Financial Services (Implementation of Legislation) Bill [HL]

Baroness Kramer Excerpts

2nd reading (Hansard): House of Lords
Tuesday 4th December 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, it seems rather strange to be the winder in a short debate like this. My noble friends Lord Sharkey and Lady Bowles laid out the position of these Benches with great clarity and raised a series of questions, so it is not my purpose today to repeat them but to say how much I stand behind them and the comments we heard from the noble Baroness, Lady Liddell, and the noble Lord, Lord Hodgson. I thank the noble Lord, Lord Leigh, because in a sense he made the point for us about the underlying concerns that we have with this legislation.

I think that everybody accepts that it is necessary to have some provision for how we deal with, as it were, in-flight directives or regulations from the EU since they were not covered in the EU withdrawal Act. If it was simply a matter of technically keeping abreast, none of us would have a lot of queries about this piece of legislation. However, as other noble Lords have demonstrated, there is plenty of scope within this for fundamental policy change, and policy change through statutory instrument—an issue which this House has tackled again and again, and which it tackled in the EU withdrawal Act. We are concerned about creating that kind of precedent once again here, as well as the actuality of what may happen under this Bill.

I raise it in the following sense. If we crash out and have a no-deal exit from the EU, the following months will be absolutely critical to the future of financial services within the UK. In those months, firms that have not already made the decision about what they relocate to the EU 27 will make further decisions, and the EU will be establishing its response to our departure and setting in place many of the key elements that it needs to be able to withdraw a significant part of that business to within the supervisory and monitoring powers of the European Union itself. An example that is given in the policy paper is that we may well end up with a location policy—in other words, a requirement from the EU that all financial transactions denominated in euros, or a significant portion of them, need to be repatriated to within the eurozone because of the exposure of the European Central Bank, which is acting as a backstop to liquidity crises with those instruments. Therefore, we may have those kinds of situations. Policy then will be absolutely critical.

I think many people take the view of the noble Lord, Lord Leigh, that the people who will be making change in that period will be the UK, and indeed he sought from the Government assurance that there would be policy action to dilute regulation in areas where he thought it was of interest. My noble friend Lady Bowles made the point that that alone begins to undermine the policy of third-country equivalence across financial services, which the Government, and the City, have seen as an underpinning to keeping our current level of dominance and vibrance. But there will also be changes within the EU, and I know that the City is very afraid of that. If those changes take place, again that undermines third-country equivalence if we are not following suit.

The point I am making is not about where you end up, on which side of this issue, but that absolutely critical policy decisions will have to be made, and those seem to be the kind of decisions that ought to be placed before this House. They will impact the functioning of the largest and most significant industry sector that we have within the UK, which feeds our tax base, which in turn supports our public services. To hand the decision-making around the issues to the Treasury, or to the Treasury working with the regulator, seems exceedingly high-risk. The breadth of power that is requested is not just to enable relevant and relatively minor adjustment; it covers a period of time in which fundamental decisions are made. We may make different decisions two or three years later, but it will be too late: the shape of our future financial services industry will basically be decided within that relatively short period. Amendments will need to be brought forward to try to tackle these issues.

I ask that the Government recognise how fundamental and significant the decision-making—and policy decision-making—will be during that period.

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[Lord Bates]

My Lords, I agree with the noble Lord, Lord Davies: this has been a well-informed debate, representative of the deep expertise in your Lordships’ House, which has been on full display. The areas of agreement were effectively two: recognition of the necessity of preparing for a no-deal scenario, and a united view that we hope never to be in the position of having to exercise the powers in this Bill.

The noble Lord, Lord Sharkey, began our debate by expressing concern about the range of powers, in particular those to include and exclude files. My noble friend Lord Hodgson questioned whether this was a stopgap measure and said that it could not be a substitute for longer-term legislation and a solution in this important area. The noble Baroness, Lady Liddell, having remarked that this is not the most exciting legislation to come before your Lordships’ House, recognised the importance of the financial services industry, to which it relates. She also recognised the role that the United Kingdom has played over many years in the European Union in shaping financial services regulations.

The noble Baroness, Lady Bowles, teed up what will be, if we are fortunate to secure a Second Reading, a Committee stage debate on words such as “implementation”, “proportionality”, “corresponding”, “similar”, “appropriate” and “adjustments”. It will be important to flesh out exactly what is meant by those terms.

My noble friend Lord Leigh talked about the impact of regulations in financial services on small and medium-sized enterprises. He also became perhaps the first Peer to announce in your Lordships’ House his forthcoming listing on AIM. I do not know whether it is appropriate to comment on that, but I wish him well—he is probably getting worried because I wished him well; it was a personal wish.

The noble Baroness, Lady Kramer, talked about the strong role of the financial services in underpinning the fiscal base of the economy, tax revenues and public services. She said it is vital that we retain that strength and continue to exert scrutiny. The noble Lord, Lord Davies, talked about the oft overlooked fact that, when we talk about the financial services, we are talking not just about the City of London but about a national industry, with hugely important centres in Bristol, Leeds and Edinburgh. He also reminded us of the international competitive nature of financial services, and that the UK’s leadership can never be taken for granted but must be earned and restated.

With that, let me move on to some of the points that were raised in the debate. The noble Lord, Lord Sharkey, asked why, if this is so important, other departments are not doing the same, specifically the Department of Health and Social Care. We have already put in place many of the legislative building blocks to deliver our exit from the EU. Since the European Union (Withdrawal) Act received Royal Assent, the Government have started laying statutory instruments to ensure a functioning statute book in all scenarios. Any requirements for further legislation in other areas will be announced in the usual way. I realise that that is not quite the answer that the noble Lord was looking for—or that I anticipated as I began reading out the note. His was a specific question, asking that I speak with colleagues in the Department of Health and Social Care, and I will certainly do that and find out how the particular legislation he referred to might be handled.

