Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019

Baroness Kramer Excerpts

Monday 18th February 2019 Lords Chamber

[Baroness Kramer (LD)]

Perhaps I could explain to the noble Lord, Lord Lilley, that one reason why so many of us are making comments and expressing concerns about procedure, including about the impact assessment and the limitation on what we can do with statutory instruments—we cannot amend or change them—is because the whole process pales greatly in comparison to the equivalent process available to us as we dealt with these fundamental issues as EU members. Then, we were framing the overarching directive that set the context through extensive and transparent consultation and scrutiny, via a process in the European Parliament and the European Council. Typically, we then engaged our regulators for the final stretch, but in the context of all that work in discussion and negotiation. One of the reasons for London’s great success is that it was able to shape so much of that discussion in the way it thought appropriate, bringing all its experience to the table. That is what made it Europe’s premier financial centre and the great global financial centre it is today, all of which it achieved in the context of EU membership.

[Lord Lilley]

The noble Baroness makes an important point but one that deflects a little from reality. When I was a Treasury Minister, I had to negotiate things in Europe. I suppose we had a certain influence, but at no point did the House get involved much, rightly or wrongly. She should not create an ideal world that did not exist.

[Baroness Kramer]

I accept fully that this House did not get involved, but I do not consider democracy as having only one locus. Our Members of the European Parliament were democratically elected as democratic representatives. The Ministers we sent to Councils engaged with democratic representatives. I do not think that this process happens in only one place. It seemed to me that as a consequence of that representation, we had real importance. Now, we face two situations—

[Lord Lilley]

The point being made by the noble Lord, Lord Adonis, and others is that we should not leave that process to Ministers. The noble Baroness seems to be saying that our doing so in the past was jolly good because they defended our interests.

[Baroness Kramer]

Well, we also had MEPs, for whom I have great respect, and engaged broadly in the process.

One of my problems is that the equivalence SI we are dealing with today essentially puts, for the next 12 months, all relevant decisions on whether we remain equivalent or, as the EU makes changes, become equivalent in any new area into the hands of the Treasury alone. Not only does that not engage this House—I suppose you could consider the Chancellor to be involved—but it represents the most disengagement we have ever had at an absolutely critical time. If we leave the EU, how we behave on equivalence in the coming months will shape the context of any negotiation on the economic future of the UK, this being its most important economic sector and a major contributor to taxes and jobs. It is pivotal to the economy, yet the Treasury alone will make many of these key decisions. All we have for context are the comments in the political declaration. I will not repeat discussions we had earlier today, but those comments are exceedingly limited and give very little sense of direction.

To make matters almost worse, it is quite clear in the SI that, beyond that period, future decisions will be made through negative SIs—not through some policy framework in this House, engagement with your Lordships in broad debate or extensive consultation, but through the negative procedure. That will make it even harder for us to be engaged in the process. I can tell the noble Lord, Lord Lilley, that all the Brexit issues we are dealing with lead to the massive democratic deficit of great concern to many of us.

[Lord Deben]

Did the noble Baroness notice that my noble friend said, “I think we may have had influence”? Is it not true that we have been at the centre of these discussions and that the European Union is much more transparent and open when it comes to them than the British Government have ever been—certainly more so than the Government now propose to be under these statutory instruments?

[Baroness Kramer]

I can only agree. We have major transparency problems. I am working on the Trade Bill; it is unconscionable that we do not have available to us information that the EU would not only put automatically on a website but constantly report back on, with discussion between the Commission, the Council and the Parliament.

Let us set that aside so I can move on with this particular instrument. I reinforce the concerns about the impact assessment. I must say that the consolidated impact assessment discussed by my noble friend Lord Sharkey contains three pages dedicated exclusively to this SI—I am sure that the Minister will point that out—but anyone who cares to read it will discover that, although it is usefully descriptive, telling us a bit more about the instrument, what used to happen in the EU and what will happen under this instrument, it cannot be called three pages of impact assessment. It does not even attempt to monetise the impact and give us a sense of the costs and the value of the benefits—that is beyond it—and it never deals with the risks in any way. Never in my commercial life have I seen impact assessments that did not assess risk—but these do not even begin to do so.

That is very disappointing, particularly for the businesses which will be picking this up. They want to make sure that this SI goes through, because anything that reduces uncertainty in any area where there is not a cliff edge will be of great value to the relevant businesses—but, my goodness, they would have welcomed something much richer in terms of the discussion to give them some forward vision rather than one that just deals with the very short period of time that will immediately follow departure under a no-deal scenario. I find that very frustrating and a real weakness in the way in which impact assessments are being dealt with here.

That takes me to perhaps the last issue that I will address, which was touched on to some degree by my noble friend Lady Bowles. There is very little discussion in any of this about what I call reciprocity. In order for equivalence for the industry to be able to function without any kind of cliff edge in no deal, not only does the UK need to provide equivalence but the EU needs to grant equivalence as well. In many instances it has not done so, but it may do so in the future. My interpretation is that at the moment it is doing so only in areas where it thinks that not granting equivalence would cause financial instability, rather than looking at broader market access issues.

