Draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019
Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019
John Glen Excerpts(5 years, 3 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019.
The Chair
With this it will be convenient to consider the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019.
John Glen
It is a pleasure to serve under your chairmanship, Mr Bailey.
As the Committee is aware, the Treasury has been undertaking a programme of legislation to ensure that if the UK 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. To deliver that, the Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018, and a number of SI debates have taken place in this place and in the House of Lords. The draft SIs to be debated today are part of that programme. The approach taken in this legislation aligns with that in other SIs laid under the Act, providing 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.
The subjects of the two sets of draft regulations being debated together today are collective investment schemes and long-term investment funds. The draft SIs relate to the management, administration and marketing of investment funds, which are investment products created to pool investors’ capital and invest it in financial instruments such as shares, bonds and other securities.
Within the EU, the framework covering regulated funds predominantly sold through retail investors is provided by the directive on the undertakings for collective investment in transferable securities, commonly known as UCITS. Long-term investment funds are a sub-category of alternative investment funds that promote long-term investment such as in infrastructure, small and medium-sized enterprises and real assets. They are often sold to institutional investors, such as pension funds.
Alongside the regulations on alternative investment fund managers, on venture capital funds and on social entrepreneurship funds that were approved by this House on 16 January and in the other House on 22 January, the draft instruments under discussion will ensure a functioning UK investment fund regime if we leave the EU without a deal.
In a no-deal scenario, which is not the policy or aspiration of the Government, the UK would be outside the single market and outside the EU’s legal supervisory and financial regulatory framework. Therefore, retained EU and domestic law relating to the regulation of UCITS and long-term investment funds needs to be updated to reflect that, to ensure that the provisions work properly in a no-deal scenario.
I will first outline the changes in the collective investment schemes regulations. Overall, this instrument will maintain the investment rules of UCITS, as set out in the EU directive. However, it will make changes to address deficiencies and to ensure a functioning regime. First, the draft regulations remove references to the Union and to EU legislation, which will no longer have legal effect, replacing them with references to the UK and UK legislation where appropriate. That includes removing references to the passporting system and binding requirements for information sharing. The instrument will also establish a distinction between the UCITS regimes in the UK and the EU. Funds authorised in the UK will be called UK UCITS.
Secondly, all UK UCITS must have a depositary that is incorporated in the UK or another European economic area state. Currently, it is possible for an EEA firm to establish a branch in the UK and to carry out the functions of a depositary. To ensure proper regulatory oversight, however, the draft instrument will remove that provision and will instead ensure that all depositaries of UK UCITS are incorporated in the UK.
Similarly, the instrument will ensure that management companies of UK UCITS are incorporated in the UK, whereas currently they may be incorporated in the UK or another EEA state. However, to align the changes with the temporary permissions given to EEA firms passporting into the UK by the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, the draft regulations provide a transitional arrangement so that the requirements for managers and depositories of UK UCITS to be incorporated in the UK do not affect such depositories or managers if they have temporary permission to operate in the UK.
Thirdly, the draft regulations will transfer the power to make binding technical standards from the European Securities and Markets Authority to the Financial Conduct Authority. As the UK’s national competent authority within the EEA, the FCA is already responsible for supervising investment funds and has extensive expertise and experience making rules relating to the sector. The draft regulations will give the FCA the power to specify the information that the operator of the fund must provide to the FCA for the operation of a UCITS fund.
To offer continuity for EEA funds and the UK customers they service, the regulations create a temporary marketing permissions regime for EEA UCITS to continue to market into the UK. That was part of the announcement by the Government in December 2017 to create a temporary permissions regime for EEA firms and funds. It will allow an EEA UCITS that currently markets into the UK under a passport, and subsequent new sub-funds of an existing umbrella fund, to continue to market to UK customers, as it could before exit day, for a period of up to three years.
Following an assessment by the FCA on the effect of extending or not extending the period, the Treasury will have the power to extend the period for a maximum of 12 months at a time, in line with other transitional regimes that have been put forward. In order to ensure transparency in the process, the Treasury will make a written ministerial statement to both Houses in the event of the Treasury seeking to extend the temporary power, prior to any statutory instrument being laid.
By the end of the temporary marketing permissions regime, the fund will need to gain recognition to continue to market to retail investors in the UK, as any other third-country fund is currently required to do. That will be under the current procedure outlined in section 272 of the Financial Services and Markets Act 2000. The Government are committed to reviewing the process and bringing forward legislation as necessary to ensure the UK can continue to efficiently recognise overseas funds.
The draft regulations also amend the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018, to bring forward the commencement date of the provisions relating to the temporary marketing permissions regime for alternative investment funds. That will allow the FCA notification window to operate as intended and at the same time as the regime outlined in the regulations.
I move on to the draft long-term investment funds regulations. Long-term investment funds are a further sub-category of alternative investment funds, which was introduced in 2015. However, it has to be said that the take-up across the EEA has been extremely limited. The FCA states that, as of December 2018, there are currently no such funds set up in the UK and therefore we believe there will be no impact on businesses or consumers. However, in line with the Government’s approach to European legislation and powers granted under the withdrawal Act, the regulations ensure that there is a functioning framework for long-term investment funds in the UK.
Like the collective investment schemes regulations, this SI maintains the existing investment rules for funds domiciled in the UK and addresses any deficiencies in legislation, including removing references to the EU and replacing them with references to the UK. It will also create a UK-only label of “long-term investment fund” to reflect that these funds will be in the UK and subject to UK rules.
Finally, as long-term investment funds are a sub-category of alternative investment funds, EEA managers of European long-term investment funds will be able to make use of the temporary marketing permissions regime for alternative investment funds, as legislated for in the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018, debated earlier this month. The Treasury has been working extremely closely with the FCA in the drafting of the instrument and has engaged with the financial services industry and will continue to do so. In November and December 2018, the Treasury published the instruments in draft, along with explanatory policy notes, to maximise transparency to Parliament and industry.
In summary, the Government believe that the proposed legislation is necessary to ensure that there is a functioning investment funds framework in the UK, which would provide continuity for UK investors and our asset management sector should we leave the EU without a deal or an implementation period. I hope colleagues from different parties will join me in supporting these regulations, which I commend to the Committee.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve on the Committee with you in the Chair, Mr Bailey. I am very grateful to the Minister for his explanatory remarks. Once again, I sit opposite him to discuss a statutory instrument that would make provisions for a regulatory framework after Brexit in the event that we crash out without a deal, which I hope is less likely following the House’s decision last night. On each previous occasion, my Labour Front-Bench colleagues and I spelled out our objections to the Government’s approach to secondary legislation.
The volume and flow of secondary legislation on our exiting the EU is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken, but establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Secondary legislation ought to be used for technical, nonpartisan and uncontroversial changes, because it allows limited accountability. Instead, the Government continue to push through contentious legislation with high policy content by using this vehicle. As legislators, we have to get this right. These regulations could represent real and substantive changes to the statute book, so they need proper, in-depth scrutiny. In this light, the Opposition want to put on record our deepest concerns that the process regarding these regulations is not as successful and transparent as it should be.
The Minister spelled out the fact that the first SI relates to the 2009 UCITS directive, which sets out a common set of standards for investor protection for regulated investment funds that can be sold to retail investors in the EU. The directive established a passporting system to enable UCITS to be marketed and sold to the general public throughout the EU, and to enable UCITS management companies to manage UCITS that are located in other member states. The directive was transposed into UK law through domestic legislation and FCA rules. Many would say that the directive has been successful: it has facilitated far greater choice for investors, and I understand that there are now more than 10,000 funds available to UK investors as a result of the directive. Almost three quarters of those are passported in from the EU27 under the UCITS directive. A large number of non-UK UCITS funds are managed by UK businesses under the directive—by asset value, it is £1.8 trillion-worth out of the £9 trillion industry across Europe. Some £375 billion-worth of that is held by UK investors.
I should express my gratitude to the industry for providing me with those figures. It has indicated that in the event of a no-deal Brexit, UCITS funds from the EU27 could not be marketed to UK investors in a straightforward manner. Furthermore, it would not be easy to list UCITS exchange-traded funds on the London Stock Exchange. Given that this SI largely preserves the status quo on the availability of UCITS funds and exchange-traded funds—albeit temporarily—there is support in the industry for the intention behind it, because there would undoubtedly be problems under a no-deal Brexit.
None the less, the Minister needs to answer some questions on this SI. It is essential that we properly understand its impact—not least because, in common with so many others that we have considered in Committee, it uses secondary legislation to amend primary legislation, which is of course the definition of Henry VIII powers. In addition, the FCA and others have raised considerable concerns about unregulated collective investment schemes, or UCIS. Many of us have heard horror stories about these, with examples that have badly let down their investors or even operated as Ponzi schemes. In the circumstances it is essential that regulations are sufficiently encompassing and do not lead to unsophisticated investors being presented with overly risky products. At the same time, the asset management industry, particularly people who are involved with investment in UCITS, is an important part of the financial services industry. Given that the industry supports one in 10 jobs in our country, it is a matter of regret that our Government have failed to prioritise seeking a better deal for financial services as part of their negotiations, and that the quest for passporting rights was quickly dropped in favour of some form of equivalence. Of course, whether to agree that will be entirely in the European Commission’s gift.
That has already led to economic activity in this area shifting out of our country. Companies from Hermes Investment Management to Legg Mason, Janus Henderson Investors, Jupiter Asset Management and Polar Capital all appear to have created additional positions, functions or operations in the EU27 rather than the UK because of the need to secure service continuity for current and future investors. As I understand it, the issue of delegation, which is essential in this area, is still not fully resolved. It remains unclear on what basis UK companies will be able to manage investments for fund companies based in the EU27. I hope that the Minister updates us on when he expects the Commission to give ESMA the green light to enable concrete discussions to take place on that score.
My second question relates to the legal basis for the draft regulations. They are said to be made under both the European Communities Act 1972 and the EU (Withdrawal) Act. Surely it is rather peculiar to have those two parent Acts, given that one is about giving effect to EU law whereas the other is about inherited EU law. Perhaps the Minister can explain why those Acts form the basis for the draft regulations.
Thirdly, we have been provided with an impact assessment for the draft regulations, albeit we received it just this morning. Clearly that is better than nothing, but it gave us limited time to acquaint ourselves with the impact assessment.
Anneliese Dodds
Thank you. That impact assessment suggests there will be a need to charge inbound EEA passporting firms as third-country firms, but that to
“reduce the impact of leaving the EU on funds, the government has committed to reviewing Section 272,”
which governs this process. It adds:
“This will be done through a future legislative vehicle.”
It would be helpful if the Minister provided us with some details about that. Does he envisage that happening at the end of the three-year temporary permissions regime or at some other point? It would, of course, require legislative change.
I turn to the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations. I am grateful to the Minister for explaining the basis for that instrument. As he explained, the EU regulation has been used far less than many would have hoped, given that it was intended to encourage long-term investment.
There are two issues with the SI. The first concerns empowerment of the FCA. My colleagues and I have frequently referred to the fact that the process of legislating for no deal has in many cases provided the FCA with unprecedented powers, potentially overshooting what is required to transpose the EU acquis. Indeed, colleagues will not have missed the conclusions by City A.M. following the recent Treasury Committee hearing on this subject; it stated that the process involves regulators being given “‘unprecedented’ powers”—its words, not mine. However, in this case, we seem to have undershooting, specifically in relation to the FCA’s powers to create a register of ELTIFs.