The noble Lord, Lord Sharkey, also mentioned the powers to adjust. As the final outcome on these files is still unclear, we need to make sure that we can bring them into UK law in a way that works best for UK markets. This could, for example, include areas where final parts of legislation could, if unchanged in a no-deal scenario, present inconsistencies with the UK regulatory framework, global standards or the UK’s position as an open, global financial market. It is important that we have the power to correct inconsistencies when bringing these into UK law.

The noble Lord then asked why we had chosen some files rather than others. The Bill provides the UK with an interim means to domesticate key EU financial services files that are in the European legislative pipeline. Those are the files that we believe will be the most important for market functioning and UK competitiveness in a no-deal scenario. Those in-flight files not listed on the face of the Bill include those that apply only to eurozone members, which we would never have implemented as a member state, those that the UK has opted out of, and those where there is not a critical need to implement the legislation in the narrow window of time covered in the Bill.

The noble Lord went on to ask what was meant by the word “appropriate”. Once we leave the European Union, we will lose our ability to influence the outcomes of files at a European level—something to which the noble Lord, Lord Davies, and the noble Baroness, Lady Liddell, also referred. As such, we will require the ability to ensure that the files or parts of the files implemented best suit the needs and the structures of the UK financial services market. The power to make appropriate adjustments to legislation is therefore designed to enable the UK Government to ensure that the implemented legislation is the best fit for the UK.

The noble Baroness, Lady Bowles, similarly asked about the power to adjust. The power will only allow the Government to make adjustments to files and not to make entirely new financial services policy not covered within the files. The power will also have to be exercised with the purpose of making similar or corresponding provision to specific lists of files set out in the Bill, so the subject matter of the regulations will naturally be limited. This is simply about ensuring that we implement legislation that is the best fit for the UK.

The noble Lord, Lord Sharkey, asked what was meant by “some criminal offences”. The limitation in the Bill mirrors that in the European Union (Withdrawal) Act. It prohibits the creation of criminal offences for which an adult can be sentenced to a period of more than two years in prison.

The noble Baroness, Lady Liddell, asked about the comparability of low-carbon benchmarks. This is an important issue and I realise that a number of noble Lords have received representations on it. I undertake to look at it specifically and write ahead of Committee.

My noble friend Lord Hodgson asked about the reporting duty of the Government and whether that would include a statement on why a power is used. The report will provide an overview of how the power has been used in the first year and how the Government propose to use the powers in the second year. In the meantime, the Government will undertake extensive engagement and co-operation with key stakeholders throughout the process, ahead of and during each use of the power, and Parliament will have the opportunity to debate every SI under the affirmative procedure. He also asked whether it would be advisable for the Treasury to consult transparently ahead of each use. We agree, which is why, within the policy note accompanying the Bill, we have committed to undertaking extensive engagement and co-operation with key stakeholders throughout the process, ahead of and during each use of the power. In that term “stakeholders”, we very much include Parliament and your Lordships’ House.

The noble Baroness, Lady Bowles, asked whether it would be helpful to change the wording to “corresponding and similar”. This is classic territory for Committee and a well-worked amendment around that will elicit a more in-depth and appropriate response from the Minister at that point. She asked a specific question, which was also referred to by the noble Baroness, Lady Kramer: namely, whether the power could be used to remove the bankers’ bonus cap. While remuneration policies were introduced as part of the EU’s Capital Requirements Directive IV, they are due to be updated through the Capital Requirements Directive V, which is included in the Bill. The Bill allows us to choose not to implement certain files or to implement parts of them. At this point we are not proposing specific policy changes or decisions. Before bringing forward any secondary legislation using the powers in the Bill, we will engage with a wide range of stakeholders, including the financial services sector.

The noble Baroness, Lady Bowles, asked about legislation regarding pension firms. Again, this is something that might best be covered in a letter ahead of Committee. She also asked why we do not just do this through primary legislation in order to get proper parliamentary scrutiny. Given the number of files in question and the potential requirement to implement them at pace to respond to market developments and meet international obligations, it would not be feasible to rely exclusively on primary legislation in every instance. The Bill requires the use of the affirmative resolution procedure for every statutory instrument made. She went on to ask why the Government will not make a full report about concerns and the approach to policy in this Bill. At this point it is very difficult to say which files or parts of files we would seek to implement and whether and what adjustments would be made. This is because we do not know the exact context in which these decisions will be made and what the final versions of many of the files will look like.

My noble friend Lord Leigh asked about the potential negative impacts on, for example, CSDR. We recognise that there are aspects of these files that are currently under development which different parts of the sector may not fully support. The Bill allows us to choose not to implement files, to implement parts of them and to correct deficiencies in them, as well as to make adjustments to ensure that the legislation works best for the UK, subject to appropriate safeguards.

The noble Baroness, Lady Kramer, asked about the so-called Henry VIII powers being used. Of course we understand the concerns around the breadth of powers, and that is why we have included a number of safeguards within the Bill to address them, including explicitly listing the relevant files on the face of the Bill and sunsetting the powers to two years, consistent with the European Union (Withdrawal) Act.

The noble Lord, Lord Davies, asked about adjustments to powers. It would be possible under the terms of the power only to make adjustments to any EU file we would be implementing and not to completely change its intent. This power would allow us to make provisions which are broadly equivalent to the original file and which therefore seek to achieve a similar outcome in a way that best fits the UK. However, it would not be possible for the Government to use this power to implement something completely different from the original file.

Again, I thank noble Lords for their contributions to the debate.

[Baroness Kramer]

This may be extremely petty, so I ask for the compassion of the Minister. However, subsection (9) is completely incomprehensible. Three of us read it and we came up with entirely different conclusions as to what it meant in terms of both the preparation and publication of this report. Is he able to provide clarity now or else to do so by the time we get to the Committee stage? It may not be contentious at all—it is just that it is impossible to work out exactly what it means.

[Lord Bates]

I can understand that. It is a fairly short Bill, but I will undertake to write a more substantial letter between this Second Reading and Committee if it is granted by your Lordships’ House. I will cover and expand further on that point.

