Financial Services Bill (Eighth sitting)

Angela Eagle Excerpts

Committee stage & Committee Debate: 8th sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[Mr McFadden]

I just have a question about these policy statements. We have been through quite a lot about how the FCA will designate, compel and continue the submission of information and all the rest of it. What role do these policy statements play in all of that? Is the policy statement simply putting into law a requirement on the FCA to say why it has acted as it has, or is it, as part of what I think is behind some of the stuff in these clauses, insulating the FCA against the threat of legal action because of the possible effect on contracts? Is this a nice to have, best practice or is it something that helps to protect the FCA against the threat of litigation, which has been a thread through this discussion?

[Ms Angela Eagle (Wallasey) (Lab)]

Obviously, this is a very technical area, to say the least. I just want to ask a couple of questions so that I can get my head round how the FCA will use the power. We have different regulators who could make different determinations as to what constitutes benchmarks going forward, and yet those benchmarks write contracts worth trillions of pounds and dollars into the future. Any arbitrage opportunity in the way that those contracts work could make some people very rich and ruin others. This will be decided as one goes along. Some of these contracts are being made, but some are already projected into the future.

To ensure that markets are not distorted and the potential for nefarious profit by some with insider information is minimised, we need reassurance about how the FCA will perform the task, particularly in its interactions with the other regulators. I am not sure what the Government’s intention is, apart from saying they are going to liaise with other regulators. Is it the Government’s intention that these benchmarks ought to be similarly designed and defined across different regulatory jurisdictions, since this is almost a currency, or are we seeking divergence here as well in order to perhaps increase our chances of being the place where some of this business is written?

Perhaps the Economic Secretary could reassure me on that, because the FCA’s powers are pretty strong, but what is the intention? That might be in all of the many consultations, which I confess I have not read, so it might be set out there. If the Minister could put a little more on the record, we might at least have some certainty there, not least for Pepper v. Hart purposes.

[John Glen]

I thank the right hon. Member for Wolverhampton South East and the hon. Member for Wallasey for their observations. The hon. Lady demonstrates her experience and professionalism in being able to jump in on the first clause, having not been here this morning—no disrespect intended.

[Ms Eagle]

None taken.

[John Glen]

The point that the hon. Lady makes is absolutely clear. We need to ensure that the regulations are in line with global practices because the issue is global. The interconnectedness of financial services markets demands, as in the statement I made just now, that we work very closely with regulators in other jurisdictions. It is absolutely right that we learn the lessons that the right hon. Gentleman, in his work on the Parliamentary Commission on Banking Standards several years ago, drew attention to with respect to the appalling abuses in the market. This measure is designed to give us a framework and to give the FCA the powers to ensure that we have global best practice and no ambiguity.

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[John Glen]

The clause introduces amendments to article 28 of the benchmarks regulation, including new paragraphs 1A to 1E. Article 28 of the benchmarks regulation stipulates requirements for benchmark administrators and supervised entities in preparing for changes to, or the cessation of, benchmarks. I will refer to this as the change and cessation procedure.

The clause inserts the word “robust” in paragraph 1 of article 28 to define and strengthen the nature of the change and cessation procedures that benchmark administrators are required to publish. The clause also inserts new paragraphs 1A to 1E, which set out requirements for the written change and cessation procedure that a benchmark administrator must publish.

New paragraph 1A establishes that the administrator must publish a robust written change and cessation procedure alongside the publication of the administrator’s benchmark statement, which, among other things, sets out the market or economic reality that the benchmark intends to measure. The documents must be published within two weeks of the benchmark being registered in the FCA’s register. Wherever a material change occurs, the benchmark administrator is required to update its written procedure. For critical benchmarks, the proposed changes in new paragraphs 1B to 1E set out additional and more stringent requirements.

