Exiting the EU (Financial Services)

Anneliese Dodds Excerpts

Monday 25th February 2019 Commons Chamber

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to be here today and to have the opportunity to speak on these important provisions. Of course this is not the first time that I have sat across from the Minister—mainly in Committee Rooms—to discuss delegated legislation relating to no-deal provisions for financial instruments, but I am pleased that at least this debate is taking place in the Chamber.

I am grateful to the Chair of the Treasury Committee, the right hon. Member for Loughborough (Nicky Morgan), for writing to the Leader of the House and the Economic Secretary to the Treasury to help secure this debate. It will not come as a surprise to Members that I robustly agree with the points she made in her letter about why this instrument merits a debate on the Floor of the House, given, as she says,

“the wide-reaching scope of powers that are being provided to the regulators.”

The Opposition made the same point in their request for a debate on the Floor of the House on the markets in financial instruments directive—MiFID—SI back in November. MiFID is a cornerstone of the regulatory architecture of UK capital markets, numbering tens of thousands of pages and enshrining important retail market protections. Yet that request was denied, and the Opposition made very clear at the time their objections and their concerns about the democratic implications of that. So although I am pleased that we now have the opportunity to participate in a wider debate about another significant item of regulation, it is not before time, and I wish that the Government had heeded our calls earlier.

We are now three months on from that MiFID SI and, thus, significantly closer to the potential reality that these items of legislation may end up on the statute book. We are now barely one month away from 29 March, yet we are still without a ratified EU exit deal. Therefore it is more important than ever that this legislation is properly scrutinised, as, unfortunately, the likelihood that it might be used increases. Tomorrow, myself and a number of colleagues currently in the Chamber will discuss the Financial Services (Implementation of Legislation) Bill in the Public Bill Committee. That Bill handles the EU regulations currently in train that will be implemented over the next two years. It worries the Opposition deeply that we are entering into a patchwork of regulation on financial services. We have debated dozens of SIs that allocate new powers to different institutions, including the FCA, the PRA, the Bank of England and the Treasury, yet we have no central means of assessing those new powers and what they look like in the round. Instead, they must be pieced together across different items of legislation, which is extremely challenging from a scrutiny perspective and risks clashes and inconsistencies. Should we crash out without a deal, it will be even more difficult, given the overall context, to keep track of which body was empowered to do what and for how long.

That is especially relevant when it comes to the instrument we are discussing today. The Financial Services and Markets Act 2000, like MiFID, is a sprawling piece of financial regulation that touches on many different areas of the market. It therefore impacts significantly on the powers that regulators will need to take on functions from the EU. It also interacts in several different ways with the overall programme of no-deal secondary legislation, most notably with the temporary permissions regime, as the Minister acknowledged. So, first, may I ask him to clarify why this instrument has been scheduled quite so late in the process, when we are just a month away from exit? What financial institutions require at this point more than anything is certainty. Leaving such a linchpin of UK markets until the eleventh hour seems as though it will place unnecessary stress on UK financial services firms, given that policies such as the temporary permissions regime were determined earlier in the process, in recognition of the time they would need to be implemented. The Treasury’s own estimate, in its impact assessment, of the number of firms that will need to familiarise themselves with this instrument, is 59,200. So this is significant pressure to place on a large number of firms so close to exit day, especially as the instrument outlines conditions that must be met by exit day.

For example, the instrument stipulates new rules for firms that are already in the process of making a part 7 insurance transfer between UK and EEA entities, with onshoring legislation introducing a savings provisions in relation to insurance business transfer schemes. But for it to be available in the two years following exit—as the Minister rightly said, to shadow the approach that would have been taken if we had a proper implementation period—an independent expert required for the transfer must have been appointed by exit day and a transaction fee must have been paid to the PRA. Can the Minister confidently say that firms that are impacted are aware of this and will have sufficient time to carry it out, given how close we are to exit day?

The Opposition’s other concern is the sweeping bestowing of yet more powers on to the regulator, without sufficient checks and balances. We have repeated our issues with that on numerous occasions in Committee. Although we have been told by the Government that these instruments do not represent policy judgments, in our view deciding where to allocate powers, along with their extent and duration, is intrinsically a policy judgment. Simply substituting the FCA for the European Securities and Markets Authority, and the Treasury for the European Commission, is not a straight swap. The two European institutions interact in a different way from the FCA and Treasury, with different checks and balances. These issues need proper discussion and scrutiny.

The impact assessment provided by the Treasury for this Bill maps out how regulators will be able to execute these new powers. It states that

“to apply the power, the relevant regulator will need to make a ‘direction’ which should be brought to the attention of the affected firm or group of firms. Before making a direction, the regulator will need to consult other regulators where the other regulator’s functions may be affected by the direction. The regulator will also need to consult HM Treasury. Directions will be published by the regulators unless doing so would adversely affect their statutory objectives.”

So we have here a mapping out of the intra-regulatory consultation, but where is the wider consultation that will take place with the affected firms and other stakeholders before proceeding? We are informed about this being “brought to the attention” of these bodies, not about a consultation. The Minister’s comments on that were slightly vague. He was talking about the whole package of financial services legislation, rather than about this specific aspect. Our concern is that this sounds like a power to make regulations simply via public notice, with limited accountability and recourse.

I am grateful for the time the Minister and his team have taken to brief me throughout this process. Nevertheless, we would be failing in our duty as the Opposition if we did not highlight our serious concerns about the use of the SI process to prepare us in this way. Some colleagues here today will have heard us list those objections in Committee previously, but to reiterate: we believe the magnitude and volume of changes proposed should have been consolidated into one piece of primary legislation that could have been better scrutinised. Indeed, at the session last week in the other place on subordinate legislation transparency and accountability, the Conservative peer Lord Lexden voiced the Committee’s concerns about the number of drafting errors in instruments. That is surely an indication that the scale of this project was too large.

I must praise the Minister’s candour in acknowledging that there were drafting mistakes in this SI. As he knows —he has kindly taken on board this fact—I have identified a drafting error in one of the SIs that was presented to us. I do not believe this is the Minister’s fault, nor do I believe it is the fault of his civil servants, who are working enormously hard on this package of legislation. It is, however, an indicator of the fact that those who believe that preparations for no deal can be simple are kidding themselves and do not understand the magnitude of the task. We simply do not understand what issues we may be storing up for the future, especially as the consequences of a no-deal Brexit, in which this legislation would be used, are so hard to predict. I can only hope that we do not find out. The Opposition will do everything in our power to prevent a no-deal outcome, despite the Prime Minister’s reckless running down of the clock by postponing the meaningful vote yet again just yesterday.