Financial Services (Implementation of Legislation) Bill [ Lords ] (First sitting)
Anneliese Dodds Excerpts(5 years, 9 months ago)
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Alison Thewliss
Again, amendment 5 seeks to limit some of the sweeping Henry VIII powers that the Government are taking under this Bill, as they did with the European Union (Withdrawal) Act 2018. We seek to disapply sections 8(5) and 8(7) of the withdrawal Act, which allow regulations to do anything, with some exceptions, that can be done by an Act of Parliament. We would very much like to see the Government bringing back some proper, primary legislation as part of a wider strategy on financial services, rather than putting all these out in the way that they are. As I have argued at different stages—and I do not seek to repeat all the arguments here—the Government are giving themselves a huge amount of power under this Bill. We would like to pull that back somewhat, which is what this amendment seeks to do.
Anneliese Dodds (Oxford East) (Lab/Co-op)
I rise to speak in support of amendment 14. It is a pleasure to serve under your chairmanship, Sir Edward, and to follow the hon. Member for Glasgow Central. I very much agree with the sentiments she has expressed. Labour’s amendment 14 is similar in intent to the SNP’s amendment 5, albeit that it would achieve its outcome through a different route; but we will support the SNP’s amendment if it is pushed to a vote, as well as our own.
As members of this Committee will be aware, we have consistently expressed our concerns about the proliferation of Henry VIII powers created through secondary legislation during the process of preparations for no deal. Indeed, that was one of many reasons why we voted against this Bill on Second Reading. The transposition of EU regulations, as mentioned by my hon. Friend the Member for Stalybridge and Hyde, is not an apolitical technical process, necessarily.
During the process of debating the different no-deal SIs that have already been passed through the House, there has been contention on a wide range of issues, including the resourcing and capacity of our regulators to carry out the tasks that heretofore have been carried out by EU bodies; the regulators’ capacity and accountability when levying fines as provided via the new legislation; the ability of Government to alter criminal convictions, which has been provided by part of this process; the setting of thresholds at UK level that previously were set at EU level involving complex sets of calculations; the discretion provided to regulators to apply or disapply EU-level decisions, with reference not to onshored EU legislation but instead to the objectives of those regulators; and many more. We have talked about all of those within the Delegated Legislation Committees and they are significant. It is our contention that they should not have been dealt with through secondary legislation.
Thelma Walker (Colne Valley) (Lab)
I wanted to speak to the amendments and new clauses in the names of my hon. Friends the Members for Oxford East and for Stalybridge and Hyde. The global financial crisis has shown us all—
The Chair
The hon. Lady can speak as often as she likes, but she must let the hon. Member for Oxford East finish her speech first.
Anneliese Dodds
I look forward to hearing my hon. Friend’s speech very soon. Indeed, she started to talk about the financial crisis. This Bill covers many of the issues that were germane during that financial crisis, for example, capital requirement setting and surcharging. The Bill also covers decisions that could be made on consumer safeguards and protections. It is our contention that this process should be accountable and where decisions are made that alter primary legislation, that should not be through secondary legislation, but through the normal process with proper recourse to Parliament. Anything else, frankly, is to allocate power to Whitehall and not to Parliament.
The process of restricting decision making to secondary legislation causes problems not only for Parliament but for the public and for industry. I am sure this has been the experience of other Committee members when they have talked to people outside this place about how secondary legislation works. There is very little understanding. The processes for challenging secondary legislation are highly opaque and—we have discussed this in other Committees—the process for making decisions on it within the UK is quite different to that at EU level, where there is negotiation between the different institutions, including the European Parliament. In the case of the Westminster Parliament, it is simply presented, often even without debate in Committee, let alone on the Floor of the House.
Amendment 14 would prevent the Bill from being able to amend primary legislation. This is sensible to ensure there is proper democratic scrutiny of changes to significant elements of our financial regulatory architecture. My hon. Friend the Member for Stalybridge and Hyde set out the different regulations covered by the Bill, which include the central securities depositories regulation, the delegated cash penalties regulation, the markets in financial instruments regulation, the prospectus regulation and the securities financing transactions regulation. They collectively ensure appropriate levels of transparency in financial markets and instruments and ensure that critical institutions for financial stability hold the appropriate margin. We cannot underestimate their significance within the global financial system.
As Members will know, Henry VIII powers derive their name from the Statute of Proclamations in 1539, in which Henry VIII gained the right to pass laws, directly bypassing Parliament. The reasons for reducing their use to the bare minimum are clear. Not only do Henry VIII powers place a huge amount of control in the hands of the Executive; they also starve the scrutiny process of oxygen. I realise the Minister may well state at this point that he believes there has been sufficient scrutiny of the new measures, which may be introduced if there is no deal. In fact, I believe he stated that in his opening comments. I have only praise for him for appearing in front of many statutory instrument Committees and for taking that burden entirely on his own shoulders. He has been willing to take on board the Opposition’s concerns, and I thank him for that, but let us be honest about the impact of this process. As the Opposition have made clear in every one of those SI Committees, this process is unprecedented in its scale and scope, so there may be areas that have received insufficient scrutiny.
The potential for problems to be discovered only after the fact is real. In fact, just yesterday, the Minister rightly acknowledged—I praised him for being open about this—that there had been mistakes in the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, and I mentioned that I had highlighted a drafting error in another SI. There may well be more examples of such anomalies, which are far more likely to be picked up when there is a proper debate on the Floor of the House rather than a brief discussion in an SI Committee—most of the time, let’s face it, just between Opposition spokespeople and the Government. Of course, not every SI is even discussed in Committee. In that context, I hope Committee members will support our amendment 14, which would halt the inappropriate use of Henry VIII powers.
Alison Thewliss
The amendment would require the Government to prepare a report outlining the impact of any regulatory divergence from the EU as its regulations under this Bill are introduced. It has been accepted that the majority of this Bill’s impact will only be known after the Brexit date of 29 March, if indeed that is still the date. I have not checked my phone; who knows what has happened in the interim? All kinds of things may happen while we are in this room. Who knows?
The Minister spoke earlier about some of the in-flight legislation not being suitable or appropriate, because the UK will no longer be part of the process of making that legislation. He accepts that this is putting a lot of power in the Government’s hands in deciding what fits and does not fit, what we need to take on, and what we do not need to take on. The appropriateness of whether it will have significance to different industries, and whether we think they are appropriate, is all in the Government’s hands.
As the hon. Member for Oxford East has often said on this, it really does amount to a political decision. It is a political choice to decide which of those things are appropriate to different financial services organisations. The amendment would give a bit more clarity on the impact assessment of those decisions—political choices—that the Government intend to make. If we are going to diverge, that has an impact on how we are then able to conduct business with the EU. We need to have a better understanding, for each of those regulations, of how that will have an impact, financial and otherwise. We need a bit more clarity on what that impact will be.
This amendment gives us more opportunity to do that—to hold the Government to account on a continuing basis, and to make sure that we have a full understanding as a parliament on what the impact of the Government’s political decisions will be.
Anneliese Dodds
I rise to support the Opposition’s new clause 2, which is similar in intent to the SNP’s amendment 10. I would like to associate myself with many of the comments by the hon. Member for Glasgow Central. It is a pleasure to follow her in this debate. Labour’s new clause 2 is broader in scope than amendment 10, but it pushes in the same direction.
Our new clause would require the Treasury, prior to making any regulations under this Bill, to publish a report on the impact of the provisions of those regulations. In particular, we specify that the report should cover the following aspects: first, the impact of the provisions on households at different levels of income; secondly, the impact of provisions on people with protected characteristics as defined in the Equality Act 2010, with which I am sure we are all familiar; thirdly, the impact of the provisions on the Treasury’s compliance with the public sector equality duty with which I am sure, again, Members are familiar; and finally, the impact of the provisions on equality in different parts of the UK and different regions of England. The new clause underlines the pressing need for a greater understanding of the impact of legislation such as this on the real economy and on the people who work within it and are impacted by it.
Throughout this process, the Opposition have been concerned about the lack of impact assessments being provided for different pieces of legislation, yet even when they have been provided to us, they have often been highly restricted in scope as well as often arriving late in the day. Often, the main element receiving consideration within the impact assessments has been the familiarisation costs to business of the different measures. That has rightly been criticised by my hon. Friend the Member for Wallasey (Ms Eagle), and indeed last night by the Chair of the Treasury Committee. They both pointed out that the formula for calculating even familiarisation costs is highly mechanistic, relying solely on an assessment of the time spent reading each word of the new regulations, rather than a proper consideration of the level of impact of new regulations on different business practices, for example. Indeed, the Chair of the Treasury Committee has suggested that a better approach might be to ask firms for an assessment of what their adjustment costs will be, then produce a proxy based on that assessment. That could be a sensible way forward. I appreciate that the formula is currently set across Government, rather than just by the Treasury, but surely the area needs to be considered in a much broader context. We have tried to broaden the debate by specifying the elements that need to be taken into account in assessing the Bill’s impact, in line with our general approach to economic decision making.
Financial regulations often come across as a very rarefied area, but we all know that, as my hon. Friend the Member for Colne Valley pointed out, the consequences of getting them wrong can be enormous, especially for specific groups. Whether or not we agree—personally I do not—that cuts to social security were necessary to reduce the deficit that had been created by measures that followed the financial crisis, the burden of those cuts has clearly had an uneven impact on different groups.