When publishing its written procedure, the administrator of a critical benchmark is required to provide an assessment to the FCA, on the basis of the information available to it, that considers the nature and extent of the current use of the benchmark, the availability of suitable alternatives, and how prepared users are for changes to, or the cessation of, the benchmark. Before publishing an updated written change and cessation procedure, critical benchmark administrators must also provide that assessment together with their updated written procedure to the FCA for review. The FCA is required to review and consider whether the procedure is sufficiently robust. The administrator must not publish an update of its procedure without receiving written notice from the FCA that its procedure is sufficiently robust.

In order to be designated as a critical benchmark, a benchmark must be used extensively, and its cessation may pose significant and adverse impacts on market integrity, financial stability, consumers, the real economy, or the financing of households and businesses. It is therefore reasonable and proportionate to require administrators of critical benchmarks to demonstrate via an assessment that their cessation plans are robust. We do not expect it to be an overly burdensome assessment for benchmark administrators. The clause will support increased preparedness in the event of changes to, or the cessation of, benchmarks in the future. I therefore recommend that the clause stand part of the Bill.

[Ms Eagle]

Again, I have just a few questions so that I can get in my head precisely what the reason is for putting this in primary legislation. LIBOR clearly had its issues but it was used for a very long time. Is the Minister anticipating that benchmarks will change much more rapidly in the future, or does he want some kind of stability with the new benchmarks that are based on actual prices, rather than the guesses of participants in the market, as LIBOR came to be defined prior to its demise?

Is the Minister expecting that this kind of provision for ceasing benchmarks will be used regularly? I anticipate that the answer will be, “Only when it is needed because of what is happening in the market.” If this kind of procedure is theoretical and on the face of a piece of legislation but hardly ever used, does that mean that the mechanisms that the Minister is setting out in clause 19 and other parts of the Bill will rust away? They will be there in theory, but there will be nobody there to work them properly. How does he anticipate that the market, the FCA and the benchmark administrators will maintain the capacity to do this if cessation is a very irregular, rare thing?

Will the Minister spend a bit of time defining what “robust” means in this context? In my time in this place, I have had many arguments with Ministers, and made many arguments as a Minister, about why we must not put particular words on the face of Bills and what their meaning is. Can the Minister enlighten us as to what he, the FCA and the Treasury mean by “robust” and how they are defining that in law, so that I can have a bit more confidence that they have got it right on the face of the Bill?

[John Glen]

I thank the hon. Lady for her comments. Although the provisions of this legislation are under the heading of benchmarks, they really refer to the capacity that we need to have to deal with the LIBOR issue. She is right to raise the question of the enduring provision and how tested and exercised that capacity would be, but this is about setting a framework for future use, which is very difficult to anticipate. We want to ensure that it is fit for purpose for the future.

The hon. Lady asks when the framework could be used, which is not a matter that I can reasonably be drawn on, because it would be about market conditions evolving, but it certainly means that we are ready for whatever might evolve, in terms of benchmarks on the path towards becoming critical. However, it will be for the FCA, in conversation with the market and Parliament, to determine how to bring that forward.

[Ms Eagle]

Does the Economic Secretary think that, given the incredible trouble that the wind-down of LIBOR has caused in the markets—not least because of what is on the face of the Bill and the very difficult issues caused by having to exit the LIBOR benchmark—it is best to try to get the next benchmark sorted and future-proofed, so that it does not turn into LIBOR 2 and cause his future successor in the Treasury and me all this kerfuffle in a Public Bill Committee?

[John Glen]

Absolutely. It is absolutely right that we give the power to the FCA but also keep a vigilant eye on evolving market conditions, so that we are well placed to move earlier to deal with any failures in benchmarks.

The hon. Lady asked me to define “robust” in the context of the Bill. I am reluctant to be drawn on that, because it is a matter of legal definition, but I would be very happy to write to her on that and respond at subsequent sittings of the Committee, if she wishes me to do so.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20

Extension of transitional period for benchmarks with non-UK administrators

Question proposed, That the clause stand part of the Bill.

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[Mr McFadden]

I just want to ask the Economic Secretary a question to ensure that we have properly understood the clause. All through this part of the Bill, we have talked about the different timescales in different clauses, and here we have another, which extends the transition period for benchmarks with third-country administrators until the end of 2025.

