Draft Financial Regulators' Powers (Technical Standards Etc.) (Amendment Etc.) (EU Exit) Regulations 2018

Debate between Lord Beamish and John Glen

Wednesday 10th October 2018 General Committees

[Mr Kevan Jones (North Durham) (Lab)]

As an old friend, it is a pleasure to serve under your chairmanship, Sir David. I suspect this the first of an avalanche of statutory instruments that will keep you and other Chairs very busy over the coming years. The Minister could not say how many SIs would be generated.

[John Glen]

I have been helpfully informed by my friends on my left that there will be about 800 SIs across Government. I provide that answer now to the hon. Member for Rotherham.

[Mr Jones]

I am sorry to be pernickety, but that is 800 across Government. Can the Minister say how many will be generated by this sole piece? He obviously does not know; perhaps he could write to Committee members.

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[John Glen]

I thank colleagues for the debate and the many points raised, all of which I shall do my best to interrogate individually. First, I acknowledge the rigour of the scrutiny from the Opposition Front Benchers.

[Mr Jones]

And the Back Benchers.

[John Glen]

I will come to the right hon. Member for North Durham later. I will do my best to deal with the serious points raised. It is worth reminding the Committee that the Government are working flat out in financial services, which I am responsible for, to secure a deal. Today, we are discussing the contingency arrangements for no deal. Obviously, there are a range of views, as expressed, about the desirability of no deal, but this is about doing what is prudent—essential, really—to have a functioning regulatory regime in place.

To refer back to the comments of the hon. Member for Rotherham, the Government expect to lay about 800 SIs before Parliament in time for exit. Some have already been laid before Parliament. I acknowledge the question from the right hon Member for North Durham about the numbers in this area, and will seek to clarify that as soon as I can. On that point, this is a live piece of work, and we are looking at how SIs should be aggregated appropriately. We are in live consultation, so I may not be able to give an accurate number.

[Mr Jones]

The Committee would appreciate the Minister taking a rough stab at it. I accept that he does not know now, but perhaps his Department could do that. The only alternative is to flood him with parliamentary questions, which we do not really want to do.

[John Glen]

I am happy to answer any parliamentary question. I think we said there are about 70 SIs, but that will not be fully accurate.

The hon. Member for Oxford East asked, at the macro level, whether financial stability will be protected. The statutory objectives of the regulators for financial stability will not change. They are enduring. A tripartite system was set up as a consequence of the crash. I think there is broad cross-party agreement on the need for that to continue, and it will.

The hon. Lady asked about holding regulators to account. Parliament will be involved in every aspect of the process to onshore EU financial services regulations, so all the changes the Treasury proposes to level 1 legislation and delegated Acts will be put before Parliament for it to approve. Any transfer of responsibility to the regulators, including any transfer of powers to make technical standards, will be put before Parliament for it to approve through affirmative-procedure SIs.

The Treasury is working closely with the Bank of England, the PRA, the FCA and the PSR on how to fix deficiencies, including in the technical standards that we propose should become the responsibility of regulators. As was said, the Treasury will be required to approve all the deficiency fixes proposed by the regulators to ensure they are consistent with the deficiency fixes that Parliament will be asked to approve in onshoring.

[John Glen]

We are seeking to give responsibility to the most appropriate body. The regulators are doing what they do. Frankly, some binding technical standards will not be suitably scrutinised or carried out within the Treasury. I refer back to the point I made about tier 1—or tier 2. Binding technical standards are sort of tier 3 within tier 2—it is a bit complicated—but basically, Parliament will have scrutiny over fundamental change, and the consequential changes that flow from that will be delegated to the appropriate body.

I think the hon. Lady asked whether this is about more than fixing deficiencies for exit. The withdrawal Act provides for the transfer of functions where necessary. Binding technical standards will need to be maintained by an appropriate body. After exit, that will be the UK regulators.

On what the hon. Lady said about her role as a Member of the European Parliament, it is absolutely right to say that we will have more to do because we will not have that scrutiny. As I understand it, MEPs can veto some binding technical standards proposals, but the UK FSMA framework of 2000 does not work in that way. Parliament has delegated technical rules to UK regulators, which is a difference.

The draft regulations set out the procedure where responsibility for future binding technical standards is transferred to regulators by other SIs. All those SIs will be scrutinised individually by separate Committees—I will probably be sat here introducing them—and subject to approval by Parliament under the affirmative procedure.