ESMA, the EU-level regulator, does not merely have the ability to create a register of ELTIFs; it is under a duty to do so. However, the draft regulations only empower the FCA to keep such a register; they do not require it to do so. There is a direct contradiction between regulations. Article 3 of the 2015 EU regulation on ELTIFs states:
“ESMA shall keep a central public register”.
The draft regulations do not just substitute “FCA” for “ESMA”; they give the FCA a power, rather than a duty, to keep a register. Regulation 6 states:
“The FCA may keep a central public register”.
I note the use of the word “may”, not “must” or “shall”. The Minister needs to explain that discrepancy before the Committee can accept this SI.
There seems to be a drafting mistake. The draft regulations seem to empower the FCA to designate ELTIFs as such across the EU, rather than empowering it to recognise them as such within the UK for the purposes of then recognising them as the new category of LTIFs. To try to explain this horrendously complicated area, I am going to differentiate my pronunciation of ELTIFs—European LTIFs—and LTIFs, the new category the Government suggest they are creating. This point is very difficult to explain without having the relevant pieces of legislation in front of us. The Minister will remember the comments of my hon. Friend the Member for Garston and Halewood (Maria Eagle) in a previous Committee.
Anneliese Dodds
I am grateful to the Minister for that clarification, if that is the case. However, even if it were not the case previously, there is a prima facie argument that it would be useful for Committees of this type to be able to see in the committee room the previous regulation and be able to compare it with what is being suggested. Otherwise, it is extremely hard for us to understand exactly what is being proposed in some of the very complex changes that are being implemented.
That difficulty had its apogee with the MiFID—markets in financial instruments directive—transposition regulation. I will not go into all the details; I have discussed the matter with the Minister many times. The Opposition had hoped to debate that subject on the Floor of the House because it was recognised in that case that a Keeling schedule was necessary, effectively to track changes. It would be helpful for Members in all such Committees to be able to see the direct impact of changes from this no-deal legislation. Otherwise, it is very difficult to understand.
John Glen
Once again, I will begin by thanking the hon. Members for Oxford East and for Aberdeen North for their thorough examination of the statutory instruments; I will do my very best to answer in detail the points that they have made, and where I cannot, I shall write to them as soon as I possibly can.
The hon. Member for Aberdeen North discussed impact assessments. We now have an impact assessment, which was circulated, as she acknowledged, at 10 past 10 this morning and covers all the statutory instruments that will be laid until 11 February. There has been a desire on my part and that of my officials to meet the necessarily exacting standards of the RPC. As I say, that is my responsibility, but I would point out that this is an unprecedented process, doing 53 SIs for financial services, 45 of which have now been laid, and working on each one individually. I hope the existence of the impact assessments up to 11 February—obviously there will be some more after that—will give her some comfort, but the points that she made have been heard.
I will come on to the other points that the hon. Lady made, but I will now turn to the issues raised by the hon. Member for Oxford East. She made some initial observations with respect to the volume, flow and appropriateness of the SI mechanism that I may have heard before, but I acknowledge her sincerity and take them in the spirit in which they are intended. We are acting within the terms of the withdrawal Act, and I have never sought to pretend that this process is optimal, but it is a practical measure to give business continuity and give the industry the answers they are concerned about.
I also recognise that the degree of uncertainty is not helpful, but I draw the attention of the hon. Lady and the Committee to the remarks of Sam Woods, deputy governor of the Bank of England, who said in April last year that we would have 5,000 to 10,000 jobs moved by day one, which is between 0.5% and 1% of financial services jobs in the UK. There is an enormous resilience in the financial services sector, and this process is about ensuring that there is minimal disruption in the event of no deal.
Moving on to the specific points made by the hon. Lady, she said that in a no-deal scenario, EU UCITS could not be marketed in a straightforward manner in the UK. The temporary marketing permissions regime is intended to prevent the market disruption that would result from a sudden end to passporting rights. The regime ensures that the business model of EEA fund operators marketing into the UK can continue for a temporary period while we transfer to the UK-only regime. That includes the new sub-funds, and reflects our intention to allow EEA firms and funds to continue their business operations for a temporary period.
If we did not allow new sub-funds to enter the temporary permissions regime after exit day, there would be a significant risk to the role of the London Stock Exchange as a global hub for exchange-traded products. Therefore, including sub-funds in the temporary marketing permissions regime reduces the risk to the London Stock Exchange and ensures continued access for UK customers to new EEA funds in future. That was a direct change from laying this SI in November and December; we laid it again on 6 December in response to feedback from the markets. There is an iterative process, hence the time constraint that puts pressure on the impact assessment.
The hon. Lady raised the issue of assurances on ESMA and on portfolio delegation. I refer to the comments of the chair of ESMA, who said on 3 October that in the case of a no-deal Brexit, EU regulators and ESMA
“should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators…ESMA has coordinated the preparations for such MOUs together with the EU27 NCAs.”
More recently, the Luxembourg regulator stated that the
“delegation of investment management, portfolio management and, or risk management to UK undertakings shall continue to be possible without any disruption post-Brexit”.
I wish it could be more transparent and sooner, but I am convinced and assured that that work is going on and that it will be completed in time.
The hon. Member for Oxford East raised the issue of why the FCA was not required to keep a register of LTIFs and the issue of the power not the duty. The power to keep the register is being transferred to the FCA. As there are currently no LTIFs set up in the UK, there is no register of those funds online. The FCA keeps a register of small UK AIFMs that manage similar funds, European venture capital funds and European social entrepreneurship funds.
The best thing is for me to obtain some assurance from the FCA about its plans, which are, in reality, at a relatively early stage because we are simply trying to transition over at this point. The detail of its ongoing regime and responsibilities will be a matter for it to convey in due course.
Anneliese Dodds
We have been told throughout the process that there will be no watering down of regulations under the withdrawal Act. I appreciate that this is an abstract case, because we do not yet have a category of investments operating in the UK that would fall into that designation, but that is not to say that one will not be created in future. If we do not have that requirement, there would surely be that resiling. Will the Minister endeavour to talk to the FCA to make sure that, if such investments start to operate in the UK, it will keep a register of them? Surely that is what the EU legislation requires.
Kirsty Blackman
It would be helpful if the Minister explicitly said, “Yes, we would like the FCA to keep a register of those new LTIFs as they arise in the UK.” The form of that register could be decided later.
John Glen
I am sympathetic to what the hon. Lady says, but she has to understand that the regulator is the regulator, and it will have reasons in terms of the market actors around that. My view is that it would be entirely appropriate for the regulator to have that register, and I would expect to see clear market-driven reasons for why it would not be necessary. Again, it would not be responsible for me to make a commitment without knowing all the background factors, but I will write to the regulator to express the Committee’s concerns and ask what its approach would be in the circumstances where those funds existed in the United Kingdom.
Anneliese Dodds
I am grateful to the Minister for what he has said, but the regulator is required to carry out what this House requires it to do. If we are talking about ESMA, it is meant to carry out what it has been required to do by EU-level policy makers. That EU legislation requires that the register shall be kept, so we need something more emphatic if we are to stick to the existing distribution of responsibilities.
John Glen
It is an interesting debating point. Had the hon. Lady seen the report of my appearance yesterday before the Treasury Committee with the chief executive of the FCA and the deputy governor of the Bank of England, she would know that we work collaboratively with the industry to do what is right. The intention of this process is not to deregulate in any way—there is no attempt by the Treasury to create some wriggle room to remove the obligation of the FCA. I understand the hon. Lady’s point, and I expect there to be continuity between the current and future regimes on the FCA’s reporting requirements. I will seek clarification on that point.
Kirsty Blackman
One last time, Minister. If the UK Government are trying to do what they tell us they are trying to do—to replicate EU law in UK law—the most sensible thing to do would be to start with a requirement for the FCA to keep this. Should there be a change and it is decided that it is not necessary, we can then legislate down the line with secondary legislation to say, “Actually, we feel like this is not appropriate for our regulatory regime.”
John Glen
I think I have said all I can on that matter at this point. I will move on to the drafting point on territorial power for the FCA, which the hon. Member for Oxford East raised. I will consider that point carefully—there may be a drafting error. It is difficult for me to be certain about that now, but I will respond in due course.
The hon. Member for Aberdeen North raised the issue of how many people engaged with the draft legislation. She will probably not be surprised to know that I do not have the numbers in front of me, but we have sought wide engagement with the industry and stakeholders as the legislation has developed, which can be seen in the fact that we relayed on 6 December following engagement on the sub-funds point. I am happy to examine any data on that and write to her on that matter.
The hon. Member for Oxford East made a point—I think it was also made by the hon. Member for Aberdeen North—about the Government’s general policy of reciprocity in the prioritisation of certain areas in a no-deal scenario. We want to continue to engage constructively with EU partners and be in a position to deliver on the political declaration in a negotiated deal, in which we would respect the autonomy of both sides but would be ambitious about the degree of collaboration on recognition. We think that that is realistic—there is a very strong relationship with our regulators across the EU, and we expect that to continue.
I have answered most of the points that have been made. If there are any others, I shall write to both hon. Ladies on the Opposition Benches. I have demonstrated why we need this SI to pass in the event of the UK leaving the EU without a deal, and I hope the Committee can now support the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019.
Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019
Motion made and Question put,
That the Committee has considered the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019.—(John Glen.)
Oral Answers to Questions
John Glen Excerpts(5 years, 3 months ago)
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Wes Streeting (Ilford North) (Lab)
The Economic Secretary to the Treasury (John Glen)
On 28 November, the Bank of England published analysis on how the short-term impact of leaving the EU could affect the Bank’s ability to meet its objectives for monetary and financial stability. That analysis is published independently and reported to Parliament, but in line with normal practice, no comment will be made on discussions between Ministers.
Wes Streeting
The Bank of England knows that no deal will be a disaster, and so do Ministers and the Chancellor, yet the Prime Minister is whipping her MPs to vote today for an amendment that will make it more likely. What does that say about the Chancellor? Does the continued presence of no deal on the table speak to his lack of influence, his lack of authority or his lack of courage?
Helen Hayes (Dulwich and West Norwood) (Lab)
I was contacted this week by a constituent who runs a business in Derry/Londonderry. He writes:
“The official position is that”
the recent bomb attack
“is nothing to do with Brexit; everyone I’ve spoken to finds this laughable—it is everything to do with Brexit. The danger, irresponsibility and absurdity really comes home to you when the bomb disposal Land Rovers are screaming past our office.”
What does the Chancellor think the implications of Brexit will be for jobs in Northern Ireland, when local employers feel like this?
Mr Alistair Carmichael (Orkney and Shetland) (LD)
Dame Caroline Spelman (Meriden) (Con)
The Economic Secretary to the Treasury (John Glen)
A consultation was launched in October, and we intend it to be as wide as possible. The consultation closes today and the Government will respond shortly, but we are very sympathetic to where my right hon. Friend is coming from.
Diana Johnson (Kingston upon Hull North) (Lab)
David Linden (Glasgow East) (SNP)
John Glen
What I can tell the hon. Gentleman is that banks must make commercial decisions on the basis of what works for them. When I visited Scotland, I found they were also keen to work with post offices and the Government’s provision to make sure that services can be delivered through the Post Office.
Nigel Huddleston (Mid Worcestershire) (Con)
Average wages in my constituency are below the national average, with many people earning the living wage. Tax rates really matter to them, so is that not precisely why we Conservatives voted for a tax cut for 32 million people, by contrast with the Opposition? Will we continue to be truly the party for working people?
Counter-terrorist Asset Freezing Regime
John Glen Excerpts(5 years, 4 months ago)
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The Economic Secretary to the Treasury (John Glen)
Under the Terrorist Asset-Freezing etc. Act 2010 (TAFA 2010), the Treasury is required to prepare a quarterly report regarding its exercise of the powers conferred on it by part 1 of TAFA 2010. This written statement satisfies that requirement for the period 1 July to 30 September 2018.