For my clarity, and perhaps for that of colleagues, will the Economic Secretary clarify whether the measures are different—I think they are—from the five and 10-year timescales in clauses 9 and 12, relating to the FCA designating what the hon. Member for Glasgow Central called zombie LIBOR? Is this five-year period about something different or does it relate to that?

Having debated this matter for a couple of hours, I am not sure that we have resolved it. My feeling is that we are leaving quite a lot to the FCA. I hope that the clause minimises the risk of harm. We have talked a lot about the risk of litigation, but there is also the risk of harm to those who have entered contracts based on LIBOR in good faith. The Government and regulators are trying to move away from that system for reasons that we understand are to minimise harm to those who signed up in good faith, but I suspect that there is still a fair bit of work for the regulator to do to ensure that that is the case.

[Ms Eagle]

Will the Economic Secretary share with the Committee the intention behind the extension to 2025? He said that it was to create certainty—I can understand that. Is the intention to transition to something different—the new third-country regime—after the extension, or is it to develop and introduce it earlier if it looks like there are advantages to doing so? I know that I am asking him to gaze into the future, but this will be in the Treasury and regulators’ work list and they will presumably schedule it at some stage. Does he expect the creation of a third-country regime to be difficult or quite easy? Are the Government thinking of basing it on the existing regimes or diverging from what we are used to? Will he give us a little more information about how the Treasury intends to proceed with this piece of technical but very important work.

[John Glen]

I am very happy to address those points. The right hon. Member for Wolverhampton South East raised the issue of the different time periods. This is different from the LIBOR transition; it is about the third-party benchmarks exclusively. It is a response to the market reality, as we have seen in the number of applications. I will come to the point of the hon. Member for Wallasey in a second.

The right hon. Gentleman also asked about the risk of harm concept and how important that is. Clearly, the LIBOR transition, as we have established today, is an incredibly complicated matter with a great deal of legal complexity, an imperative to align to global best practice, the need to produce a synthetic alternative and the evolution of policy around that. It is also designed to protect. He is right to say that there is a lot more work to be done; there is no off-the-shelf solution. This measure allows the formal framework for that to evolve.

The hon. Member for Wallasey asked me to comment on the future time period by which the new third-country benchmark regime would be constructed. The extension is a response intended to resolve industry concerns and to ensure that UK markets can retain access to the third-country benchmarks. There is no intention to find some way of deviating from norms on that. It is in our interest to have complete alignment to global best practice. The extension gives UK firms the legal and economic certainty. As soon as it can be done, it should be done. I cannot give her the precise location of where that is in the work plan—the FCA has a lot on at the moment—but she is right that we need to operationalise it appropriately, recognising the different obligations on different sized firms. I will be working with the FCA to keep an eye on that in the coming weeks and months.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Benchmarks: minor and consequential amendments

Question proposed, That the clause stand part of the Bill.

[John Glen]

Clause 22 delivers the Government’s commitment to enable Gibraltar-based firms to have continued access to the UK’s financial markets. We move on, finally, from benchmarks and LIBOR; I cannot say that I am too disappointed by that.

[Ms Eagle]

I recognise that I missed a lot of exciting things this morning, but I do not think the Minister is really moving on from that, as he now has to do the work to put it into effect.

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[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Dr Huq. I just have a few quick questions, mainly coming from the evidence we heard last week. During the fourth sitting, at column 125, the Minister, Albert Isola, said that the Bill is akin to enabling legislation, and that other things would need to be worked through in relation to other aspects of the financial services that are currently dealt with. If the Minister could clarify what would happen about those other areas, that would be useful.

Secondly, perhaps the Minister could give further assurances about access to the Financial Ombudsman Service. It is important that consumers here should have adequate protections in the new arrangements, and that those should be made clear. That is the kind of scenario that would not be found out until a consumer needed to make a complaint. Something would have to go wrong for it to be addressed, and I would not want to be such a consumer, feeling in those circumstances that I did not have recourse to the protection that I would have had if I had chosen an insurance policy not based in Gibraltar. It would be useful to hear about that.