We will carefully consider all the points which have been raised in this debate. I thank noble Lords for bringing their expertise and knowledge to bear on this important piece of legislation. I request that the Bill now be given a Second Reading.

Financial Services (Implementation of Legislation) Bill [HL]

Baroness Kramer Excerpts

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Baroness Kramer (LD)]

We will have amendments discussing equivalence more directly later, but will the Minister confirm that nothing could be done to step away from or undermine equivalence, or does this allow that? That is certainly the way it has been read by most Members of this House.

[Lord Bates]

We will have the debate under the future group of amendments on equivalence. We are not setting here the test or the bar as one of equivalence. We are simply talking about the specific directives and regulations before us and mentioned in the Bill: the 15 here; the four already agreed, which are mentioned on page 1 of the Bill; and the further 11 mentioned in the Schedule accompanying it, which have not yet been agreed. Because they have not been agreed and may be under debate or amendment without the UK at the negotiating table, we are simply adding in that greater level of power to say that the UK, in the event of leaving without a deal, would need to look after the interests of the UK financial and industry sector and could not give a blank cheque in the opposite direction to the EU to pass whatever regulation that we would automatically implement because of adherence to a notion of equivalence. That cannot be right for UK financial services. We need to look at what comes to us, then act within the interests of the UK financial services sector at that time.

I will deal with some of the specific points raised. The noble Lord, Lord Sharkey, talked about the recommendation of the Delegated Powers and Regulatory Reform Committee. I pay tribute to the work it did on this and the quick turnaround and punchy conclusions it arrived at. We are considering its recommendations, which the noble Baroness, Lady Liddell, asked us to look at. I will be happy to meet with noble Lords ahead of Report to discuss where we stand. I thank the Delegated Powers and Regulatory Reform Committee for its work and recognise that it raised some very pertinent issues. We want to look at them in greater detail, and I would be happy to discuss that with noble Lords ahead of Report.

I hope I have gone some way to addressing noble Lords’ points at this stage. We will come to a number of the other points in future debates and groups.

[Lord Bates]

I am happy to do that. As the negotiations on these files continue, further amendments may be agreed, proposed or dropped that the Government will wish to domesticate or remove using the powers under this Bill. As the final outcome on many of these files is still unclear, we need to make sure that we can bring them into UK law in a way that works best for UK markets. This might, for example, include areas where the final parts of legislation could, if unchanged in a no-deal scenario, present inconsistencies with the UK regulatory framework, with global standards or with the UK’s position as an open global financial market. It is important therefore that we have the power to adjust these inconsistencies when bringing them into UK law. I acknowledge that this is a—

[Baroness Kramer]

I am sorry, but the Minister just said that Clause 1(1)(b) allows an interpretation not to remain with the objective described in the European directive. His whole argument under Clause 1(1)(a) was that the words “corresponding” and “similar” provide, in different legal ways, for us to take steps only where it is consistent with the objective of the European directive. He is now directly saying that Clause 1(1)(b) allows us to take steps that are directly opposed to or completely inconsistent with the European directive. Could he provide us with some clarity on this? It seems that the power allows the Government to move in any direction they wish, and that is exactly the issue we are trying to raise here. Under those circumstances, is that for Parliament to decide or for the Treasury to decide through statutory instrument?

[Lord Bates]

I thank the noble Baroness for her intervention. There is a difference between the two elements and between the use of “adjustments” and the terms used earlier, “similar” and “corresponding”. Effectively, they relate to the two different groups that we have here. The first group is those for which we have been party to the negotiations and to agreeing. Following engagement, we know that the industry is keen to see those transposed into UK law, and we support it in that respect. Then there are those other elements that are incomplete, the final shape of which we do not yet know. Once the final shape is known—in all likelihood, that will be after the date in this scenario and once we have left the European Union and the negotiating table—we will have the power to adjust. Those are the two different elements.

[Lord Bates]

That is not the case. I accept that the noble Lord is presenting a caricature of the situation that proves a particular point, but of course that is not what will happen. First of all, certain guarantees are presented in terms of reporting, which we will come on to again later. There are certain processes in terms of scrutiny of secondary legislation, not only by the Secondary Legislation Scrutiny Committee, which does incredible work and of course has a role set out in Standing Orders as to how it must scrutinise secondary legislation. Also, the affirmative SIs must be debated in your Lordships’ House. In addition to that, we have also undertaken that there should be proper engagement with the industry in talking about this and with other stakeholders too. There is a wide range of things.

We will delve deeper into some of the points in the noble Lord’s own amendments later. I appreciate that the role and purpose of Committee is to elicit from the Government further explanations about what these terms mean. We may have a difference about whether the noble Lord’s view is shared by the Front Bench, and whether all these matters should be dealt with by primary legislation in 15 Bills or by secondary legislation, which has been the convention, particularly when it comes to financial services.

[Baroness Kramer]

My Lords—

[Lord Bates]

I will just finish this point if I may. That is why the noble Lord, Lord Tunnicliffe, and I and indeed the noble Baronesses, Lady Kramer and Lady Bowles, spent so much time in Grand Committee talking through various pieces of secondary legislation on financial services. That has been the conventional way in which we have worked. The noble Lord, Lord Adonis, believes that the legislation ought to be primary in this case. That is his view. It is not the Government’s view and it is my job to outline the Government’s view on this. We are following established procedures and providing powers under scrutiny to allow us to deal with a unique set of circumstances, which we have never had to deal with before.

[Baroness Kramer]

My Lords, this is genuinely a question of clarification. Is the Minister saying to me—I cannot read it in the language of the Bill—that Clause 1(1)(b), which states:

“with any adjustments the Treasury consider appropriate”,

excludes the category of in-flight legislation described as,

“specified EU financial services legislation”?

