Financial Services and Markets Bill

Baroness Lawlor Excerpts

Committee stage
Thursday 23rd March 2023 Grand Committee

The Government issued a call for input and have committed to explore options for the introduction of a new fund structure, the unauthorised contractual scheme, but I ask the Minister why we do not just go back to where we were before AIFMD and abolish it quickly. Only professional investors may invest in such funds anyway, and the consumer therefore needs no protection. It is not necessary to give the regulators time to consult on replacement rules, because there should not be any, and my amendment would ensure the immediate revocation of the directive and all its associated regulations. The Bill enables the Government and the regulators to do much, but I fear they will change little. It is therefore, in effect, largely an enabling Bill, and there are currently only a few clauses that bring about immediate changes. There is no time to lose; we need to start updating and simplifying the rulebook now. I beg to move.

[Baroness Lawlor (Con)]

My Lords, I support the noble Viscount’s amendment, to which I have added my name. My noble friend referred to the political background of the EU at the time of the AIFMD; he spoke about its impact on the industry, with great knowledge and experience, and about the opposition encountered at the time. I shall say a few words about each, beginning with the policy background, noting other differences between the UK sector and the EU sector, and other concerns raised by the House of Lords European Union Committee at the time.

Although businesses may have learned to live with the directive, as one person in the industry told me, it is not exactly something that helps competition or helps the sector to do as well as it might do—nor has it. At the time, the directive had a policy background. It was portrayed as a response to the financial crisis, but in fact it was already on the cards in the European Parliament in 2008. Discussions took place again in April 2009 at the G7. I see it, in terms of policy, as part of Michel Barnier’s commissionership for Internal Markets and Services between 2010 and 2014, when it was driven through as part of a raft of measures designed to promote EU monetary and banking union, including, for instance, the single supervisory mechanism. Monsieur Barnier’s overall approach was to have a centrally controlled and directed policy for the sector, reflecting the traditional approach of the French state to the economy and brought into the EU at its inception.

So, AIFMD should be considered in that context, rather than as suitable for the UK, which was outside the single currency and the economic union. Our financial model is based on markets, freedom and competition under UK law. Indeed, even in the context of the global direction of the sector leading to cross-border regulatory systems, it was seen from the European legal perspective as potentially having “undesirable effects”, with the need highlighted there to find the right balance between rules and freedom, according to the co-authors of a section in the Alternative Fund Managers Investment Directive, a multi-volume assessment, from a legal perspective particularly, published by Kluwer Law in the Netherlands in 2012. The co-authors of the chapter “Challenges from the Supervisor’s Perspective” were concerned about finding the right balance between rules and freedom.

Here in the UK, that balance has traditionally been struck by domestic law and regulation, which has accommodated innovation, competition and regulated risk in a diverse range of businesses. My noble friend Lord Trenchard spoke about those: hedge funds, private equity and, indeed, property. It has not been under a rule of law with a “one size fits all” approach, such as that of the EU, which reflected a different approach—a precautionary and code-based system of the law—that is ill equipped for our diverse sector.

My noble friend mentioned the differences between the UK and EU sectors. I would just add that, overall, when we look at the context, the UK sector is different in proportion, in size and in composition. Our financial services sector accounts for 8% of the UK economy—the same proportion as that of Canada and the US. By contrast, in the European states—in Germany and France—as well as in Japan, it accounts for just 4%, so half of ours.

Within the sector, the UK AIFs have a particular profile. According to the figures from ESMA collected for 2019—the last year when they were collected—before leaving the EU, the UK’s AIFs accounted for a net asset value of €1,338 billion, compared with €5,468 billion for the EEA 30, so about 20% of the net asset value. As my noble friend Lord Trenchard said, he puts the percentage of UK AIFs as a proportion of the EU at 85%. Other figures suggest slightly less, such as 75%, but it is not worth fiddling over the percentage—it is very significant.

That brings me to my third point. My noble friend mentioned many concerns at the time. I would just raise the concerns of the House of Lords EU Committee in February 2010. Commenting on the alleged or apparent aims to increase the stability of the financial sector and facilitate the single market in alternative investment funds, it noted that the discussions about hedge funds and private equity funds regulation had taken place at the EU level in 2008, with reports by MEPs in the EU Parliament, and before the G20 summit. The committee’s balanced report broadly welcomed and acknowledged the potential for risk and welcomed the co-ordination and supervision of fund managers, which would benefit the single market and the UK economy, as well as the co-ordination and supervision of arrangements. It also welcomed the introduction of passports for the sector.

None the less, it had serious concerns about a number of rather major points. It said that this was a directive designed to cover all non-UCIT funds. It said that there was a failure to acknowledge the differences in how AIFs are structured and operate, as well as a failure of proposed disclosure by managers to supervisors to take account of the different types of AIFs and the fact that the requirements should be proportionate and relevant. Above all, the committee was concerned that the directive should be

“in line with, and complement, global arrangements”.

