. My office contacted the Treasury for an impact assessment, so can the Minister explain why it is being provided after the Committee? We do not have the opportunity properly to scrutinise SI Committee presentations of legislation, which is not acceptable.

[John Glen]

I understand the hon. Lady’s concern, and this reflects the unusual nature of the process. The Treasury has made five impact assessments on these SIs, and I have been in dialogue with the Regulatory Policy Committee about the unusual nature of this process and the contingency arrangements for no deal. Those impact assessments will be published in due course.

[Rushanara Ali]

This is a broader issue that has been raised in previous debates, because we do not have the opportunity properly to scrutinise these measures with the relevant facts and information. Will the Minister give an undertaking that Committees will be provided with information in advance, to the best of the Treasury’s abilities, rather than saying, “Sorry, we don’t have anything to provide to you”? That is not acceptable because it means that these Committees are a rubber-stamping exercise without the relevant information and support to enable Members properly to conduct their roles and scrutinise the Government.

[John Glen]

The issues with impact assessments are extremely complicated, and we have taken the time needed to ensure that they are as robust as possible in a very constrained timeframe. This is not an optimal process, and I and my fellow Ministers and officials are doing everything we can to bring the impact assessment process to the scrutiny of the House as quickly as possible. The hon. Lady is correct—ideally we should have published these impact assessments sooner. We have proactively sought to engage Members on the issues with the SIs, anticipating concerns that may be raised, and we are doing everything we can. [Interruption.] I cannot give more comfort, I am afraid, but I am happy to give way if the hon. Lady thinks we can edify the Committee further.

[Rushanara Ali]

I am grateful to the Minister and apologise for taking up his time, but can he provide an undertaking that this will not happen in future? It is unacceptable that the impact assessment is provided after Committee sittings. Will the Minister give an undertaking that that will not happen, and that Committees will be held after the impact assessment has been made available?

[John Glen]

I undertake to continue to do everything I can to bring these impact assessments to the House as quickly as possible in the imperfect conditions that we have. Where possible, we will do that, but I also have to balance that with ensuring that the statutory instrument that I bring before the House is fit for purpose, because the objective is to provide a contingent regime in a no-deal scenario that is fit for the market and avoids the instability that we wish to avoid.

Turning to the second point by the hon. Member for Stalybridge and Hyde on thresholds, he asked me to elaborate on the transfer of powers from the European Commission to the Treasury. This SI onshoring process does not permit us to specify additional changes in policy. The Treasury is well equipped to make those judgments and will do so in a no-deal situation, as part of a larger piece of financial services regulation.

The hon. Member for Glasgow Central quite legitimately raised concerns, as she has done on a number of occasions, about the FCA’s capacity to carry on the functions of EU bodies to implement this instrument and the resources available. I can reassure her once again that those resources are available. The FCA does have the resources to account for the additional work. Processes such as notifying a regulator of net short positions under the SSR will remain the same, and market makers in the UK will continue to report to the FCA in the same manner as they currently do under the European Security and Markets Authority, which delegates its implementation powers to the national competent authorities. In this country that is the FCA, so the FCA is equipped and ready to do that.

General concern was expressed about whether this means that we will go down a deregulatory route in a no-deal situation. It is my instinct, and, I think, that of the regulator, that we would wish to remain closely aligned. A no-deal situation, as undesirable as it is, does not mean we are in a situation of hostility. From my conversations with my counterparts in European countries, I know that they wish us to have a strong relationship even in a no-deal situation. I believe the lines of communication are open and the UK has been a force for good in securing high-quality regulations.

In conclusion, I believe that this SI is necessary to ensure that the regulatory regime relating to short selling and certain aspects of credit default swaps will work effectively if the UK leaves the EU with neither a deal nor an implementation period. I hope the Committee has found this morning’s sitting informative and will join me in supporting the regulations.

Question put and agreed to.

2019 Loan Charge

John Glen Excerpts

Tuesday 20th November 2018 Westminster Hall

[The Economic Secretary to the Treasury (John Glen)]

Thank you, Mr Walker. It is a pleasure to serve under your chairmanship.

I congratulate my hon. Friend the Member for Wycombe (Mr Baker) on bringing this debate to the Chamber. I acknowledge the 12 speeches from colleagues from across the House, who raised some very important issues on behalf of their constituents. Only last Friday, some of my constituents too came to raise the matter with me.

In the course of my response, I hope to address the significant issues discussed: time to pay; retrospection; whether HMRC is going after the promoters; what my hon. Friend said about the disclosure of tax avoidance schemes; the numbers involved; and the difference between retroactive and retrospective. I will also give some detail on the sums of money that we anticipate will be raised through the measure.

The responsibility of Government is to assess critically the impact of any tax reform, and to ensure that it is structured and implemented in the best possible way.

[Mohammad Yasin (Bedford) (Lab)]

The Government say not only that the loan charge is designed to treat loans as income, but that if the loans—now income—are written off, they will be subject to inheritance tax because the loan will not be repaid. Numerous court and tribunal findings agree that the loans were loans, not income, yet the Government press ahead regardless. Does the Minister agree that that is completely wrong and unfair?

[John Glen]

In the course of my speech, I will address that point. I am happy for the hon. Gentleman to come back to me later if he feels that I have not done so.

To be clear, I am the Economic Secretary; the Financial Secretary wanted to be here but he is in the main Chamber for the Finance Bill, so I am here in his place.

I acknowledge the early-day motion tabled by Members. It has attracted 103 signatures, and I also acknowledge the concern throughout the House on this matter. The concerns expressed are for people who have used a disguised remuneration scheme, who expect to have outstanding loans in April 2019, and who will be subject to the charge. I recognise that the Government need to be clear about why we legislated for this charge, which received Royal Assent following a full debate during the Finance Bill process in 2016-17. I will outline the steps that the Government have taken to help those individuals who may be affected.

The Government believe that it is not fair to ordinary taxpayers, who pay their tax on time and in full, to allow people who have used tax avoidance schemes to get away with it. Disguised remuneration tax avoidance schemes are contrived arrangements that use loans, often paid through offshore trusts, to avoid paying income tax and national insurance contributions. The schemes may have involved provision of a loan with no intention whatever to repay it. I spoke to the Financial Secretary this morning, while preparing for the debate, and he said, “Earnings are earnings, and a loan is a loan,” and that is what the issue boils down to.

[Gareth Snell]

I understand the Minister’s point, but before he progresses with his speech, will he clarify whether he accepts what many Members have asked this afternoon-that those who undertook the scheme did so in good faith, and therefore that the people ultimately in trouble for this system are those who perpetrated it, not those who signed up to it?

[John Glen]

I am happy to concede that for the 50,000 indivi-duals affected, there are obviously responsibilities for those who promoted this. It is absolutely the case that HMRC is pursuing those individuals. They often promoted the scheme to large numbers of individuals. Five cases are before the courts—that seems a small number, but each one covers a large number of individuals—and there has been a judgment in one, with the other four cases still moving through the courts. It is not right to say that HMRC is not engaged with those who promoted the scheme.

[Gareth Snell]

Others set it up.

[John Glen]

Others did, I appreciate that—that is fair. I take on board the sentiment of the Chamber with respect to ensuring that HMRC is engaged with those who promoted the scheme, as well as the other individuals.

[Lyn Brown]

I will be gentle, because the Minister knows, as I do, the peope who are really responsible in our respective parties for this particular piece of legislation. I would, however, be grateful if he takes on the responsibility to ensure that we are written to about the actions that the Government take against the enablers.

[John Glen]

I am very happy to engage with HMRC to get a letter setting out the action taken. I suspect that there might be some constraints on revealing details of individual live cases, but where data are available, I will make them available to hon. Members.

[Tommy Sheppard]

Will the Minister confirm, either now or in any such letter, the Treasury’s objectives in pursuing those companies? Is it to take retrospective action against them to try to recover the great volume of money they received from selling those schemes?

[John Glen]

HMRC’s objective will be to secure the money owed, as per the rules of the tax system. HMRC has enormous power to levy charges of up to £1 million on those individuals who are not complying.

The schemes may have involved provision of a loan with no intention to repay it. The recipients of such payments enjoyed them no differently from the way any of us use our normal income. As such, in the eyes of HMRC, the payments have always been taxable.

I have acknowledged the comments of colleagues who said that the charge on disguised remuneration loans will apply to loans that were made as far back as 1999. It is fair to say that the schemes were never permitted. They were defective, going back to then.

[Mr John Hayes]

We now learn from the Minister that HMRC knew that the schemes were inappropriate from the outset. So is he saying that HMRC is not malevolent but indiligent, inefficient and ineffective? If HMRC knew that, and the schemes were mainstream for 20 years, why is it acting only now?