I assume that it includes that. Therefore, the Minister’s argument is that the Government will have to stick with the underlying objective for specified EU financial services legislation—which is what Clause 1(1)(a) is talking about—but the same legislation can then be overturned and dealt with completely differently under Clause 1(1)(b), which frankly allows adjustments as long as a piece of string. That is what I am trying to clarify. I understand that they are two different groups, but paragraph (b) surely applies to both groups.

[Lord Bates]

Perhaps it would be helpful at this stage to agree that these issues will be addressed in future groups. We will choose some wording—if not today, then certainly before Report—that is quite rightly required by the Committee to reassure itself about what is and is not referred to in that respect. With that, and with the undertaking to meet with colleagues specifically on the report of the Delegated Powers and Regulatory Reform Committee before Report, I invite noble Lords not to press this amendment.

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[Baroness Kramer]

I say to the noble Lord—and perhaps to clarify for others—that I think there is a real difference regarding the in-flight legislation, which has gone through an extensive European process that we have been engaged in. That is a highly democratic process involving scrutiny and consultation on a scale that we rarely experience here in the UK. It has gone through the Council and Parliament, and the technical language is nearly all in place. That is in a different category from other provisions, which are typically dealt with in the schedule; everything is at a much earlier stage and—if we leave—we will not be engaged in the on-going process that shapes that outcome.

We can look for some flexibility on the first category. I say that in part because we are all incredibly conscious that just getting through the essentials of the legislation on our plate is overwhelming. The last thing I would wish to see is for us to fall out of equivalence by accident, because the Government put elements on which we have been engaged and on which we agree at the back end of their legislative priority list, and we find ourselves by default stepping out of an equivalent situation. That is a concern, and it is one of the reasons why we would like to explore some of the options my colleagues have been outlining.

[Lord Tunnicliffe (Lab)]

My Lords, I think the two groups of amendments in many ways cover the same issue. They are essentially about how much flexibility the Executive should have in using this new law. Taking noble Lords back to the creation of the withdrawal Act, it was an extremely painful process because we were naturally reluctant to give the extensive powers in the withdrawal Act to government. But we were in a sense battered into the very realistic understanding that, given the volume of work that had to be done, the only way to do it was through statutory instruments enabled by the withdrawal Act.

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[Lord Flight]

My Lords, the hope is that if everything were sensible, the amendment would be appropriate and powerful. As the noble Baroness, Lady Bowles, pointed out, it is possible that the EU may go down paths of regulation that are not very sensible. In that situation, given that the market for the UK’s financial services industry is not just Europe, it may not be practical for the UK to use and follow equivalence. Indeed, there may need to be changes to the benefit of the industry other than vis-à-vis a Europe that has gone off the rails with its regulations.

[Baroness Kramer]

My Lords, I added my name to the amendment because I consider it one of the most important in the range we are addressing today. Two fundamental issues seem to underlie our concerns about the legislation. One issue comes from a constitutional perspective, concerning Henry VIII powers. It matters; we discussed it in other contexts but it is important in this context too. It has an impact on the relationship between Parliament and the Executive, including applying the ability to exercise policy power and Parliament’s role in scrutinising policy.

One aspect of that is particularly substantial in the Bill. In the two-year period when the regime discussed in the Bill holds sway, we will be in a critical time, determining our future relationship with the European Union and whether our financial services industry continues to have access to European markets for financial services. That is a huge discussion and decision; it should not be handed over to the Treasury to enact simply through statutory instruments. I am exceedingly concerned that using this legislation, we will find ourselves in a position where because of Treasury decisions, our negotiators will find that no matter what they wish at the end of their negotiating period, we will have diverged significantly in financial services, making it almost impossible to reconnect parts of the market. If the industry sees that we will go through a period in which that may happen, it will make decisions about where it puts operations, activities and jobs that would not be in the long-term interest of the UK. That two-year period—exactly the period when this legislation applies—is critical. We will basically delegate decisions on whether equivalence continues to be UK policy that come into effect in this House only through the weak medium of statutory instruments.

I see this measure as a safeguard. I recognise what was said by the noble Lord, Lord Flight: that some things about future European regulation in the financial services industry may be unsatisfactory and that we may decide to diverge from them. But it really should not be the Treasury’s decision to do that and it should not be the Treasury’s decision to shut off the possibility of creating a long-term equivalence regime. That is why I support this amendment. If we accept that within this Bill and the Government decide that there are indeed instances where they want to diverge, they can bring forward primary legislation. It is simply that they could not do that through secondary legislation in the way that this Bill would currently allow them to do so. That is too major and fundamental a decision.

I remind the Committee that the financial services industry is probably the most important sector in our economy. It delivers something like £76 billion a year in taxes which support our public services. To make a decision that will fundamentally impact on key aspects of the industry and with all the consequences that that entails must surely need to be done only through primary legislation and with the full and total engagement of this House. That is why I am particularly concerned about this clause.

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[Lord Bates]

I thank noble Lords for their contributions to this debate. I shall begin by looking at what I think is an area of common ground: we all recognise the importance of the financial services industry to the UK. Perhaps I may pick up on a point made by my noble friend Lord Flight, that one of the main purposes of this Bill is to ensure that the UK remains an attractive and competitive place to do business, retaining our place as a world leader in financial services. To do this in a no-deal context, it is essential that the UK retains sovereignty over our rules. From the perspective of financial stability and protecting the UK taxpayer, it is essential that the Government, the Bank of England and the FCA have the tools available to ensure that the UK markets are appropriately and effectively regulated.

It would be wrong to set a condition over the UK’s regulatory framework that means decisions which are made about the UK’s future regime are determined through the lens of maintaining equivalence to the EU, irrespective of the quality of those rules and how future legislation and the market itself may evolve.

[Baroness Kramer]

I think that there may be a misunderstanding. This would mean that statutory instruments could not be used to create divergence—it does not mean that primary legislation could not be used to do so. That is the underlying point.

[Lord Bates]

The legislation we are dealing with is in its very composition a temporary measure; it is a temporary piece of primary legislation with a sunset clause.

