Financial Services Bill

Baroness Fookes Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Lord Sharkey (LD) [V]]

I thank everybody who has spoken in the debate on this group. I confess that I should have said clearly at the beginning that my amendments and their text were not the issue; the amendments were simply the fossilised remains of my scope negotiations with the Public Bill Office and a means of introducing the subject of sharia-complaint student finance.

I must say that I am, as usual, extremely disappointed by the Minister’s evasive and unconvincing response. It is a great pity. I still do not understand why there has been such a long delay in addressing this serious problem. The Minister has not offered a reason for the delay except to point at various complications. Perhaps I should remind him that the takaful version of the Help to Buy mortgage system was introduced from a standing start in six months. This has taken nearly seven years, and we have not got there yet. I simply do not understand why this is going to be prolonged and why the Minister cannot give us any assurance about a firm date for the introduction of a sharia-compliant student product.

I also do not understand—I never did—why the Augar review is at all relevant; perhaps the Minister can explain why at some other point. However, I understand that the Muslim community continues to suffer a direct disadvantage without any good reason or plausible excuse. The Government are acting in a completely mean-spirited and heartless way. They are failing in their moral duty, failing to fulfil their explicit promises and failing to provide any real comfort that they might eventually do what they should have done long ago. They are behaving neglectfully and really rather disgracefully. We will return to this issue later.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

Does the Minister wish to speak further? No? Does the noble Lord, Lord Sharkey, wish to withdraw his amendment?

[Lord Sharkey (LD) [V]]

I beg leave to withdraw the amendment.

Amendments 81 to 85 not moved.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

We now come to the group consisting of Amendment 86.

Amendment 86

Moved by

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[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow my noble friend Lord Trenchard who, as usual, speaks good sense on this matter. While these are clearly probing amendments designed to get the Government to say how they see the future of various aspects of financial services, it seems to me that, as regards equivalence with the EU, they are rooted in the language of the past. It has been clear for a long time that the EU sees equivalence either as a route to dictate how the UK’s financial services sector is regulated or as a weapon to be used against the UK as a competitor. The Governor of the Bank of England has spoken strongly against the EU’s apparent positioning on equivalence. He said that either it was trying to say that our rules should never change, which he described as dangerous, or that our rules should change whenever the EU changed its rules, which was “not acceptable”.

There is no doubt that the EU sees the UK as a threat to its way of doing things. It no longer has a leading financial centre within the EU and will struggle to create one, especially if its only weapon is protectionism. We have long been one of the leading financial markets in the world and I hope that we get our number one slot back now that we are unshackled from the EU. That may well take us into new areas of financial services; it should certainly lead to the dismantling of some elements of the EU’s rules that we never liked. The alternative investment funds directive is one clear example; Solvency II and MiFID are others. They never reflected what we regarded as important, and introduced rules which we regarded as unnecessary and cumbersome.

It would have been very easy for the EU to have granted us equivalence at the end of the transition period; we were completely aligned. However, there is a misguided belief in the EU that they can create a rival to the UK and that the best way of doing that is to make it difficult for UK firms to operate in the EU. My own view is that we should abandon any interest in equivalence. Even if we were to get a favourable decision, the EU has retained the right to remove any such decision at short notice. We know that decisions on granting or removing equivalence will not be made on technical merit. They will be political decisions designed to advance the EU’s financial services industry at the expense of the UK. I do not believe that a UK-based financial services operator could ever build a viable business model on the shifting sands of equivalence as determined by a body—the EU—which does not wish us well.

In addition, I do not think that it matters very much. We may find that some areas of our financial services as currently operated will become less profitable—for example, if the EU cuts off its nose to spite its face and denies Euro-denominated derivatives the advantages of London’s liquidity via UK clearing exchanges. Many UK banks and other financial institutions have already set up EU-based subsidiaries to carry out the business that was previously carried out under passporting. That is now water under the bridge—those subsidiary structures will carry on while the business is profitable and cease if it is not.

For these reasons, I believe that the amendments in this group are looking in the rear-view mirror. Of much greater importance is what plans the Government have to support and promote the future—

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

My Lords, there is a Division in the Chamber. The Committee stands adjourned for five minutes.

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[Earl Howe (Con)]

My Lords, the noble Baroness, Lady Bowles, has taken us into an interesting topic area: regulatory equivalence.

The UK has long been a global leader in financial services. As we adapt to our new position outside the EU, it is essential that we continue to support a stable, innovative and world-leading sector. We have already considered the UK’s international standing in another debate. With these amendments, we are considering equivalence and the UK’s relationship with the EU in relation to financial services. I know that there is a lot of interest in this issue, so I will take this opportunity to provide an update on where we are, to the extent that I am able to do so at this point in time. Perhaps, though, I could begin by saying something about our approach to making these decisions.

Amendment 90 seeks to impose an obligation on the Government to make an equivalence determination only where they have determined that the relevant overseas jurisdiction has legal and supervisory standards equivalent to those of the UK. It also seeks to prohibit the Government granting an equivalence determination based only on an agreement to make determinations on a reciprocal basis.

I am happy to confirm that the Government are already committed to conducting their equivalence assessments of overseas jurisdictions on the basis that the relevant legal and supervisory framework of that jurisdiction provides equivalent outcomes to the UK’s. This is outlined in the guidance document on the UK’s equivalence framework which was published in November 2020.

In addition, an example of the legislative requirement for granting equivalence can be seen on page 35 of the Bill. It amends the money market funds regulation to allow the Treasury to make equivalence determinations and states:

“The Treasury may not make regulations under paragraph 1 unless satisfied that the law and practice of the country or territory imposes requirements on MMFs which have equivalent effect to the requirements imposed by this Regulation.”