This report also covers the UK’s implementation of the UN’s ISIL (Daesh) and Al-Qaida asset freezing regime (ISIL-AQ), and the operation of the EU’s asset freezing regime under EU regulation (EC) 2580/2001 concerning external terrorist threats to the EU (also referred to as the CP 931 regime).
Under the UN’s ISIL-AQ asset freezing regime, the UN has responsibility for designations and the Treasury, through the Office of Financial Sanctions Implementation (OFSI), has responsibility for licensing and compliance with the regime in the UK under the ISIL (Daesh) and Al-Qaida (Asset-Freezing) Regulations 2011.
Under EU regulation 2580/2001, the EU has responsibility for designations and OFSI has responsibility for licensing and compliance with the regime in the UK under part 1 of TAFA 2010.
A new EU asset freezing regime under EU regulation (2016/1686) was implemented on 22 September 2016. This permits the EU to make autonomous Al-Qaida and ISIL (Daesh) listings.
The tables available as an online attachment set out the key asset-freezing activity in the UK during the quarter.
The recently passed Sanctions and Anti-Money Laundering Act will help ensure that UK counter-terrorist sanctions powers remain a useful tool for law enforcement and intelligence agencies to consider utilising, while also meeting the UK’s international obligations.
Under the Act, a designation could be made where there are reasonable grounds to suspect that the person or group is or has been involved in a defined terrorist activity and that designation is appropriate. This approach is in line with the UK’s current approach under UN and EU sanctions and would be balanced by procedural protections such as the ability of designated persons to challenge the Government in court.
Attachments can be viewed online at: http://www. parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2019-01-23/HCWS1267/.
[HCWS1267]
Draft Market Abuse (Amendment) (EU Exit) Regulations 2018
Draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019
John Glen Excerpts(5 years, 4 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.
The Chair
With this it will be convenient to consider the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.
John Glen
It is a pleasure to serve under your chairmanship again, Mr Davies. The Treasury has been preparing extensively for a range of outcomes in the context of the UK’s withdrawal from the EU, including a no-deal scenario. The draft regulations form part of the necessary work to ensure that there will continue to be a functioning regulatory and legislative regime for financial services if the UK leaves the EU with no deal and no implementation period.
Sir Greg Knight (East Yorkshire) (Con)
Although explanatory memorandums are not technically part of regulations, it is important that they be accurate and up to date in all respects. Will the Minister confirm that that is the case? In particular, will he confirm that the first sentence of paragraph 7.1 of both memorandums is still Government policy? It states:
“The UK will leave the EU on 29 March 2019.”
John Glen
I am happy to confirm that point—I wondered what my right hon. Friend was going to come out with.
As part of the programme that I have set out, the draft regulations will address legal deficiencies in retained EU legislation relating to market abuse and credit rating agencies. They are important for regulating market conduct practices and safeguarding market integrity. Their approach aligns with that of other legislation laid before Parliament under the European Union (Withdrawal) Act 2018, providing continuity by maintaining existing legislation at the point of exit, but amending deficiencies where necessary and introducing transitional provisions to ensure that they work as effectively as possible in a no-deal context. I shall first outline the 2018 draft regulations and then turn to the 2019 draft regulations.
Market abuse can involve a range of illegal practices relating to financial markets, including unlawful disclosure of inside information, insider dealing and market manipulation. MAR—the EU market abuse regulation, which came into effect in 2016—prohibits market abuse practices, thereby increasing market integrity and investor protection and enhancing the attractiveness of the EU securities markets for capital raising. It gives EU regulators powers and responsibilities to prevent and detect market abuse; the Financial Conduct Authority is the regulator that currently enforces it in the UK. MAR applies to financial instruments traded on EU trading venues, as well as market abuse that concerns such instruments anywhere in the world.
The 2018 draft regulations will make amendments to MAR and related legislation to ensure that the UK continues to have an effective regime to regulate market abuse once it leaves the EU. In line with our general approach of onshoring EU legislation by transferring powers and functions in the remit of EU authorities to the appropriate UK institutions, they will transfer powers from the European Commission to the Treasury, including the ability to make delegated Acts related to market abuse, and from the European Securities and Markets Authority to the FCA, enabling the FCA to make binding technical standards.
The FCA has consulted on its proposed changes to its binding technical standards, and it will continue to enforce the market abuse regime in line with its current role as part of the EU framework. That approach reflects the FCA’s extensive experience, expertise and capability to continue in that function post exit. I remind the Committee that it has 158 full-time employees working on Brexit—an increase from 28 in March 2018—and that in a few months it will publish its plans for the year 2019-20.
Furthermore, the statutory instrument retains the existing scope of MAR, so that it continues to apply to financial instruments traded on both UK and EU trading venues, as well as to conduct anywhere in the world that concerns these instruments. That means that the FCA will continue to be able to investigate, prohibit and pursue cases of market abuse related to financial instruments that affect UK markets, as far as is possible in a no-deal scenario. The scope has been limited to the UK and EU, and is not worldwide, given that markets in both jurisdictions are highly integrated due to the current arrangements.
The SI also retains exemptions in MAR—and amends the scope of the exemptions to UK-only—that relate to certain trading activities that cannot be enforced against the regulation[Official Report, 5 February 2019, Vol. 654, c. 1MC.] They include exemptions on monetary and public debt management activities, buy-backs and stabilisation, and accepted market practices. Power will be conferred on the Treasury to extend the exemptions related to monetary and public debt management activities. That power is currently held by the Commission.
In addition, the SI retains references to emission allowances. That will allow UK firms to continue to participate in secondary market trading under the emissions trading scheme, despite the UK leaving it, and will enable the FCA to continue to monitor and enforce against UK-registered emission allowance market participants.
Additionally, the SI removes co-operation requirements between the UK and EU counterparts. The UK will no longer be obliged to share information related to market abuse with the EU, given that there would be no guarantee of reciprocity. However, the FCA will still be able to respond to information requests from third-country regulators; indeed the existing domestic framework for co-operation on information sharing with countries outside the UK already allows for that on a discretionary basis.
Finally, the SI will make further amendments to retained EU and UK legislation, including EU legislation that amends MAR, to ensure that it is operable in a UK-only scenario; to the Criminal Justice Act 1993 to remove references to directly applicable EU regulation; and to the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 to ensure that the UK’s market abuse regime works effectively once the UK leaves the EU.
Mr Ranil Jayawardena (North East Hampshire) (Con)
Will the Minister make it his business to ensure that credit rating agencies share information appropriately not only with each other and with regulators, as necessary, but with consumers? Too often, they are inaccessible to consumers, and consumers cannot even write to them to have the appropriate information registered with them. Will he make it his business to sort that out or to impart that to the FCA?
John Glen
To pick up from where I left off, the best solution would be for my hon. Friend the Member for North East Hampshire to write to me about his specific concern. I will look into it thoroughly and get back to him as quickly as possible.
Let me turn to the 2019 draft regulations. A credit rating is used to assess the creditworthiness of an entity or financial instrument for regulatory purposes. CRAR, the credit rating agencies regulation, was introduced after the financial crisis in 2009 to ensure that EU bodies—in this case ESMA—could supervise credit rating agencies in a suitable way. The draft regulations will amend CRAR and related legislation to ensure that the UK continues to have an effective framework to regulate credit rating agencies once we have left the EU.
First, the draft regulations will transfer supervisory and enforcement powers from ESMA to the FCA to ensure that the FCA can effectively supervise credit rating agencies and enforce the new UK regime, as well as becoming responsible for the regulatory functions relating to the endorsement process. I should note that this provision was drawn to the special attention of the House of Lords in the 9 January report of Sub-Committee A of the Secondary Legislation Scrutiny Committee. It is a sensible provision, given the FCA’s role in regulating the operation of markets and safeguarding market integrity; it will enable the FCA to assess whether a third country’s regulatory and legal framework is as stringent as the UK’s, thereby enabling credit rating agencies in the third country that are affiliated with a UK-based credit rating agency to endorse ratings into the UK for regulatory use.
Secondly, the SI will transfer equivalence powers from the European Commission to the Treasury, which will enable the Treasury to determine whether a third-country regime is sufficiently aligned in its regulatory outcomes to be declared equivalent and allow for the clarification process, allowing unaffiliated CRAs in third countries to issue ratings in the EU for regulatory purposes. That is consistent with the transfer of equivalence powers across other areas of retained EU law in SIs that have already been debated in this Committee.
Thirdly, the SI will enable credit ratings to be used in the UK for regulatory purposes, should those ratings be issued by a CRA established in the UK with an FCA registration. The instrument will also allow for a transitional period of one year to enable credit ratings issued prior to exit day by EU firms that register or apply for registration with the FCA to be used for regulatory purposes in the UK. Furthermore, the SI sets out that firms are required to establish a legal entity in the UK to register with the FCA.
There are three types of registration regimes that will smooth the transition from ESMA registration to FCA registration: the conversion regime, which will enable UK-established CRAs to notify the FCA of their intention to convert their ESMA registration; a temporary registration regime, which will allow newly established legal entities in the UK to operate in the UK if they are part of a group of CRAs with ESMA registration; and an automatic certification process, which will allow certified CRAs established outside the EU to notify the FCA of their intention to extend certification to the UK. As part of the additional powers granted to it, the FCA will receive pre-exit powers to begin the preparatory work for registering CRAs before exit day.
Additionally, references to EU institutions in relation to appeal rights will be replaced with appropriate UK bodies. Given the new enforcement powers given to the FCA, where its warning and decision notice will apply to CRAs, a right to appeal such actions has also been provided. The relevant UK body will be the upper tribunal.
Finally, further amendments to UK legislation are made. The Financial Services and Markets Act 2000 is amended to enable the FCA to charge fees in relation to its new supervisory functions in respect of CRAs, as well as ensuring that the FCA is exempt from liability for damages relating to its new supervisory functions.
The Treasury has been working closely with the FCA and the Bank of England and engaging with industry bodies on both instruments. They have both been published in draft form, accompanied by an explanatory policy note, to maximise transparency to Parliament, industry and the public before being laid before Parliament.
In summary, the Government believe that these SIs are necessary to ensure that the regulatory regimes relating to market abuse and credit rating agencies work effectively if the UK leaves the EU without a deal or an implementation period. I hope colleagues will be able to join me in supporting the regulations, and I commend them to the Committee.
John Glen
I am extremely grateful for the comments from the hon. Members for Oxford East and for Linlithgow and East Falkirk. I shall try to respond to the points raised in detail.
The hon. Member for Oxford East raised five substantive points on the credit rating agencies. The first referred to the impact assessments, whose importance I recognise. I will not go over the full discussion that we had in Committee yesterday, but for the benefit of this Committee, I confirm that I will make the assessments available as soon as possible. I am in discussions with the Regulatory Policy Committee to get the impact assessments completed to its satisfaction. It quite rightly has exacting standards, with which I am keen to fully comply. I can commit to publishing the impact assessments when they are ready; I hope that will be next week, in time for the SI we have scheduled for next Wednesday. That is my expectation at this point.
The hon. Lady also mentioned FCA resources—I will not repeat the numbers that I gave earlier—and said that the powers in certain areas appear to go beyond ESMA’s powers. Why has that been deemed necessary? The FCA has powers deemed necessary for a wide range of firms. It is appropriate that those powers are consistent and that the FCA exercises them in accordance with its statutory objectives. The obligations on CRAs under the UK regime will remain aligned with those in the EU.