[Baroness Kramer]

I know that we will discuss the sunset clause later. It does not mean that the statutory instruments created under this legislation die after two years, it means only that the powers in the overarching legislation will die. However, those two years are the critical period, so the sunset clause does not have the consequence that I think the Minister might suspect it does.

[Lord Bates]

To go back to first principles, I am saying that the power in this Bill is not in effect to make policy—rather, it is the ability to produce secondary legislation that has a policy content to it and which would then be subject to scrutiny in this House. That power is being put in place for an extraordinary set of circumstances—I think we all agree that these are extraordinary circumstances and in fact I should underscore that we hope that these powers will not be required to be acted upon, because there will be a deal and we will continue to have access to the market in financial services across the EU. That is our aim, but we are preparing for all eventualities.

The noble Baroness will be aware that equivalence determinations are autonomous decisions with the EU and, in turn, the UK retaining autonomy for determining if a foreign jurisdiction has equivalent standards and supervision. The EU takes a varied approach to assessments of equivalence, tailoring its approach to individual regimes with regard to how the assessment is conducted. The Commission itself has stated:

“It is the equivalence of regulatory and supervisory results that is being assessed, not a word-for-word sameness of legal texts”.


Indeed, for a recent example, one need to look only at the EU’s statements on equivalence in a no-deal scenario. Within these, the EU has been clear that equivalence decisions of the UK will be made where justified in the interest of the Union and its member states, with time limits and conditions to their decisions where appropriate. As such, it is very difficult to judge what the EU will take into account in its future assessments and how its autonomous third-country regime will evolve. Such an approach, plus the breadth and variety of considerations that form part of equivalence determinations, from the rules themselves to supervisory approaches, means that it would be very difficult to determine what effect, if any, a change or adjustment that the UK makes to our laws might have on a future equivalence determination in a given area, given that these are autonomous decisions taken by the EU. It is therefore difficult to see how the test set out in this amendment could be met.

Let me reiterate the importance of, in the case of a no-deal situation, retaining the ability to adjust our legislation so that it best serves the aims and objectives of the UK once we have left the EU, as my noble friend Lord Flight has identified. It is crucial to ensure that we can bring into force pieces of legislation in a way that works best for the interests of UK markets. The Government are also committed to doing this as transparently as possible, which is why we have set out the strict reporting requirements to which I know we will return on Report. In the light of that, I invite the noble Baroness to withdraw her amendment.

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[Lord Deben (Con)]

My Lords, I remind the House of my declaration in the register of interests, particularly my chairmanship of PIMFA, the organisation that represents independent financial advisers and wealth managers.

I have to disagree with the noble Lord, Lord Adonis, about the meaning and purpose of this amendment. But I have to say to my noble friend that one of the reasons for this amendment is that many of us are very concerned that the Treasury in particular should take very seriously the issues of the financial services sector and the contribution that it makes to the British economy. That seriousness has not always been evident.

Secondly, the European Commission has been very helpful in listening to the British applications and those of our colleagues in the rest of the European Union and, should we leave the European Union, which I trust will not happen, we would certainly expect to have at least as much access as we have on the present stage and certainly as much influence.

I am concerned because in the past we have sought to pass amendments that asked the Treasury to bear in mind important matters. For example, an amendment some years ago stated that the Treasury should insist that regulators bear in mind the need for savings in our society. That was pooh-poohed by the Government who said that it was entirely unnecessary and of course everybody knew that. The result has been that regulators have not taken that issue into account and indeed pointed out that the Government did not accept when it was suggested to them that saving as part of our society was important. So it is important to bring home to the Government the issues raised with this amendment.

I want to make two further points. First, this is a very competitive world. We need to have legislation if we are not a member of the European Union that enables us to continue to be as competitive as possible. This may not be exactly the right wording, but it carries that meaning. Secondly, small companies find much of the legislation not only burdensome but unnecessary—points that my noble friend Lord Leigh properly made. That is not because one wants lower levels of legislation.

At this point, I want to take serious objection to what the noble Lord, Lord Adonis, said. I happen to be a Conservative. I sit on the Conservative Benches and I have been a Conservative Minister for longer than almost anyone else. But I am very much in favour of this regulation. The industry that I am happy to work in is also very much in favour of sensible legislation because we do not like cowboys either. They produce extremely bad reputations. Nobody can be tougher about the fact that we need proper regulation. There is no question in these amendments that somehow or other we would lower the bar. That is not the issue.

I would agree about some of the remarks made about Singapore. I am deeply upset to have a Foreign Secretary who thinks that Britain should be compared to Singapore. Fundamentally, that is as about as helpful as suggesting that we should be like Liechtenstein. I am sorry, but it is not a sensible comparison for so many reasons, not least because of the autocratic Government of Singapore. I do not want to be associated with them as a comparison.

However, our financial services need proper regulation. We want regulation, but it has to be proper regulation within the context of our competition. Therefore, it is proper to say that we do not want regulation that either makes it more difficult for us to compete or lays a disproportionate burden on the shoulders of small companies. Those seem two such simple and reasonable things to suggest that, on this occasion, my noble friends here and I are helping the Government.

Ministers are always suspicious, particularly when I say that I am trying to help the Government, but I am, on this occasion, trying to help them. I am doing it in great difficulty because I do not like this Bill at all. I do not want to leave the European Union. It is more and more clear that leaving the European Union is barmy, and we are having to spend time talking about barmy things that will take two years and then go away. It is a pretty insulting thing for this House, but that is what we are having to do. So I ask Ministers please to take this seriously and not to take the view of the noble Lord, Lord Adonis, in the way that he put it, but merely to agree that the amendment is sensible. If the Government cannot give us that undertaking, I have to say that the financial services industry will be very suspicious. If the Government are not prepared to do at least as well as the European Union has done in negotiation and discussion, I will be very sad.