I turn to the Treasury’s authority over regulatory changes. It is appropriate that the Treasury approves all the deficiency fixes that the regulators propose, and Ministers will be accountable to Parliament for that. On the responsibility for binding technical standards that regulators will take on post-exit, the Treasury will need to approve future changes to those technical standards and will be able to veto a proposal for the two reasons set out in the draft regulations: if it appears the proposal would

“have implications for public funds”,

or if it would

“prejudice…negotiations for an international agreement”.

I cannot anticipate what they are, but all I know is that I would be subject to parliamentary scrutiny on that.

[Mr Jones]

That is very interesting. As I understand it, the buck stops finally with the Treasury and the Minister. How does Parliament get into that? Are the proposals published or laid before Parliament? How would Parliament be able to have a view of that?

[John Glen]

Any changes that the regulators make must be consistent with the higher legislation that Parliament has approved.

[Mr Jones]

What if they are not?

[John Glen]

Then the regulators would have to explain why not, and I would have to explain and justify that. They are not licensed to innovate through this onshoring process. They are not given that discretion. We talk about correcting deficiencies, which is quite a technical term, but it means that where the legislation currently refers to EU institutions and EU bodies, technical wording needs to be changed to make it legally effective. It is not about innovating in terms of doing the sorts of significant changes that my hon. Friend the Member for Basildon and Billericay is suggesting that I take on board.

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[Mr Jones]

That says a lot about a lot of these things. As this SI goes through, therefore, have those various bodies that will get these powers got the necessary technical expertise to be able to determine that, or is that a Treasury decision?

[John Glen]

They have been given the responsibility where their technical expertise is formed and known, and where their role currently is to deal with this stuff. It is not exclusively about a language change, but I am just trying to give an indication of the lack of policy innovation that is going on here.

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[John Glen]

Where there are deficiency fixes that the regulator has proposed, they will be subject to approval, but I will be scrutinisable on those decisions, through Select Committees and the normal mechanisms of Parliament.

[Mr Jones]

I accept that the Minister is saying that he, as the Minister, will be scrutinised by Select Committees and others, but what role is there for Parliament to be able to challenge any of these?

[John Glen]

Regulation fixes will be put in the public domain and laid before Parliament for information, so there is nothing hidden about it.

[Mr Jones]

That is not good enough, because I could lay anything. Let us be honest: the Minister could write anything and place it in the House of Commons Library, but if Members of this elected House do not have an ability to question or change it, is not that a deficiency in the process? Otherwise, it gives the Minister the power to decide what is deficient or not. Afterwards, he can produce a report for the Select Committee or place it in the Library, but actually we have no influence at all as Members of Parliament.

[John Glen]

I just draw the Committee’s attention back to the purpose of this, which is to onshore, to ensure that we have a regulatory regime in place for a no-deal scenario. This is not about seeking to give additional powers to change in any way the policy framework that is set by the primary legislation that we have debated in the House. We are in the realm, I think, of constructing hypothetical scenarios of fixes that produce some meaningful change, which they would not be licensed to do in the first place, and saying that those would not be subject to scrutiny. They will be laid before Parliament, but it would not get to that point, because they are not licensed to do the sorts of things that the right hon. Gentleman suggests that they would do.

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[John Glen]

Given the relationship that the Treasury has with the different regulators, it is for them to raise concerns with me with respect to the resourcing. All parties are intimately involved in a dialogue around the construction of the process. It is not done unto them by me or the Treasury. In terms of the adequacy of the resources, at the moment I have no concerns about that—it is matter that they would need to raise with me.

[Mr Jones]

The Minister says he has no concerns about it, but he does not know what the cost is. If he does not know what the cost is, I am not surprised that he does not have any concerns about it. I would also question the leaders of those organisations. If they have taken on responsibilities without knowing what costs are going to come down the line, that is foolish on their part, I would argue.

[John Glen]

All I can say is that the lines of communication are open between the FCA, the PRA, the PSR, myself and the officials. We are pretty open and clear. If there were concerns going through this process, which started several months ago, about the availability of resources, I am sure they would have been raised.

[Mr Jones]

In my experience as a Minister dealing with the Treasury, if responsibilities are taken on and then money is asked for afterwards, there is a likelihood that it will not be given. The estimated costs should have been set out in the explanatory notes, as they usually are. It is foolish to think of going along to the Treasury later with a begging bowl and trying to get money out of it—blood out of a stone comes to mind.