A point was also raised about fees. Andrew Bailey, the chief executive of the FCA, has said that he expects to hold FCA fees steady for a year or two, assuming an implementation period. Obviously, if it were necessary to increase those resources in a no-deal situation, that cost would have to be borne. That is why the Government’s position is that we are seeking to secure a deal. This whole programme of SIs—all 53 of them for financial services—is a precautionary measure.
The hon. Lady raised the issue of co-operation arrangements between the UK and the EU post-exit. After exiting the EU, the UK will no longer be obliged to undertake co-operation and information sharing with EU authorities. We will remove that legal obligation but UK authorities will continue to establish ambitious co-operation arrangements with our EU counterparts. The hon. Lady’s deep expertise in this area is testimony that we in the UK have led much of the sharpening of the regulations within the EU.
The FCA will look to put in place alternative arrangements for co-operation and information sharing with ESMA and EU regulators. The FCA and ESMA have publicly stated their ambition to agree a memorandum of understanding in relation to CRAs. That is what we anticipate and it is confirmed in ESMA’s statement of 9 November 2018.
The hon. Lady also raised an issue around the relationship to the 2009 regulations of the FCA. It would be appropriate for me to reflect and write to her with more detail. I emphasise that the point of these SIs is to hold regulations steady before and after exit in the circumstances of no deal. I make the general point that if we have no deal, the obligation on the Government to come forward with a whole range of additional regulation in financial services would be immediate and significant. Clearly, what we are doing here is transferring the appropriate powers for continuity at the point of exit. We are not saying that that will be the final state.
The hon. Lady raised two significant points with respect to the market abuse statutory instrument. On the point about the co-operation requirements being removed, I do not need to say more than I have already. The aspiration to have an ongoing, positive dynamic is there but, of course, in an unplanned no-deal scenario, we cannot anticipate the degree of co-operation. We would seek to be proactive in driving that and there is obviously a desire from market actors for us to achieve that. Changes made by the SI, and existing gateways for the FCA sharing confidential information, will enable the FCA to continue to co-operate and share information with ESMA and EU regulators, where we choose to do so.
The hon. Lady wanted to know whether UK authorities will build co-operation arrangements for their UK counterparts. I think I have covered that. Memorandums of understanding are being negotiated between regulators and we hope to reach an understanding on those before the end of March. We cannot do that unilaterally, but progress is being made.
What is the impact on EU issuers? There will be a change for EU issuers with financial instruments admitted to trade or trading on UK trading venues. UK MAR requires EU issuers with financial instruments admitted to trading or traded on UK trading venues to provide such notifications and reports to the FCA. That will mean that EU issuers with financial instruments admitted to trading or traded on UK trading venues will need to send reports to the FCA and their home regulator.
The hon. Lady has deep knowledge of this subject and has set out the considerable burden that that would place on the FCA. As I say, that is unavoidable at this stage, but obviously we would need to do some more work following exit in this no-deal scenario. I am grateful for the comments of the hon. Member for Linlithgow and East Falkirk, and I reiterate that the Government’s objective is to secure a deal, but, in the absence of that, this is none the less a comprehensive piece of work. We are working hard to secure the impact assessments and a fully functioning regulatory regime in the instance of no deal, which I and the Government believe to be wholly undesirable.
I hope that that adequately responds to the questions on both those statutory instruments. I think I have demonstrated that there is a need for these provisions to be made and passed by this Committee. I acknowledge the enduring concern about impact assessments; I accept that we are not in the optimal place, and I can only say that I am doing all I can to meet the appropriately exacting requirements of the RPC. I can do no more at this stage. I ask for the Committee’s support for these regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.
Draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019
Motion made, and Question put,
That the Committee has considered the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.—(John Glen.)
Draft Interchange Fee (Amendment) (EU Exit) Regulations 2018
John Glen Excerpts(5 years, 4 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Interchange Fee (Amendment) (EU Exit) Regulations 2018.
First, may I say what a pleasure it is to serve under your chairmanship, Mr Hanson? As the Committee will be aware, the draft regulations are part of a programme of legislation that is being undertaken by the Treasury, which will ensure that, if the UK leaves the EU without a deal or an implementation period, the UK will continue to benefit from a functioning legislative and regulatory regime for financial services. They will fix deficiencies in UK law relating to interchange fees applicable to card payments, as well as rules for card schemes, issuers, acquirers and merchants.
The approach taken aligns with that of other statutory instruments being laid under the European Union (Withdrawal) Act 2018, by maintaining the fundamentals of existing financial services legislation at the point of exit while amending it to ensure that it functions effectively in a no-deal context. The SI was debated and approved by the House of Lords last week, on 15 January.
Interchange fees are paid whenever a payment is completed using a debit or credit card. They are typically set by card schemes, for example Mastercard or Visa. They are paid from a merchant’s payment service provider, also referred to as a merchant’s acquirer—typically, the banks of the merchant and the consumer—to a card user’s payment service provider, also referred to as a card issuer.
The 2015 EU interchange fee regulation brought in two main policy interventions. First, it imposed caps on interchange fees for transactions where both the acquirer and the card issuer are located within the European economic area; the caps do not apply where either the acquirer or the card issuer is located outside the EEA. The caps limit interchange fees for such transactions to 0.2% of the total value of the transaction for consumer debit cards, including prepaid cards, and 0.3% for consumer credit cards. Furthermore, the EU interchange fee regulation allows individual member states to apply lower caps for domestic debit and credit card transactions where both the acquirer and issuer are in that country.
Secondly, the EU regulation sets rules on card schemes, issuers, acquirers and merchants. For example, it requires the separation of card schemes and processing entities, such as Worldpay.
In the event of no deal, that EU regulation would no longer include the UK within its scope, and interchange fees would therefore no longer be capped for payments involving a UK acquirer and an EEA card issuer. Higher interchange fees that might result from that could in turn be passed on to UK businesses and consumers, directly or indirectly. Without the change in scope to UK legislation introduced by the draft regulations, caps would still apply to card payments involving an EEA acquirer and a UK card issuer, which would result in asymmetrical obligations on UK card issuers vis-à-vis EEA card issuers.
The draft regulations make the following amendments in order to ensure that retained EU law related to the 2015 EU interchange fee regulation continues to operate effectively. First, they reduce the scope of the UK legislation relating to interchange fee regulation from the EEA to the UK, in line with the general principle as set out in the approach by Her Majesty’s Treasury to financial services legislation under the EU (Withdrawal) Act. That means that interchange fee caps will continue to apply to domestic card payments where both the merchant’s acquirer and the card issuer are located in the UK. The interchange fee caps will no longer apply to cross-border card payments where either the merchant’s acquirer or the card issuer are located outside the UK but within the EEA.
The draft regulations will continue to allow the Treasury to set lower caps on domestic consumer debit and credit card payments by making regulations that are exercisable by statutory instrument subject to the negative procedure. This approach mirrors the EU interchange fee regulation.
Secondly, the draft regulations will transfer from the European Commission to the Payment Systems Regulator the power to make regulatory technical standards regarding the requirements for separation of card schemes and their processing entities. That follows the Treasury’s general approach of delegating responsibility for technical standards to the appropriate UK regulator.
In drafting the regulations, the Treasury has engaged with the PSR and with industry. To maximise transparency to Parliament and industry, we published the regulations in draft on 16 November before laying them before the House. As set out in the accompanying explanatory memorandum, which was re-laid on 19 December, the most significant change is that interchange fee caps will no longer apply where either the merchant’s acquirer or the card issuer are located outside the UK but within the European economic area. Any resulting adjustment to interchange fees would be a commercial decision; such an impact would be a consequence of the UK leaving the EU, rather than of the approach taken in the regulations. The direct costs as a result of the draft regulations will be minimal—hence the de minimis impact assessment.
The draft regulations are necessary to ensure that the UK’s legislative and regulatory regime for financial services remains effective under a no-deal scenario. That will be to the benefit of UK business and consumers. I hope that colleagues from all parties will join me in supporting the draft regulations; I commend them to the Committee.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central, for their points. I will do my very best to respond to them all.
First, I will address the overall context of where we are. It would be wholly undesirable for us to have a no-deal outcome, but my job is to deliver 63 statutory instruments to ensure that we have a functioning regime in place. Never has so much effort gone in to achieving something that hopefully we will not need.
I acknowledge the rigour and seriousness with which the Opposition Front Benchers have taken to this task, and I take on the points that are repeated each time. All I can say is that I will seek to maintain good will by giving as full an explanation as possible. Where I can, I will follow up with letters if I do not know all the responses that are sought.
Now I will seek to address the points that have been made, in sequence. The hon. Member for Stalybridge and Hyde mentioned the issue that was raised in the Lords concerning, first of all, the scope of this measure and why we are taking action under this mechanism. This SI reduces the scope of the UK legislation relating to interchange fee regulation from the EEA to the UK, and it maintains caps on transactions that involve only UK entities. It is laid under the EU (Withdrawal) Act, which transfers directly applicable EU law to the UK statute book, and it gives the Government the power to amend legislation to fix any provisions. However, it does not allow us to innovate.
Baroness Bowles of Berkhamsted legitimately wanted us to move forward and insert a cap so that we would not be vulnerable in a third-country situation to whatever might come from the EEA, but that is not something that the Government are permitted to do under this legislation. So, the measure is limited just to making those fixes, to restrain the Government from that sort of proactive innovation.
Linked to the point about the payment services directive, I will say that all legislation that is ongoing through the EU will be subject to the in-flight files Bill, which is now going through the House of Lords and will come to the Commons, I believe in February. That will determine the mechanism by which we onshore files that are ongoing.
So, there is a deliberate restraint on innovation during this SI process, which therefore prompts questions. However, what we cannot do in this situation is to assert proactively what sort of third country we want to be to the EU, when the EU has not offered a reciprocal arrangement that would make sense.
Jonathan Reynolds
I understand very clearly what the Minister is saying. However, we have sold this process to the public and to our colleagues in the rest of Parliament as a process that continues the status quo. I understand that logically what the Minister is saying is absolutely right; effectively, he is saying that we cannot innovate to provide for the status quo. By transposing this measure, however, we are actually diminishing the position of British consumers, which is of concern.
John Glen
I fully recognise that that is a legitimate point to raise, but in addition to this process we have the in-flight files Bill, which determines how we would go about onshoring—or not—provisions of ongoing directives, and we are also working on financial services legislation for the 2019-20 session, which would seek to respond holistically to the challenges that would be presented in a no-deal scenario. We are not passively waiting to be vulnerable, but this is the first stage of a process that we would have to undertake. It would be complex and time-consuming, and there would be a lot of work to be done, but that is where we are.
With respect to the challenge posed by the hon. Member for Glasgow Central about no deal, I really do not want to see a no-deal. There are a lot of observations that a managed no-deal would be okay, but what is not clear to me is how one determines that degree of management. It seems to me to be quite a random set of actions and the consumer detriment in the short term would be considerable.
I have covered the point about why I am using secondary legislation rather than primary legislation, and the constraints under which I have to act. I was asked about the capacity and expertise of the payment systems regulator to deal with these new responsibilities. The payments systems regulator was set up four years ago. It has issued public statements on the actions that it is taking. In the Treasury, we are confident that it will be making adequate preparations and effectively allocating resources ahead of March 2019. It has responsibility for monitoring and enforcing compliance with the new interchange fee regulation and for some regulation of the UK payments systems. We remain confident in its ability to continue to discharge its responsibilities.
