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

Debate between Lord Kirkhope of Harrogate and Baroness Bowles of Berkhamsted

Tuesday 30th October 2018 Grand Committee

[Lord Kirkhope of Harrogate (Con)]

My Lords, I would like to intervene briefly to ask my noble friend a couple of questions. Although we all hope for a deal scenario, not a no-deal scenario, nevertheless the practical approach to these matters should perhaps be thought through a little more. My first point is a procedural one relating to the statutory instrument—I refer particularly to the EEA passport rights matter. I spent some years—not many, thank goodness—as a member of the Select Committee on Statutory Instruments in the House of Commons, which was chaired by the late Bob Cryer. He was scrupulous about determining the nature of approaches towards statutory instruments.

I am concerned that we have, effectively, a hybrid—an affirmative resolution, but nevertheless with the prospect of a negative procedure in the event of any extension of time, for registration of the various bodies that may need registration in due course. I find that rather concerning. I would like my noble friend to confirm that we are not getting dangerously close to a ban on negative approaches. Clearly that could happen when the affirmative approach is required but where there is a fee involved for a function which a UK public authority would exercise.

I believe the registration itself must by implication—although it is not revealed in this document—carry with it some financial implications; some fees will have to be paid, although they are not referred to here. If that is the case, would it not be more appropriate for affirmative resolution to be carried through to those extensions as well as to the rest of the item? That is my first point.

My second point is that while the FCA seems capable of handling quite large numbers of registrations for companies under EEA processes, the Prudential Regulation Authority does not. That is a deep concern. So far, the PRA seems able to manage only 10 or 12 applications per year. It has already indicated that it expects that there will be between 100 and 200 applications in the event of a no-deal scenario under these proposals. How does my noble friend believe this can be dealt with, without some form of massive increase in resources or powers, particularly in the hands of the PRA? I would be grateful if he would allow that.

I come to my third and final point. He has talked about the extension of the extension, which requires six months’ notice from either the PRA or the FCA as to the needs arising. To my mind, that is an almost indefinite process; we would see these extensions going on ad infinitum, or certainly for a considerable time. Surely that must be a disadvantage to the entities applying for registration and, indeed, to the position of this country in relation to the financial services in which it is at present so pre-eminent. Can he assist with that? I am grateful to him for his introduction.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for his introduction and I concur with him that these are necessary instruments. I declare my interests as in the register and, in particular, as a director of the London Stock Exchange.

Starting with the EEA passport rights regulations, I fully understand the need for temporary or deemed permissions and some flexibility, but in the longer term there are risk and competitiveness issues to consider, so I shall explore further the time periods and how the policy surrounding them might operate. There are two time periods: two years from exit before a formal application for authorisation has to be made, and three years from exit, extendable, within which the relevant regulator makes a determination. Supervisors can require a formal application to be made before the two-year period is up, and presumably that could be exercised for a variety of reasons, such as phasing in for size or complexity of entity or for other risk-based reasons. As the Minister has already mentioned, the two-year period is also potentially useful to EEA firms trying to decide what to do, getting used to UK supervision and having time to organise themselves before having to seek authorisation. It can also be that the two years is simply a waiting room until the regulators have the capacity to carry out the authorisation determinations. How is it envisaged that the two-year period will operate? What is the policy? Is it a phasing mechanism? Will the regulators be controlling that phasing? Is it wholly in the hands of the firms that want their passports replaced? Is it expected that everyone will have two years and then there will be a sudden rush of applications; or, as I asked before, will there be some kind of risk-based assessment about which applications must be brought forward in time?

I now turn to supervision, because the entities in the temporary regime will come under supervision. Can the Minister assure us about the regulator’s capacity to supervise and that significant supervision will take place? If it is envisaged that there may be an unmanageable, or at least long, queue for authorisations because of capacity issues, what is the capacity situation with supervision?

Does two years really mean a fixed two years that cannot be extended? I cannot find anything to say that it could be, and there is nothing in the Explanatory Memorandum. But just in case I might have missed something, will the Minister clarify whether the construct of the regulation stating that “Section 55U” of FiSMA “has effect as if” is a good way of keeping the two years unamendable by any power to make changes that might be embedded in FiSMA or anywhere else? I am still learning the tricks of some of the parliamentary drafting that goes on here, and that is quite a good one to remember.

As to the three-year limit allowed for determination of applications, it can be extended, as has already been said. How necessary that is might in part be determined by the policy over the preceding two years. Is extension available only if the regulators do not have the capacity to conclude within three years? I think that is what the Minister said. Has three years been set assuming a rush of applications at the two-year stage, or will an extension be inevitable if that two-year rush happens?

As the noble Lord, Lord Kirkhope, said, it would clearly not be appropriate for the extension to be used on a rolling basis to allow businesses that might not measure up to full UK authorisation standards to continue to operate in a temporary regime because there had been no determination of their application. That is one of the reasons why I share the view expressed by the Secondary Legislation Scrutiny Committee that there is a good case for an extension requiring the affirmative procedure. I do not agree with the reply from the Treasury Minister John Glen in the correspondence. It is not satisfactory to say that some affirmative permission somehow flows from this SI so that the negative procedure is enough at the time of the extension. That might have been the case if the policy on these time periods had been more clearly elaborated, but it was not. In fact, it seems to be in the hands of the regulators, and if that is the case, then I cannot see how avoiding affirmative procedure is the right way to go. If the Government had set the policy and embedded it in here, that would be different, but this does not include the policy on how it is going to be used.