I hope that people notice just how good the Commission has been when they attack the European Union for bureaucracy and suchlike. It has been more open and more able to discuss, and more concerned about the issues than any of our governmental structures. We have to remind people that the European Union is more open, more willing to listen and more concerned to be there for industry than the Treasury has been in history, which is why this amendment has been tabled.

[Baroness Kramer]

My Lords, I have to say to the noble Lord, Lord Deben, that every alarm bell went off in my head when I heard the noble Lord, Lord Leigh, basically argue that this would be a route to get naked short selling on AIM. This is essentially a mechanism that will allow people to enter into contracts which they know if they had to fulfil they would be very unlikely to fulfil—talk about risk. That general underlying principle worries many of us who think that a less speculative financial services industry is, in the long run, much more sustainable than a far more speculative financial services industry. That is exactly the point. It is people selling short shares that they will not be able to buy if they are ever forced to close on the contract.

[Lord Leigh of Hurley]

With great respect, I must say that that is not the situation in respect of the AIM market. This is where market-makers who are bound to make a market respond to requests for specified sums or amounts of shares with quoted prices. I think that the noble Baroness is talking about a different type of short selling.

[Baroness Kramer]

I thought that the noble Lord described naked short selling, which I thought I just defined. Anyway, I am nervous about the idea of policies such as this. There will be enormous pressure to use this opportunity, where the Treasury alone is the decision-maker, basically to loosen the regulatory structure that we have in the UK. That issue is a fundamental one for Parliament.

I would say to the noble Lord, Lord Hodgson, who talked about the need to find the appropriate place and that it is good that we can have those discussions with the Treasury, to have them with Parliament because there is another side to the argument. One reason why the UK been spectacularly successful as a financial centre is because the regulatory environment in which it functions is considered by many to be a global gold standard. If the noble Lord goes to countries such as China, India or other places, the level of trust and respect in financial institutions that are framed within those EU parameters—he could say it is foolish or sensible—is very high. It annoys the United States to heaven and beyond because so often it has loosened its regulatory standards but has not seen the business shift out of the EU into the US.

If you talk to companies, part of that reason is the reputational issue. For many companies, to be able to turn to clients and say, “I operate in the gold standard regulatory environment which means that you can trust me and what I do”, is so key to the future of their business that clients will reply, “If there is a significant loosening of standards, it might in the short term increase my profits but in the long term it will damage my regular relationship with my client base and I will need to move to the place that carries that gold standard kitemark”. Losing the kitemark is significant. That is something that this House and the other House should consider and should not be simply left to a conversation between the industry and the Treasury. It backs up our whole argument that this Bill, by transferring all those decisions simply to statutory instruments, is running into very dangerous territory.

[Baroness Bowles of Berkhamsted]

My Lords, a couple of interesting points have been made in the context of this amendment. As it reads, it looks reasonably acceptable as we do not want gold-plating, which could potentially happen. I echo that the Commission has been particularly good at dealing with smaller companies and businesses. My experience is that that has not always been reflected in the UK when the dispensations have been a matter for the member state. On more than one occasion, I have written to regulators and others about that.

One of the points was about asymmetric effects and the fact that when we are no longer a member state the law will bear down on us when we replicate it, or nearly replicate it, in a different way from when we were a member state. It is not only in financial services legislation that this could potentially happen. It happens with contractual obligations. When we replicate Rome I and Rome II, if the other party is in, say, New York, the penalty for breach of contract will be different in the UK from what it would be in France because we no longer tick the member state box. It essentially means that the higher New York penalty will apply rather than it being limited.

I sit on one of the secondary legislation scrutiny committees, and there have been various occasions when asymmetries have come up. There have sometimes been attempts to balance them, but sometimes not. It depends. These judgments about asymmetries already appear to be going on under the withdrawal Act. From the ones that I have seen, by and large it has not looked as though we could have dealt with them differently, but the issue is worth investigating. To say that the Treasury should do what it can for small businesses is a good thing, whether or not we say that we should not be put in a worse competitive position. Our markets are bigger and, because we have bigger global markets, we may have to regulate in a way that looks stronger rather than weaker. There may be other ways that it does not suit the specificities. I would be a little worried about “no worse competitive position” taken to its extreme, but in the general sense it is possibly more acceptable.

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[Lord Davies of Oldham]

My Lords, I can be brief because we have already had at least four debates this afternoon on the exact issues that this amendment and Amendment 11 in my name and that of my noble friend Lord Tunnicliffe deal with. It all revolves around the fact that we are not prepared to give the Government and the Treasury primary powers over issues that would normally require primary legislation just because this Bill has some exceptional qualities to it. It does indeed have exceptional qualities, as has been pointed out on all sides. It is meant to have a lifetime of a bare two years. The vast majority—I will withdraw that remark; I cannot qualify it. Some people who have spoken today have sought to make some improvements to the Bill but I do not have the slightest doubt that they hope that the Bill will never be necessary and that we will not crash out of the European Union without an agreed position.

Two debates ago, the noble Baronesses, Lady Bowles and Lady Kramer, did exactly what we seek to do with this amendment—that is, to identify just where our limits are with regard to the intention in the Bill and to point out that it is misconceived because it attributes to the Treasury powers that we ought not to allow it to have. We thought that we had spotted the area where the debate would flare up most significantly in Henry VIII powers terms, but in fact these issues have already been discussed without the need to mention that moniker too often.

I therefore move this amendment on the basis that the Committee and the Minister know only too well the strength of feeling on all sides that this Bill cannot be a Trojan horse to allow the Treasury and the Government to introduce measures that they would ordinarily introduce through primary legislation but which they are trying, through the enabling quality of this Bill, to introduce through statutory instruments and Treasury adjustments. We have debated this matter long and hard. We all know where we stand and I therefore beg to move, although I do not expect too much in the way of contributions in support.

[Baroness Kramer]

I will just say from these Benches that we agree.

