Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024

Baroness Kramer Excerpts

Monday 18th November 2024 Grand Committee

The amendments made by this instrument may be technical, but they are important in bringing the statute book up to date. Failing to make them could cause confusion about the relevance of EU law to domestic regulation. These SIs make technical changes that are necessary to ensure that our statute book remains up to date and adequately reflects the UK’s exit from the European Union. They also make important provision regarding the provision of services into the UK, either by ensuring that UK firms and investors can access the products and services that best suit their needs or by giving UK authorities appropriate control over when certain services can be provided. I hope that the Committee will join me in supporting these regulations, and I commend them to the Committee.

[Baroness Kramer (LD)]

My Lords, I will be relatively brief because these are highly technical instruments, but there are some comments that I would like to make.

I shall start with the collective investment schemes and central counterparties order and begin with collective investments schemes. I ran this one by my noble friend Lady Bowles of Berkhamsted, who is the ultimate guru in our party on collective investments schemes and, I suspect, one of the experts on them within the House, and her report was “It’s absolutely fine, let it go”, so I will happily take that position on the necessary tidy-up of the changes in the language for collective investment schemes.

However, the second part of that order is far more interesting and raises some questions, about not the language but the broader issue of central counterparties and the hint that this regulation may contain. Everyone in this Room understands that central counterparties became an instrument for countering the fallout of the 2008 financial crash when liquidity seized up across the financial services sector because, within that huge area of derivatives—I think derivatives outstanding typically exceed something like $60 trillion at any one time—the outside world did not know who owed what to whom and therefore who was at risk from which failure and whether there would be domino effect. Indeed, liquidity then seized up and we went from a contained financial crisis into a wholesale financial crisis. Now, vanilla transactions and derivative arrangements that go beyond the vanilla pass through central counterparties so that there is a middleman, if you like, that can hold the risk so that if one party fails, the counterparty takes the risk, not the person who holds the mirror transaction on the opposite side.

I think everyone has always recognised—I could quote Andy Haldane, but I have done it too often before—that, in a sense, the central counterparty is an accumulation of risk. One could almost think of it as an unexploded bomb. Serious levels of risk are contained with the central counterparty and, if anything goes awry, the shock to the financial system would be global. The Committee will know that many of the counterparties share common ownership. They may look like completely separate organisations, but they feed back and the same parties, in a sense, make up their various memberships and ownerships. Cross-contamination is always a huge risk when dealing with central counterparties.

It is obviously sensible now that, sadly, we have left the EU, that regulation which tied into EU directives should drop away, but I am concerned that this does not become an excuse for playing the game of regulatory arbitrage. We hear constantly about the significance of growth. I do not deny that, but I am concerned about the gradual understating of risk that sits alongside loosening and changing regulation to create the animal spirits that will create growth.

The potential to play a regulatory arbitrage game around central counterparties must be raised in this context. When we required recognition by more than one regulator—ESMA as well as its UK equivalent—we had the constraint of two sets of significant eyes looking at a particular situation. Now there is one set of eyes only. While we always acclaim the importance and, as I often hear, the great superiority of the British regulators in this area, I would very much like some assurances that there is at least some degree of oversight and monitoring in recognising the potential of trying to loosen up regulation around the central counterparties.

Both prior to our exit from the EU and today, the dominant European clearing house—one might say the dominant global one—was LCH. It is no longer called the London Clearing House and its party in Paris is now known as LCH Paris. It is still dependent for about a third of its clientele on recognition from ESMA. ESMA has given it temporary equivalence, but that could be adjusted or changed in future and there could be limitations on European institutions from doing more than a certain percentage of their clearing through LCH or other UK clearing houses. Can the Minister update us on that issue? Is there any sense that the steps we are taking could trigger a more adverse decision from ESMA in reference to UK-based CCPs?

I will very briefly deal with the insurance distribution regulations. Some in this Committee will know that I hate the concept of a regulatory perimeter whereby we regulate activities on one side but not on the other. I gather from the Explanatory Memorandum that some companies which were outside the regulatory perimeter will now be drawn inside it. That can be only a good thing, but there has always been a tendency for companies in the UK to game the regulatory perimeter. They grow to a size that puts them just outside sight of the regulation. Will a significant number of companies be affected by this adjustment in denominating the assets from euros to sterling? Will we see a cluster around the regulatory perimeter and have any concerns been triggered in looking at this set of changes?

[Baroness Neville-Rolfe (Con)]

My Lords, I take great pleasure in returning to the Front Bench to debate Treasury matters, albeit now in a shadow capacity. Although I do not have current interests to declare, I hope that my past experience as Commercial Secretary to the Treasury and as a member of the EU Financial Affairs Sub-Committee will stand me in good stead. Until 2022 I served as a non-executive director of a challenger bank and, of course, I have served in business more generally. I thank the Minister for her clear explanation of these two instruments and their obvious complexities. I am glad of the opportunity to work with her across the House and I look forward to hearing the answers to the observations made by the noble Baroness, Lady Kramer, especially about risk.