There is a key point for me to make here. This is not a so-called “line-by-line approach”, where we require a country to have identical rules. We believe that compliance with internationally agreed standards and equivalent regulatory outcomes in different countries can be achieved in different ways and through different legal frameworks.

In that context, there is a further important point that I invite noble Lords to note: granting equivalence is a decision we make independently with no reciprocity requirement. The UK would not grant equivalence just on the basis of reciprocity but would always carry out an assessment to ensure that the other jurisdiction is equivalent. The Government must lay a statutory instrument in Parliament to make an equivalence decision. This will give all noble Lords the opportunity to consider and scrutinise Her Majesty’s Treasury’s decisions as part of the normal legislative process.

I turn to consider our relationship with the EU. I say to the noble Baroness, Lady Kramer, that there is no question of us dismissing this relationship with a wave of the hand or otherwise. Amendments 100 and 105 seek to impose obligations on the Government to report on the status of the EU’s considerations about UK equivalence and on the status of negotiations on the regulatory co-operation memorandum of understanding between the UK and EU. I have already said that the granting of equivalence is an autonomous matter for the UK, and this is equally true for the EU, so the Government are not in a position to report on what the EU may or may not be thinking at a given point in time, even if we wanted to.

The noble Baroness, Lady Bowles, characterised the UK regulatory system as a squidgy balloon and hence difficult for the EU to grapple with but, as I have previously set out, the EU is well used to assessing regulator rules and practice as part of its equivalence assessments, and we see no reason why it would not be able to assess the UK in the same way if the will is there.

However, I can provide an update on our own actions. In November, the Chancellor announced a package of equivalence decisions for the EU and EEA member states. We did this to provide clarity and stability for industry. My noble friend Lord Hodgson asked me a number of factual questions about the existing equivalence decisions between the UK and the EU. If he will allow, to ensure a full and accurate response, I am happy to write to him on those questions.

We are not ruling out further equivalence decisions for the EU in the future, and we continue to believe that comprehensive mutual findings of equivalence between the UK and EU are in the best interests of both parties. The Government remain ready and willing to work with the EU to achieve this. For their part, the EU has granted only minimal decisions for the UK. As per our joint declaration with the EU on financial services, which was agreed alongside the trade and co-operation agreement, we have agreed to establish structured regulatory co-operation on financial services by the end of this month. My noble friend Lord Trenchard will be glad to note that we believe we are on track to do that.

This co-operation will support engagement on issues of mutual interest, including facilitating transparency and dialogue around the process of adopting, suspending and withdrawing equivalence decisions, but I should be clear that it is not envisaged, in the joint statement or elsewhere, that the agreement of the MoU on regulatory co-operation will directly entail any new equivalence decisions. This MoU will be publicly available to Parliament after the conclusion of negotiations. I reiterate that the Government are committed to operating an open and transparent approach to equivalence with the EU, but I am afraid that the Government cannot provide updates on this discussion in real time.

My noble friend Lady Neville-Rolfe expressed concerns that we may have given EU firms some kind of advantage over UK firms. In the absence of clarity from the EU, the UK has acted to provide clarity and stability to industry, supporting the openness of the sector, and to deliver our goal of open, well-regulated markets, but these decisions should not be seen simply as altruistic. They will allow firms to pool and manage their risks effectively and to support clients on both sides of the channel in accessing our world-leading financial services and highly liquid markets, so there are benefits for the UK as well as for the EU.

Finally, Amendment 100 also seeks to impose a legal obligation on the Government to publish a strategy to provide security to UK retail investors in the event of equivalence being withdrawn. I reassure noble Lords that, as set out in the guidance document on the UK’s equivalence framework, the Treasury will seek to ensure that withdrawal of equivalence is undertaken in line with the principle of transparency. That means that the Treasury will endeavour to engage with interested parties as part of the process and will seek to provide Parliament with appropriate scrutiny. I say to the noble Lord, Lord Eatwell, that I recognise the importance of clarity and stability regarding the potential withdrawal of equivalence. When withdrawing an equivalence determination, it will be undertaken in an orderly and controlled manner to ensure that investors are protected.

The noble Lord, Lord Eatwell, made clear a similar concern in relation to the overseas funds regime, given that the provisions of the Bill also create a new equivalence regime there. I assure him that we do not envisage that in the event of equivalence being withdrawn investors would be forced to divest their investments in the fund, but instead that the fund should continue to service them. The Bill also includes a power so that the Treasury may take steps to smooth the transition for funds if equivalence has been withdrawn.

I realise that noble Lords might have wished for a slightly fuller account of our discussions with the EU on the MoU and equivalence issues, but I trust that the reasons for me being constrained on those matters are clear. I hope nevertheless that I have provided the Committee with a sufficient update on this topic and ask that the amendment be withdrawn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received a request to speak after the Minister from the noble Lord, Lord Northbrook.

[Lord Northbrook (Con) [V]]

My Lords, since we are already diverging from the EU—for instance, with regard to lightening new share-listing rules—does the Minister believe that equivalence does not really matter because Her Majesty’s Government believe that the UK will make up the lost revenue from the passporting system in this and other financial areas?

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[Baroness Penn (Con)]

My Lords, this may be a convenient moment for the Committee to adjourn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

That concludes the work of the Committee this afternoon. As always, I remind Members to sanitise desks and chairs.

Committee adjourned at 7.34 pm.