[Lord Bates]

My Lords, first, I am sure that I speak for the whole Committee in thanking the noble Lord for his succinctness in presenting his amendment. I recognise the old adage that everything needs to be said but not everyone needs to say it. That is a good principle. In following him in that spirit, I will put on the record a few comments that I believe will be helpful for our wider debates.

We appreciate the concerns across the Committee regarding the Henry VIII powers and, where they are proposed, it is clear that their necessity must be well evidenced. In the case of the financial services legislation, to which the power in this Bill will apply, I hope that noble Lords will accept the need for such a power.

An inability to amend existing primary legislation such as the Financial Services and Markets Act 2000 will render it impossible to implement this necessary body of legislation. Further, as noble Lords will be aware, the exercise of many functions under financial services legislation is carried out by the independent regulators—the Financial Conduct Authority and the Bank of England. The capacity and expertise of the financial regulators will be absolutely crucial to the effective implementation of these pieces of legislation and, consequently, to the resilience and prosperity of the financial services sector here in the UK.

The amendment would remove the ability to delegate to the regulators because, as a general rule, a power to make secondary legislation does not include a power to sub-delegate. An inability to effectively delegate powers to the regulators in implementing the legislation contained in this Bill would severely undermine the value of transposing the original legislation into UK law. In many cases, it would effectively render legislation unenforceable, and the Bill would simply not be able to achieve its central goal of ensuring that the UK continues to be an attractive and competitive place to do business in the immediate two-year period post exit, in the unwelcome and unlikely event of a no-deal scenario. Given this context and the context of the previous debate, I invite the noble Lord to consider withdrawing his amendment.

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[Lord Sharkey]

My Lords, given the debate so far I can be very brief. If the Bill proceeds as currently drafted, it will enable the Treasury to create a new set of laws and policies for our financial services industry, all via secondary legislation. These new laws and policies will not have been exposed to proper parliamentary scrutiny and will not have been amendable. This stands in extreme contrast to the careful, detailed and very lengthy scrutiny given to all previous changes in the laws and policies for our financial services industry—scrutiny which has frequently resulted in very significant amendments. This is an entirely unsatisfactory state of affairs, and I know we will come back to this on Report.

But if we are to have legal and policy changes introduced by SI, then we should at the very least have the opportunity to review them after the fact. That is what my amendment proposes. The Bill as it stands contains a sunset provision for the powers in Clause 1. My amendment proposes a sunset provision for the regulations created by the powers in Clause 1. The sunset provision for the powers extends for two years after we leave the EU. My amendment proposes that the new regulations expire two years after that.

This would have two effects. It would give time to assess how the new regulations were working in practice. It would also mean introducing primary legislation to reinstate and/or modify or add to new regulations. This would guarantee what we do not have in this Bill: a means of proper, full parliamentary scrutiny of new laws governing a critical part of our national and economic life. My amendment would restore to Parliament the ability to debate and amend these new laws in the proper context of primary legislation. I beg to move.

[Baroness Kramer]

I want to make one very quick comment to add to those of the noble Lord, Lord Sharkey. There is a real danger that the pattern within this Bill becomes a precedent, and that for future financial legislation we in effect see this process of Treasury decision enacted through statutory instrument. This sunset clause would make that impossible. It would make sure that this was, in effect, a one-off, and that there was a return to normal practice following the end of four years.

[Lord Davies of Oldham]

My Lords, it is time to be kind to Ministers when one gets to this end of the Bill. My advice to the Minister is to indicate what a logjam of SIs there would be four years on from the consequences of this strategy. I understand entirely, and sympathise very much with the intent behind the amendment, but if I were the Minister I think I would point out a few of the practical difficulties.

Financial Services (Implementation of Legislation) Bill [HL]

Baroness Kramer Excerpts

Report stage (Hansard): House of Lords
Tuesday 29th January 2019 Lords Chamber

[Lord Leigh of Hurley (Con)]

My Lords, I too refer to my declaration of interest in the Members’ register, which has not changed since I last spoke. Despite my interest, I confess that I had some difficulty understanding all of subsection (1A)(b) of the proposed new section. The noble Lord, Lord Sharkey, read out the easy bit. The difficult bit is the words,

“but does not include changes that result in provision whose effect is different in a major way from that of the legislation”.

I think I understand the intent, but I am not sure that the words are exactly as another draftsman might have chosen to put it.

I am today looking for an assurance from the Minister that the adjustments he proposes will allow the Government the flexibility needed: in particular, if there is a restriction on changes that might be significant or major, that these will not bite where change really is needed if we leave the EU with no deal. As the noble Lord, Lord Davies of Oldham, has said, this legislation will come into play only if we have left without a deal—which nobody in this House seeks as a primary option—and in those unfortunate circumstances, we might need to be as flexible as possible.

By way of example, in respect of article 2(e) of the prospectus regulation, the alleviations granted by the EU were a compromise designed to suit all member states’ markets, all of which are very much smaller than the UK’s. The Government should adjust these to make them proportionate to the scale of the relevant UK markets. For example, the threshold below which public offers—an area I am particularly interested in—are exempt from the requirement to publish a prospectus, which is a huge cost, has been set at €8 million. By the way, initially it was agreed to be €2 million, then it went up to €5 million without any issues and then it became €8 million. For the UK market alone, a more appropriate level might be, say, £20 million.

The noble Baroness, Lady Bowles, referred to the definition of SME growth markets, which is a very important term. The definition was of course a compromise designed to suit all member states’ markets, and to avoid in some instances classifying members’ entire national stock market as an SME growth market, which would be a bit unfortunate. Perhaps the Government want to adjust this to make it proportionate to the scale of the relevant UK markets, possibly increasing the maximum market capitalisation from €200 million to £500 million.

Outside of article 2(e), I have mentioned at earlier stages of the Bill some issues relating to CSDR settlement discipline which are perhaps inappropriate and, in some cases, highly damaging to the unique, quote-driven liquidity provision of the UK’s SME market. I hope that I have satisfied the noble Baroness, Lady Kramer, that short selling in those markets is not damaging or dangerous to the UK economy. This would not apply to EU-based dealers, thus putting UK market makers at a competitive disadvantage because it would apply to them.