[John Glen]

I thank my right hon. Friend for his point. Every scheme will be taken individually. They were not one single scheme that was developed. It is for HMRC to open cases on the disguised schemes, which it has done—going back many years on some of them—and it will take action as appropriate. A concern has been raised in the debate about not determining an outcome, and my hon. Friend the Member for Wycombe raised the concern about the implication that, when a tax avoidance scheme has been disclosed, that is somehow a verification or an endorsement of it. That is a misleading perception that has been left, and something for which HMRC should be accountable.

[Mr Hayes]

Forgive me. I will not intervene more than twice on the Minister, because I know he wants to make progress. I have always regarded HMRC as an efficient organisation that goes about its business properly. Is this not about the Government? The Government took a view about all this and I suspect that, although it may be true that HMRC is implementing Government policy, this is really about the Government changing their mind. That is what we are asking for.

[John Glen]

The Government that my right hon. Friend was part of and, I believe, a Minister in at the time the legislation was passed. [Interruption.] Let me make some progress.

Although the measure subjects the loans to a tax charge, that 2019 charge applies only to current loan balances and does not arise until April 2019. Recipients of loans can still repay outstanding balances in full or settle with HMRC. The legislation is not retrospective because it sets out Parliament’s intention: payments subject to the loan charge should always have been, and will be, subject to tax. The announcement in the 2016 spring Budget by the former Member for Tatton provided scheme users with a three-year period in which to repay disguised remuneration loans or agree a settlement with HMRC to avoid the charge.

[Kirstene Hair (Angus) (Con)]

Nearly 50% of those who are liable for the loan charge have not had any communication with HMRC since June 2016. Some of them are my constituents. Does the Minister agree that HMRC must accelerate its communications, to take that cloud of uncertainty away from those who are affected?

[John Glen]

I thank my hon. Friend for that point. There have been 24,000 contacts with HMRC. The number of telephone calls has increased from 2,000 to 4,000 a week and extra resources have been made available by HMRC, but I am happy to take up any individual cases that my hon. Friend may wish to bring to me.

In the view of the Government and of HMRC, the payments were always taxable as income, and the new legislation reiterates and formalises that stance.

[Anna Turley (Redcar) (Lab/Co-op)]

The Minister is being very generous with his time. That final point reiterates the issue here. I have constituents who are employed in the construction industry and when they were taken on by the agencies—the umbrella companies—through which they had to go to access the work, they simply were not aware of their liabilities and were not made aware of them. This is a natural justice issue. The policy is harming people who are not particularly well paid, have done everything right and are being unfairly punished.

[John Glen]

The responsibility to settle tax affairs is on an individual basis. If an employer forced an individual into a tax arrangement of this sort, the employer would be in a liable position.

[Several hon. Members rose—]

[John Glen]

Let me make some more progress or, despite the time I have, I will not get to the end of my speech and I want to address the points raised.

Anyone who has been involved in legal action will be well aware that it can be protracted and expensive for all concerned. Agreeing a settlement with HMRC allows taxpayers to move on, and out of avoidance for good. In most cases, any users of schemes will be better off approaching HMRC and agreeing a settlement rather than waiting for the charge next April, and HMRC is encouraging anyone worried about being able to pay to get in touch as soon as possible.

[Joseph Johnson]

On the point about taxpayers wanting to move on, several of my constituents have requested settlement sums from HMRC but have not received a response, notwithstanding the passage of several months. That is prolonging their uncertainty and anxiety. Will the Minister take steps to ensure that HMRC responds to those requests for settlement as rapidly as possible?

[John Glen]

I certainly will. I took the precaution of speaking to the Financial Secretary again this morning, and I would like to clarify that, with the time-to-pay arrangements, the five-year period will automatically be put in place for those with incomes of less than £50,000. For those with larger incomes, there is an opportunity for dialogue with HMRC. With respect to individuals who have not had that settlement made known, I will be happy, as we all will as constituency MPs, to take those cases up with HMRC.

HMRC is helping thousands of scheme users to get out of avoidance for good.

[Kirsty Blackman]

rose—

[John Glen]

Just one moment. It will consider all personal circumstances to agree a manageable and sustainable payment plan wherever possible, and it has recently announced simplified payment terms for individuals looking to settle their tax affairs before 2019.

I want to address another issue of the debate. Those who oppose the legislation have made claims that the loan charge will bankrupt public sector workers, including teachers, nurses and social workers. It is my understanding that 1,500, or 3%, of individuals will be involved in the health and education sectors but that most of the scheme users worked in professional services. The average salary of the scheme users was £66,000, which is considerably higher than the average annual wage.

[Lyn Brown]

rose—

[John Glen]

In fairness, I should allow the hon. Member for Aberdeen North (Kirsty Blackman) to intervene.

[Mr Charles Walker (in the Chair)]

There is no time, Minister. You have 40 seconds.

[Kirsty Blackman]

I have contacted HMRC on behalf of constituents and have been told that it cannot talk to me about those individuals and that they will get an answer by 5 April. That is not helpful.

[John Glen]

I obviously cannot respond on an individual’s situation, but what I will say is that disguised remuneration schemes are complex and contrived and, as my hon. Friend the Member for Wycombe said, fail the “too good to be true” test.

Although the Financial Secretary and I have tremendous sympathy for those facing large tax bills, it is unfair to let people get away with not paying the tax they owe. There is support for people who have used the schemes and now find themselves in difficult situations, which require those affected to approach HMRC and bring the matter to a close. I will now allow my hon. Friend the Member for Wycombe to make some concluding remarks.

[Mr Baker]

I am grateful to everyone who has come to the debate and participated. The debate has overwhelmingly avoided straying into the partisan, for which I am grateful. I listened carefully to all the speeches and I do not think anyone stood up and sided with those who think it is legitimate to be paid through loans that have been made with no intention of repayment—no one stood on that side of the argument. What we have seen is how people have been drawn, or even driven, into such schemes, and that is the heart of the injustice.

We have heard stories of human suffering that would melt any heart, which brings us on to the heart of the matter—the rule of law. Once again, my hon. Friend the Minister has earned my admiration, because he seems to get all the Treasury’s toughest gigs. I sometimes wonder whether he should have been promoted to the Department for Exiting the European Union for a little break.

[John Glen]

No thanks.

[Mr Baker]

He will have heard the response of people present when he explained that the measure is not retrospective, and I really hope that the Treasury goes away, looks at the measure again and eliminates retrospection. When people have acted in good faith under advice and end up subject to injustice, we must uphold the principle of the rule of law. Some might then say that they had got away with it, but sometimes we have to say, “While we don’t stand on their side and we accept that it was not Parliament’s intent, we respect that there is a price to be paid for upholding the rule of law so that in the end we can preserve human liberty and justice.”

Motion lapsed (Standing Order No. 10(6)).

Draft Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018

John Glen Excerpts

Monday 19th November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018.

May I first say what a pleasure it is to serve under your chairmanship, Mr Bailey? Claims management companies offer advice and other services to consumers making claims for compensation. The Government have been consistently clear that a well-functioning CMC market provides vital support for consumers, who may otherwise be unwilling or unable to bring a claim for compensation themselves, and that CMCs benefit the public interest by acting as a check and balance on business conduct.

Robust regulation is important, as CMCs handle millions of pounds’-worth of consumer claims. However, there is significant evidence of misconduct in the CMC sector. Between 2015 and 2017, 443 warnings were issued to CMCs and 135 licences were cancelled by the regulator. As a result, consumers are distrustful of CMCs—76% reported to the legal ombudsman that they are not confident that CMCs tell their customers the truth.

The majority of stakeholders feel that the current regulator lacks sufficient powers and resources to supervise the market properly. That is why the Government are committed to strengthening claims management regulation. The draft order delivers on that objective by making provisions for the transfer of claims management regulation to the Financial Conduct Authority.

The provisions in the Financial Guidance and Claims Act 2018 lay the framework for strengthening the regulation of CMCs under the FCA. The draft order implements that framework by transferring the existing Compensation Act 2006 regulatory regime to the FCA and the Financial Ombudsman Service, with some changes, including extending claims management regulation across Great Britain for the first time. Consumers in England, Wales and now Scotland will have the same protections with regard to CMCs.

The draft order creates seven different permissions for claims management activity. That will make it possible for the FCA to take into account the different types of work and activities across each sector. Each CMC will require separate permissions, depending on the specific activities it wishes to undertake and sectors it wishes to operate in. Depending on which sectors they operate in, some CMCs may require just one permission while others may require several. That replaces the current regime, with a single permission covering all regulated conduct across any combination of activities and sectors.