The areas of regulation covered in the Bill could have highly disparate impacts. Arguably, the process of financialisation and the intensification of investment banking compared with relationship banking—boring banking, as we might call it—have helped to fuel the imbalance in lending. Over recent years, there has been an enormous move in the UK banking system away from loans to small and medium-sized enterprises and towards loans for real estate. That process has been much more marked outside London and the south-east—it has had a regional impact. The Bill covers some of the instruments that were involved in that process. Capital requirements also have an impact on the structure of banking and its regional distribution, so it is very important that we consider the issues properly.
Finally, I have a question for the Minister about his understanding of the impact of the better regulation provisions. I had assumed all along, as I am sure many other hon. Members did, that those provisions would not apply to this process, given the Government’s stated intention not to water down regulations. As hon. Members will be aware, the better regulation approach specifies “one in, three out”: for every new regulation introduced, three regulations must go. The same issue came up in a debate last night on a very different subject, albeit one that also related to no deal: the REACH etc. (Amendment etc.) (EU Exit) Regulations 2019, the no-deal provisions on the registration, evaluation, authorisation and restriction of chemicals—another incredibly complex body of legislation.
We do not have a clear answer from the Minister on the matter, so I would appreciate his assurance that the better regulation provisions will not apply to the process. If they did, it would counteract any claims made in this Committee or elsewhere that there would be no watering down. The issue is particularly relevant to new clause 2, because the better regulation process focuses only on the costs to business; it does not consider the costs, from a regional perspective, of not regulating, or the potential countervailing benefits to other groups. I have been informed that the better regulation provisions will not be applied to Grenfell-related fire safety regulations. Will the Minister confirm that they will not apply to this process, either?
If we suddenly find that the “one in, three out” provisions apply in this case, we will be in very different territory. There will be even more need for a proper impact assessment, because to an extent it will counteract some of the mechanistic impacts of the “one in, three out” process.
John Glen
I thank the hon. Members for Glasgow Central and for Oxford East for speaking to amendment 10 and new clause 2. I shall discuss them together, because although they differ in key aspects—the former looks backwards at the impact of regulations, while the latter looks forward—we have a similar response to both. The intentions behind them are sound, because it is only right that the Government make regulations with an understanding of their expected impact, but I suggest that they are both unnecessary in the context of the Bill.
As hon. Members know, the Government publish impact assessments for statutory instruments as a matter of course, and it will be no different for those introduced under the powers in the Bill. The impact assessments will include analyses of economic impacts and equalities considerations where relevant.
I acknowledge the challenges of publishing impact assessments for the SIs closely associated with the Bill. I have explained on several occasions in Delegated Legislation Committees, and I reiterate now, that we have done this in a compressed timeframe. Every SI that has gone through the Regulatory Policy Committee—I think there have been five of them—has been registered green. I note the concerns raised by the hon. Member for Oxford East and last night by my right hon. Friend the Member for Loughborough (Nicky Morgan) about the mechanism for evaluating the familiarisation costs. I am pleased that the hon. Member for Oxford East today acknowledged that this is a cross-Whitehall provision.
I will reflect on the points that the hon. Lady has made about the application of the better regulation “one in, three out” rule in respect of this process. I confess that I am not able to give her a definitive statement this morning; I will need to write to her. We have done what we can, and the Treasury is committed to meeting our obligations on impact assessments to enable parliamentary scrutiny. In line with the duties under the Equality Act 2010, and with Cabinet Office guidance, regulations will be made with the equality duty in mind, and any impacts identified will be included in the relevant impact assessments in the usual way.
I remind the Committee that the Government are required in legislation to produce reports ahead of and looking back at the publication of SIs under the Bill. Such reports will of course include, where relevant, the expected and realised impacts of the legislation that is introduced. I hope that, in the light of those assurances, the amendment will be withdrawn and the new clause will not be pressed.
John Glen
The schedule contains a list of financial services files that are essential for ensuring the continued competitiveness and functionality of UK markets. Those files consist of 13 EU legislative proposals that are currently in negotiation and may enter into the EU Official Journal up to two years post EU-exit.
It is not an exhaustive list of all in-flight EU financial services legislation. In order to bring before both Houses a Bill that was as narrow in scope as possible, a triage process was undertaken to settle on files deemed essential to the ongoing functionality, reputation and international competitiveness of our financial sector in the crucial period following a no deal. Some in-flight legislation, for example, relates solely to the eurozone, so it would be inappropriate to include it in the Bill. I extend my thanks once more to the Lords, who suggested expanding the list to include the remaining two sustainable finance files, which was a suggestion that we were happy to accept.
In short, the files in the schedule are those that we believe will be most important for market functioning and UK competitiveness in a no-deal scenario. I recommend that the schedule be the schedule to the Bill.
Question put and agreed to.
Schedule accordingly agreed to.
Anneliese Dodds
I beg your pardon, Sir Edward, but I would like to ask for the Chair’s clarification if I may. We wish to clarify whether it is the case that as clause 1 was ordered to stand part of the Bill, new clause 1 falls, and that that is why we have not had a vote on it. Is that the case?
The Chair
That is correct. All that remains is for me to thank you very much. That was a very expeditious and efficient Committee. I said to Thelma Walker that during the first Committee that I attended, we spent 100 hours filibustering on the Cromwell statue, so I thank you for your efficient scrutiny and wish you a very good morning.
Bill, as amended, to be reported.
Exiting the EU (Financial Services)
Anneliese Dodds Excerpts(5 years, 9 months ago)
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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.
Draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019
Anneliese Dodds Excerpts(5 years, 9 months ago)
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Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve on the Committee with you in the Chair, Mr Gray. I am grateful to the Minister for his explanatory remarks.
Once again, the Minister and I are here to discuss a statutory instrument that makes provision for a regulatory framework after Brexit in the event that we crash out without a deal. On each of those occasions, I and my Labour Front Bench colleagues have spelled out our objections to the Government’s approach to secondary legislation. The volume of EU exit secondary legislation is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken. However, establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity.
Secondary legislation ought to be used only for technical, non-partisan, non-controversial changes because of the limited accountability it allows. Instead, the Government continue to push through far-reaching financial legislation via such vehicles. As legislators, we have to get it right. The regulations could represent real and substantive changes to the statute book and they need proper in-depth scrutiny. In that light, the Opposition would like to put on the record our deepest concerns that the process regarding the regulations is not as accessible and transparent as it should be.
I will now pose four questions to the Minister that I hope he will respond to in his later remarks. My first question concerns timing and the relationship between this SI and the legislation recently passed on in-flight financial services legislation. As the Minister referenced in his remarks, we are currently within a transitional period for the benchmarks regulation, with its coming fully into force only from the start of next year. Only after that point will there be an outlawing of benchmarks that have not been approved for use by one of the routes set out in the EU regulation. Why was the regulation not included within the in-flight process? It has clearly been agreed at EU level, but formally speaking is not yet implemented. I thought that such measures were covered by the in-flight process; hopefully, the Minister can illuminate me if I am wrong.
Secondly, I want to press the Minister on a detail related to the transitional period. The regulation, as with other SIs laid by the Government, provides for a system of deemed equivalence for the transitional period. Effectively, it suggests that EU27-approved benchmarks can be used in the UK and will be assumed to be equivalent, as if they had been examined by the UK’s regulator. However, there is a strange aspect to the regulation in relation to the process if an EU27 national competent authority decides to remove a benchmark or if an administrator is removed from the register, or if that is undertaken by the college of regulators that assesses critical benchmarks. This regulation states that even if such a benchmark, or a benchmark administrator, is removed in the EU27, it can still be maintained on the UK list during the transition period if
“the FCA considers that doing so would not be compatible with the FCA’s strategic objective or would have a material adverse effect on the advancement of the FCA’s operational objectives.”
That appears to be beyond the scope of the withdrawal agreement’s empowerments, because continued placement on a benchmark register, or a register for benchmark administrators, is not dependent on whether national competent authorities believe that is compatible with their objectives as regulators—it surely depends only on what is in the benchmark regulation that set out the criteria for the benchmarks to be approved. I do not really understand why such language has slipped into the UK regulation. Will the Minister explain?
Thirdly, I want to question the empowerments for the FCA within the regulation. It gives the FCA, with Treasury oversight, exclusive powers over critical benchmarks—a change that I will go on to talk about in a moment—but that is on top of all the other empowerments within the regulation that the Minister rightly referred to. The FCA will have to keep a register of benchmarks and benchmark administrators, develop a code of conduct and so on.
As I am sure Members are aware, there have already been questions about the FCA’s role in the enforcement of benchmark regulations. In 2017, the complaints commissioner partially upheld cases against the FCA brought by two former UBS traders caught up in the LIBOR-rigging scandal. The commissioner criticised the FCA for serious errors. Indeed, it has been commented that in some cases the junior traders have been the ones who face prosecution rather than those further up the food chain, who were well aware of what was going on. In that context, surely it is important for the FCA’s role to be properly scrutinised.
I want to focus on the arrangements for critical benchmarks, which, as I said, under EU law are undertaken by a college of national regulators under the overall overview of ESMA. This SI removes the UK from such arrangements, and places determinations on criticality entirely under the purview of the FCA, albeit it with reporting obligations to the Treasury. When making those determinations, the FCA must consider whether the benchmarks concerned pass certain thresholds of use. Will the Minister explain a little more about how that process would work? Will the FCA be able, within the time provided, to determine those benchmarks, given that the SI refers to the FCA’s having to review thresholds
“in the light of market, price and regulatory developments and the appropriateness of the classification of benchmarks with a total value of financial instruments, financial contracts, or investment funds referencing them that is close to the thresholds”?