I take this as a real shot across the bows that we need to take on board, framing the EU intent as to where it will take future negotiations in this area. That is important and I am rather concerned that the Government do not deal with those kinds of issues in this impact assessment, because an honest discussion of that is crucial for businesses as they use the product and everything that we are printing to try to understand what the context is going forward. It has made me feel very gloomy that we will see a much more fragmented set of financial services. I am sure that London will remain a crucial global centre, but I can see the way in which the pattern is developing. It will have some very significant rivals that will take away very significant pieces of business. Over the long term that has real consequences for the UK.

In all that we have here there is one last issue which perhaps the Minister would address, because it could be my deficiency in reading all of this. At the moment we know that third countries operate, as it were, within the EU because the EU has granted them equivalence. As I understand it, the UK will be granting identical equivalence under this SI for the day that we leave if it is a no-deal scenario. But I am unclear about how many of those third countries are granting us reciprocal equivalence. Not only do we have questions about in which areas the EU is granting us third-country equivalence, I am not clear where we stand, for example, in terms of the US. Will we be granting the US equivalence using exactly the same pattern as that of the EU currently? It is not clear whether the US is granting us equivalence and on what terms—and that is just one of the many different countries with which we have built up a kind of network through mutual equivalence that has been established over the years.

Equivalence is extraordinarily complex. It is not a matter of a simple one-hour discussion about four or five easy to understand factors. It is exceedingly complex, it often comes with conditions and it may be limited in a whole variety of ways such as by time and by content. It may have many issues attached to it, and therefore negotiating new equivalence arrangements from scratch would concern me a great deal. I say that in particular because of what we have seen with some of the trade deals, where Liam Fox was absolutely confident that we could take existing trade deals between the EU and the 71 other countries with whom we had free trade agreements and roll them over. He has now been woken to the fact that most of those countries see this as an ideal opportunity to improve their position and to renegotiate. It has become a much slower, much more difficult and much more complex process. I want to try to understand where we are with our equivalence agreements, because potentially the situation is exactly the same. It is very different having an equivalence agreement to have access to the market in the UK from having access to a market of 500 million people. I do not know how many of these equivalence agreements are in play.

[Lord Tunnicliffe (Lab)]

My Lords, I shall be brief on this instrument and brief to the point of extinction on some of the others. I wish I thought that that would have any significant impact on the length of the debates we are going to have, but I fear that my brevity may be somewhat wasted tonight.

Every time we look at a bunch of these instruments, I hope to be forgiven for making the simple, formal statement that I regret being here doing these SIs. Her Majesty’s Government should rule out no deal. The Prime Minister is behaving irresponsibly in not doing so, but unfortunately no deal seems increasingly possible. From my limited understanding of history, most bad things that have taken place were by accident. Unfortunately we have a Government who are playing a game of chicken and hoping that the EU will blink first without realising that one of the outcomes of a game of chicken is mutual disaster. Accordingly, we will not obstruct Her Majesty’s Government’s legislation in preparing for no deal because it is a genuine probability. It was good that at least one speaker in the debate—I think that it was the noble Earl, Lord Kinnoull—pointed out that industry needs these SIs in order to get on with its business.

Virtually all the Treasury SIs have three parts. They tend to transfer functions, to transfer references, and to have a little policy where a decision has to be made if it is not self-evident where the status quo lies. This SI is similar. Its substance is set out in Regulation 2(1), which states:

“The Treasury may, by direction”,


and so on. In the Explanatory Memorandum there is a very important statement on this power:

“It provides ministers with a temporary power, for up to twelve months after exit day, to make equivalence directions and exemption directions for the EU and EEA member states. This power is intended to be used only in cases where it is necessary to make equivalence decisions for the EU and EEA member states quickly and efficiently to support UK market activity and the continuity of cross-border business”.


Unfortunately, nowhere in the SI is that assurance made. There is no limitation on the powers in the statutory instrument itself. As a minimum I hope that the Minister will repeat the essence of what is in the Explanatory Memorandum and assure us that this power is designed to be very limited. As I understand it, the power can be and in fact will be used after exit day. What I would value is if the Minister could explain the parliamentary process that will be associated with it because, so far as I can see, it boils down to nothing. I assume it just boils down to a Written Ministerial Statement. I hope that he can give us some more comfort that whenever this power is used, we will know about it and that he will be making a statement of some kind.

Finally, towards the end of Regulation 2—one usually runs out of energy before one gets to the end of these—paragraph (6) states:

“The power of the Treasury under paragraph (1) includes the power to revoke or vary an equivalence direction at any time”.