We have kept the sectors that were regulated by the Claims Management Regulator—personal injury; financial products and services; employment issues; industrial and criminal injuries; and housing disrepair. We have focused on those sectors with the greatest potential for detriment associated with unregulated CMCs or a high number of spurious claims. The majority of claims management activity is in the financial services sector, which accounted for 74% of CMC turnover in 2017-18. We of course recognise that some sectors that CMCs operate in are not named in the draft order. We will monitor developments closely and consider how the Government can best meet that challenge.

The draft order sets out who is exempt from regulation by the FCA for the claims management activity they carry out. The issue of the exemption of solicitors came up during the passage of the Financial Guidance and Claims Act 2018, when some concern was expressed that unscrupulous CMCs would attempt to circumvent regulation by employing solicitors, who are exempt from regulation by the Claims Management Regulator, to carry out their claims management activity. I can reassure the Committee that solicitors are already strictly regulated by the Solicitors Regulation Authority for their work, which is often very similar to claims management work. The purpose of the exemption in respect of their claims management activity is to ensure that solicitors are not unduly burdened by dual regulation. That exemption applies only to the claims management activity that a legal professional carries out in their ordinary work as a solicitor.

The order includes vital provisions to ensure that the transition of regulation is a smooth and orderly process. A temporary permissions regime will be in place after the transfer on 1 April 2019. That will allow firms that have notified the FCA of their desire to transfer to the new regulatory regime to continue to benefit from authorisation until their full permission application has been determined. That should allow CMCs time to adjust to the new regulatory regime.

We are confident that the provisions of the 2018 Act, implemented by the order, will allow the FCA to introduce a regulatory regime that enhances both consumer protection and professionalism in the sector. The Government are confident that the FCA will be well placed and that it has the relevant resources to regulate the sector effectively. Bringing regulation under the remit of the FCA brings its expertise in conduct regulation. In addition, it will be able to leverage its strong existing relationships with other financial services organisations, such as the Financial Ombudsman Service, which will handle complaints about CMCs, and the Information Commissioner’s Office, which enforces the restrictions on cold calling by CMCs.

The Government believe that the new regime defined in the order will bring proportionate and professional regulation to the CMC sector. The Government hold firm to the belief that a well-regulated claims management sector can provide an important service to consumers by assisting them to claim the redress they are due. I hope that colleagues will join me in supporting the draft order, which I commend to the Committee.

--- Later in debate ---

[John Glen]

I thank the Committee for the serious questions and the range of issues raised. I will do my best to respond to all the questions. I will start with the hon. Member for Oxford East, who asked about progress on the cold calling plan. The Chancellor announced it in the Budget and laid a statutory instrument two days later banning cold calling in relation to pensions. It will be debated later in the year and hopefully will be in force early in the new year. I texted her counterparts on the Labour Front Bench to make them aware of that.

[Anneliese Dodds]

I am grateful to the Minister for enlightening us on that. However, we are talking about claims management rather than pensions.

[John Glen]

I will move on to that in a moment. I also want to touch on the point about the ICO as an enforcer, and why not the FCA. There are two debates here. The hon. Member for Garston and Halewood asked about the FCA’s suitability. One issue that has come up—my hon. Friend the Member for South Norfolk mentioned it as well—is the ICO’s experience and powers to enforce the restrictions on CMC cold calling. The ICO can levy fines of up to £500,000 for breaches of the Privacy and Electronic Communications (EC Directive) Regulations 2003. It has the international reach to enable enforcement action when companies are operating abroad, and perhaps calling my hon. Friend.

The ICO and the FCA work together to establish whether the claims management company has FCA authorisation to carry out marketing activity. The FCA will be able to consider whether the CMC is in breach of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and will sanction appropriately. It is really about the concentration of the FCA’s skills and experience in this domain.

[Neil Gray]

I thank the Minister for explaining where the Government are trying to move to in terms of CMC cold calling, which was a hot topic of debate during the passage of the Financial Guidance and Claims Act 2018. What he has described does not go as far as banning CMC cold calling, although he has banned it for pensions. Why is he not banning it? That is what we are getting plagued with. The hon. Member for South Norfolk and many others will be in the same position as me.

[John Glen]

The Government believe that claims management companies fuel speculative claims for redress, that consumers struggle to understand the services that they offer, that there is a lack of transparency around how they operate, and that they offer poor value for money.

[Mr Bacon]

That is an answer to a question, but not the question, “Why aren’t they just banned?” I mentioned not the ICO, but the Solicitors Regulation Authority—

[John Glen]

I will come on to that.

[Mr Bacon]

Good, because I would still like to hear an answer to whether, in making the phone call, the person, who plainly has my name and number and who refers in the opening sales pitch of the conversation to an accident that did not take place, is committing a crime now, or will be under the new regulations.

[John Glen]

I will move on sequentially through the points made.

On the question about why the Government are not banning all cold calls, which I think is behind all this, we are determined to tackle CMC cold calling and pensions cold calling, but a balance needs to be struck between ensuring that consumers are adequately protected and providing the right conditions for the legitimate direct marketing industry to operate. I recognise that there is a debate about the extent of the coverage and which sectors should be covered, but we took a view about what should be included at this time so that we could make progress and lay the order. We are actively prepared to consider further sectors that should come under the order.

The hon. Member for Oxford East raised the issue of the interim regime’s funding. The FCA is making a one-off levy from April 2019, and it will continue to collect fees from industry. Having recently closed a fees consultation, it will release a policy statement later this year about the funding mechanism for that transition period.

[Anneliese Dodds]

I asked specifically about the resources available to the FCA for creating that interim regime at a time when it is under enormous pressure in other ways. Is it to be expected to fund all that through its existing budget and receive that levy only after 1 April? Surely that could pose some problems.

[John Glen]

The FCA has made provision for the funding of the activity, and it will make a policy statement later this year about how it will work after April.

I was asked about the impact of new FCA regulation on the fees, so I will give more detail. To cover the costs of the transfer, the firms will be required to pay a one-off levy spread over two to three years, which will be collected by the FCA. Clarification will be given later about the regime following that.

On the point about solicitors’ exemption, which goes to the point about regulatory arbitrage raised by my hon. Friend the Member for South Norfolk, there are strict controls in professional regulation under the SRA. The intention has been to have a tougher regulatory regime for CMCs without burdening solicitors with unnecessary regulation, because we believe that they are robustly regulated. Whether the two are aligned is a legitimate issue that needs ongoing review. We are concerned about the risks. The order is designed to close the potential loophole through a provision that removes the exemption for legal professionals if their claims management activity is not part of their ordinary legal practice. That is what has been happening: they have not been subject to FCA oversight because, in effect, they have been doing something that they could say was under their regulator but that the FCA has nothing to do with.

The FCA and SRA have therefore committed to reviewing their memorandum of understanding where it sets out how they will work together, to ensure that the regulation is effective and avoids precisely the matter that my hon. Friend raised.

In relation to FCA scrutiny, there is a statutory duty on the FCA to report to the Treasury, and that will cover CMC activity. The FCA will do that regularly—on an annual basis. Additionally, there are informal, three-weekly conversations between me and the FCA, and obviously I will be subject to scrutiny in the House. That mechanism is a real one: I am obviously pushing the FCA to get this right and it is keen to get it right.

The hon. Member for Airdrie and Shotts asked about the conversation with the Scottish Government. During the passage of the Bill that became the Financial Guidance and Claims Act, the Scottish Government confirmed that it would be proportionate and relevant to bring Scottish CMCs within regulation. This Government have had further, ongoing discussions with the Scottish Government and the Law Society of Scotland throughout the drafting of this legislation, and we are very happy that they are, obviously, included in it.

My hon. Friend the Member for South Norfolk asked about the current status of someone making a cold call. The 2018 Act prohibits anyone from making an unsolicited marketing call in respect of claims management activity. As I have said, that is enforced by the ICO, which has the power to levy large fines and has international reach. Under this statutory instrument, any advertising of claims management services must have prior authorisation by the FCA. Breaching the regulations and failure to have FCA authorisation will be an offence. There has been greater clarity about telephone numbers having to be published, but the ICO is the place where my hon. Friend could take the calls that he is facing.

[Anneliese Dodds]

I am grateful to the Minister for being so generous with his time. May I try to clarify something? Surely we are talking about two different forms of authorisation. This may have been in the Minister’s mind anyway when he was talking; I am not sure. There is authorisation by the regulator, but also by the person who is being rung by the claims management company. Surely they are two quite different things.

[John Glen]

Somebody should not be called unless they have given explicit permission to be called, so it is an illegal act if that permission has not been given.