The hon. Member for Glasgow Central raised the issue of the de minimis impact assessment. It has been prepared in line with the better regulation guidance, and we consider that the net impact on businesses would be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the payments systems regulator, and that is where that cost comes from. Firms will benefit from the reduction in uncertainty under a no-deal scenario, and without this instrument legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.
The hon. Lady made a number of points related to the Bird & Bird legal paper. I have not seen that. To be fair, I would prefer to reflect on that fully and write to her in detail, so I can address some of the concerns raised around different drafting elements of it. She asked whether the SI capped debit card fees. We are maintaining a domestic cap for debit and credit card transactions. Those are referred to in amendments made to articles 3 and 4 by regulations 6(1) and 7(1). However, their derivation applies only to debit card transactions in the existing law.
I was asked about the broader question of monitoring the interchange fee in future, as a third country in a no-deal situation. Clearly, the Government keep all policy under review, but we would need to look proactively as soon as possible at what would be the appropriate arrangement to come to. As has been made clear in the discussion this morning, if we were a third country the 0.2% and 0.3% cap would not automatically be applied, and that would have serious implications.
Jonathan Reynolds
I understand what the Minister is saying about the unworkability of the legislation if this does not go through, but from what he is saying it seems that if this SI were not passed, the British consumer would be in a stronger position than if it were passed. When we think about the circumstances of no deal—immediate tariffs, almost certainly some further depreciation of sterling, higher inflationary pressures—I am not sure that we are in a position to say that passing this legislation is in the best interests of the British consumer.
John Glen
We have to remember that this is in a no-deal situation; we would be outside and without the scope of the EU regulations of which we are currently a part. We would have no regulations for maintaining the caps within the UK. All we are doing is domesticising that existing provision as far as we can, within a UK environment. In our engagement with industry and with the PSR, it has been recognised that this is necessary but it is not the final solution. That is why there would need to be further innovation and policy work subsequently, as I have set out.
In conclusion, the SI is needed to ensure that the UK continues to have a functioning legislative and regulatory regime for payment card interchange fees in the event of a no-deal scenario. I have reiterated my belief that that should not be the outcome we secure in the end, but I hope I have dealt with the points raised. I will return to the hon. Member for Glasgow Central on her specific concern about the Bird & Bird note, and I shall make that available to the Committee.
Alison Thewliss
I thank the Minister for his offer to write and for the welcome letters he has sent after previous inquiries. Does he accept, however, that this is completely inadequate? We came here this morning with serious questions, and we are being asked to approve the SI without any impact assessment. It is great that the Minister will write to us, but that will be after we have voted.
John Glen
I draw the hon. Lady’s attention to the de minimis assessment that was passed as per the rules of the House and that sets out the impact of this SI, as well as to the consequences of our engagement with industry and the regulator that suggest that it is necessary in a no-deal scenario. The hon. Lady refers to specific legal drafting, which I am confident can be addressed. There is scope within the SI programme, in the last four or five SIs, for us to address any issues that have been raised, but the regulations have been scrutinised by the Lords Committee and no points were raised. I do not take her concerns lightly, but when referring to legal drafting I do not want to give an ad hoc response when that would clearly be problematic. I hope that members of the Committee have found this morning’s sitting as informative as I could make it, and that they will join me in supporting the regulations.
Question put and agreed to.
Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, Etc., and Transitional Provision) (EU Exit) Regulations 2018
John Glen Excerpts(5 years, 4 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Sir David. As part of our contingency preparations for a no-deal scenario, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. To deliver that, we are laying statutory instruments before the House under the European Union (Withdrawal) Act 2018. A number of those instruments have already been debated in this place and in the House of Lords. The draft regulations are part of that programme.
The draft regulations will fix deficiencies in UK law to ensure that regulations on over the counter derivatives, central counterparties and trade repositories continue to operate effectively post exit, following an approach that aligns with that of other instruments laid under the 2018 Act: providing continuity by maintaining existing legislation at the point of exit, but amending it where necessary to ensure that it works effectively in a no-deal context. They are the last of three sets of regulations to address deficiencies in the European market infrastructure regulation—EMIR—and ensure that an effective regulatory framework is in place for over the counter derivatives, central counterparties and trade repositories in a no-deal scenario. They follow two instruments that have already been debated and made: the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018.
EMIR is Europe’s response to the G20 Pittsburgh commitment made in 2009 to regulate over the counter derivative markets in the aftermath of the financial crisis. It imposes requirements on all types and sizes of entities that enter into any form of derivative contract, including those not involved in financial services, and establishes common organisational, conduct-of-business and prudential standards for central counterparties and trade repositories. It places three main requirements on entities that enter into any form of derivative contract: reporting to a trade repository every derivative contract that they enter into, implementing new risk mitigation standards for uncleared derivative contracts, and clearing through a central counterparty those over the counter derivatives that are subject to a mandatory clearing obligation.
A derivative is a financial contract linked to the fluctuations in the price of an underlying asset or basket of assets. Common examples of assets on which a derivative contract can be written include interest rates instruments, equities and commodities. Over the counter derivatives, which make up the vast majority of the derivatives market, are derivatives that are privately negotiated and not traded on an exchange. Central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. By guaranteeing the terms of a trade, even if one party defaults on the agreement, they reduce counterparty risk. Trade repositories centrally collect and maintain the records of derivatives and play a key role in enhancing the transparency of derivative markets and reducing risks to financial stability.
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 draft regulations will therefore address deficiencies in EMIR and related UK legislation to ensure that the UK continues to have an effective regulatory framework for over the counter derivatives, central counterparties and trade repositories in a no-deal scenario.
First, they will provide for a continuation of the key requirements set out in EMIR and transfer the relevant EU functions to UK authorities, ensuring that the UK remains compliant with its G20 commitments and maintains a safe and transparent derivatives market. Those requirements include the clearing obligation—the requirement that certain derivatives contracts be cleared through authorised or recognised central counterparties—and the reporting obligation, which is the requirement that firms report details of their trades to an authorised or recognised trade repository. They also include the margin requirements—the provisions in EMIR that dictate that derivative contracts not cleared through a central counterparty should be subject to higher margin requirements.
The margin requirement compels firms to put forward money to cover the costs associated with trades. To have a framework in place to facilitate these requirements, the relevant functions are transferred from the European Securities and Markets Authority to the UK regulators, namely the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England.
The responsibility for drafting binding technical standards relevant to EMIR is also transferred to UK regulators. The Bank of England will take responsibility for specifying which classes of over the counter derivatives should be subject to the clearing obligation, and will set the phasing in of new clearing obligations for firms regulated by the PRA, with the FCA setting the phasing in for all other firms. The FCA will assume new supervision and enforcement powers for UK trade repositories and the ability to suspend the reporting obligation for firms for up to a year, in the unlikely scenario where no trade repository services are available. The PRA will take on the function of specifying the over the counter derivative margin requirements for those financial counterparties that are authorised by the PRA, with the FCA responsible for setting the requirements for all other cases.
Secondly, the draft regulations transfer the power of granting equivalence decisions for non-UK trade repositories from the European Commission to the Treasury, and transfer functions for recognising non-UK trade repositories from ESMA to the FCA. They also remove from the equivalence process the requirement for an international data agreement, to take into account the UK position outside the EU financial services framework.
Thirdly, the draft regulations create a temporary intra-group exemption regime. Under EMIR, intra-group exemptions may be granted to allow parts of corporate groups to be exempt from the clearing obligation and certain requirements of the risk management obligations, such as the margin requirements, when trading with each other. In a no-deal scenario, after exit day certain cross-border exemptions granted before exit day will no longer apply to the UK. The regime will ensure that intra-group transactions that are exempt from the EMIR requirements before exit day or currently will continue to be so after exit day, to avoid any unintended additional cost and burden on UK firms. The regime will last three years from exit day to allow time for the FCA to determine a permanent exemption, and can be extended by the Treasury if necessary. Under the MiFID II—the second markets in financial instruments directive—legislation, there is an exemption from clearing and margining for certain energy derivative contracts and this exemption is maintained in the draft regulations.
Finally, changes are made to ensure that redundant EU processes that will no longer apply after exit, are removed and replaced with relevant UK processes. Under EMIR, EU trade repositories are authorised and supervised by ESMA and follow the EU's processes of appeal. However, following the transfer of functions from the trade repositories SI, it will be the FCA rather than ESMA who will authorise and supervise trade repositories operating in the UK after exit. EU central counterparties are supervised by colleges, which are groups of EEA regulators that oversee the jurisdiction in which central counterparties and their members are based. After exit day, the UK will be independent from EU jurisdiction and will no longer be required to comply with the EU college system; that regulatory oversight will instead be provided by the Bank of England.
Provisions relating to obligations of member states to share information with ESMA will also be omitted as after exit the UK will no longer be part of the EU supervisory framework. That will not preclude the regulators co-operating with each other in future, as appropriate.
The Treasury has been working closely with the FCA, the Bank of England and industry bodies. The statutory instrument was published in draft form, with an explanatory policy note on 5 December 2018, to maximise transparency to Parliament, industry and the public ahead of laying. Regulators and industry bodies have generally been supportive of, and welcomed, the provisions in this SI. The Government believe that the proposed legislation is essential for ensuring the UK continues to have an effective regulatory framework for over the counter derivatives, central counterparties and trade repositories if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting the draft regulations and I commend them to the Committee.
John Glen
I thank the hon. Members for Oxford East, for Aberdeen North and for Garston and Halewood for their clear questioning. I shall try very hard to answer the points raised.
I hear the frustration on the volume and the time that this scrutiny process is taking. All of the 63 statutory instruments we are bringing forward are under the terms of the European Union (Withdrawal) Act that we have previously debated.
The hon. Member for Aberdeen North referred to the issue of equivalence and what would happen with respect to the EU’s assessment of the UK. Clearly we cannot determine that unilaterally. We have as deep a dialogue as we can, but these are provisions for no deal. We have sought to engage deeply with the industry and all the different industry players to achieve an outcome that is as optimal as can be in the circumstances. That is why I put on record my absolute commitment to ensuring that we get a deal. I feel very keenly the frustration of the speeches on the process, and I acknowledge that it is not as it would be under normal circumstances.
In terms of the consultation with industry, we have engaged with stakeholders, including the financial services industry, while drafting the SIs. They are strictly limited by the enabling power, and therefore have limited policy choices within them. In some of the areas I cannot go further than what I said in my opening remarks, which is that we are transferring things over and dealing with deficiencies. However, I shall in a moment address the points raised.
We published a document in June, which set out the approach. We have been publishing draft legislation in advance of laying it to maximise transparency, and securing industry knowledge from TheCityUK and others along the way. We discuss EU exit preparations regularly with industry, which has helped us to understand the impact of the SI. We shared a draft version of the SI to allow stakeholders to familiarise themselves with aspects of it.
As to the key question raised in all three Opposition speeches, about impact assessment, I am conscious of the need to publish the relevant impact assessments as soon as possible and want to reassure the Committee that I am doing everything I can to make that happen. I met officials last week and this morning to try to expedite that and complete the necessary clearance processes. We will publish it as soon as possible.
Maria Eagle
Why does the explanatory memorandum say that it has been published?
John Glen
Because at the time it was printed it was anticipated that it would have been published by then.
As ever, I must stress that some firms would incur some costs adjusting to the changes made by the SIs, if they come into effect, but those costs are significantly outweighed by the benefit that is provided by ensuring that the legislation transferred by the European Union (Withdrawal) Act operates effectively after exit. Without the amendments made by the SIs firms would face far greater disruption to their businesses.