Our investment schemes and central counterparties are without question the backbone of the United Kingdom’s financial services industry. They enable our country to attract global capital, support pensions and, ultimately, benefit people and businesses up and down the country. As the Minister said, it is important that the rules and regulations are not needlessly bureaucratic. The removal of EU recognition is welcome. We now have domestic arrangements for oversight and I believe we should not be double-banking, so I am in a slightly different place to the noble Baroness, Lady Kramer, on that.

I wish to make two wider points. I am particularly grateful to the Minister for including a de minimis impact assessment with the first SI. I note that it has also been through the better regulation unit. I have always been a huge supporter of impact assessment and wider cost-benefit analysis of all legislation, but I have two questions. Can the Minister confirm that it is the policy of the new Government to require de minimis assessments of this kind on all SIs—unless the impact is negligible, as with the insurance distribution SI? She can perhaps answer for the Treasury today. I note from GOV.UK that her ministerial role also relates to business regulation more widely. Although she may need to write, I would appreciate a wider answer, as such a requirement would help deliver value for money across government and limit the negative effect on growth of new regulation.

My other concern is the glacial pace at which we are leaving the EU financial services regime behind. The collective investment SI provides for a year’s extension of a temporary regime. Although this may be well and good for the reasons the Minister has clearly explained, I have no idea when the UK will have completed the task of replacing EU financial services law with our own. I was trying to advance this process in 2017 when I was at the Treasury so that we would be ready when Brexit day arrived; as it happened, it did not arrive until January 2020. I believe the transition was well debated during the passage of the Financial Services and Markets Act 2023, but I have two other related questions. Do the Government, with the help of the regulators, have a plan for completing it and taking advantage of any new freedoms and simplifications that are now possible? Will the Minister agree to send me a list of the missing regulations and a timetable?

Although it is a demand, I mean that as a constructive question. Our financial services sector is so important to UK growth, and we need to make sure that these changes are completed, take effect and help our financial services sector, which has so much to contribute to UK growth, productivity and prosperity. Having said that, I am very happy to support the two sets of regulations.

Listed Investment Companies (Classification etc) Bill [HL]

Baroness Kramer Excerpts

2nd reading
Friday 15th November 2024 Lords Chamber

[Baroness Kramer (LD)]

My Lords, this House has heard from three experts, and it will now hear from a layman—I will be extremely brief. My position and that of these Benches is very strongly to support the Bill. As we have heard, especially from the noble Lord, Lord Hodgson, and my noble friend Lady Bowles, listed closed-end investment companies are absolutely fundamental to investments in longer-term, more illiquid activities exactly of the kind the Chancellor has discussed promoting.

I want to disabuse some of the conversation suggesting that the Bill actually increases risk. The Bill overturns an error in the existing regulatory arrangement that, in effect, forces a double-counting of costs for holistic closed-end investment companies, versus other kinds of funds. It is simply an error that has resulted from the complex layers of regulation and legislation.

Like others, I congratulate the Government on having very quickly taken some steps to bring in two SIs, and the FCA on having declared forbearance while the detail is worked through. The reality is, however, that we cannot let this drag on from day to day because it is having a very immediate impact. The noble Lord, Lord Hodgson, talked about new companies, but it is basically driving this industry out of the country. We have to act faster.

The two statutory instruments, the forbearance and the FCA were important steps forward, but are not sufficient as they have missed out some key elements. Those key elements need to be tackled immediately. The quickest way the Government could do it is to give fair weather to this Bill.

Whistleblowers

Baroness Kramer Excerpts

Monday 28th October 2024 Lords Chamber

Asked by

[Baroness Kramer]

To ask His Majesty’s Government what assessment they have made of the current capacity and efficacy of the law to provide confidentiality for whistleblowers and to protect them from retaliation.

[The Parliamentary Under-Secretary of State, Department for Business and Trade and Department for Science, Information and Technology (Baroness Jones of Whitchurch) (Lab)]

My Lords, whistleblowers play an important role in shining a light on wrongdoing in public life. They need confidence that they will be taken seriously and will have legal recourse if subjected to detriment or dismissal for making a protected disclosure. There are already day-one rights for workers, but we intend to strengthen whistleblowers’ protections.

[Baroness Kramer (LD)]

My Lords, whistleblowers who are defined as workers, and therefore protected by the existing law, still fail to win 96% of their cases in employment tribunals because of evidentiary requirements. They are financially ruined by cases that can drag on for years and, even if they win, their careers are destroyed because the tribunal does not acknowledge blacklisting. Will the Minister commit to an office of the whistleblower to ensure genuine protection for whistleblowers and proper investigation of tip-offs—to avoid a repeat of Horizon Post Office, Grenfell, financial mis-selling, Letby and Al Fayed, to name but a few?

[Baroness Jones of Whitchurch (Lab)]

The noble Baroness is absolutely right to raise those cases. We all take those issues very seriously, and we have debated them here in the Chamber on many occasions. There should not be a need for anybody to whistleblow; people should have their concerns taken seriously in the first place. This Government are absolutely determined, from the top, to make sure that people who have concerns at the workplace are able to raise them without the detriment to which the noble Baroness refers. With regard to an office for the whistleblower, there are a number of ideas around this. We are looking at the role and remit that such a body could have. There will be a need to look at the cost, role and function of a potential new body, but we are looking at all the ways we can ensure that whistleblowers are protected at the workplace, as they should be.