Lastly, it would be helpful to have any further clarity that the Minister can give about what would happen to UK businesses and customers if market access were suddenly withdrawn, and where that would leave consumers in the UK. Would they be left without policies and protection? What would happen as a reaction to that, should market access be withdrawn for a period of time? Would it mean that businesses would dry up, withdraw their UK services and go somewhere else, or does the Minister envisage other scenarios happening in that case? I appreciate that it is a scenario that he would want to avoid at all costs, but it could well arise, and I want to ask what state the Government’s preparations for such a scenario are in.

[Ms Eagle]

I suppose I want the Minister to reassure me about the fact that financial markets are rapid and regulation—if there is an equivalence regime, or mini-single market as my right hon. Friend the Member for Wolverhampton South East put it—allows the Gibraltarian authorities to do the regulation and then have immediate access to the UK. That may be done in a way that gives us some benefit; perhaps the Minister will say what the benefits of the regime are, particularly for UK consumers, given that Gibraltar does 90% of its business with the UK anyway. Perhaps he will also say what the risks would be.

My right hon. Friend spent a little time raising some of the risks and I suppose they can be characterised by the view that in a very liquid and rapid global money market, if there are vulnerabilities or back doors into regimes that are interconnected, that causes risks. We saw some of those risks playing out during the global financial crisis. To what extent does the Minister believe that the Gibraltar regime for which the clauses legislate will be—I am going to use that word—robust enough to prevent the opening of back doors to vulnerabilities for all sorts of money that is sloshing round the world? My right hon. Friend mentioned some of that—money used for money laundering, drugs and terrorism. It is important that the defences that we have against coming under that kind of influence should be maintained and strengthened, rather than weakened.

[Stella Creasy]

My hon. Friend is giving the speech that I wanted to give, so I thought I would intervene. One example, to express some of the concerns we might have, is the fact that in the Gibraltar regime there is currently no legal requirement to refuse registration to someone with a criminal record. In practice that does happen. It is something that the FATF report flags, but it is not inevitable. One thing we might want to think about for our regulatory regime—and I take the point made by the shadow Minister about not suggesting that the UK regime is perfect—is looking at whether there are lessons in the report that should be put into the Bill to make sure we do not create such a back door. That seems an eminently practical example of the sorts of things that might happen if people with criminal convictions, who may still be able to access financial regulations as a result of the Gibraltar regime, are now able to operate in the UK.

[Ms Eagle]

My hon. Friend gives an example of exactly the kind of point I was trying to make more generally about ensuring that these regimes are correct. Given that Gibraltar governs itself, the Bill makes it clear that Gibraltarian regulators will continue to do that job in Gibraltar and supervise the companies based there after this arrangement has been legislated for. That is quite proper in many ways, but it does give our regulators in a small number of narrowly-defined circumstances—I think this is the phrase—the duty or the right to leap in and do some regulation or enforcement presumably. Will the Minister say a bit more about that? He did mention it in passing in his introduction to the clause, in which he talked about financial stability. We clearly had some recent examples during the 2008 crash, where some robust enforcement had to take place with offshore island countries or territories that were trying to take money out of our jurisdiction in ways that were unacceptable at the time.

There is therefore a financial stability issue, but there is surely something about consumer protection, fraud and money laundering here as well. Perhaps he could talk in more detail about what those narrow circumstances are. Our regulators will be reluctant to romp and stomp all over Gibraltarian institutions and their regulators. Yet, by definition, Gibraltar is a small territory, and it will have less capacity to deal with some of the sophisticated fraudsters and international terrorist, money-laundering types than we do here. I am not saying that our regime is perfect, if we are honest, and we will get on to that later in the Bill.