My hon. Friend the Member for South Norfolk asked whether this regulation covers banks. No, they will be covered by their FCA authorisation and supervision, so they are covered but not under these provisions.

[Mr Bacon]

On the Minister’s previous point, when he said that calling would be an offence, he did not say whether it would be a criminal or a civil offence. Could he do so?

[John Glen]

It would be a criminal offence, but I will be happy to clarify the situation exactly in a letter to my hon. Friend subsequently. I think that I have covered the point about the SRA and regulatory arbitrage.

A point was raised about other sectors—this point came through a lot in the passage of the main legislation —by the hon. Member for Garston and Halewood. The Government are actively examining the extent of the coverage. According to my initial statistics, in 2017-18 financial products and services claims made up 79% of CMC turnover and personal injury made up all the remaining turnover. A point that has often come up is about coalminers. If they do not already come under personal injury, we will be able continually to observe, and possibly extend, coverage, based on whether a discrete additional category is needed.

In relation to the next steps on this regulation, if the Committee approves the order today, the regulation will transfer to the FCA on 1 April 2019. The FCA regularly updates its rulebook. It is a robust regulator, which I have frequent dialogue with, and is subject to scrutiny.

[Sir Oliver Heald]

Does my hon. Friend agree that since 2006 there has been a problem in finding the right regulator for CMCs? The advantage of the FCA is that it is a big regulator that already covers a lot of businesses and has a lot of capacity to tackle the area, unlike the original trading standards-type regulation that was introduced in 2006. It was always intended that what the MOJ did would be a temporary measure. Is it not to be welcomed that the area will now have a robust and substantial regulator?

[John Glen]

I entirely agree. That is the purpose of the draft order, which will enable claims management regulation to be transferred to the FCA and the Financial Ombudsman Service. Given the breadth of their existing regulatory oversight, that will satisfy the concerns of those who want a more robust regulatory regime in place. Consumers will benefit from a well-regulated and professional claims management industry. The industry can provide important services to some consumers, but there needs to be confidence in how difficulties are handled.

[Neil Gray]

I do not believe that the Minister has adequately addressed the point raised about the five-year wait for monitoring. He says that he is accountable to the House. Of course he is, but it would be far more useful if he could lay progress reports before the House and have more frequent voluntary reviews to allow proper scrutiny of progress.

[John Glen]

My view is that there are clear categories that the Government have been challenged on with respect to inclusion. There was a judgment to be made about what was to be included in the order at this point in time, but I would seek to make regular reports to review progress—far more frequently than every five years, which is the formal requirement. It would certainly be within the FCA’s remit to introduce changes far more regularly; if the hon. Gentleman reflects on the FCA’s work on high-cost credit, he will agree that its interventions have led to more rapid changes. My expectation is that the regulator will respond to market changes and consider the appropriateness of extending to additional categories.

I hope that the Committee has found this evening’s sitting informative and will support the order.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018.

Draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018 Draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018

John Glen Excerpts

Tuesday 13th November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018.

[The Chair]

With this it will be convenient to consider the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018.

[John Glen]

It is a pleasure to serve under your chairmanship, Mr Hanson.

An essential part of preparing for a potential no-deal scenario in which the UK leaves the EU without a deal or an implementation period is ensuring that there continues to be a functioning legislative and regulatory regime for financial services in the UK. To deliver that, the Treasury is laying statutory instruments before Parliament under the European Union (Withdrawal) Act 2018, several of which have already been debated in this place and in the House of Lords. Both sets of draft regulations before the Committee are part of that comprehensive programme. They will fix deficiencies in UK law relating to the regulation of e-money institutions, payment institutions and account information service providers, as well as making transitional provisions. They align with the approach taken in other SIs laid under the 2018 Act by maintaining existing legislation at the point of exit to provide continuity, but amending it where necessary to ensure that it works effectively in a no-deal context.

The regulatory regime that applies to payment institutions, electronic money institutions and account information service providers, and the rules for facilitating payments and issuing electronic money for those institutions, are created by various pieces of EU legislation: the EU directives on payments and electronic money, which were implemented in the UK through the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 respectively, and the EU’s directly applicable regulation on credit transfers and direct debits in euro.

In a no-deal scenario, the UK would be outside the European economic area and outside the EU’s legal, supervisory and financial regulatory framework. The existing legislation needs to be updated to reflect that and amended to ensure that its provisions will work properly in such a scenario. Furthermore, in a no-deal scenario, the UK will no longer automatically maintain participation in the single euro payments area, which enables efficient, low-cost euro payments to be made across EEA member states and non-EEA countries that meet the governing body’s participation criteria. SEPA is a key enabler of trade between the UK and other EEA member states and non-EEA participants.

To ensure that the legislation continues to operate effectively in the UK once the UK has left the EU, and to maximise the prospects of the UK maintaining participation in SEPA in a no-deal scenario, the draft regulations will make amendments to retained EU law relating to the 2017 and 2011 regulations and to the EU regulation on credit transfers and direct debits in euro. I will set out the approach taken in each set of draft regulations and the interaction between their provisions and the UK’s future participation in SEPA.

The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations will make the following principal amendments to the 2017 and 2011 regulations. First, they will create a temporary permissions regime for payment firms. Should the UK leave the EU without a deal, there would be no agreed legal framework under which the passporting system implemented for EEA payment firms under the Payment Services Regulations could continue to function, so firms from the EEA would not legally be able to operate in the UK. The draft regulations will therefore create a temporary permissions regime for such firms that is similar to, but separate from, the regime set out in the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which applies to firms regulated under the Financial Services and Markets Act 2000 and has already been debated in the House.

Secondly, the draft regulations will make changes to ensure the continued effective safeguarding of consumer funds. To provide consumer protection in the event of an institution becoming insolvent, the Payment Services Regulations require payment institutions and electronic money institutions to safeguard consumer funds to ensure that they are paid out in priority to other creditors. The most common method of safeguarding funds is for the firm to hold them in a segregated account with a credit institution. A considerable number of UK firms hold safeguarding accounts in the rest of the EU. They will still be able to do so once the draft regulations come into force, but they will also have the option of using safeguarding accounts based anywhere else in the world, subject to adequate guarantees of consumer protection. This is in line with existing practice for protecting client assets and investments.

Thirdly, the draft regulations will remove the provisions that currently require supervisory co-operation with EU authorities. In a no-deal scenario, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or co-operate with EU authorities, so the provisions that require co-operation and information sharing with the EU have been removed. However, that will not preclude UK authorities from sharing information with EU authorities if appropriate, which the existing domestic framework for co-operation and information sharing with countries outside the UK allows for on a discretionary basis.

Fourthly, the draft regulations will transfer to the appropriate UK bodies functions currently carried out by EU authorities. Under the payment services directive implemented by the Payment Services Regulations, responsibility for drafting regulatory technical standards currently sits with the European Banking Authority. In line with the Government’s cross-cutting approach to the transfer of functions, the draft regulations will ensure that those functions are transferred to the appropriate UK body, the Financial Conduct Authority.

The draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations will make the following principal amendments to the retained EU regulation on credit transfer and direct debits in euro. First, they will introduce the concept of a qualifying area, comprising the UK and the EEA, within which they will apply to UK payment service providers’ euro-denominated transactions. The qualifying area is broadly aligned to the geographical scope of SEPA, but it does not include SEPA’s existing non-EEA country participants; EU law does not include those countries, so it is not possible to include them in UK law under the European Union (Withdrawal) Act.

Secondly, the draft regulations will transfer to the appropriate UK body functions currently carried out by EU authorities. Under the regulation on credit transfer and direct debits in euro, the European Commission may adopt delegated acts to take account of technical progress and market developments. In line with the Government’s cross-cutting approach on the transfer of functions, the draft regulations will ensure that those functions are transferred to the appropriate UK body, Her Majesty’s Treasury.

Finally, let me turn to the interaction between the UK’s future participation in SEPA and the provisions made in both sets of draft regulations. The UK payments industry is required to make an application to maintain participation in SEPA as a non-EEA country in a no-deal scenario; I understand that UK Finance, which represents UK payment service providers, has made such an application on behalf of the industry. Applications from non-EEA countries are determined by the European Payments Council by reference to its published criteria for non-EEA country participation. Through the draft regulations, the Government intend to retain relevant EU law in a way that maximises the prospects of the UK maintaining participation in SEPA.

Should the UK not maintain participation in SEPA in a no-deal scenario, UK payment service providers would be unable to comply with some of the requirements in UK law that presuppose the existence of euro-denominated transactions within SEPA. To cater for that scenario, the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations will give HM Treasury limited powers to revoke certain requirements to prevent detrimental effects on UK payment service providers.