Could the Minister make it clear whether that paragraph dies after 12 months, like the power in paragraph (1)? The power to revoke or vary an equivalence direction—which seems almost as powerful as the power to create a direction—is pretty important and should die at the same time as the power in Regulation 2(1).

I will not make any other general comments, other than to note that all the SIs this evening, as far as I can tell, do not have reciprocity. The whole issue of the negative impact that leaving without an agreement brings is that there is no reciprocity. All we can do is create the rules that allow us to make the move towards the EU, and we have to hope the EU sees the sense in making reciprocal powers. This is just one more reason why crashing out of the EU is a thoroughly stupid thing to do.

[Lord Bates]

We could probably start with agreement across the House in saying that that is certainly something the Government do not want to happen. There is a very easy way for the noble Lord to ensure that that does not happen: to ensure that his colleagues support the deal before the House. This would then be unnecessary. This is not in any shape or form an objective this Government relish. It is a possibility that any prudent Government must prepare for. That is its status—nothing more, nothing less.

Given that we are going to be in for five substantial debates tonight, I will set one thing in context at the beginning. I will not cover some of the points, because I know they will come up in later debates, so I will try to not test the patience of the House by repeating answers five times to five different SIs. I will try to keep them as concise as possible so we can move through them at some pace.

I thank the noble Lord, Lord Sharkey, as the official spokesman for the Liberal Democrats and the noble Lord, Lord Tunnicliffe, as the official spokesman for the Opposition, for stating their intent to let this legislation go through, because they recognise that—whatever their concerns—there is a greater concern to ensure that there is a functional statute book in the unlikely event of no deal. I recognise that responsible approach, and I am sure it will be welcomed by the industry. The noble Earl, Lord Kinnoull, and the noble Lord, Lord Leigh, spoke from that perspective.

I want to put this on record, because I think it is really important. In their presentations the noble Baroness, Lady Kramer, set out brilliantly and the noble Baroness, Lady Bowles, set out extremely well—and indeed the noble Lord, Lord Sharkey—the outstanding work that the Parliament and the Commission did in regulation. The UK has been a leader, an influencer and a shaper of regulation. It really has been a good process. Every single one of the SIs we are dealing with through this entire process has gone through that scrutiny. We are not dealing with something that has never been thought of before; this already exists and has been subject to scrutiny—not only in the Parliament but, let us not forget, in another important group that does incredible work in this House: the European Union Committee and its six sub-committees. They scrutinise all the regulations and directives that come out. Then we had the European Union (Withdrawal) Act, in which we said—because it included a revocation of the European Communities Act 1972—that we needed to bring a lot on to the statute book. That is what we are doing: bringing on SIs, directives and regulations from the EU that have been subject to scrutiny by a UK Minister, the European Parliament and your Lordships’ House in the sub-committees, at the instruction of Section 8 of the European Union (Withdrawal) Act. Many of us recall the long and painful process of that working its way through the House. I looked it up: we spent 10 hours on Section 8, which gives us the powers and sets up the process we are now following.

The idea is sometimes presented that somehow what we are doing here is bringing onshore a whole load of stuff that we have never prepared for and that industry has not had any clue about dealing with. Industry is working with it, and we are now bringing it onshore. The process by which we deal with new regulations in future—the point made by the noble Lords, Lord Lilley and Lord Leigh—is something we need to look at. What we are doing at the moment is bringing across what is already in existence and has already been considered through a rigorous process, and putting it on the UK statute book.

[Baroness Kramer]

Perhaps this is my misunderstanding, but as I read the SI I did not have the understanding that the Treasury, following exit day with no deal, would be able to act only in exact accordance with the pre-existing rules established under European directives but that it could make fresh and new decisions to revoke, effectively amend or make new decisions for a 12-month period; a process would appear at some point in that time that was not Treasury-only, but it would be structured around a negative SI. I thought that was part of this whole package.

[Lord Bates]

The powers the Treasury will have are the powers the Commission currently has. The Commission cannot have them because we will have left the EU without a deal. Somebody therefore has to have them, and it goes to the Treasury because that is the equivalent body. Where the European markets authority was the regulator, that is transferred to the regulator here. We are simply doing all the things the noble Lord, Lord Tunnicliffe, has said at least two dozen times when we have discussed these points. He looks to see if we are actually following the rules as set down in Section 8 of the European Union (Withdrawal) Act. That is what we are doing. We are not making substantial policy changes, just correcting deficiencies and making fixes. The noble Baroness is absolutely right; that is the process.

[Baroness Kramer]

I accept what the Minister says. The Treasury in effect becomes the Commission, but without the checks and balances that normally exist on the Commission because we do not have the democratic process. That is the only point I am trying to make.

[Lord Bates]

I know the noble Baroness is seeking to make a point, but the Treasury does have a representative in your Lordships’ House. I know the noble Lord, Lord Deben, thinks, with the Chief Whip present, that I will be here today, gone tomorrow. That may well be the case.