Anneliese Dodds
The Minister is being generous with his time and none of us doubts his commitment to ensuring that the process works properly, but will he enlighten us as to the blockages that are preventing that? Is it a matter of resources or policy issues that have to be dealt with? It would be helpful for us to understand, because although it is wonderful to hear he is trying so hard to get it sorted out, the Committee needs more.
John Glen
I am happy to give clarification. Essentially the process of gaining approval for the impact assessment demands that we share certain information and provide it in an adequate form. Because of the unusual nature of the process and the volume of material, it is difficult to line up. As I said to the hon. Lady in the last Committee in which we served opposite each other, we submitted a group of SIs together, and are working as hard as we can to resolve that.
As Miles Celic, the chief executive of TheCityUK, said in a letter in November, these are exceptional circumstances, which require a unique response. We are doing everything to reach that, but I would not want the process to be truncated. We have not yet had an impact assessment that does not give us a green rating, and I want to make sure that that is how things will end up. However, I fully accept that the situation is not an optimal one. I take on board the observations of all three hon. Ladies, and all that I can say is that I am doing everything I can. I understand that that is inadequate in itself, and wish I could give a date, but it is not possible.
Maria Eagle
Given that it has not proved possible to do what the explanatory memorandum says has been done, why has not the Minister republished and corrected it?
John Glen
Because I wanted the opportunity to explain face to face in the Committee and, given the need to secure the SIs for industry, as I made clear in the quotation from TheCityUK, it is not the perfect process. [Interruption.] I understand the point that the hon. Lady makes but I think I have responded to it as reasonably as I can.
Kirsty Blackman
Lastly, although the Minister has not said it, it appears to me that the issue might be with the Regulatory Policy Committee not getting through the impact assessments that are sent to it. Given that we are going to have an awful lot of SIs and, presumably, an awful lot of impact assessments, that is likely to become more of a problem. Is it necessary for the assessment to go to the Regulatory Policy Committee? Is there a way we could see it without it going to the RPC?
John Glen
The responsibility rests ultimately with me and my officials, and I have to take it on board. It is for me to be accountable for the impact assessments—I am not blaming anyone else. I will continue to do everything I can over the coming hours and days.
The hon. Lady mentioned impact. The draft regulations will not place new regulatory burdens on UK firms. We expect a one-off familiarisation cost for legal experts to examine the draft regulations, which we estimate will have an impact on just over 400 firms and cost £350,000 in total.
The regulatory requirements for trade repositories as defined in title VII of EMIR, will remain largely unchanged. The FCA has been given the power to supervise trade repositories against those requirements, but it has been in close engagement with trade repositories to ensure that their transition is as smooth as possible. Trade repositories will have to familiarise themselves with changes to the supervision and enforcement procedures under the UK regime, but we do not anticipate that that will be burdensome or that the familiarisation costs will be high.
The hon. Member for Oxford East asked how likely the FCA is to use the power to suspend the reporting obligation. It is almost certain that it will not need to use that power because the trade repositories regulations enable it to process advance applications for new trade repositories, or convert authorisations for existing UK trade repositories, to ensure that the UK has operational trade repositories from exit day.
Sir John Hayes (South Holland and The Deepings) (Con)
As I read it, part 2 makes it clear that, should the obligations be suspended, the FCA will retain the power to decide when any trades conducted through the period of suspension are made known. The a priori assumption that businesses should retain information and be willing to report it during the period of suspension provides considerable reassurance.
John Glen
I concur.
The hon. Member for Oxford East asked whether the regulator has adequate resources to cope with its new powers to supervise trade repositories. The Treasury has worked closely with the regulator to prepare the legislation, and we are confident that it is making adequate preparations ahead of exit day and that it has the resources to manage its task. I should point out that, at the end of December 2018, the FCA had a total of 158 full-time employees working on Brexit—an increase from 28 in March 2018. It will publish its 2019-20 plan in the spring, setting out its work for the coming year. When I met Andrew Bailey, head of the FCA, for an hour last week, he did not raise the matter—he has the resources in place.
The hon. Lady asked what would happen in a scenario in which the Treasury provided a temporary regime for intra-group transactions that was not reciprocated by the EU. The Government can address only deficiencies in UK firms, not the issues for EU-based entities—that is why we want to get a deal and get the equivalence process signed off six months before the end of the implementation period, as was set out in the political declaration. The Commission has adopted a temporary equivalence decision for UK CCPs, and in the central counterparties regulations we put in place a reciprocal temporary recognition regime in the UK for EU CCPs.
The hon. Member for Garston and Halewood made a point about the publication of appropriate documents for the Committee. I can only apologise to her. I will examine immediately whether our approach needs to change.
The hon. Member for Oxford East asked why the EMIR provisions on trade repository appeals, fines, supervisory fees and penalties are being replaced with provisions in the Financial Services and Markets Act. The current EU provisions on those matters will no longer be effective under a UK regime, so it is appropriate to replace them. The FSMA provisions that currently apply to FCA supervision of authorised persons will be applied, with appropriate modifications, to its supervision of trade repositories. The new provisions on trade repositories will be equivalent to those to which they are currently subject.
The hon. Member for Aberdeen North asked whether the draft regulations will apply in a no-deal scenario only. This legislation is being implemented to ensure that in the event of no deal we have a fully functioning regime. It will not come into effect in March 2019 in the event of an implementation period on securing a deal, which would be delivered through a separate piece of legislation—the EU withdrawal agreement Bill. However, it could be amended to reflect an eventual deal on the future relationship or a no-deal scenario at the end of the implementation period.
I think I have dealt with all the points raised. I believe that the draft regulations are essential to ensuring that the UK continues to have an effective framework in place for over the counter derivatives, central counterparties and trade repositories if the UK leaves the EU without a deal or an implementation period. I hope the Committee has found this afternoon’s sitting informative and will support the draft regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
Treasury
John Glen Excerpts(5 years, 4 months ago)
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John Glen
Work is being done across the Treasury, the Home Office and the MOJ to look at how we can refine that.
[Official Report, Second Delegated Legislation Committee, 8 January 2019; c. 11.]
Letter of correction from The Economic Secretary to the Treasury:
Errors have been identified in my contribution to the debate on the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.
The correct statements should have been:
Contingent Liability Notification
John Glen Excerpts(5 years, 4 months ago)
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The Economic Secretary to the Treasury (John Glen)
I can today confirm that I have laid a Treasury Minute informing the House of the contingent liability that HM Treasury has taken on in authorising the sale of a portfolio of Bradford & Bingley (B&B) and NRAM commercial loans, acquired during the financial crisis under the last Labour Government, to a consortium formed of Arrow Global Ltd and Davidson Kempner European Partners LLP, who are specialist asset buyers.
On this occasion, due to the sensitivities surrounding the commercial negotiation of this sale, it has not been possible to notify Parliament of the particulars of the liability in advance of the transaction documents being signed. The Chairs of the Public Accounts Committee and Treasury Committee were notified in confidence ahead of the transaction being agreed.
The contingent liability includes certain market standard time and value capped warranties confirming regulatory, legislative and contractual compliance. In addition, there are further remote fundamental market-standard warranties. The maximum contingent liability arising from all contractual claims is approximately £61 million. The impact of the sale on a selection of fiscal metrics is as follows:
public sector net debt is reduced by £61 million in 2018-19;
public sector net borrowing is increased by a total of £7.9 million by 2022-23;
public sector net liabilities is increased by £30 million in 2018-19; and
public sector net financial liabilities is increased by £30 million in 2018-19.
UKAR will incur an accounting loss of £30 million on the transaction in 2018-19. UKAR is expected to make an overall profit in 2018-19. The net present value of the assets if held to maturity was estimated by UKAR’s advisors using Green Book assumptions. UKAR received less than this estimated hold value in exchange for the assets. The Government should not be a long-term owner of financial sector assets and it is right that these assets should be returned to private hands.
I will update the House of any further changes to B&B and NRAM as necessary.
[HCWS1240]
Draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018
Draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018
Draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018
John Glen Excerpts(5 years, 4 months ago)
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The Chair
I will now call the Minister to move the first motion and speak to all the draft instruments. At the end of the debate, I will put the question on the first motion and then ask the Minister to move the remaining motions formally.
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018.
The Chair
With this it will be convenient to discuss the draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and the draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018.
John Glen
It is a pleasure to serve under your chairmanship, Mr Sharma. As the Committee will be aware, the Treasury has been undertaking a programme of legislation to ensure that, if the UK 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 under the European Union (Withdrawal) Act 2018 to deliver that, and several such debates have already been undertaken in this place and in the House of Lords. These draft instruments are part of that programme.
The approach taken in these draft regulations aligns with that in other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending it where necessary to ensure that it works effectively in a no-deal context. The three draft instruments relate to the management, administration and marketing of alternative investment funds.
Investment funds are investment products created to pool investors’ capital and invest it in financial instruments such as shares, bonds and other securities. An alternative investment fund is defined as any investment fund not covered by the directive on undertakings for collective investment in transferable securities, commonly known as UCITS. Such funds are often sold to institutional investors, such as pension funds and corporate investors, as opposed to UCITS, which are mainly aimed at retail investors.
Alternative investment funds include hedge funds, venture capital funds and private equity funds. Registered venture capital funds and social entrepreneurship funds are sub-categories of alternative investment funds. The former focus on start-ups and early-stage companies, and the latter on social enterprises. These sub-categories will also have to comply with the alternative investment fund regulations, as well as the regulations specific to them.
The issue is that, in a no-deal scenario, the UK would be outside the single market and the EU’s legal, supervisory and financial regulatory framework. Retained EU and domestic law relating to the regulation of alternative investment fund managers, European venture capital funds and European social entrepreneurship funds will therefore need to be updated to reflect this, and to ensure that the provisions work properly in a no-deal scenario. The draft regulations amend the legislation to create a UK-only regulatory framework for alternative investment funds in the UK.
I think it would be worth while to pause at this point and to reinforce the point I have made in previous debates. This is about creating a UK-only regulatory framework; it is not about innovating in any way with respect to disputes that may exist about the regulations. The draft regulations remove references to the Union and EU legislation, replacing them with references to the UK and UK legislation. That includes references to the passporting system, which the UK will no longer be part of after exit.
To ensure that a clearly defined funds regime is identifiable in the UK, the draft instruments create UK-only fund labels, which replace the European Economic Area fund labels with “registered venture capital fund” and “social entrepreneurship fund”, reflecting the fact that these funds are located in the UK and subject to UK rules.
The alternative investment fund managers regulations alter the definition and scope of alternative investment funds to reflect the UK’s position outside the EU in the scenario that I have described. Any fund that is not a UK UCITS will be treated as an alternative investment fund. The effect is that UCITS funds located in EEA countries will be treated as alternative investment funds in the UK after exit.
However, the alternative investment fund regulations were not intended for UCITS funds, which are specifically regulated funds aimed at retail investors. As I said, alternative investment funds are more complex funds, largely aimed at professional investors. Different requirements are needed for these types of funds. Therefore, treating EEA UCITS in the same way we currently treat alternative investment funds would be disproportionate. In recognition of that, this instrument removes certain regulations that were not designed for retail funds such as UCITS—for example, certain reporting requirements. That will ensure that EEA UCITS funds continue to be regulated proportionately in the UK as retail funds.
These instruments will also transfer responsibility for the regulation of alternative investment funds and their managers from EEA authorities to the Financial Conduct Authority and from the European Commission to Her Majesty’s Treasury. As the UK’s national competent authority in the EEA, the FCA is already responsible for supervising alternative investment funds and their managers and therefore has extensive experience of making rules relating to this sector. As of last month, there were 3,936 highly trained and professional individuals working in the FCA on all these areas of regulation.