My worry is that this might inadvertently create some vulnerabilities. I suppose what I am seeking from the Minister is some reassurance that the regulators have got a handle on this, that they will not allow the wish not to infantilise the Gibraltarian regulators to be a reason for not paying close attention to this, and that there will be some close supervision of what is happening, particularly once the regime is established. Once these things settle down, it is then that things start to happen. If a door is opened inadvertently somewhere, this money swilling around tends to find it, and then things can start changing very rapidly.

What warning flags does this regime put up to ensure that if that dynamic begins to happen, we can close it down rapidly? Does the Bill expect some kind of relationship between the Gibraltarian regulators and the Treasury? How does the Minister expect that relationship to work out? Obviously, I do not want to spend all my time being so negative about these things, so will the Minister also say a little more about what the benefits might be?

Will the Minister also talk about consumer protection in his response? Motor insurance is one of the largest components of the financial services that Gibraltar currently sells into the UK, and clearly there is a big retail consumer protection angle to such financial services.

[Stella Creasy]

While we are considering the variations for companies based in Gibraltar as opposed to the UK, it would be helpful if the Minister answered the question that the insurance bodies could not: about VAT benefits for companies based in Gibraltar and the likelihood, now that we have left the European Union, of companies moving more industry to Gibraltar because of that benefit, which could also affect consumers. Does my hon. Friend agree that it would be helpful if the Minister set out those figures? The industry seemed slightly coy when we spoke to it about those matters.

[Ms Eagle]

Clearly, the potential situation is there now. In evidence, the response—reasonably—was that that has not happened to date, even though there have been close connections between Gibraltar and the UK. However, these things tend to be dynamic and, once the agreement with Gibraltar is established, our tax regimes may diverge even further. If the Chancellor has his way after yesterday’s statement, I suspect they might have to.

Will that create more of a temptation for financial service companies to offshore to Gibraltar outside of the UK? Is the Minister convinced that that will not happen as a result of the Bill? I want reassurance from him about those potential weaknesses or risks and about consumer protections. He might even want to say a bit about benefits, if he feels up to it.

[John Glen]

I counted several questions in those four contributions and I will do my best to address them. First, I will reiterate what we are trying to do: to create the market access regime for Gibraltar-based financial services wishing to operate in the UK, and to make provision for outbound UK-based firms wishing to operate in Gibraltar.

The right hon. Member for Wolverhampton South East made a number of points, which I will start to address. He asked about the two-year reporting mechanism. The Gibraltar authorisation regime provides a broader and deeper market access into the UK market—including to the retail market—than other market access regimes, so the Treasury needs to be satisfied continuously that all conditions are met. We will therefore work carefully with the Minister we spoke to last week from the Government of Gibraltar to ensure that those conditions can be satisfied on an ongoing basis.

It is important to contextualise the nature of the relationship with Gibraltar. There has been a lot of dialogue, visits—not latterly—and evaluation of each other’s situation with respect to market access. In the lead up to the new regime, the Treasury will assess Gibraltar against the relevant market conditions for the sub-sectors to which it seeks access, and we will work closely with the Government of Gibraltar. The most significant area is the Gibraltarian insurance market, and 90% of that is UK facing.

The right hon. Gentleman compared the two-year review to our refusal to review the prudential regimes. As we have already discussed, the prudential measures include an accountability framework; we had a different view on the suitability of the one we suggested versus the amendment. The regulators have the expertise to set rules in the complex and technical areas of financial regulation and can do so in an agile way.

The right hon. Gentleman also referred to the FATF report. I have not read it in full, but I am aware of its broad indications of the challenges that exist. I am also aware that, while we had a good report, there are some challenges that we need to address in the UK. I will not hold back on admitting that. I will write to him specifically on those measures that pertain to Gibraltar, because I ought to do justice to his proper scrutiny.

There is an issue with the extension of the Gibraltarian regime to other countries. That is a bespoke regime that has been specifically designed for Gibraltar, recognising what the right hon. Gentleman and others will acknowledge is a special historical relationship, and our past common membership of the EU. These circumstances do not apply to any other jurisdictions, so that is not designed as a model or, as he said, a mini-single market to be extended elsewhere.