We heard in relation to the markets in financial instruments directive and no-deal regulations that calculating thresholds would require up to four years. That came after a suggestion from Her Majesty’s Treasury that all that was needed for those no-deal preparations was a simple shift in roles and responsibilities from EU to UK actors. A number of us were sceptical about that claim, and we were proved right. Of course, the determination of thresholds for a relatively small set of benchmarks will be much less onerous than that for hundreds upon hundreds of commodities contracts, but some indication of the FCA’s view of the difficulty of the process, or otherwise, would be helpful.
There is likely to be a major shift in the use of critical benchmarks. Members will be aware of the LIBOR scandal, and arrangements for the reporting of interbank rates are changing. The Bank of England will not require banks to submit those rates beyond 2021, and it will therefore not be possible to calculate LIBOR anymore. A whole proliferation of critical benchmarks appear to be on the way, from the eurozone’s euro short-term rate, ESTER, to the UK’s reformed version of the sterling overnight index average, SONIA—they all have interesting acronyms—and some are obviously being developed by the US, Switzerland and Japan. That suggests that the process of assessing different benchmarks, especially critical benchmarks, could become quite onerous for the FCA, with a greater plurality of widely used benchmarks beyond LIBOR. It would be helpful to hear how and whether the FCA is prepared for such an eventuality.
On the point made by my hon. Friend the Member for Wallasey, the use of such benchmarks is incredibly widespread in terms of the people it would affect and the impact it might have on markets. Estimates of the use just of LIBOR vary from between $200 trillion to $370 trillion of financial contracts across the world, particularly with interest rates swap contracts, and the benchmarks are enormously important.
Finally, in regulation 5(9) the statutory instrument provides a definition of “commodity”. The definition seems fine, but I do not believe that it is in the EU benchmark circulation and it would be helpful to know why it has been provided. Is that because there is not the same inter-relationship with other pieces of no-deal legislation as there is with existing EU legislation? It would be helpful to know about that, and it is fine for the Minister to write to me on that point of detail.
John Glen
I am grateful to the hon. Members for Oxford East and for Wallasey for their scrutiny of this measure, and I shall endeavour to answer the points made.
On the general opening remarks of the hon. Member for Oxford East, all I can say to her is that the Government are not taking any powers beyond those that exist within the withdrawal Act. To the points made by the hon. Member for Wallasey, I say that there has been an attempt at every juncture to be thorough in the way that we have examined the optimal way to transition and onshore these powers, that we have engaged with industry and the regulator, and that we have done that with their consent and allowed scrutiny through that process, even in a condensed period.
I will now address the four points that the hon. Member for Oxford East raised. The first one was around the issue of the relationship with the in-flight files and the fact that there are ongoing challenges to this regulation, which is in the process, essentially, of being fully adopted.
There is a European supervisory authorities review file in the in-flight files Bill, but that is separate and additional to this onshoring process; the regulation is in force already, but it is in a transitional phase. Many requirements in the regulation already apply. It is simply the case that some benchmark administrators are not required to apply for authorisation until 2020. However, on the broader issue, if subsequently the ESA file that is in-flight then makes an EU-wide update, then—in a no-deal scenario—we would have to make that decision at a future point.
The second point that the hon. Lady raised was about deemed equivalence of the EU27. I responded to the hon. Member for Wallasey earlier with respect to the publicly available machine-to-machine software, to ensure that at the point of a no-deal moment—not what the Government expect—at the end of March, we would be completely up to date with decisions made across national competent authorities across the EU at that point.
The hon. Member for Oxford East referred in her remarks to a transition period. Well, we would not have that transition period in a no-deal situation, so it would not apply. I sense that she wants to intervene and I am very happy to give way.
Anneliese Dodds
I appreciate the Minister’s sincerity in trying to respond to my comments, and I apologise: I do not think I expressed myself clearly. I was referring to the fact that there could be a divergence between the benchmarks still approved in the UK during the 24-month period—I probably used the wrong language to describe that—and what applies in the EU27, because this regulation says that a benchmark can be retained in the UK even if it is not in the EU27, if the FCA considers that taking it off would not be compatible with its strategic objective and so on.
John Glen
On the maintenance of benchmarks if they have been dropped from the ESMA register, I was going on to say that this SI enables the FCA to exercise judgment. It does not have to follow ESMA decisions. The FCA objectives are in place to protect UK markets and consumers. In a no-deal situation, that is a function that the FCA would have to take on.
I have set out the transition mechanism for decisions that have already been made, but in a no-deal situation we would absolutely face a very challenging environment. I am sympathetic to the comments of the hon. Member for Wallasey about the resourcing of the FCA in that situation; it would be significant. In this corpus of 53 SIs, I am concerned about making the transition process clear. There would be a lot of legislation to pass and work to be done in a no-deal situation subsequent to this process.
Anneliese Dodds
I know that the Minister and his officials are doing the best they possibly can in the extremely difficult situation that they should not have been put in, but I want to press him on this. These regulations are described as putting into practice the EU benchmark regulation; they are not described as dealing with any eventualities that could come out of no deal. In that situation, surely if we are just following the EU benchmark regulation, we should use the criteria that ESMA uses on benchmarks, not other criteria for the FCA’s objectives. That falls outside the scope of these regulations.
John Glen
I think, with the greatest respect, that the hon. Lady is getting two things muddled up. At this point, we are onshoring what already exists. We have a 24-month transition period during which, in a no-deal situation, there would be considerable engagement with industry and regulators about how we would adopt the criteria as a national body independent of the European supervisory authorities. If we were in that situation, we would clearly need to develop a new framework altogether for regulation. How we would harmonise with other bodies outside the UK would depend on the basis of that no deal. If the hon. Lady is asking me whether I am setting out in this SI a comprehensive regime for an independent verification of benchmarks over the next two years in a no-deal situation, I should say that no, I am not.
Ms Eagle
It is difficult to think of scenarios that we hope will not happen. We all hope that at some stage sense will break out and there will be time to do this disentangling. Will the Minister reassure me that if there is no deal, the regime that these changes will put in place will be in place the day after no deal, and that there will not be large numbers of loopholes through which very rapid trading, which can be instantaneous, can occur, leading to huge profiteering?
Anneliese Dodds
The Minister is being enormously generous in giving way. I appreciate his comments, but I would like this put on the record. What I take from his remarks is that these regulations are hybrid. They are not just about onshoring the existing regime, because if they were they would not include the reference to the FCA deciding on these matters because of its strategic objectives. Rather, they are partially about the creation of a new regime. As such, they depart from what is allegedly the template for these regulations.
John Glen
I am grateful for both points. I will first respond to the hon. Member for Wallasey. I assure her that the regulation will onshore and will not create any cliff-edge risks around the loopholes that she refers to. We have worked very closely with the FCA, which provides the technical expertise. I will address her point about the resourcing of the FCA in a moment.
For the record, I do not accept the characterisation of hon. Member for Oxford East of the regulations as hybrid. In a no-deal situation, there would need to be a lot of extra work to create a new permanent regime. In terms of the divergence between the UK and the EU27, the FCA will not necessarily know why a benchmark has been removed from the ESMA register after exit. It is therefore prudent to give the FCA the discretion to make its own assessment so it is able to protect UK markets and consumers. In a no-deal situation, we would be in a world very different from the one we are used to and we take the view that the provision fixes a deficiency caused by our withdrawal.
The hon. Member for Wallasey raised the importance of the benchmarks being regulated, and I absolutely agree. The SI will ensure that the regulatory regime in the UK will operate effectively in a no-deal scenario. I reassure her that the SIs in the programme have passed through the usual quality control procedures and we have engaged extensively with the FCA in drafting them.
Based on my earlier comments about the additional full-time equivalents that the FCA has had this year in preparing effectively to manage the programme, I am confident that it has adequate resources. Regarding the future pressure, the FCA is not funded by the Government but by a levy on industry, so it will be up to the authority to bring that forward in its plan, which it will do shortly for 2019-20.
I note the observations about the familiarisation costs and the mechanism to calculate them. To be clear, the SI has been assessed to result in an estimated one-off familiarisation cost of £8,300, which, shared between the 16 UK benchmark administrators authorised under the regulations, is £518 each.
Draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019
Anneliese Dodds Excerpts(5 years, 9 months ago)
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Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve on this Committee with you in the Chair, Sir David. As always, I am grateful to the Minister for his explanation of the statutory instrument. Once again, the Minister and I are here to discuss a statutory instrument that would make provision for a regulatory framework after Brexit in the event that we crash out without a deal. On each occasion, I and my Labour Front-Bench colleagues have spelt out our objections to the Government’s approach to secondary legislation. The volume of EU exit secondary legislation is concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken. However, establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity.
Secondary legislation ought to be used only for technical, non-partisan, non-controversial changes because it allows limited accountability. Instead the Government continue to push through far-reaching financial legislation via this vehicle. As legislators, we have to get it right. The regulations could represent real and substantive changes to the statute book and they need proper in-depth scrutiny. In this light, the Opposition would like to put on record our deepest concerns that the process is not as accessible and transparent as it should be.