I hope the Minister can assure me that the Government will retain the power to have the flexibility needed to allow the UK to set its own rules for our financial services market, which is very different from the EU’s. I appreciate that this provision applies only in respect of in-flight rules but it sets the tone, and hereon in we will want to create our own bespoke laws, which may well diverge from the EU’s but will be more appropriate for our market. Rather than just hanging around hoping for some small alleviations in the circumstances of a no-deal Brexit, we really will need to act in a way that suits us in these areas.

[Baroness Kramer (LD)]

My Lords, I am very grateful not to be the Minister, who has to respond to my noble friend Lady Bowles and the noble Lord, Lord Leigh. I can see that it is a challenge and I hope that if I talk for a few minutes, it will give the Box a little more time to get notes to him.

I think that the House knows that my underlying question has always been how we draw the line so that we know when it is appropriate for change to be carried through by an SI and when it should come to this House as primary legislation, particularly in this field. What happened in the weeks and months immediately following a no-deal exit would shape whether we were in a position to maintain access to the EU market for our most significant industry—the services sector—and indeed for the economy as a whole. I think that in the changes he has made the Minister has got us to a better place and to a much clearer understanding of the Government’s intent. If he wanted to split the difference, he could say “major or significant” and deal with the problems all in one go.

I want to say how much I appreciate the listening that the Minister did and how much we appreciate the listening, thought and effort that his officials put into responding to the queries and issues that we raised. It gives me the feeling that we in this House, including the Government, are all essentially on the same page in understanding the significance of the period that would follow no deal and how carefully and sensibly we would have to approach regulation in the financial services area because of the potential knock-on impacts and unintended consequences, which could be extraordinarily severe.

With that sense that the Minister understands when an issue should be brought to the House because it is a fundamental change of policy and critical to an underlying key sector of the economy, and when it is an issue that can rightly be dealt with under a statutory instrument, I can say that I am very happy with the changes that have been offered and, again, I thank the Minister for them.

[Lord Bates]

I thank noble Lords for their contributions. I particularly thank the noble Lord, Lord Davies, for moving his amendment and giving us the opportunity to comment. I very much concur with the noble Baroness, Lady Kramer, about how the officials have engaged in this process. I do not know whether it is appropriate to refer to them on the Floor of the House but I will do so anyway. I think that they too found it a very useful interaction. This Bill is beginning its journey through the legislative process in your Lordships’ House, and the ability to shape and craft it so that it will have been improved by the time it leaves this House will make the job of the other place, which has quite a lot on its plate at the moment, a little easier.

I also agree with the tribute paid by the noble Lord, Lord Davies, for the work being done by officials and, indeed, by UK Members of the European Parliament and the industry on shaping EU financial regulation over the years to make it effective and proportionate.

I believe that the intent behind the noble Lord’s amendment and behind the noble Lord, Lord Sharkey, putting his name to it was to give the Government an opportunity to put further flesh on the bones of what is meant by “major” and “significant”. They will become the new version of “corresponding” and “similar”, which we discussed in Committee. I do not want to hark back to that debate; instead, I shall focus on these key words. I will put some remarks on the record and then turn to the point made by my noble friend Lord Leigh.

It is clearly important that we find a way of limiting this power appropriately, and I am very grateful for the proposal in Amendment 2, moved by the noble Lord, Lord Davies. However, the noble Lord’s amendment could have the unfortunate and unintentional effect of rendering the power and therefore much of the Bill almost unworkable. The reason the Government settled on the term “major” rather than “significant” in drafting this amendment was the greater clarity provided by the term “major”.

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Dig fractionally deeper and there are consent SARs. These are when one of your clients may not be behaving quite as well as he or she should, and you go to the authorities and say, “This is the situation, I want consent to do the transaction”. You are, essentially, running up a very red flag. Last year, with the increase in these consent SARs of 20% to 22,600, 85 per working day, the number of arrests out of that 22,600—clearly, right at the sharp end of everything, that is what the firms are telling the authorities—was 40, covering 28 cases. The money collected—and we are talking about billions flushing through the system here—was £52 million. That system is not delivering. In thanking my noble friend on the Front Bench and supporting this amendment, I hope noble Lords will remember the need to update, to inform, to improve and then to eliminate regulations that no longer have an application.

[Baroness Kramer]

My Lords, with that provocation I say to the noble Lord, Lord Hodgson, that perhaps we should look at the quality of enforcement. I would far rather that we had too many warning signs, but captured a large part of the wrongdoing, than missed major wrongdoing because there were so many options where people could avoid early warning signs. I suspect we have an enforcement problem, and often in this House we have heard that echoed. It sits entirely outside what we are dealing with today. For goodness’ sake, let us be very wary of the seductive argument that where we fail to enforce we should not even investigate.

[Lord Tunnicliffe (Lab)]

My Lords, I support Amendments 3, 4 and 5. They are the product of ideas from all parts of the House: from the noble Lord, Lord Hodgson, and particularly from Lib Dem Members. Amendment 4 strikes me as a very important innovation. Other parts of the Administration may want to ponder what should be done here, because while it will all be down to the Government how they use it, it creates a mechanism by which we get will close to being able to amend an SI. Clearly, no great measures are going to fall because we have no great power to influence them and we all know that we are not going to vote on such SIs.

However, to be able to discuss an SI with the Government—obviously not on the Floor of the House but perhaps by approaching Ministers on particular issues—before it is laid would be an important step forward. Proposed new paragraph (b)(ii) and (iii), inserted by Amendment 4, is also important for making how such an SI is generated much more structured. I hope this will give real transparency to SIs, which can at times be very complex. I end by thanking the Minister for his efforts on the Bill and almost by celebrating, for want of a better term, the extent to which we have been able to come to consensus.