Furthermore, powers are transferred from the Commission to the Treasury, as the suitable Government body. The Treasury will have powers regarding the rules and regulations in respect of investment funds. For example, it will have the power to specify the criteria used by the FCA in assessing alternative investment fund managers.
Finally, to offer continuity for EEA funds and the UK consumers they service, the alternative investment fund managers instrument delivers a temporary marketing permissions regime for EEA alternative investment fund managers currently passporting into the UK. This was part of the announcement made by the Government in December 2017 in relation to creating a temporary permissions regime for EEA firms and funds. That was something that the Government did proactively to ensure maximum continuity. For alternative investment funds, it will allow EEA fund managers who currently have a marketing passport to continue to market their funds to UK customers, as they could before exit day, for a period of up to three years. Following an assessment by the FCA of the effect of extending or not extending the period, the Treasury will have the power to extend the period for a maximum of 12 months at a time, in line with the position under other transitional regimes that we have been putting forward through such SIs. The SI that will extend the regime will be subject to the negative procedure.
At this point, I want to refer to concerns expressed in the other House during the debate on the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. In response to those concerns, which I think came from Baroness Bowles, in particular, but probably also from Lord Tunnicliffe, the Treasury has committed that any extension of this or any other such temporary regimes will be preceded, at an appropriate interval of time, by a written ministerial statement issued to both Houses of Parliament, to facilitate closer scrutiny of the decision to have an extension. The statement would give Parliament notice of the Government’s decision to extend the temporary permissions regime ahead of the extension SI’s being laid.
By the end of the temporary marketing permissions regime, fund managers will be directed to notify the FCA under the national private placement regime, the current mechanism for non-EU, third country fund managers to market alternative investment funds into the UK.
In drafting this instrument, the Treasury worked closely with the FCA, but it has also engaged closely with the financial services industry and, in particular, the Investment Association, and it will continue to engage very closely. In September and October 2018, the Treasury published the instruments in draft form, along with explanatory policy notes to maximise transparency to Parliament and to the industry. That significant engagement has given us positive feedback. The reaction is that people are pleased that we have taken the measures proactively in advance of, and ready for, all outcomes.
I would also like to note that an amendment to the alternative investment fund managers regulations will be brought forward separately and additionally under the related Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019, which were laid before Parliament on 17 December 2018. It will amend part 1 of the alternative investment fund managers regulations to bring forward the commencement date of the temporary marketing permissions regime to the day after the 2019 regulations are made. That will ensure that the FCA has the powers it needs in time to have systems in place to implement the temporary marketing permissions regime. Specifically, it will give the FCA power to process notifications before exit day. That is consistent with the other temporary permission regimes that have been introduced.
In summary, the Government believe that the proposed legislation is necessary to ensure that alternative investment funds continue to operate effectively in the United Kingdom, providing continuity for UK investors, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.
John Glen
I thank my hon. Friend the Member for Basildon and Billericay and the hon. Members for Oxford East and for Glasgow Central for their exhaustive scrutiny of what I said and some of the issues. I put on the record my great respect for the assiduous way in which Opposition Front Benchers have conducted themselves during this process; I concede that it has not been optimal, in terms of the level of engagement and impact assessments. I will now try to faithfully respond to all the points; when I cannot, I shall write to the relevant Members.
Before I come to the issue of the level of engagement and impact assessments, I will address the point that the hon. Member for Oxford East raised. There were long discussions during the passage of the EU withdrawal Act, but that legislation does not give the Treasury the ability to make major changes to policy or legal frameworks beyond those appropriate to ensure basic continuity. We are acting within the spirit of that and doing so as professionally as we can, with as much work to consult and engage with the industry as possible.
We have not conducted a formal consultation on these SIs, but we have engaged closely with industry to ensure that there is a functioning legal framework in a no-deal scenario. That hints at the points raised, which I will come on to more substantively in a moment, about the fact that there are contested spaces in this area and that, in a no-deal scenario, there would be a significant imperative for a bigger corpus of legislation to set the industry fair in this country. Obviously, though, we anticipate and hope—well, not hope, but believe—that we will secure that deal.
The engagement has involved talking to asset management trade associations, representative bodies such as the Investment Association and wider financial services bodies such as TheCityUK, to get technical input to inform our work. That is across the United Kingdom as a whole. I chair the asset management taskforce and I had three or four meetings through 2018 where many of those concerns were also taken forward. I draw attention to the words of Chris Cummings, the chief executive of the Investment Association, who said on 7 December last year:
“In a possible no deal Brexit, HM Treasury’s commitment to remain open to international funds ensures that the UK will remain a world leading asset management centre and that UK savers will continue to have access to a full range of investment opportunities.”
We have worked to satisfy him, and other stakeholders like him, through this process.
I turn specifically to the issue of the impact assessment. The challenge in some areas has been that multiple statutory instruments will apply. We have grouped them together and taken them to the Regulatory Policy Committee to be looked at in the round, so it can then provide a more meaningful assessment of the impact.
I recognise that, as the hon. Member for Glasgow Central said, it is sub-optimal not to have it at this point, but the impact assessment that covers the SIs being debated today has been prepared and is going through the normal clearance and scrutiny procedures. We hope to have it published shortly. It will then cover the balance of those statutory instruments that we will be debating subsequently in these Committees over the next eight weeks, so I hope I will not need to make this apology again.
I emphasise that the point of this legislation is to minimise disruption to firms and their customers and maintain continuity of service provision as a whole. As such, these SIs will significantly reduce costs to business in a no-deal scenario, as without them the legislation would be defective. That is the principle on which we are doing this: we are doing it because the industry wants us to deliver it.
On the point made by the hon. Member for Oxford East about the temporary marketing permissions and the volume of notifications to the market, earlier in the year the FCA launched an online survey for EEA inbound passporting firms and funds, to help inform its preparations and identify firms for which a temporary permission may be relevant. In 2018 there were around 2,060 EEA alternative investment funds that had been notified via a passport to market into the UK. It is not expected that those firms will enter into the temporary marketing permissions regime.
The hon. Lady asked about the specific requirements on depositories. Authorised UK AIFs will be required to have a UK depository as a result of amendments to be made in a related collective investment schemes SI. Transitional arrangements are included in that SI to ensure that firms have sufficient time to make preparations, and unauthorised AIFs will be allowed to have an EEA depository.
The hon. Lady went on to ask about something that has often been raised: the cost to the sector. Again, we will need to see the overall cost, based on that impact assessment. UK investors will maintain their rights to funds in which they are already investing, and will continue to have access to funds currently marketed under a passport and enter the temporary marketing permissions regime. The main cost to firms that we have identified are familiarisation costs of the new legislation and transition costs, because of changes in legal definitions and reporting requirements for firms using the temporary marketing permissions regime. In due course, I think that will be seen to be a very modest sum.
Both Front-Bench spokesmen referred to the FCA resourcing. I will seek to provide more clarity on that. I managed to get the number of full-time equivalents, but I knew that if I gave some information, more would be requested, so I will seek that out. In its business plan it is funded by a levy and it would be able to move quickly, should it need additional resources.
With regard to UK fund managers passporting into the EEA, the Government are only able to take legislative action in relation to EEA fund managers who passport into the UK; we cannot determine the outcome the other way around. However, again, for the comfort of the Committee, I draw attention to the statement made by the chair of the European Securities and Markets Authority on 3 October 2018, in which he said:
“In the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators…ESMA has co-ordinated the preparations for such MOUs together with the EU27 NCAs.”
That is also supplemented by the remarks of Andrew Bailey of the FCA to the Treasury Committee last December, when he estimated that the cost of EU withdrawal for the FCA has been less than initially expected, thanks in part to the temporary permission regimes that the Government have enacted, and which the alternative investment fund managers SI and a number of others have set up.
Mr Baron
I take on board that the Minister has just quoted ESMA and all the rest of it. The trouble is that investment trusts are not well understood within the EU. It is all right for them to say, “We are happy with things,” but if they are inherently deficient, we have to step up to the plate.
John Glen
Let me just finish with the points made by the hon. Member for Oxford East and then I will come to my hon. Friend’s points.
On the point about regulations on UCITS, I think the hon. Member for Oxford East was asking whether removing the AIF-related reporting requirements for the EEA UCITS, despite their being defined as alternative investment funds, will reduce transparency, in essence. It will not. This instrument carves out reporting requirements on alternative investment funds for funds that obtain recognised status from the FCA, to be sold as UK retail investments. As a result of that recognition process, the FCA will already receive all the information necessary for the effective supervision of the funds.
I want to come to the points made by my hon. Friend the Member for Basildon and Billericay. He kindly offered me the device of writing to him by letter, but in essence he set out a series of concerns, which he raised previously in a similar Committee in October, about the distinctions between the investment trust and the unit trust, and the application of key information documents and how they can be misleading. He drew my attention again to the concerns of the different industry bodies. For the edification of the Committee, I wrote to him, as he pointed out on 26 October. In Q1 2019, the FCA will publish its feedback.
My hon. Friend’s point about the obligation of the Government versus the regulator is very fair. I will reflect on his comments and have a regular dialogue. I met the chairman of the FCA this week. I have regular conversations and meetings with the chief executive, and I will make those points to him. That has to be set within the context that I am not licensed by this process to innovate, although I recognise that we must also accept that over the last 10 years we have reached a level of authority and reputation, when it comes to regulatory breadth and depth of oversight, that is commonly welcomed.
My hon. Friend has quite reasonably drawn attention to the lack of familiarity in the EU framework with some of the instruments in some jurisdictions outside the UK, which means that the appropriateness of those conclusions has sometimes been contested. I very much understand the issue.
Anneliese Dodds
I am grateful to the Minister for giving way; he is being very generous overall. Might I gently suggest that, as a Committee, we surely need to know whether the Government raised these kinds of issues at any point in their capacity in the Council, in their relations with MEPs in the Parliament or in their relationship with the Commission?
Of course, as the Minister mentioned, this is a separate process that the Government are undertaking. The UK has frequently drawn attention to the specificities of the British financial sector during the creation of many of these regulations; I experienced that regularly as a Member of the European Parliament. I am not clear whether the British Government made any entreaties about how the KIDs were set up and whether they appropriately covered investment trusts, but surely that would have been the stage. If we start to say that they should be changed at this stage, without having made those entreaties, I think that would raise eyebrows—to put it mildly.
John Glen
I respect the deep—deeper than my own—personal experience of both hon. Members who have spoken about that matter. In terms of the previous engagement of the British Government through their representations as the documents were constructed, I cannot account for that now, but I am happy to write to the hon. Lady about it.
The point that my hon. Friend the Member for Basildon and Billericay is making is that, in the future, when we leave the EU, we will have to take account of the combination of responsibilities to broadly align with common expectations in like-minded investment communities and to attend to real challenges that lead to perverse investment decisions and outcomes for investors, which my hon. Friend is very familiar with.
I hope that has covered the points raised. If there are other points that I have not answered, I will be happy to write to hon. Members.
Mr Baron
May I remind the Minister of the sense of urgency that is required? It is not just that the date of the 29th is looming, but that the FCA, if one were being charitable, has been slow out of the traps—that is not just my opinion, but that of a number of trade bodies—and appears somewhat slow in coming to review the whole situation. Pressure from the Government would help.
John Glen
I accept that. In the context of Q1 of this year, with respect to no-deal preparations, the Financial Services (Implementation of Legislation) Bill on in-flight files is going through the other place at the moment to put in place a mechanism to have discretion to onshore, or not, files that are live. They have to be the priority at the moment, but the point is well made and I have heard it. I will make representations.