Yet again, we have an SI that changes primary legislation—in this case, FSMA. At the latest count, 288 changes had been made to that Act through Henry VIII powers, as part of the no-deal preparation process. In that connection, I am increasingly concerned about the mission creep that has been evidenced via the progression of SIs that have been laid before Delegated Legislation Committees.
After a discussion in one such Committee this morning about what was and was not facilitated by the EU (Withdrawal) Act 2018, I went back to that legislation to examine exactly what it describes as deficiencies, which are the purported basis for the SI. There is no reference to Ministers being able to determine what may be in the national interest, and to use secondary legislation to enact that. I have no doubt that there would be considerable financial turbulence in the event of no deal—the Minister was absolutely right to emphasise that this morning—but the no-deal SIs, coupled with the 2018 Act, do not provide carte blanche to deal with market turbulence.
The deficiencies mentioned in the 2018 Act do not encompass general problems that might arise and require a public policy response. Instead, they cover specific areas, such as where retained EU law would be redundant because it would have no practical application, or where reference is made to reciprocal obligations that would no longer exist. However, the Minister intimated this morning that it was acceptable for the FCA effectively to adopt a completely different approach to approving benchmarks from that of the European Securities and Markets Authority, if it felt that that was justified by its own objectives and not, I underline, those of the retained EU legislation. We have a similar issue with this SI, to which I will return later.
As with many of the instruments that we have been considering recently, the SI seeks to transfer significant powers to the FCA. First, regulation 19 allows the FCA to make rules requiring disclosure by issuers, but there is little guidance about how it should do that or about the limits of the rules. Will the Minister please provide us with further information in that regard?
Secondly, regulation 27 gives the FCA regulating power to make corporate governance rules relating to the corporate governance of issuers who want to trade securities. I hope that the Minister can explain the rationale for providing that wide-ranging power to the FCA, rather than allowing the Treasury to set those rules, at least in part. I appreciate that it would be done under the purview of the Treasury, but surely in many circumstances there would be more of a direct political impact in that area.
Thirdly, as with the SI we discussed only this morning, we find a new definition, this time that of “debt securities”. As before, it would be helpful to understand why the definition is present here.
Fourthly, I want to ask about the process for determining equivalence between UK and non-UK accounting standards in relation to the issuing of securities. The explanatory memorandum appears to suggest that the creation of an equivalence regime is an aspiration rather than a mechanism provided within the SI. I appreciate that it was probably written quite some time before the latest draft of the SI was, but the power to assess equivalence does appear to be provided, in regulations 67 and 68.
The process of assessing whether other countries’ accounting standards are equivalent to the UK’s or to the EU’s IFRS, which the regulations seem to deem equivalent to the UK’s approach, could be very onerous. It would be helpful to understand, first, whether the resource implication has been taken on board, and secondly, and above all, to know the anticipated timing of the process of assuring equivalence. If securities cannot be traded by issuers based in non-EEA countries until their accounting conventions have been deemed equivalent by the FCA, that could surely pose significant problems for the financial markets, even accounting for the fact that existing prospectuses will continue to be able to be passported into the UK under the SI. That would be an issue for new securities but also for those whose prospectuses had expired.
I would have thought that the cost of a potential gap would be rather more than the £700 one-off familiarisation cost per firm that is intimated in the impact assessment. There is an acknowledgement in that assessment that a change to business processes would be needed as a result of the SI, but the costs of that change are not quantified. From what I can see, there is just the one-off familiarisation cost, and we had a discussion about the basis for that this morning.
In the circumstances, it is unclear why the Government seem to have chosen not to assume equivalence for accounting procedures with non-EEA countries where the EU might have already deemed them equivalent for an initial period, with the FCA being able to review that later. In fact, there seems to be an inconsistency here, because a very different approach has been taken when it comes to allowing public bodies to issue securities without having to comply with prospectus requirements. There is a completely open door for those public bodies, even if they are from outwith the EEA.
As the Minister said, the impact assessment states that it is appropriate to enable public bodies to issue securities without their having to comply with prospectus requirements, even if they are from outwith the EEA, because that
“offers the most appropriate balance between investor protection and maintaining the attractiveness of the UK market, and is therefore the most appropriate option to preserve the continuity of the UK’s financial services market—in line with HM Treasury’s overall approach to financial services legislation, and the framework set out in the EUWA.”
Given what I said previously, I suggest that that exemption is in line with the former but not the latter. It may well be in line with the approach that the Government decide to take to financial services legislation, but it is not clear that it is justified by the 2018 Act.
Fifthly, the explanatory memorandum refers to an SI that was to be laid before the House by the Department for Business, Energy and Industrial Strategy this January—last month—about the future adoption and use of UK-adopted international accounting standards. The Minister seemed to suggest that that would happen only at some unspecified point before exit, so it would help if he could give us more clarity about the timing. BEIS is not the Minister’s Department, and I do not know whether the SI has been delayed because of issues with setting up the new UK IFRS endorsement board within the Financial Reporting Council, but given that the explanatory memorandum refers to the SI being laid before the House last month, it would be helpful to know when it will be in place. In the SI that we are debating, reference is made to UK-adopted international accounting standards, so presumably amendments will need to be made to change the language once the BEIS SI has been laid before the House.
Finally, I am pleased that the Minister made it clear that the future elements of the prospectus regulation that have not yet been enacted will be covered by the in-flight files Bill; that was not stated in the explanatory memorandum. I wonder about the extent to which that coheres with the approach taken to benchmarks. This morning it was stated that although all the provisions for benchmarks had not yet commenced, the SI assumed that they would be complied with, whereas with the SI that we are debating it is suggested that additional legislation will be necessary. That is presumably because more substantive changes will come in under these regulations, but clarification would be helpful.
Anneliese Dodds
I am grateful to the Minister for those clarifications. To be absolutely clear, the equivalence gap that I was concerned about was not about EU IFRS and whether they are equivalent to UK rules. It was about non-EEA countries’ accounting rules and the process by which the FCA deems them to be equivalent. That process does not seem to be set out clearly in the SI. I am concerned that it could take the FCA some time to assess that equivalence, and that within that time costs could be imposed on business. Sorry; I obviously did not express that point sufficiently clearly.
John Glen
To be honest, I think the best thing is to write to the hon. Lady and set out my response clearly for the record, and also to make it available to the Committee.
The hon. Lady asked what we are doing in the SIs within the remit of section 8 powers on deficiency fixing, and I can say a little more about that. The 2018 Act, which gives Ministers the power to lay the SIs before the House, was debated thoroughly, and it represents the considered view of Parliament as we prepare to leave the EU. The section 8 powers were the subject of particular scrutiny and debate, and we spent approximately 12 hours in Committee debating the clause that grants them. What constitutes a deficiency in retained EU law is clearly defined in section 8 of the Act, and the Treasury is clear that the relevant SIs fall within the scope of that power. I do not think that the scrutiny that has taken place so far would have allowed us to reach this point, if that had not been the case.
On the question of whether the FCA has the resources to carry out the extra functions, we are absolutely clear that it does. It has had the additional resource of 130 full-time equivalents over the past year. Its business plan for 2019-20 will give more detail on that, but it has the discretion to raise more from a levy should that be needed. I accept that £16 million has been diverted to Brexit-related SIs, but I contend that that work is wholly necessary to prepare for the unwelcome outcome of a no-deal scenario without an implementation period.
The hon. Lady asked for an explanation regarding the FCA’s sub-delegation powers to legislate. Regulation 72 provides the FCA with the powers to make technical standards for the purposes specified in part 3 of schedule 2 to the SI. Currently, the European Securities and Markets Authority exercises those powers. As the powers relate to technical standards currently made by ESMA, it was considered appropriate to delegate them to the FCA rather than to the Treasury. Again, that is consistent with the financial services legislation domesticated under the 2018 Act.
The hon. Lady also drew attention to the in-flight files Bill. The challenge is that in a no-deal situation without an implementation period, a whole body of work is ongoing, some of which we have been very involved in, as a country within the EU, and some of which we absolutely desire to happen but will not land fully until after exit day. It would be possible to adopt the four files at the start of the in-flight files Bill, as per the terms that we discussed on Second Reading, only if we fixed the deficiencies in the language. They would essentially mark the next iteration of an evolution in the regulations on prospectus. In the same way, the general review that would cover the benchmarks we discussed this morning would have to be in the schedule of files. Those would not be the four that are nearly done, so we would have to make a judgment subsequently.
If I may, I will conclude the discussion. I will examine the record, and if there are any outstanding points, I will write to the hon. Lady and make my response available to the Committee. The Government contend that the SI is needed to ensure that the UK has an effective prospectus regime, listing regime and transparency framework. We seek to do that within the letter of the law. If the UK leaves the EU without a deal or an implementation period, we must ensure that we have made the appropriate provisions for the legislation to function. I hope that the Committee has found the sitting informative and will join me in supporting the regulations.
Question put.
Exiting the European Union (Financial Services)
Anneliese Dodds Excerpts(5 years, 9 months ago)
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Anneliese Dodds (Oxford East) (Lab/Co-op)
First, may I associate myself with the heartfelt tributes that have been paid to my hon. Friend the Member for Newport West (Paul Flynn), and I express my sympathies to his family?