In summary, the Government believe that the draft regulations are necessary to ensure that the regulatory regime that applies to payment institutions, electronic money institutions and account information service providers works effectively if the UK leaves the EU without a deal or an implementation period, and to maximise the prospects of the UK maintaining participation in SEPA to the benefit of UK consumers, businesses and the wider UK economy. I hope that colleagues from all parts of the House will join me in supporting the regulations. I commend them to the Committee.

--- Later in debate ---

[John Glen]

I will respond to the substantive points raised by the hon. Members for Stalybridge and Hyde and for Glasgow Central. First, I remind the Committee that these statutory instruments are needed to ensure that the regulatory regime that applies to payment institutions, electronic money institutions and account information service providers works effectively if the UK leaves the EU without a deal or an implementation period, and to maximise the prospects of the UK maintaining participation in SEPA.

The hon. Member for Stalybridge and Hyde spoke about the undesirability of this process. I acknowledge that going through 30 or so debates in this place is an interesting experience, but we are doing it to ensure that, in the unlikely scenario of no deal, we have a comprehensive regime in place.

On the overall situation with financial services, the negotiations are ongoing. I acknowledge the speculation over whether we have reached a deal. I am not able to confirm anything, but we are seeking to establish a strong bilateral relationship with EU regulators to fully mitigate the risks of being subject to equivalence decisions that are, at the moment, inadequate. I cannot comment further on that, nor on the progress on the deal as a whole. Members will appreciate that, as a relatively junior Minister at the Treasury, I am not privy to that information.

I can comment on some meaningful points. Concerns were raised about changes to consumer safeguarding as a result of the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations. The Payment Services Regulations 2017 require that payment and electronic money institutions safeguard consumer funds to protect consumers in the event of an institution becoming insolvent. The most prevalent method used to safeguard funds is for the firm to hold them in a segregated account with a credit institution. A significant number of UK firms hold safeguarding accounts in the rest of the EU, and they will still be able to do so once the statutory instrument comes into force. They will also have the option of using safeguarding accounts based elsewhere in the world, subject to adequate guarantees of consumer protection. That is in line with existing practices for protecting client assets in investments.

On the consultation undertaken, the hon. Member for Stalybridge and Hyde quite reasonably said that the usual process has been somewhat truncated. None the less, the draft regulations were published on 5 September and laid on 9 October. Consultation took place with key lobby groups in the industry, in particular UK Finance. We held a series of bilateral conversations with banks, FinTechs, payment providers such as PayPal and lawyers to verify the credibility of the statutory instruments. Although we have not undertaken a formal consultation on the statutory instruments, we have submitted them for approval in terms of the impact assessment and we expect that to come through imminently—next week, I hope.

I was asked about the impacts if the UK loses access to SEPA. SEPA enables efficient, low-cost euro payments to be made across participants. If, as expected, the UK secures a withdrawal agreement from the EU, EU law will be applicable in the UK during the implementation period and the UK will automatically remain within the geographical scope of SEPA. The Government’s approach to onshoring legislation is designed to maximise the prospects of the UK maintaining participation in SEPA in a no-deal scenario.

On the determination of the application to SEPA, which was raised by the hon. Member for Glasgow Central, UK Finance has made an application. Applications from non-EEA countries are determined by the European Payments Council, which is an international not-for-profit association; it is not part of the EU institutional framework. I cannot give the hon. Lady a categorical assurance over the timetable, because it is a matter for the EPC. UK Finance is in dialogue with it and has made the necessary provisions to do that in a timely way.

The hon. Lady also raised the impact of the UK losing access to SEPA. I think I have covered that.

[Alison Thewliss]

No, you have said what the impacts are if we stay in.

[John Glen]

I am sorry: what are the impacts if the UK loses access to SEPA? In the unlikely scenario that the UK does not maintain participation in SEPA, UK consumers could face higher transaction costs and longer transaction times when making euro payments. That is precisely why we are making these provisions and I am happy to concede that. That is what underpins the whole of this legislative effort through statutory instruments.

The hon. Member for Stalybridge and Hyde asked why safeguarding goes beyond the EEA. In order to protect consumer interests, we wanted to make it possible for firms to use as wide a range of safeguarding accounts as possible. Restricting them only to UK accounts could place a burden on firms and restricting them only to EEA accounts would not be legally viable under World Trade Organisation rules on a most favoured nation status.

I hope that I have answered all the questions that were raised. There are two more, possibly. The hon. Member for Glasgow Central asked if the EU will engage with UK authorities on the same information sharing basis. Obviously, that is ultimately a matter for the EU and will be determined by EU law after we leave, but we hope that the UK authorities and the EU authorities maintain a constructive working relationship. Having visited two EU countries last week, I think there is a lot of good will towards the maintenance of that relationship, and that underpins our approach to the negotiations.

We should not assume that in a no-deal scenario there would be outright hostility to the UK; we hope we would be able to manage that. [Interruption.] I am seeking to be as constructive and reasonable as possible. I do not mean to be flippant about it. We are doing everything that we can to ensure that those relationships are as strong as possible. Throughout the last 40 years, we have played a leading role in influencing the regulation of financial services and many are uncomfortable with us leaving, but that means that the dialogue can still be very constructive in terms of our influencing future regulation.

Finally, the hon. Member for Stalybridge and Hyde asked about the prioritisation of the SEPA measure. It is a priority, as part of the Government’s approach to onshoring legislation. It is designed to maximise the prospects of the UK maintaining participation in SEPA. We are having a complex series of engagements in these Committees, but I am reassured that we have had a full discussion. I hope that the Committee is reassured and has found the sitting informative, and that we will now be able to support the regulations.

Question put and agreed to.

DRAFT ELECTRONIC MONEY, PAYMENT SERVICES AND PAYMENT SYSTEMS (AMENDMENT AND TRANSITIONAL PROVISIONS) (EU EXIT) REGULATIONS 2018

Resolved,

That the Committee has considered the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018.—(John Glen.)

Treasury

John Glen Excerpts

Monday 12th November 2018 Ministerial Corrections

[Ian Murray (Edinburgh South) (Lab)]

The Minister has been asked five times to identify the figures for unemployment if we leave the customs union, so let us make it easier for him: will unemployment go up or will it go down?

[John Glen]

What I can say is that unemployment in this country is at a record low, demonstrating the coherence of this Government’s economic policy.

[Official Report, 22 October 2018, Vol. 648, c. 32.]

Letter of correction from the Economic Secretary to the Treasury:

An error has been identified in my response to the hon. Member for Edinburgh South (Ian Murray).

The correct response should have been:

[John Glen]

What I can say is that the unemployment rate in this country is the lowest since 1975, demonstrating the coherence of this Government’s economic policy.

Oral Answers to Questions

John Glen Excerpts

Tuesday 6th November 2018 Commons Chamber

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

4. What assessment he has made of the potential effect on the OBR’s Budget 2018 forecasts of the UK leaving the EU without a deal.

[The Economic Secretary to the Treasury (John Glen)]

The Office for Budget Responsibility has set out its forecasting assumptions regarding EU exit and will update them when the details of a deal justify a forecast change. Parliament will be presented with the appropriate analysis to make an informed decision ahead of the vote on the final deal. It is in the interests of the EU and the UK to strike a deal, and we remain confident that we are on track to achieve a mutually advantageous deal in the near future.

[Mr Bailey]

The Chancellor’s Budget measures were based on OBR assumptions of an orderly withdrawal from the EU and a 21-month continuation in the customs union. In the event of a no deal, will the Minister share with the House the assessment he has made of the potential decline in tax revenues and consequential changes to his tax and spending plans in the Budget?

[John Glen]

The Government are fully committed to achieving a good deal with the EU. We will make lots of assessments during that process, but our mind is focused on achieving that deal and the Government will achieve it.

[Nicky Morgan (Loughborough) (Con)]

Mr Speaker, through you, may I assure all Members of this House that the Treasury Committee will take very seriously the job of scrutinising the analysis produced by the Treasury on the final deal on behalf of all Members, and will let Members know the conclusions that we draw from that before the meaningful vote?

My hon. Friend the Minister may well be aware of the OBR discussion paper published last month on Brexit and the OBR’s forecasts. Paragraph 1.27, which talks about the risk of a disorderly Brexit, says that

“while not a direct parallel, it is worth noting that the ‘Three-Day Week’ introduced in early 1974…was associated with a fall in output of…under 3 per cent that quarter.”

The shadow Chancellor might think that the 1970s was a good way to manage the economy, but can my hon. Friend assure us that he does not think that that is the way forward for this country?