I hope I have demonstrated that the regulations are needed to ensure that alternative investment funds continue to operate effectively in the UK if the UK leaves the EU without a deal or an implementation period. I hope that the Committee has found the debate informative and will now be able to support the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018.
draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018
Resolved,
That the Committee has considered the draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018.—(John Glen.)
draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018
Resolved,
That the Committee has considered the draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018.—(John Glen.)
Draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018
John Glen Excerpts(5 years, 4 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.
May I say what a pleasure it is to serve under your chairmanship this morning, Ms McDonagh? As the Committee will be aware, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the United Kingdom. To deliver that, the Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018, several of which have already been debated in both Houses, with plenty more to come—we have another tomorrow afternoon.
The draft regulations are part of that programme. They will fix deficiencies in UK anti-money laundering law to ensure that it continues to operate effectively post exit. Their approach aligns with that of other statutory instruments laid under the 2018 Act, providing continuity by maintaining existing legislation at the point of exit but amending it where necessary to ensure that it works effectively in the event that we leave the EU without a deal in place.
Many hon. Members present will be familiar with the existing anti-money laundering legislation. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 set out the requirements for regulated firms to combat money laundering and terrorist financing. The EU funds transfer regulation specifies the information that must accompany electronic transfers of funds. The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 established the Office for Professional Body Anti-Money Laundering Supervision within the Financial Conduct Authority early in 2018.
Anti-money laundering legislation is designed to combat illicit finance while minimising the burden on legitimate businesses. In a no-deal scenario, the UK will be outside the European economic area and the EU’s legal, supervisory and financial regulatory framework, so the three pieces of anti-money laundering legislation that I mentioned will need to be updated to reflect the UK’s new position and ensure that their provisions work properly. The changes that the draft regulations will make to the UK’s anti-money laundering regime will primarily affect the financial services sector, but their impact will be minimal and we have engaged extensively with industry to ensure that affected firms are aware of them.
First, the draft regulations will transfer to the FCA responsibility for making technical standards to specify the additional measures that credit and financial institutions with branches or subsidiaries abroad are required to take. Such standards are of a similar type to those that the FCA already makes and are in an area in which it has deep technical expertise, so it is the appropriate body to take on that responsibility. The transfer of this power is necessary because the relevant standards are currently made by the European Commission.
Secondly, the draft regulations will remove the obligation for certain UK persons to have regard to guidelines published by the European supervisory authorities. The UK will be outside the EU’s regulatory framework, so it would be inappropriate for UK persons to be legally required to have regard to those guidelines. However, it is important to remember that firms will continue to be required, under the broader obligations of the FCA, to have regard to guidance developed by the UK supervisory authorities and industry bodies.
Thirdly, the draft regulations will equalise the regulatory treatment of EEA member states and third countries for correspondent banking relationships, which arise when one bank provides banking services on behalf of another. Currently, UK financial institutions apply enhanced due diligence measures to correspondent banking relationships with financial institutions outside the EEA, but those measures are not required for intra-EEA relationships. The draft regulations will equalise regulatory treatment so that enhanced due diligence will be required for all correspondent banking relationships. That change better aligns with the Financial Action Task Force standards on the issue and with the existing practice of many UK institutions that apply enhanced due diligence because of the risks associated with correspondent banking relationships.
Fourthly, the draft regulations will equalise regulatory requirements with respect to the information about the payer and payee that accompanies the electronic transfer of funds. UK payment service providers will be required to provide the same volume of information to accompany transfers into EEA member states as to other countries. Those changes are being made to reflect the UK’s new position outside the EU’s regulatory framework. The position of the Crown dependencies within the UK’s payments area will remain unaffected.
Finally, the current money laundering regulations require certain information to be communicated to EU institutions. Those provisions will be removed, as they will no longer be appropriate once the UK ceases to be a member of the EU.
The House of Lords Secondary Legislation Scrutiny Committee queried the change in requirements to transmit information to EU institutions. It also queried whether the FCA will co-operate with its counterparts in other countries to combat illicit finance. However, the draft regulations’ changes to information submission requirements relate to specific duties to provide directly to EU institutions information such as the national risk assessment of money laundering and terrorist financing. Legal obligations to submit such information would be inappropriate once the UK leaves the EU, but it is important to emphasise that UK supervisory authorities, including the FCA, will continue to have an obligation to co-operate, as they consider appropriate, with overseas anti-money laundering authorities in relation to firms that have offices in the UK.
The Treasury has worked closely with the FCA in drafting the regulations. We have also engaged with the financial services industry on them and will continue to do so in relation to other statutory instruments in the onshoring programme. To maximise transparency for Parliament and industry, we published the instrument in draft in November, along with an explanatory policy note.
The Government believe that the draft regulations are necessary to ensure that the UK’s anti-money laundering and counter-terrorist financing regime operates effectively and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting them; I commend them to the Committee.
John Glen
It is a pleasure to respond to the hon. Members for Oxford East and for Aberdeen North, who raised a series of thoughtful questions. I have to say at the outset that the draft regulations are about creating the functioning regime that we will need in a no-deal situation. A whole range of points that were raised were discussed during the passage of the Sanctions and Anti-Money Laundering Act 2018, but I will seek to respond to them.
The hon. Member for Oxford East raised concerns about the EU’s high-risk third country list. I can confirm that we will use the Sanctions and Anti-Money Laundering Act to update the high-risk register. We will use the affirmative procedure, which will enable Parliament to vote on any changes. International standards will be considered as part of any updates.
The hon. Lady also raised the Financial Action Task Force and its recommendations, and I will come on to some of those around the resourcing of the FIU. However, it is important for the Committee to understand that the comprehensive review of the UK regime that took place last year, which is done on a 10-year basis, judged the UK to be in the best state of all 60 countries that have been evaluated. However, I acknowledge that there are pieces of work that need to be undertaken to improve it.
There has been an 80% reduction in Scottish limited partnerships.[Official Report, 17 January 2019; Vol. 652, c. 9MC.] The Department for Business, Energy and Industrial Strategy, which leads on this area, published a report in December that set out a series of elements, including tighter regulation, the need for a firmer connection to the UK, increased transparency of information and giving the registrar the power to strike off dormant partnerships. I accept that there is work to be done, but progress is being made.
The hon. Members for Oxford East and for Aberdeen North raised the issue of co-operation with the EU. Paragraph 84 of the political declaration explicitly sets out that the UK and the EU should co-operate on anti-money laundering. I am not able to give chapter and verse on specific mechanisms, but it is important to remind the Committee that the UK is known as a world leader in setting the agenda in this area and it is inconceivable that the Government would not wish to continue to take a lead in driving forward these standards.
Obviously in a no-deal scenario, work would have to take place to establish how the FCA’s relationship with the EU would work, in the context of a thorough and holistic piece of legislation on financial services. The Treasury, working across Government with the Home Office and the Ministry of Justice, takes its responsibilities in this area very seriously. I gave evidence to the Treasury Committee’s inquiry on economic crime and we look forward to its report, which will guide us and to which we will respond.
The Home Office leads on the resourcing of the FIU and the SARs reform work, so I am not able to give a detailed answer, but shall write to the hon. Member for Oxford East.
Anneliese Dodds
Would the Minister mind also writing to me to indicate when the Government will release their response to the consultation on creating an offence of failure to prevent economic crime?
John Glen
I would be happy to respond on that matter as well.
A point that often comes up in these discussions is the resourcing of the FCA. I acknowledge the great work that it has done over the last 18 months in helping the Government to prepare these SIs. It is funded by an industry levy and has set out in its business plan the resources involved in working towards exit. The Government are confident that the FCA has made adequate preparations ahead of leaving. If additional resources are needed in the event of no deal, it would be able to raise those funds very quickly, but we would all be in a situation where we would have to do things that we had not anticipated. This programme of SIs is about getting to the basic starting point that allows us to have confidence in the regulatory regime, but I do not deny that a considerable amount of work would need to take place.
On maintenance of standards and equivalence with the EU on anti-money laundering, the hon. Member for Oxford East discussed the use of the word “may” versus “must”. I want to clarify that what we have removed is the obligation to report in a specific way, as per the legislation. It is not our intention to remove ourselves from either the spirit or substance of that obligation; it is just that it would be inappropriate to leave a legal obligation to an entity when we are a third party. That is the only way that I can describe it.
To expand further on future co-operation, through the bilateral agreement with the EU, we expect to have an expansive relationship that would have a wide scope of cross-border activity. The changes in the SIs do not preclude deep co-operation between UK and EU regulators in the future. It is desirable to have that co-operation.
The hon. Member for Aberdeen North raised the burden on banks’ IT systems. When one makes a transfer between one bank and another, if it is in an unfamiliar, non-mainstream destination in Africa—I will not name an individual country for fear of getting a letter from its ambassador—some checks would be done, because the bank would then obviously receive those funds. A check would be done on that, but because that sort of transaction is inherently risky, the same degree of checking will need to take place—and does take place in practice in the banking industry—with countries in the EU that are more familiar to us. Broadly, there is harmony on that matter anyway.
I mentioned the SARs reform, which the Home Office leads on. We anticipate that new IT will provide a more user-friendly portal for reporters from all sectors and that improved data processing, storage, analytics and distribution will be required. Work is being done across the Treasury, the Home Office and the MOJ to look at how we can refine that.[Official Report, 17 January 2019; Vol. 652, c. 10MC.] At the moment, the basic problem is that there is a high volume of SARs and we could better interrogate that data pool.
The hon. Member for Oxford East mentioned the concerns raised by the Thames Valley police and crime commissioner. He has also raised them with me and I will get in touch with him about them. Obviously, we do not rest on our laurels with respect to the FATF evaluation. I have mentioned the concerns that the Government have acknowledged in terms of the FIU, and the improvements to SARs and to the Companies House register, on which we expect a Government report in Q1 or Q2 of this year.
The statutory instrument is needed to ensure that the UK’s anti-money laundering and counter-terrorism financing regime operates effectively and that the legislation functions appropriately if the UK leaves without a deal. I hope that I have adequately responded to the points raised.
Kirsty Blackman
When the Minister was talking about the resourcing of the FCA in the event of a no deal, he suggested that it would be able to draw down extra money very quickly. Is he basically suggesting that, in the event of a no deal, on 1 April, Parliament will come in and approve lots of money to be given to lots of different Government agencies to deal with that scenario, or will that happen in advance of a no deal? We have only 80 days to go.
John Glen
My colleague the Chief Secretary has set out comprehensive budgets for each Department for the financial year with respect to a no deal, and a process for urgent requests. The FCA would be able to raise its levy autonomously and separately from Government. It will have contingency arrangements for doing that quickly. I obviously cannot address all Government agencies and Departments, because it will be done through different Ministers in different Departments, but I can say that the Treasury has fully communicated the process for making additional requests in a no-deal situation to all Ministers in all Departments.
Kirsty Blackman
What about communicating that to Parliament rather than just to Ministers? I know that the scrutiny process is rubbish and Parliament does not have much say on Government spend generally, but surely it should have some say on that.
John Glen
If I take the Department for Education, for example, where a large portion of the budget is for providing food in schools, in a no-deal circumstance where additional costs might be associated with that food, the Minister would need to make a statement to Parliament about that and respond to it. Inherently in the process, there is a mechanism for the Government and different Departments to bring matters to Parliament. They would need to justify where they would spend that additional money and the basis for it. With respect, I think that is beyond the scope of the statutory instrument—at least, that is my judgment.
John Glen
I am sorry for that. I hope the Committee has found the debate informative and will now be able to support the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.