We are here to discuss two no-deal statutory instruments appertaining to financial services. Members will be aware that the Conservative Government refused to allow a debate on the Floor of the House about arguably the most significant such SI—the one concerning the markets in financial instruments directive, which was sufficiently complex to require a Keeling schedule. The Government did agree to a recent debate on an SI concerning securitisation, but of course that was not a no-deal SI, and the debate only happened when the Opposition prayed against the SI. Members may be forgiven for scratching their heads about why the Conservative Government have adopted such a different tactic this time; I am sure Members can come to their own conclusions on why this debate is taking place on the Floor of the House today.
These statutory instruments make provision for a regulatory framework after Brexit in the event that we crash out without a deal. The volume of such legislation is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken as part of the no-deal process. However, establishing a new regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Secondary legislation ought to be used only for technical, non-partisan and non-controversial changes, because of the limited accountability it normally allows; instead, the Government continue to push through far-reaching financial legislation via this vehicle.
As legislators, we have to get this right. The regulations could represent real and substantive changes to the statute book, and as such, they need proper and in-depth scrutiny. I am slightly surprised to see some Government Members shaking their heads at the idea that we need appropriate scrutiny. It is incredibly important, and in the light of that, the Opposition would like to put on record our deepest concerns that the process regarding regulations in the event of no deal is not as accessible and transparent as it should be.
The rationale for these SIs is preparation for a no-deal Brexit—something that continues to be retained on the table by the Conservative Government despite clear evidence of the harm that that is doing to our economy. Last week in this Chamber, I mentioned the concerning slowdown in growth rates and the shift into recession of our manufacturing sector. The financial sector has not been immune; quite the opposite. As many Members will know, Ernst and Young has created what it calls a Brexit tracker, which monitors the public statements of more than 200 of the biggest financial services companies operating in the UK. As of January this year, the tracker showed that more than a third of the financial services companies that were tracked indicated that they are considering moving or have confirmed that they will move some of their staff or operations outside the UK. As we consider these two financial services SIs, we must reflect on why the current Government continue to retain the so-called option of no deal, especially given that the House has emphatically shown its opposition to such an outcome.
The first SI appears to cobble together three sets of legislative changes to a variety of parent legislation. The Minister, as he always does, made a valiant attempt to present a coherent case, but we are talking about three different sets of changes. As with other SIs that the Opposition have contested, the parent legislation includes primary legislation, not least, as the Minister acknowledged, FSMA. Yet again, we see here the operation of Henry VIII powers.
In connection with that, I note that as of last Thursday, 288 changes have been made to FSMA as part of the preparation for no deal. That is an enormous number of changes to primary legislation, and it has been delivered in a completely piecemeal manner. We have no indication of when Government will present us with a finalised and integrated version of the new no-deal legislation, coupled with the primary legislation that it amends. Perhaps the Minister, in his concluding remarks, can tell us whether his Department has such an overview and, if so, whether it would be willing to share it with the House and the public so that we can better understand what the financial services regulatory system would look like in the event of no deal.
The explanatory notes for the regulations were truly a masterpiece of the kind we have come to know well from no-deal SIs. I note that Her Majesty’s Treasury uses the crystal mark on some of its documents. I am sorry to speak so bluntly, but HMT would perhaps have done well to use the crystal mark’s drivel detector—its words, not mine—on the explanatory notes. All they did was to list the bits of legislation that were being changed. In no case did they explain why, aside from maintaining that doing so was necessary to address deficiencies. Yet again, we find questionable decisions being taken with no explanation.
Not all the changes in the regulations appear even to relate to the EU. For example, there are changes relating to disclosure requirements and to the Panel on Takeovers and Mergers—in regulation 2—but there is no indication why those changes have been made. Again, definitions are changed, such as that for short selling regulation information, but it is not clear whether that definition will be replaced elsewhere or, indeed, why it had to change in the first place.
Perhaps most worryingly, we see yet again a shift away from EU requirements, which suggests that these measures are potentially going beyond direct transposition and instead diluting existing provisions. For example, the wording of one article of the EU regulation on short selling and certain aspects of credit default swaps—sorry, that is not a lovely name to pronounce—is amended from “shall, where possible” to “may”. From my reading, the amended provisions relate to the obligation to liaise with third countries concerning the identification of where shares are traded, but it is not clear why that obligation should be watered down. There is a similar change to the 2014 market abuse regulation, where “shall, where necessary” is altered to “may”. It appears that the UK’s co-ordination with non-EU countries and its relations with the EU27 are being altered through these measures. The withdrawal Act does not provide the authority to do that.
The Minister appeared to suggest that this was to do with the exchange of confidential information and that we needed to have a different process. Surely, however, there are different ways of responding to the issue; there could have been measures in this legislation to deal with the problems and to ensure that information was appropriately guarded against anybody who might use it in an inappropriate way. However, we do not have that; instead, we have these provisions, with no explanation why.
Relatedly, there is no clear indication of the process to be used to determine which countries might be chosen for the conclusion of disclosure agreements mentioned by the Minister, or of the process required for those agreements. I absolutely agree with the point made by the hon. Member for Aberdeen North (Kirsty Blackman). Obviously, she was referring to the overall import of these regulations, but there are other ambiguities about timing. When it comes to the conclusion of disclosure agreements, does the process have to be completed by exit day? If it does, has that process started? If it has started, on whose authority has it started? Presumably, it is not the authority of this House. In addition, it would be helpful to understand why the Government have decided to follow a bilateral approach, rather than one that might have been integrated, with an integrated disclosure agreement that could have been signed with the European Securities and Markets Authority.
Finally, we are again informed that an impact assessment has not been conducted on this instrument, even though the explanatory memorandum states that there has been engagement with relevant stakeholders concerning the SI. It would be helpful if the Minister provided further details about that engagement.
Let me move now to the Money Market Funds (Amendment) (EU Exit) Regulations 2019—I will just talk about MMFs from now on. Obviously, the regulations are intended to implement the EU’s MMF regulation of 2018. As described by the Minister, that regulation was intended to make money market funds more resilient against disturbances in the financial markets, reduce the risks of runs in the markets, limit cross-border contagion and improve investor protection. That regulation immediately applied to new MMFs, from July of last year, but it came into practice for existing MMFs very recently—just last month. I will not go into all the details of the use of MMFs, but I would just add charities to the list the Minister talked about—there are a number of different bodies that use these funds.
The process of creating the regulation was led by a UK Labour MEP in the European Parliament, Neena Gill. As many Members may be aware, the process was controversial; it was not entirely straightforward, and there was huge debate about whether the UK should exactly follow the US approach or not. There was a lot of scepticism about whether the system of MMFs, in and of itself, should be encouraged. Many have described it as a system of shadow banking, because of its relative lack of transparency.
As with other SIs tabled by the Government, there are a number of problems with this legislation. First, it provides a new definition of money market funds that is arguably circular. It describes them as
“instruments normally dealt in on the money market which…satisfy…Article 2a(1)”
of the regulation. That is quite a different approach from the one taken by the EU, even back in the days of the Committee of European Securities Regulators. Before ESMA was created, there was an inclusive list of activities that would lead to classification as an MMF. A different approach is taken here.
Secondly, again as with other pieces of no-deal financial services legislation, there is no indication why and how the FCA, in particular, is meant to adopt the regulatory approach suggested in this SI. Regulation 6 provides it with the power to regulate MMFs, but without explaining how that will impact on its existing activities. The Minister intimated the different kinds of activities that the FCA will have to take on as part of this process, but they are very onerous. Just in relation to reporting templates, ESMA produced a 135-page report after consultation with stakeholders about what should go into those templates. I assume that similar levels of detail might be required for the FCA. This will not be a light-touch area to move into. Again, there is a lack of clarity about the extent of industry consultation on this SI.
As has often been the case with these SIs, we have had some rather strange throwaway comments in relation to this SI. The guidance accompanying it states that it does not include provisions that may be necessary to ensure Gibraltarian financial services firms can have continued access to UK markets in line with the UK Government’s statement in March 2018 and other provisions dealing with Gibraltar more generally. It also says that, where necessary, provisions covering Gibraltar will be included in future SIs. Does that mean that provisions for Gibraltar should have been covered but that there just was not time to consider them properly, or is there a procedural reason why they are not covered here? Again, will we need an omnibus SI at some point covering regulatory arrangements for Gibraltarian financial services?
Anneliese Dodds
I am really pleased to see the Minister nodding, and I look forward to his explanation of why this has been an issue.
Above all, we see secondary legislation being used expansively here, with no overall indication of how it will interact with other pieces of secondary legislation and, indeed, primary legislation. There appears to be no rhyme or reason why the Conservative Government wish certain SIs to be taken on the Floor of the House and others to be taken in Committee—aside, that is, from a desire to fill the timetable for this week, after their mismanagement of the Brexit process. Issues of such importance as our nation’s financial stability and resilience surely deserve better than this.
Securitisation Regulations 2018
Anneliese Dodds Excerpts(5 years, 9 months ago)
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Anneliese Dodds (Oxford East) (Lab/Co-op)
I beg to move,
That the Securitisation Regulations 2018 (S.I., 2018, No. 1288), dated 3 December 2018, a copy of which was laid before this House on 4 December 2018, be revoked.