The hon. Member for Glasgow Central asked about the scope of the FOS jurisdiction over products sold by Gibraltarian firms. Our intention is that all Gibraltar-based firms with a schedule 2A commission will be covered by the FOS’s compulsory jurisdiction. That ensures that individuals and small businesses can seek appropriate redress. However, the extension of the FOS’s jurisdiction to schedule 2A firms does not require express wording in this Bill. The Bill makes schedule 2A firms a type of authorised person, so the FCA be able to make rules about them, bringing them inside the FOS’s remit. The FCA will be reflecting that change in the rules governing the FOS’s jurisdiction. Firms already under the FOS’s voluntary jurisdiction will transfer to the compulsory jurisdiction, with no loss of eligibility for their consumers in respect of actions occurring before they entered the compulsory jurisdiction.

The hon. Member for Glasgow Central also asked about the withdrawal of equivalence. If market access were to be withdrawn, schedule 2A puts in place winding down arrangements that enable the Government to pass secondary legislation providing for Gibraltar-based firms to exit the market in an orderly fashion, with appropriate protections for UK consumers. That is what would happen in market failure.

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[Ms Eagle]

Given that some of the areas caught by this part of the regulation were previously quite esoteric, but might not be so esoteric in the not-too-distant future—I am thinking of electronic money, which a few years ago would have been a tiny amount of transactions and is now very much larger—can the Minister reassure the Committee that, if the size and importance of these transactions grow, they are confined in the right area of the law for regulation? Does the Treasury have any views on how to take account of the changing importance and size of this area and to change the regulations around it in future? As we see, the pandemic has meant that many people who used to use cash no longer use it. Payment services and e-money are growing areas and could grow rapidly.. Is he convinced that this is the right regime to have in and around areas of perhaps rapid evolution?

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[Mr McFadden]

We will come on to their reaction. It is extraordinary that a sector this important has been relegated so far in the Government’s priorities. It is absolutely extraordinary that in these final days of renegotiation this is not front and centre. We just need to look at the employment, the investment and the tax revenues, and the role that the sector can play in global standards. Yet it has been relegated by the Government to an outcome that they admit is inferior and which, right now, they have not even been able to achieve.

All we can legislate for here is what we do. The fact that it is not front and centre of the negotiations right now speaks volumes about how far we have drifted from talk of achieving all the same benefits and securing a free trade zone from Iceland to the Urals—do hon. Members remember that? All of that has gone.

[Ms Eagle]

Is my right hon. Friend therefore surprised or unsurprised that the Office for Budget Responsibility documents yesterday said that the cost of the end of the transition period will be an economy that is permanently 2% smaller?

[Mr McFadden]

That is the OBR’s estimate of the additional cost of a no-deal scenario, on top of the already long-term hit in the deal scenario. My hon. Friend is absolutely right to set that out.

The fact that this has happened slowly over the past couple of years, and maybe the fact that the industry has become weary of arguing about it—as, perhaps, have all of us—should not disguise the importance of what has happened. It is important to set that out and to put these clauses in perspective. The Government chose to relegate the importance of UK financial services industries in the Brexit negotiations. Having made that decision, they then relegated financial services even further by aiming for an outcome that they openly admitted was inadequate, and they have not even been able to achieve that outcome. That is the context of these clauses.

I have a few questions on the details of the regime being established by the clauses. First, how does this relate to the Chancellor’s statement on financial services on 9 November? The clause and schedule 9 set out a country-by-country approval system for equivalence decisions, but in his statement on 9 November the Chancellor said that he was publishing a set of equivalence decisions for the UK and the EEA member states—those member states who still have access to these passporting rights, even though they are not EU members. Clause 24, as I said, implies a country-by-country process. Does the Chancellor’s statement mean that in policy terms, the equivalent recognition has already been given to all EU and EEA member states? Is that for all the financial products that are produced to which such equivalence might apply—that is, those traded on a cross-border basis?