[John Glen]

I note the right hon. Gentleman’s point and I will now move on to the issue of supervisory co-operation and the continuance of that, as raised by the hon. Member for Oxford East. While it is true that we will be outside the EU’s framework, we want supervisory competition to continue. I am sure that the hon. Lady knows that there exists a high level of co-operation across many countries outside the EU framework, and our regulators stand ready to do this. A point was made about optimism for the future. The Chancellor set out some great opportunities in the Mansion House speech that we will have with global financial partnerships. The regulators will be deeply involved in that.

I turn now to the points made by my hon. Friend the Member for Basildon and Billericay and acknowledge the quality of his articles in the Investors Chronicle. I look forward to reading his book. The powers in the European Union (Withdrawal) Act 2018 deal only with fixing deficiencies at the point of exit, as he will know. Wider changes need to be considered at a later date, but I think he has put on the record some meaningful analysis of the implications of the regulations for the characterisation of risk around unit trusts versus investment trusts. I have heard that, as have my officials, and we will come back on that.

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[John Glen]

I will take on that point, while also responding to the hon. Member for Glasgow Central, who made the same point about watering down of EU regulation. There is no provision to water down in the Act the regulations that we are seeking to onshore. The wider point has been made about the future direction. On that, again, I can be reassuring. We do not want to define ourselves as a nation by regulatory arbitrage.

I also acknowledge, as my hon. Friend the Member for Basildon and Billericay pointed out, that the financial services have ongoing issues with legislation that has been onshored while we have been members of the EU. They are not about reckless setting aside of prudential regulations. They are in areas, perhaps, on which there is greater emphasis in our UK financial services, as my hon. Friend mentioned, these are things that do not exist in other jurisdictions.

Those are matters that a future framework would at least give us a mechanism to examine and then there would be an understanding, if we achieve what we seek—reciprocal responses from both the sovereign regulatory supervisory bodies. But we are not starting from a point where we are seeking to deregulate.

On the point the hon. Member for Glasgow Central made about UK regulators losing influence, I visited Edinburgh and Glasgow over the recess and acknowledge the growing financial services hub that exists there. The UK is a major financial centre and UK regulators are major players in global forums for financial regulation. There are global colleges for supervision for banks, for example, where we are key players. Although I recognise that the context will be different, this is not the time for UK regulators to adopt a more detached role from international leadership in some of these areas.

Reference was made to the BBC report of the comment I made at the Lords Select Committee this morning about jobs. Throughout the last nine months that I have been doing this, I have been in frequent contact with firms about jobs lost. I was referring to a comment made by Sam Woods, the deputy governor of the Bank of England, about the contingency arrangements. In my opinion, it was not news; I was just reflecting what had been said by somebody else. Of course, contingency arrangements have been made, but I have seen no expectation or desire to move significant tranches of jobs to the EU beyond that. A deal would clearly arrest that fear. We have set out clear proposals on a future ambitious relationship with the EU. We hope that that will transpire, and we expect it to take place.

The other point was about rule-taking. We are not proposing that UK regulators will have to work within a framework, other than the UK Parliament framework. There would be parliamentary scrutiny of any significant changes that we wished to make, and we will set those changes in primary legislation.

The right hon. Member for North Durham made a point about the impact assessment. The regulations would have no cost to business, as they deal with the transfer of responsibility from the Treasury to the appropriate regulators. As a whole, the regulations will significantly reduce costs to business in a no-deal situation. That is the whole point--to ensure that the effects of the transition are minimised in an undesirable situation.

Through our dialogue with firms and trade bodies, we have attempted to minimise the disruption to firms, but it is inevitable that some preparation will be needed. The Government have committed to providing the UK regulators with the power to phase in regulatory requirements that will change as a result of exit, which will mitigate the cost to firms. Due to the wide scope of the changes needed and the broad set of firms affected, however, it has not been possible to accurately quantify the actual costs to firms—I concede that—but these regulations will reduce the cost to business in a no-deal scenario. That is undoubtedly their purpose.

[Mr Jones]

How?

[John Glen]

Because they will set a reliable regulatory framework that will mean that firms will not be at risk of defaulting or of not having the regulatory oversight that would not exist otherwise.