These regulations are not labelled as no-deal preparatory regulations, but they are being pushed through via a statutory instrument in the middle of a series of about 70 Brexit-related statutory instruments relating to financial services, including one relating specifically to the operation of the securitisation regime. The matters raised by this instrument require more debate and scrutiny than they have been afforded. It is for that reason that we asked for this debate on the Floor of the House.
As the Minister will be aware, the official Opposition also requested a debate on the Floor of the House about the transposition of the markets in financial instruments directive no-deal regulations via an SI. Those regulations were so complex that they required the production of a Keeling schedule, yet they were pushed through as a negative SI without any broader debate. This SI may be less wide-ranging than the other one but, like it, it is focused on the aspects of the financial system that precipitated and amplified the 2008 financial crisis.
Securitisation refers to the pooling of different kinds of loans or debts and their repackaging into a single financial product that is sold to investors. The use of complex, opaque securitisations—particularly those linked to the US sub-prime housing market—has been viewed as a key element in transporting the negative impact of the credit crunch through the financial system into the heart of major financial institutions. It is therefore essential that any legislation proposing changes to the regulation of securities be carefully reviewed.
The regulations have three main causes of concern. First, schedule 1 amends primary legislation—the Financial Services and Markets Act 2000. Schedule 1(8) nullifies the effect of section 399 of the Financial Services and Markets Act and disapplies section 402. Delegated legislation generally should not be used to amend primary legislation. Otherwise, it would allow the exercise of what lawyers and judges have disparagingly described as Henry VIII clauses. Put simply, primary legislation that has been drafted and reviewed by Parliament as a whole should not generally be revoked through statutory instruments. It might be argued that these regulations are part of a broader package of delegated legislation bringing in a new regime, but any regime of financial regulation is best set out in primary legislation. The Opposition made that point only two days ago in the debate on the transposition of so-called in-flight EU financial services legislation.
The EU securitisation regulations are wide-ranging. For example, they impose a number of requirements on institutional investors to carry out due diligence before investing in a securitisation position. They relate not only to individual decisions about specified positions, but to the creation of new procedures for monitoring compliance and stress-testing. They also introduce numerous requirements for transparency for securitisation, requiring the originator, the sponsor and the securitisation special purpose entity to designate one of their number to provide details of the securitisation, either to a repository or on a website. Finally, they provide preferential treatment to so-called simple, transparent and standardised securitisations, enabling them to be discounted for the purpose of allocating credit margins.
A core element of STS securitisation is the retention by originators, sponsors and original lenders of a 5% stake in the securitisation, described colloquially as “skin in the game”. Those involved must also follow certain transparency and due diligence requirements. As such, although the regulation does to an extent consolidate existing legislation, it also significantly loosens the burden of capital retention for banks using STS securitisations compared with the previous situation. Some stakeholders felt that reigniting the use of securitisation through this legislation would help to promote liquidity and boost economic activity, given that it, in effect, allows higher levels of borrowing by the economic actors whose debt is repackaged in the securitisation. However, many others point to the potential dangers this poses for financial stability if unsafe, non-transparent and overly complex securitisations are allowed to fall within the STS bracket. This is especially the case given the reduced capital requirements to balance off the default risk from STS securitisations. I hardly need to remind this House of the problems caused to the sustainability of financial institutions and the subsequent calls made on the taxpayer due to insufficient margin being held by the banks against the risks they held.
Secondly, these provisions amending primary legislation affect the criminal offences that are on the statute book. The legislation permits the use of sanctions for cases of negligence and intentional infringement, for example, fraudulent reporting of STS status. In addition, however, the provisions alter existing offences. The regulations appear to say that section 399 of the Financial Services and Markets Act 2000, which establishes an offence of misleading the Competition and Markets Authority, does not apply. In addition, paragraph 8 of schedule 1 prevents the Financial Conduct Authority from instituting proceedings for money laundering and insider dealing. It is not clear why, on the basis of this statutory instrument alone, this needs to follow from the parent legislation. Why, if we are reading this complex statutory instrument right, does it abolish the offence of misleading the CMA and prevent the FCA from instituting proceedings for money laundering and insider dealing? What problem are these provisions addressing? Why are these changes being achieved through this piece of secondary legislation? We hope that we can receive some clarification on these points. If we cannot, these provisions would appear to be troubling. Because of the impact on people’s liberties and the overall balance of offences on the statute book, which surely should be as public and accessible as possible, criminal offences should not be altered by delegated legislation in this manner.
Thirdly, and finally, these regulations transfer significant powers to the FCA to supervise compliance. It might be said that the FCA is the orthodox body to develop financial regulation and to ensure compliance with it, but there is a need for full debate about the allocation of responsibility for supervision and compliance. The original EU regulation provides no obligation for the FCA to be designated as the competent authority, so this is a political choice. It is also not clear, on the basis of this statutory instrument, whether the FCA has sufficient resourcing and capacity to carry out these tasks. It is not optimal or desirable for these powers to be transferred via a statutory instrument.
These powers are, of course, complicated by the interaction of this SI with the no-deal SI related to securitisation, which transfers the responsibility of the European Systemic Risk Board, for assessing and mitigating systemic risk, to the “competent authorities”. The latter are, as I understand it, here designated as the Prudential Regulation Authority, the FCA and the Bank, with systemic risk here identified as
“a material risk to the financial stability of a financial institution or to the financial system as a whole”.
Under this approach, the FCA would also be able to permit re-securitisation for specified legitimate purposes, an important exception to the general ban imposed from this legislation on re-securitisation. The general ban prevents the underlying assets of a securitisation from being themselves already securitised assets—this is one of many activities that produced the highly complex and opaque securitisations linked to contagion during the financial crisis. As part of these regulations, the FCA would be responsible for ensuring that those engaged in a securitisation complied with the relevant transparency requirements. It is especially important that these kinds of regulatory developments receive scrutiny, given the contention around elements of the securitisation package and, in particular, whether it is sufficiently stringent. What became known as “skin in the game” was set in the regulation at 5% of risk to be retained across each mode of risk retention, despite calls for a higher level from many quarters. Indeed, many actors within the EU questioned whether securitisation should be encouraged in the first place through the creation of the STS designation. Given that the resultant regulations were a balance between very polarised positions on this subject, it is essential that we properly scrutinise the transposition of these measures into UK law. For that reason, we have prayed against these measures being transferred purely through an SI process.
Anneliese Dodds
If I may, I will start my remarks with a brief observation. Far too often in this House, I have heard hon. Members suggest that the financial crisis was somehow the result of the then Government’s policies. I am very pleased to have heard the opposite from the Minister today. In fact, it was the correct interpretation of what precipitated the global financial crisis, which did indeed, as he intimated, begin with the sub-prime mortgage collapses in the United States and then spread through the financial system, particularly through the use of complex financial instruments.
John Glen
I am very happy to draw the hon. Lady’s attention to the fact that the default rate for triple A rated bonds in the EU was 0.6%, while in the US it was 16%. The key point that the Conservatives have always wished to stress is that the spending profile from 2002 and 2007 massively compounded the difficulties we found ourselves in.
Madam Deputy Speaker (Dame Eleanor Laing)
Order. A short while ago, this was a very well behaved debate on very specific issues, but since the speech of the hon. Member for Enfield, Southgate (Bambos Charalambous), it seems to have become a very general and exciting debate. I know that Members are anticipating a Division, and they will be trying very hard to make up their minds on which side of the House they are going to vote, but they must listen to the hon. Lady.
Anneliese Dodds
I will not strain the House’s patience, but I fear that the Minister, who is normally very clear in his remarks, is mixing apples and pears. He mentioned credit rating in relation to sub-prime mortgage-related securities in the United States. There was a relationship with the US state in that case, because of Fannie Mae and Freddie Mac, but there was not a connection between that process and the British state. I fear that there was a little bit of confusion there.
Mr Jim Cunningham (Coventry South) (Lab)
Perhaps we can clear up the mystery of whose fault it was, because the previous Chancellor said that it was not the fault of the Labour Government at all.
Anneliese Dodds
As ever, my hon. Friend makes an important, pertinent and brief point.
Mr Jayawardena
I wonder whether, on reflection, the hon. Lady thinks that the former regulatory structure under the Financial Services Authority was not fulfilling its duties, that it was right to break it up between the PRA and the FCA, and that that resulted in an improvement in regulation.
Anneliese Dodds
The overall regulatory structure for the financial services industry is surely not what we are talking about in this debate. We are talking specifically about the regulation of securitisation. [Interruption.] The hon. Gentleman appears to be suggesting that he was trying to make a point about the lack of stringent regulation at the time of the financial crisis. I remind all Members that it was, of course, the Conservatives who urged the then Government to deregulate further and to remove regulation.
My hon. Friend the Member for Enfield, Southgate (Bambos Charalambous) set out the involvement of securitisation in the financial crisis very clearly. To respond briefly to the hon. Member for North East Hampshire (Mr Jayawardena), building on what my hon. Friend said, there has been a wide-ranging debate about whether it is appropriate to encourage additional securitisation, of which he may be aware. Of course, securitisation facilitates additional leverage, beyond what would already be there, because it makes liquid assets that are not already liquid. That may be appropriate in some contexts, but it can lead to inappropriate leveraging, particularly when it is conducted in a complex and opaque way, as arguably was the case during the financial crisis. It is surely appropriate, therefore, that we question any new regulations that apply to securitisation in this House, as we have done in this debate.