[John Glen]

That is certainly not the way forward. I can assure my right hon. Friend that we are doing everything we can to plan for all eventualities. That is why I am taking through a large number of statutory instruments to take account of all possibilities next year, but we are working on, and focused on, achieving a good deal.

[Helen Goodman (Bishop Auckland) (Lab)]

There is no estimate in the Red Book for the benefits to tax revenues of the measures that we took in the Sanctions and Anti-Money Laundering Act 2018. Is that because Ministers are holding that money in their back pocket in case of a no deal?

[John Glen]

What is clear is that we will have greater freedom in terms of how we implement a sanctions and anti-money laundering regime, and that will give us the opportunity to fix measures that are appropriate for this country, and the revenues will flow from that.

[Leo Docherty (Aldershot) (Con)]

Surely the greatest threat to this country is not no deal, but a Labour Government and the tax bombshell that would come with them.

[John Glen]

I agree wholeheartedly with that characterisation of the risks associated with the Opposition ever getting into power. The enormous increases in taxes for businesses would hit consumers and be appalling for the state of the economy.

[Lee Rowley (North East Derbyshire) (Con)]

5. What steps he is taking to increase productivity in the economy.

--- Later in debate ---

[Gareth Thomas (Harrow West) (Lab/Co-op)]

T4. The co-operative movement in the UK has a turnover of £36 billion. Given that it employs thousands, and that thousands will benefit as a result of the economic and social benefits that co-operatives bring, why was there no mention of the co-op movement in the Budget?

[The Economic Secretary to the Treasury (John Glen)]

As the hon. Gentleman knows, the co-operative movement is very important to our economy; we have met to discuss various aspects of its future. I am happy to meet him again to discuss the matters that he wishes to bring forward.

[Luke Hall (Thornbury and Yate) (Con)]

T7. Does the Budget not demonstrate that we have turned around the economic catastrophe left to us by the Labour party to deliver billions of pounds for public services, and tax cuts for millions of people up and down this country?

--- Later in debate ---

[Chris Bryant (Rhondda) (Lab)]

If we took every single person who has suffered a major traumatic brain injury—for instance, from a car crash—from needing four people in order to be able to wash, clothe and look after themselves to needing just one, and thereby leading a more independent life, we could save the taxpayers £5 billion a year. May I meet with the Chancellor to explain all this?

[John Glen]

rose—

[Chris Bryant]

With the Chancellor.

[John Glen]

As the hon. Gentleman knows, I have a previous interest in this subject. I commend the excellent work he has done with the all-party group on acquired brain injury, and am happy to meet him to discuss the matters he has raised.

[Mr Speaker]

Before we come to the first of the two urgent questions, I remind the House that the sitting will be suspended at 1.45 pm and will resume at 3.15 pm. That is to accommodate the fact that significant numbers of colleagues are going to the commemorative Remembrance service in St Margaret’s church. It might be useful for colleagues to know that both urgent questions will therefore finish by 1.45 pm.

Draft Building Societies Legislation (Amendment) (EU Exit) Regulations 2018

John Glen Excerpts

Monday 5th November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Building Societies Legislation (Amendment) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Hosie. The draft regulations are another statutory instrument to form part of the Treasury’s work to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario in which the UK leaves the European Union without a deal or an implementation period. These regulations fix deficiencies in UK law relating to building societies. They have been drafted using the same approach taken across all the financial services SIs that I have had the pleasure of introducing, laid under the European Union (Withdrawal) Act 2018.

The Building Societies Act 1986 and related legislation contain various provisions governing how building societies must act. Those include requirements relating to the UK’s membership of the European economic area. For example, one provision ensures that loans secured on UK land and loans secured on EEA land are treated equally. That has important consequences for building societies, as loans secured on land are used when defining who counts as a building society member in the original legislation. Loans secured on land are also used when calculating a building society’s lending limit—a legal requirement that ensures that building societies focus on their core business of mortgage lending. Other parts of the 1986 Act ensure that EEA bodies and UK companies are treated in the same way regarding transfers of business from a building society to a commercial company.

In a no-deal scenario, however, the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework. UK legislation relating to building societies therefore needs to be updated to reflect that, and to ensure that the provisions would work properly in such a scenario. The original legislation treats members of the EEA differently from other third countries in certain respects. Given that that will no longer be appropriate after exit day, the draft regulations will amend the 1986 Act and related legislation to equalise the treatment of EEA countries and other third countries after exit day.

To take the example that I have already set out, this draft SI amends the original legislation to ensure that new mortgages on properties in non-EEA states and in EEA states are treated the same after exit day. Members should note, however, that the instrument maintains pre-exit legal treatment of mortgages on properties in EEA states, providing contractual continuity for those building society members who have an existing mortgage on a property in an EEA state. Building societies will have to take that treatment into account when calculating lending limits and defining building society members. Members of the Committee should also note that no existing building society members will have their mortgages, savings or membership rights affected by the changes in this statutory instrument, and that no building society currently lends on property outside the UK—only a handful have done so in the past.

The original legislation also allows building societies to transfer business to and from companies and mutuals in EEA states, but not in countries outside the EEA. The draft SI will amend the legislation so that such transfers are no longer allowed, equalising treatment of EEA firms with other third countries. Members should note that no building society has yet used the provisions that are being removed; to date, all transfers of engagement have taken place between UK companies and mutuals.

The draft regulations replace several references to EU directives with equivalent references to the Prudential Regulation Authority’s rulebook, and ensure that the existing relationship between the UK and the Channel Islands, the Isle of Man and Gibraltar are maintained.

There are some potential costs for business linked to the restriction of the ability of building societies to lend on properties in the EEA. That is because the provisions in the draft SI will prevent building societies from diversifying too far into EEA lending, should they wish to. Members should note, however, that there will be no direct impact on building society balance sheets resulting from this instrument—no building societies are offering mortgages outside the UK, and only a handful have done so in the past. Any potential costs are therefore expected to be minimal.

As I emphasised this afternoon, in an earlier Delegated Legislation Committee sitting, if we enter an implementation period when we leave in March 2019, access to each other’s markets will remain the same, and the legislation will continue to apply as at present for the duration of the implementation period. However, the draft regulations contain practical measures necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves without a deal or an implementation period. I hope that Members will join me in supporting the draft regulations, which I commend to the Committee.

--- Later in debate ---

[John Glen]

I am keen to try to address the points raised by the hon. Gentleman. First, I reiterate that the Government believe that the draft regulations are necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves the EU without a deal or an implementation period. There is no intention whatsoever to make any policy change with respect to the governance and law surrounding building societies.

I note the hon. Gentleman’s reference to the issue raised by Lord Tunnicliffe in the other place and the comment on restricting the ability of building societies to lend on properties in the EEA post-exit. I think that issue was also raised in the impact assessment, which led to the question being asked in the Lords.

The change to the definition of loans secured on land means that building societies will be restricted from diversifying too far into EEA lending. This is a function of the lending limit that will apply, which requires building societies to secure at least 75% of their assets on residential property. Clearly, if they were continuing to lend in the EEA, that would not contribute to that 75%, which would really practically impact them, and therefore they would probably find it an undesirable lending decision to make. Also, as I said in my opening remarks, no building societies are currently proactively offering products for properties in the EEA.

As for the consultation, in line with the general approach to onshoring, the building society sector was not consulted on this SI. However, officials consulted extensively with the PRA, which has in-depth knowledge of each individual building society within the sector, when drafting the SI. Furthermore, the SI was shared with the Building Societies Association on its publication over the summer, and the BSA had no comments on it.

In conclusion, this SI does nothing to affect existing building society contracts. On exit day, all contracts between a building society and its customers, such as mortgage contracts, will remain unchanged. I hope that gives the hon. Gentleman the reassurance he seeks and answers the points he has raised. I commend the regulations to the Committee.

Question put and agreed to.

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

John Glen Excerpts

Monday 5th November 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Bailey.

As part of contingency preparations for a no-deal scenario, the Treasury is laying between 60 and 70 statutory instruments under the European Union (Withdrawal) Act 2018, to ensure that, in the unlikely scenario of the UK leaving the EU without a deal or an implementation period, a functioning legislative and regulatory regime will continue to be in place for the UK financial services sector. The SIs will do that by fixing deficiencies in applicable EU law that would be transferred directly on to the UK statute book at the point of exit, and in existing UK law to ensure that it continues to operate effectively after exit day. The SIs do not change policy; instead, they are intended to provide continuity as far as possible at the point of exit by maintaining current legislation.