I am grateful to the Minister for his opening remarks. However, I regret that he failed to respond to my detailed comments about the manner in which the EU regulation has been transposed. Our complaint is not necessarily with the overall framework, which, as he rightly intimated, came from the Basel framework through IOSCO and, latterly, the EU. The point is that the process has not been entirely without controversy. As a result, the decisions that the Government make about how to implement the framework are potentially delicate, as was underlined rightly by the hon. Member for Aberdeen North (Kirsty Blackman).
The Minister said that the statutory instrument is a simple empowerment of the FCA. However, I referred in my remarks to how the regulations disapply elements of existing legislation, including those relating to offences under the purview of the Competition and Markets Authority and to insider dealing. He did not make it clear why that was necessary. He said that the measures would make our statute book consistent with offences in other countries in respect of complex securitisation and so on. He did not indicate whether they were consistent with existing offences on the UK statute book. That, surely, is what is at issue.
For all those reasons, we will press the motion of revocation to a vote.
Question put.
Financial Services (Implementation of Legislation) Bill [Lords]
Anneliese Dodds ExcerptsMonday 11th February 2019
(5 years, 9 months ago)
Commons ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 View all Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 143-R-I Marshalled list for Report (PDF) - (25 Jan 2019)
Anneliese Dodds (Oxford East) (Lab/Co-op)
My hon. Friend the Member for Stalybridge and Hyde (Jonathan Reynolds) set out very clearly and comprehensively the problems with this Bill in his opening remarks. I do not want to repeat them all, but I will summarise the core reasons why the official Opposition cannot support the Bill.
The Conservative Government often mix their metaphors when presenting their Brexit process. This Bill, for example, part of what the Government have described as an onshoring process, is presented as dealing with those so-called in-flight measures that have not yet landed. In my brief remarks, I want to explain why many of us are confused about the identity of the pilot of this plane, quite how far and fast the plane will go, and indeed whether it should be on the runway in the first place. I suppose that it is at least a relief that the Transport Secretary is not in charge, given last weekend’s revelations.
First, who will decide which parts of in-flight EU legislation will be implemented? This is straightforward for those Bills that have already been passed at EU level but not yet implemented—those taxiing on the runway. In that case, the Bill commits itself to implementation in the UK, not least given that UK Ministers and MEPs would have been fully involved, one would hope, in all aspects of that legislation, with Government only able to fix deficiencies in that legislation.
The picture is, however, far less clear for legislation still under discussion at EU level, and thus to a certain extent still up in the air. In that regard, we are informed that this Bill will enable
“the Government to choose to implement only those EU files, or parts of those files, which it deems beneficial to the UK”.
They will be able to
“adjust the legislation as it is brought into domestic law to fix any deficiencies or, in the case of files still in negotiation, to ensure that it reflects the UK’s position outside of the EU.”
How exactly they might do so, and what that reflection might encompass is left unclear. The right hon. Member for Loughborough (Nicky Morgan), Chair of the Treasury Committee, rightly raised this earlier in an intervention on the Minister, and I am disappointed that she did not receive a sufficiently clear response to that question; I will return to that point later. Indeed, there is no indication here that that deviation from EU practice will even be flagged up to this place, let alone go through a different decision-making process as a result. Instead, it is expected that, as usual with this Government, sadly, statutory instruments will be used. Clause 1(1)(b) even states that the Government can make
“any adjustments the Treasury consider appropriate”,
a power that was initially open-ended but that, quite rightly, was amended in the other place.
The point remains that it will be difficult for Parliament to be aware of any deviations from EU practice. The Conservatives may well respond by stating that industry would be quick to point them out. Frankly, I am grateful for industry’s engagement with this process, to the extent that it has been able to input, and it is essential that, as mentioned by my hon. Friend the Member for Stalybridge and Hyde, we preserve our strong and successful financial services sector, and our regulations must reflect that. However, I reiterate a point I have made before: there is no organisation in the UK with an explicit mandate to promote financial stability and the consumer interest in financial services, a role which is filled within the EU by the Finance Watch. It is unsurprising therefore that Finance Watch has put on the record its concerns that the current approach to Brexit could be used as a means to undermine financial regulation, pointing to, for example, the Chequers agreement’s phraseology of the UK pushing for greater liberalisation of financial services, investment and procurement markets post Brexit.
The second reason to reject the Bill concerns its peculiar status among the rest of the so-called onshoring process. The flight path here is bedevilled with interactions with numerous other legislative processes, from those embedded in the 40 statutory instruments that have already been laid before Parliament to the additional 20 yet to go, and with only 34 working days between now and 29 March, as rightly underlined by my hon. Friend the Member for Stalybridge and Hyde.
By contrast, with the extraordinarily rushed process being adopted here, the Government’s powers under this Bill can be exercised for up to two years—yes, two whole years after Brexit. That is in a context where the Government have no clear plan for financial services regulation post 29 March. Rather than this confusion of legislation—short-term, long-term and of indefinite duration; primary, secondary affirmative and secondary negative—we surely need to have some consolidated legislation covering this area. This confusion is of course part of a pattern, sadly, over recent years from Conservative Ministers, with Acts in 2012, 2013, 2014 and 2015 having to correct or amend existing provisions. Indeed, we have been informed that there may well be correcting amendments to be considered even after the 60 statutory instruments and this Bill are passed.
Of course we had a good example of the deficiencies even within this Bill, as rightly pointed out by my hon. Friend the Member for Wakefield (Mary Creagh), in relation to the legislation governing environmental indicators and reporting, which was initially missed off the schedule. I pay tribute to her for raising this essential issue of green finance and greening finance and how it was initially missed out of these proposals.
I found the Minister’s response to the hon. Member for Bromley and Chislehurst (Robert Neill) rather peculiar; I note that the hon. Gentleman is no longer in his place, but I felt he made an important point. He asked whether the UK would keep in step with emerging provisions from the EU, such as in the area of non-performing loans. The Minister suggested in response that alignment in this Bill was rejected due to the content of those proposals, when his Bill, however, was presented as inclusive of all financial services legislation that was in-flight aside from those elements that we had specifically opted out of, such as those relating to banking union, which we do not participate in of course and which is presumably the real reason why non-performing loans legislation is not included here.
My hon. Friend the Member for Wakefield highlighted in her remarks the non-scientific nature of the assessment by this Government of which measures will be deemed in-flight or otherwise. We have had no indication of the criteria to be used for that from Government. The discussion we have had, albeit in this brief debate, has pointed up that all we have as a Parliament currently as an indication of this Government’s approach to regulating financial services in the future is this Bill and the no-deal SIs—no overall plan, no indication of how the different pieces fit together, and above all no clarity around how we will be able to keep in step with the EU27 in relation to emerging issues like green finance and cryptocurrencies.
Sir Greg Knight (East Yorkshire) (Con)
On the issue of no clarity, can the hon. Lady tell the House why her party did not oppose the Bill in the other place or suggest any changes to it there?
Anneliese Dodds
It is my understanding that there was significant challenge from my party in the other place, and in fact changes were made, including for example a clearer indication of the circumstances under which those adjustments could be made by the Government. Initially that was very open-ended, but we supported and pushed for much more clarity on that. We would have liked to have seen change in other areas, and perhaps clarification in additional areas. We have not had that, however, which is why it is necessary to oppose the Bill at this stage.
Finally, this legislation is of course only required because of the Conservative Government’s recklessness in persisting with a commitment to keep no deal on the table, as rightly underlined by the hon. Member for Glasgow Central (Alison Thewliss). We have seen very clearly today from the preliminary estimates of GDP growth for the final quarter of last year how this determination to prioritise ideology over national interest is harming our country. The contribution to GDP from business investment was negative for the fourth quarter in a row; that is a clear sign that uncertainty surrounding the Government’s Brexit strategy is acting as a real drag on the economy. The construction sector actually contracted this quarter, and after two consecutive quarters of negative growth, the UK manufacturing sector sadly is now officially in recession. So 2018 had the worst annual GDP out-turn since the then Chancellor’s disastrous 2012, and economists are forecasting that even worse could well come.
The flight into the buffers that would be represented by a no-deal Brexit is still being countenanced. Any responsible Government would take that plane off the runway once and for all.
UK as a Financial Services Hub
Anneliese Dodds Excerpts(5 years, 10 months ago)
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Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to participate in this debate, and I congratulate the hon. Member for Hitchin and Harpenden (Bim Afolami) on securing it. It has been an interesting debate, particularly when it comes to hearing about how Members’ professional experience has informed their approach to these matters in Parliament.
As many Members have said, financial and related professional services are an important area of the UK economy, and they contribute just over a twentieth of the UK’s overall economic output. There are interesting developments in the sector, which has traditionally not reflected the diversity of UK society. With the Women in Finance charter, changes are being made to reduce the pay gap. In relation to other characteristics, action is being taken to increase the number of people in the sector who have disabilities or are from black and minority ethnic or working class backgrounds.
We have discussed the fact that many people in the sector are not based in London or the south-east. I will add one statistic: there are more than 100,000 people employed in banking and finance in the north-west, which makes it the area with the third-largest number of people working in the sector, outside London and the south-east.
We have had an interesting discussion this morning about the sector’s tax contribution. Reference has been made to research undertaken by PwC that suggested that about 1p in every 10p of Government revenue comes from the sector. Let us be clear that that is counting the tax contributions of everybody who works in the sector, so it is not just looking at corporate taxation. As we all know, the corporation tax rate has been reduced. That has meant that the amount of corporation tax, in relative terms, has reduced. In absolute terms, it has gone up, but that is because these banks and so on have returned to profitability after the financial crash, so actually the burden has gone down in that area. Of course, it has also gone down when it comes to the bank levy, which has been scaled back. A surcharge has been applied as well, but when we look at both of them over time, we see that that burden is also going down.
Reference was made to stamp duty on shares. That stamp duty brings in about £3 billion of Government revenue a year. It is one of the most efficient and least avoided taxes, and for that reason Labour is considering extending it as part of a financial transactions tax. I would be very happy to talk to the hon. Member for Hitchin and Harpenden about how that would work.
As many hon. Members have said, financial services contribute significantly to Britain’s exports. In 2016, they were worth about £61 billion, with a surplus of £51 billion over imports of—yes, obviously—£11 billion. Of course, that is very significant in a situation in which other areas that traditionally were important for Britain’s export strength face tremendous headwinds, not least in relation to manufacturing, given the current uncertainty about Brexit.
As the hon. Member for Hitchin and Harpenden rightly mentioned, the UK is increasingly integrated into global markets. I would argue that the UK is already a very important hub when it comes to the Chinese financial markets, for example. About two thirds of renminbi payments outside mainland China and Hong Kong flow through London, so we are already catching quite a lot of that business. In addition, a number of Chinese firms have established themselves here. However, we need to be clear: yes, that activity is increasing, but, as others have said, we have to be sanguine about its current size. TheCityUK, in its report entitled “Key Facts about the UK as an international financial centre”, says that only about 0.4% of UK financial services exports currently go to China. That may of course increase in the future, but if we compare that with the 44% of our exports that go to the EU, there is a massive difference. As my right hon. Friend the shadow Chancellor of the Exchequer has intimated many times, it must continue to be possible for our financial services companies to win business across Europe and, reciprocally, for European companies to win business here.
As I have said many times during delegated legislation Committees on no-deal legislation, the UK Government have failed to prioritise sufficiently our financial services. I absolutely agree with the comments in that regard by the hon. Member for Aberdeen North (Kirsty Blackman). We appear to have accepted an outcome whereby equivalence, rather than passporting, is the likely eventuating circumstance, and of course that equivalence will operate on virtually exactly the same basis as it currently does for nations such as the US and Japan, which are far less dependent on access to the EU27’s markets than the UK is. On the question of how equivalence would work in the future, the point is that it would work the same for all third countries. If there were to be a stricter regime generally, that would apply to us in just the same way as it would to Japan and the US—the point is that it can also be removed at any point, from the perspective of the EU Commission—rather than there somehow being a more onerous regime for the UK, which I think would not be the case.
I very much associate myself with the remarks by the hon. Member for Bromley and Chislehurst (Robert Neill) concerning the current legal services conundrums and how they can have some kind of certainty on many regulatory issues.
Only very late in the day did our Government start to stress the shared interest of the UK and the EU27 in maintaining access to UK financial services. That was an enormous shame, because we have a mutual interest both in financial stability and resilience and in ensuring that the EU27 can continue to access the deep pool of capital that is available via our financial services. That recognition came only after a much longer period, sadly, in which a very damaging zero-sum narrative had developed, with the cut in corporation tax suggesting an intention to race to the bottom on tax and regulatory standards. That was immensely frustrating. What the hon. Member for North Warwickshire (Craig Tracey) described in relation to the insurance industry is actually what I am finding right across the financial services sector. There is no appetite anywhere, from what I can see, for a bonfire of regulations. Actually, the concern is to try to prevent regulatory turbulence and ensure that there is co-ordination into the future, and yet a picture has developed of a zero-sum approach whereby the UK would seek to reduce those regulations. I think that that has been very damaging.
On that issue, although I agreed with much that the hon. Member for Hitchin and Harpenden said, I did not agree with his comments about EU regulation. Actually, one root of the financial crisis was the misalignment of risk with reward. That was targeted by the cap on bankers’ bonuses, and rightly so. A second root of the financial crisis was the lack of transparency in financial markets—dark pool trading and so on. That was targeted by MiFID, which encouraged many other countries to adopt the kind of transparency standards that existed in the UK before. I therefore think that we need to be very careful about mounting any kind of wholesale assault on those regulatory systems. When it comes to having robust regulation of systemic providers of market infrastructure, I think that that is a very sensible approach and, indeed, it is one that has been supported a lot of the time by UK actors.
Co-ordination of regulation will become ever more important with more innovation in delivery models of financial services. I strongly agree with the comments by the hon. Member for Henley (John Howell), who is no longer in his place, about the need for regulations to keep in step with new developments—for example, in relation to digital currencies. I also agree with the comments made about the workforce, who are incredibly important. We need to ensure that we still have access to people from other countries who can contribute so much to our financial services.
I am a little surprised that we have not talked much in this debate about the contribution of financial services to investment, particularly in business. We need to be clear about what has happened over time. In 1988, almost a third of banks’ UK lending went to businesses. It is now less than a tenth, so there has been an incredible change over time. The Labour party thinks that we need to do something to deal with that. We need to learn from what other countries have done in relation to national investment banks—KfW in Germany, in particular. We need to look at the RBS branch network. I share the anger of the hon. Member for North East Derbyshire (Lee Rowley) about the closure of some of that network.
Of course, we need to focus on vulnerable consumers as well. Although we have seen many positive innovations in that space, that often has not been the case for consumers on low incomes. I will add one statistic to this debate, which is that about one in three families in the UK do not have the financial wherewithal to pay for a new cooker if their current one stops working. That quite extreme lack of financial resilience is now very present in our communities. Consumer credit debt is still far too high, not least for people with overdrafts, credit card debt and/or hire purchase debt. We need to see much more strenuous activity on that. I was very pleased to hear the comments of the hon. Member for Hitchin and Harpenden about credit unions in that regard. Yet again, I urge the Government to focus on better integrating credit unions into the Help to Save programme. I also ask the Government to look again at having a proper tribunal process for the businesses that were dealt with so badly during the RBS Global Restructuring Group scandal, so that there is some redress for small firms that may have been impacted on by banks’ practices.
Graham Stringer (in the Chair)
May I request that the Minister leaves a small space of time at the end of the debate for the mover of the motion to wind up?
DRAFT DEVOLVED INCOME TAX RATES (CONSEQUENTIAL AMENDMENTS) ORDER 2018
Anneliese Dodds Excerpts(5 years, 10 months ago)
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Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve on this Committee with you in the Chair, Mr Gapes. I am grateful to the Minister for his helpful explanation. As he set out, this is a relatively straightforward set of measures that are consequential on the 2014 Act and the current situation with Scottish income tax. We obviously needed to have some of this secondary legislation laid before the House, to ensure that income tax reliefs, deductions and PAYE continue to operate with the Welsh rates of income tax component and also with the changes that have occurred in the Scottish situation.
Obviously, this instrument is in keeping with the established procedures relating to devolved powers and we will therefore not oppose it. However, I have one question for the Minister—it might be easier for him to write to me afterwards—about the arrangements for gift aid donations. The explanatory note states that the approach being taken will ensure that no donor will be made worse off as a result of having made a gift aid donation. Similarly, the impact assessment states that there will be no or negligible impact on charities as a result of these measures. Presumably, however, there would be some impact on the Exchequer, given that there is an assumption that individuals would be treated in practice as if they were still UK basic rate taxpayers, and obviously we already see some changes in the Scottish system around the income tax structure. It might therefore be helpful to have a little more information on this. However, that is really the only question I have about these measures.
Draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019
Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019
Anneliese Dodds Excerpts(5 years, 10 months ago)
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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.
Kirsty Blackman (Aberdeen North) (SNP)
Even if the documentation that was made available to MPs beforehand related to the relevant legislation, that would be a slightly better position than the one we are in now, and it would not require a Government Minister actually to bring the legislation with him.
Anneliese Dodds
I absolutely agree with the hon. Lady. She is right that it would be helpful. In many cases, we are talking about the initial legislation, which itself was relatively complex and has often been amended. It would be useful for all of us during this complex process to have some aid in that regard.
In its amendment of article 5.1 of the EU regulation, the statutory instrument would give the FCA an extra-territorial power that it should not have. That is obviously fairly problematic because, whatever kind of Brexit occurs, ELTIFs will continue to exist under EU as well as UK law. It is EU-level authorities that will provide their initial designation for the EU27. To explain that quickly, articles 4 and 5 of the ELTIF regulation set out the conditions for the designation and authorisation of ELTIFs. In the draft regulations presented to us today, article 7 amends articles 4 and 5.1 of the EU regulation in quite a strange direction.
Article 4 refers to LTIFs, but article 5.1 talks about applications for authorisations of ELTIFs and says that application for authorisation as an ELTIF shall be made to the FCA, and sets out the process for application for LTIFs. I am sorry that this is very complicated but it underlines the confusing nature of the SI.
It seems that the proposed article 5.1 as amended is wrong because ELTIFs will continue to exist under EU law after Brexit. It will not be in the FCA’s gift to recognise and authorise them outwith the UK. We need just a small change to article 5.1, which should read: “An application for authorisation within the UK as an ELTIF shall be made to the FCA.” Will the Minister assure us that he will look into that and seek to amend the legislation accordingly, if that concern proves genuine and is not just my reading of the text?
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.
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.