Where existing EU legislation would not operate properly in a UK context in a no-deal scenario, we need to amend it, to ensure that it works effectively after we leave. The regulations deliver on a commitment made last December, when the Treasury announced that it would give the Bank of England functions and powers in relation to non-UK central counterparties and establish a temporary regime to enable those firms to continue to operate in the UK for a limited period after exit. That is similar to the approach we have taken to the European economic area firms that currently operate in the UK under the financial services passport, creating a temporary permissions regime that will allow them to continue operating in the UK for a limited period after exit, while they apply for authorisation. The debate on the instrument implementing that regime took place on 24 October.

Central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer, and they guarantee the terms of trade even if one party defaults on the agreement, reducing counterparty risk. As such, they are central to the UK and global financial system, reducing risk and making the system as a whole more resilient.

UK firms currently receive services from non-UK central counterparties under the framework set out within the European market infrastructure regulation. Under EMIR, non-UK central counterparties are permitted to provide services to UK firms if they are either located in the EU and authorised by their home regulatory authority, or located in a third country that has been deemed equivalent by the European Commission and the central counterparty is recognised by the European Securities and Markets Authority.

Should the UK leave the EU without a deal or an implementation period, it would be outside the single market for financial services, meaning that non-UK central counterparties would be unable to provide services to UK firms until they were recognised under the UK’s domestic regime. Given that many UK firms rely on non-UK central counterparties to provide clearing services and for mitigating transaction risks, such a sudden dislocation in the provision of services would introduce risks to those UK firms and financial stability risks to the broader financial system. The draft regulations therefore introduce measures to mitigate the risks and ensure a smooth continuation of services from non-UK central counterparties to UK firms.

First, the draft SI establishes a UK framework for recognising non-UK central counterparties while maintaining the same regulatory criteria for non-UK central counterparties to provide services in the UK. To do that, the European Commission’s responsibility for determining the equivalence of a third country jurisdiction’s regulatory and supervisory framework in respect of EMIR is transferred to the Treasury, and the Bank of England may provide technical advice from the Treasury on such decisions, in the same way as the European Securities and Markets Authority may, and does, provide such advice to the Commission currently.

In addition, functions of the European Securities and Markets Authority that relate to recognising individual central counterparties located in third countries will be transferred to the Bank of England, including the mandate to make technical standards specifying the information to be provided by CCP applicants. The Bank is the appropriate authority to take on that role, as it is already responsible for the authorisation of UK central counterparties.

Secondly, the statutory instrument will provide powers to the Bank to consider recognition applications ahead of exit day, so that the necessary steps to recognise non-UK central counterparties can be taken as soon as possible after exit day. In response to a point raised by Baroness Bowles when the SI was debated in the other place last week, I note that central counterparties are not required to apply for recognition ahead of exit day. Although they are able to do so and are encouraged to engage with the Bank on such matters as soon as possible, they will also be able to apply for full recognition after exit day.

Finally, the draft regulations will establish a temporary recognition regime for central counterparties. The regime will provide temporary recognition for a period of three years to non-UK central counterparties that intend to continue providing clearing services in the UK. The purpose of temporary recognition is to allow additional time for applications to be processed and for equivalence decisions to be made by the Treasury. Although non-UK CCPs are encouraged to engage with the Bank as early as possible, the TRR will ensure continuity of services in the event that a recognition decision cannot be made ahead of exit day. The statutory instrument also gives the Treasury a power to extend the regime for 12 months at a time if it is

“satisfied that it is necessary and proportionate to avoid disruption to…financial stability”.

The SI is essential to ensure that we have a functioning financial services regime in a no-deal scenario. It provides reassurance for non-UK central counterparties and the UK businesses and customers they serve that they will continue to be able to operate here, no matter the outcome of negotiations. The importance of the SI’s provisions is reflected in our announcement last December, which made it clear to industry well in advance of exit day that the Treasury would introduce legislation to deliver such a regime. The Bank of England is in the process of engaging with industry to ensure that the regime functions properly when the UK leaves the EU.

It should be noted that if, as expected, we enter an implementation period when we leave in March 2019, non-UK central counterparties that meet the current requirements will continue to be able to provide services to UK firms, because access to each other’s markets will remain the same during the implementation period. However, it remains prudent to continue to prepare for a no-deal scenario to provide certainty to the financial services sector that we are ready for all outcomes. In that context, the measures in the SI are a pragmatic approach to ensuring that UK firms can continue to access non-UK central counterparties if the UK leaves the EU without a deal.

I hope that colleagues from all parties will join me in supporting the draft regulations. I commend them to the Committee.

--- Later in debate ---

[John Glen]

I shall do my best to answer the questions that have been raised. I think it would also be helpful if I were to set the context with respect to powers under the European Union (Withdrawal) Act 2018. What is being done through the statutory instruments may be disputed by the Opposition, but it is ultimately a matter of the legislation that was passed. I am using the provisions to do everything I can to ensure that we have the right arrangements should there be a no-deal scenario. I recognise the points about the unusual nature of the process—the large number of statutory instruments. That is why I am committed to doing everything I can to facilitate meaningful scrutiny, dialogue and exchange of information in advance of Committee sittings.

The regulations are tightly constrained to fix deficiencies, not to make wider changes; this is not a power grab. The temporary recognition regime and other transitional arrangements are in line with the expectations of the industry, which needs certainty. It needs the contingency arrangements. I propose to go through the six questions and the additional points raised by the hon. Member for Glasgow Central and, I hope, answer them meaningfully.

First, as to the consultation, it is right to say that there has been long-standing engagement. It is done case by case, on the basis of the most appropriate mechanism. We announced it in December 2017 and published three letters over the course of this year. Engagement with relevant stakeholders in the industry has to vary according to different statutory instruments. In the case we are considering, I think it is fair to say that the arrangements we have undertaken have been well received by the industry, which welcomes the certainty we have given. Obviously there are a small number of players, and we have done what is necessary.

Secondly, the hon. Member for Oxford East is correct about the alignment of the Commission to the Treasury and the transmission of the ESMA powers to the Bank of England. The Treasury will make the equivalence decision, but the authorisation process will be carried out at a technical level with the appropriate skills in the Bank of England. That is purposefully aligned to the same distribution of roles from the Commission to ESMA.

Thirdly, on the question whether, if there were a need for an extension, it would be appropriate for the Treasury to make that provision using the negative procedure, that is an administrative, managerial decision. It is not based on any extension of the existing powers. It would be on the basis of a clear need to do so. The principle of what we are doing and the criteria for doing it are being discussed now; it is a translation of what already existed. The three years plus one arrangement is designed with industry convenience in mind.

Fourthly, as to the scope of EMIR and any changes, we are retaining most of EMIR as it currently applies in the EU and are unable to make significant policy changes, as I said, under the 2018 Act, so the legislation provides a good basis for discussions on equivalence with the EU. The hon. Lady raised the issue of regulation 14(1)(a) and the equivalence, as compared to EMIR,

“as it has effect in EU law as amended from time to time”.

Regulation 14 applies only before exit day. After exit day our approach to equivalence will be to compare third-country regimes to EMIR as onshored and part of domestic law. We will not necessarily as a matter of policy be following changes to EMIR in EU law; but equally it would not be our aspiration to deviate wilfully. There is obviously a lot of alignment. We start from a common starting point, and obviously we anticipate securing a deal on the basis of the alignment that currently exists.

Fifthly, the hon. Lady rightly pointed out the need for clarity the other way, in how the Commission deals with trades carried out through UK CCPs. It is welcome that, according to Tuesday’s Financial Times, Vice-President Dombrovskis has indicated a willingness to act to mitigate. That outcome is a function of the technical group dialogue that has been going on since April, and it has been welcomed in the City. More details are needed, but we have acted proactively to give as much assurance as we can, and that significant step forward is very welcome.

Sixthly, the hon. Lady asked about the mechanism to switch off the regulations. The SI itself does not include provision for switching itself off in the event of a deal, but the White Paper on the withdrawal agreement Bill confirmed that it would contain provisions to allow SIs like this one to be repealed, delayed or amended should a deal be secured. In the circumstances of a deal, we will do whatever is appropriate, and clearly this SI would not be necessary. The hon. Lady is looking at me quizzically.

[Anneliese Dodds]

I am grateful to the Minister for that explanation. Are we to understand that the decision whether to switch off any SI produced in the context of the withdrawal Act is ultimately in the gift of Ministers?

[John Glen]

To be honest, I will have to write to the hon. Lady to clarify that detail. The essential point is that the statutory instrument is for a no-deal scenario; if we get a deal, we will not need the SI because we will be in a close working partnership and we will have the implementation period. I will need to write to her about the precise mechanism that we would use to get rid of the SI or withdraw its provisions, but that is my attempt to answer her six questions.

The hon. Member for Glasgow Central asked about fees and, quite reasonably, echoed a number of other points. There has been dialogue with the industry on the fees, which will be proportionate to the process that the Bank of England will need to go through. In practice, these firms do not exist in massive numbers. I cannot give her the cost in pounds and pence, but it will be aligned to industry expectations and will not impede the choice to register.

[Alison Thewliss]

Can the Minister give any indication whether the fees will start straight away, or be phased in over a longer period?

[John Glen]

On the fees that will be necessary to go through the process of authorisation with the Bank of England, it would be best if I wrote to the hon. Lady to give clarity on how they will be applied.

I have had conversations with the relevant people in the Bank of England and am confident that it is making adequate preparations and effectively allocating resources ahead of March 2019. As demonstrated by the letters published in December 2017 and in March and October this year, the Bank will continue to work closely with CCPs to provide guidance on applications with a view to making the process run as smoothly as possible.

The hon. Lady made a wider point about resourcing and skills. I have checked the position, after previous debates in which the right hon. Member for North Durham made similar reasonable points, and there is provision for regulators to extend their resources if required.

I hope that I have adequately responded to points raised, that the Committee has found this afternoon’s sitting informative, and that it will join me in supporting the draft regulations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.

Leaving the EU: Central Counterparty Clearing

John Glen Excerpts

Thursday 1st November 2018 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

I congratulate the hon. Member for Nottingham East (Mr Leslie) on securing this debate and thank him for what he said. He set out very clearly the risks and the need for clarification. I am very happy to give him the answers to the questions that he has posed in his thoughtful and helpful speech.

I, first, wish to acknowledge the issue of no deal and to clarify from the outset that the Government firmly believe that it is in the interests of the EU and the UK to strike a deal. That remains the clear goal on both sides and we are confident that that will be achieved. I reassure the hon. Gentleman and the whole House that an enormous amount of work and dialogue is going on at all levels in order to understand the issues that exist on both sides.

Our proposal for the future UK-EU relationship in financial services seeks to be both negotiable and ambitious. It is founded on preserving the economic benefits of the most important financial services traded between us and on ensuring stable institutional processes for governing the relationship into the future. That is the best way to protect financial stability and open markets, and it is in the interests of businesses and consumers on both sides. Just for clarification, under our plan, we would build on the EU’s existing equivalence regimes but expand their scope to recognise business activities that are in the interests of both the EU and the UK but not covered by the existing regime.

[Mr Leslie]

Just stepping back from the specifics, on the policy stance of the UK Government, are we intending to remain in lock-step with our European neighbours in terms of the regulatory approach that we take—as a matter of philosophy? The Americans would perhaps like us to depart from that, but it feels to me important, for our existing market access, that a commitment is given to preserve some of the harmonies that we already have.

--- Later in debate ---

[John Glen]

I am very happy to respond to that point. We are seeking to recognise that we start from a common starting point. What we acknowledged in the White Paper in July is that there is an appetite on both sides—on the part of the UK and the EU—to retain the autonomy around their supervisory bodies. But we need to develop a strong bilateral relationship in the future should either side wish to innovate and deviate from the existing alignment, so that we can then have a strong bilateral dialogue on how to resolve any disputed areas.

However, I reassure the hon. Gentleman that we are not seeking to differentiate ourselves and to become a bargain-basement regulatory environment. We secure such significant investment in the City of London because of the world-class nature of our regulatory environment. In fact, we have led the way in many of the dialogues over the years within the EU. So our aspiration is an ambitious one and it is based on a strong trading dynamic with the EU into the future.

I want to move into the specifics, because the hon. Gentleman has raised some significant and sensible points. We are prepared for all outcomes, including for no deal. The Government recognise that, in the event of a no deal, this is a critical issue. We are not complacent and he has set out the stakes clearly, which are so high for jobs and livelihoods up and down this country.

As the Financial Policy Committee has said, £69 trillion- worth of centrally cleared derivative contracts could be affected. Central counterparties, as the hon. Gentleman set out, are financial institutions that firms use to reduce counterparty risk. CCPs do that by standing between the parties of a trade, becoming the buyer to every seller and the seller to every buyer. That guarantees that transactions will be honoured if the other party defaults.

CCPs are central to the UK and global financial system. They reduce risk and ultimately improve the efficiency and resilience of the system as a whole. Any disruption to this system would affect large banks and institutional investors, which use these clearing services when hedging their risks.

There are key issues for CCPs and their members. First, when the UK leaves the European Union, EU CCPs will not be recognised to provide their clearing services to UK firms, and vice versa. Secondly, there is legal uncertainty about whether EU clearing members can continue to meet their contractual obligations to UK CCPs. This disruption is particularly acute for EU firms using UK CCPs. The European Central Bank estimates that UK CCPs clear approximately 90% of euro-denominated interest rate swaps used by euro area banks. The only industry mitigant available would be to close out or transfer the contracts that EU clearing members have with UK CCPs before March 2019. But as the FPC has said, the movement of such a large volume of contracts in a short timeframe would be costly and would strain capacity in the derivatives market.

The importance of the financial services sector to the UK and the EU has already been noted in this debate, and it is critical that we acknowledge that and respond to these challenges wholeheartedly. I spend my time as a Minister promoting, preserving and standing up for the benefits of the sector for the whole United Kingdom—not just the City of London, but areas such as Bristol, Nottingham and Edinburgh. The sector is a British asset as much as a European one. This Government remain committed to agreeing a close future relationship on financial services with the EU that preserves the mutual benefits of our uniquely integrated markets while protecting financial stability, consumers, businesses and taxpayers across the UK and the EU, and this relationship must take into account that the UK is a global hub for these clearing services.

As I said, it remains unlikely that the UK will leave the EU without an agreement, but we are prepared for all outcomes, so I will now go into some detail on the no-deal situation. As the hon. Gentleman mentioned, we have committed to unilateral action to resolve the risk of disruption as far as possible on the UK side. Colleagues will be aware that the Government have already laid draft secondary legislation that will establish a temporary recognition regime for CCPs. That regime will allow non-UK CCPs to continue to provide clearing services to UK firms for up to three years while those CCPs apply for recognition in the UK.

My noble Friend Lord Bates debated the statutory instrument through the Lords on Tuesday, and a debate is arranged for a Delegated Legislation Committee in the Commons next Monday—the pack is ready for me to go home to Salisbury with so I can prepare—and, as has been highlighted, any successful mitigant to the clearing services problem requires action by both UK and EU authorities.

I welcome the announcement by European Commission Vice-President Valdis Dombrovskis, I think, on Tuesday this week, that the EU will, if necessary to address the financial stability risks arising from the UK leaving the EU, act to ensure continued access to UK CCPs on a temporary basis. It is right that EU authorities will have to set out further details on their plans, and we would welcome that, but this announcement is a positive step in ensuring the stability of the financial system for the UK and the EU.

The Government are committed to working with our EU partners to identify and address risks relating to the UK’s exit from the EU. We are supportive of continued engagement and co-operation between our regulators. This is continuing, including through the technical working group convened by the ECB since April with the Bank of England, and is evidence of our shared interests in these issues. I acknowledge what the hon. Gentleman has said about the lack of detail coming out. I think that is a condition of the Commission’s negotiating stance. We respect that, but will continue to engage and to observe what is going on.

There are suggestions from some in the EU that UK CCPs pose a risk to the EU’s financial stability. That is the impetus behind the proposal to revise the framework for supervising third-country CCPs, including the so-called location policy. UK CCPs are truly global institutions, and we recognise that there are legitimate questions about the future supervision of UK CCPs with EU members once we leave the EU. We should take a stable and co-operative approach to the supervision and regulation of globally active firms. This should include the ability for regulators in different jurisdictions to defer to each other based on comparable rules—a principle that the EU and the UK have committed to at the international level. Some of the measures currently under consideration by the EU undermine this principle and cannot be seen as an enhancement of the existing equivalence process. In particular, a location policy would be a poor solution that would unnecessarily harm investment in Europe, increase costs for European firms and ultimately undermine financial stability. We are making that case, and I am sure that those who use CCPs will be making the same case.

I thank the hon. Member for Nottingham East for raising, in a very thorough way, some very legitimate issues at the core of these negotiations. I want to reassure him, and the hon. Member for Bristol East (Kerry McCarthy), who contributed to the debate, that the Government are not complacent on these matters. I am acutely conscious of the large number of statutory instruments that I will be taking through over the coming weeks. Dialogue is continuing at all levels as we seek to reassure the City of London, and the financial services industry across the United Kingdom, that the Government are prepared for all outcomes, though working determinedly and passionately for the best outcome and a good deal that recognises the centrality of financial services to the UK economy.

Question put and agreed to.