It added:

“Coordination with the US regulatory regime … is essential to avoid a situation in which the EU alternative investment fund industry loses competitiveness at a global level as a result of regulatory arbitrage.”


To conclude, the AIFMD was designed for a different economic and legal system and is not suitable for the UK’s approach. It was seen at the outset to be unsuitable for our sector—one that is different in proportionate size and composition. It is ill suited to the supervision of individual firms and the diverse composition of the sector. It is also ill equipped for a market system under UK law; rather, UK arrangements should be in line with and complement global arrangements. As was explained by the House of Lords EU Committee in 2010, co-ordination with the US regime is essential.

[Baroness Penn (Con)]

My Lords, through this Bill, the Government are seeking gradually to repeal all retained EU law in financial services so that the UK can move to a comprehensive FSMA model of regulation. Under this model, the independent regulators make rules in line with their statutory objectives as set by Parliament and in accordance with the procedures that Parliament has put in place.

It is not the Government’s intention to commence the repeal of retained EU law without ensuring appropriate replacement through UK law when a replacement is needed. The Government set out their approach to the repeal of retained EU law in the document that I referred to earlier, Building a Smarter Financial Services Framework for the UK, which was published in December last year as part of the Edinburgh reforms. It makes it clear that the Government will carefully sequence the repeal to avoid unnecessary disruption and ensure that there are no gaps in regulation.

The Government are prioritising those areas that offer the greatest potential benefits of reform. They have already conducted a number of reviews into parts of retained EU law, including the Solvency II review, the wholesale markets review and my noble friend Lord Hill’s UK listing review. By setting out these priorities, the Government are enabling industry and the regulators to focus their work on the areas that will be reformed first.

My noble friend Lord Trenchard’s Amendment 246 relates to legislation implementing the Alternative Investment Fund Managers Directive in the UK. As has been noted, the UK is the second-largest global asset management hub, with £11.6 trillion of assets under management; this represents a 27% growth in the past five years. The sector also supports 122,000 jobs across the UK and represents around 1% of GDP. These statistics demonstrate the huge value of this industry to the UK and, while the Government would never be complacent, also suggest that the sector is in good health.

The health of the sector is underpinned by proportionate and effective regulation. The Government believe that this must include an appropriate regulatory regime for Alternative Investment Fund managers. These funds are major participants in wholesale markets; they take influential decisions about how capital is allocated, and it is vital that they are held to standards that protect and enhance the integrity of the UK financial system. Moving simply to repeal the legislation that currently regulates this sector without consideration of replacement could open the UK up to unknown competitiveness and financial stability risks. It could undermine the UK’s reputation as a responsible global financial centre committed to high standards of regulation, which could have significant ramifications for the UK’s relationships with other jurisdictions.

I understand that my noble friend Lord Trenchard has some concerns that the legislation deriving from the Alternative Investment Fund Managers Directive creates unnecessary burdens on innovative UK firms serving professional investors. The Government have not to date seen evidence that the reform of that directive is a widely shared priority across the sector.

[Baroness Lawlor (Con)]

Does my noble friend the Minister agree that UK law would be a better arrangement for supervising the sector than inherited EU law?

[Baroness Penn (Con)]

As I said at the start of my contribution, it is the Government’s intention to move all retained EU law when it comes to financial services into the FSMA model of regulation. That will apply to this area, too, but it is a question of sequencing and priorities. As I referenced before, we have set out our first wave of priorities and are seeking to look at those areas where the greatest potential benefits of reform lie. I am happy to confirm for my noble friend that it is our intention to move all areas of retained EU law on to a UK law basis.

[Baroness Lawlor (Con)]

Just for clarification, will that involve moving away from the precautionary, code-based approach of the EU, which very much influenced the sector post the 1990s and the thinking of our regulators? Will my noble friend confirm that, when the Government review the corpus of retained EU law for this sector, in line with their objects as has been stated, they will pay special attention to the need to rethink the framework of approach rather than simply adopting it? These are different ways of thinking.

[Baroness Penn (Con)]

My Lords, I would not want to pre-empt the approach for any specific area of regulation, but the principles on which we are seeking take forward this work are about looking at regulation and ensuring that we use the opportunities outside the EU to take the right approach to that regulation for the UK. My noble friend talked about the different perspectives taken by regulators in the different jurisdictions. That is right. The aim of moving from retained EU law is not simply to transcribe it into UK law but to ensure that it is well adapted to our own circumstances, too. However, I do not think that I can helpfully pre-empt the approach in each area in this debate, but only talk about some of those wider principles.

I was talking about the intention to move all retained EU law into the FSMA model. We have set out our priorities for the first areas in which we are seeking to do this. The Government have not to date seen evidence that the reform of the Alternative Investment Fund Managers Directive is a widely shared priority across the sector. However, the Treasury would of course welcome representations on this point. We are keen to engage further with industry and understand the sector’s priorities as we work to repeal retained EU law associated with alternative investment fund managers over the medium term.

The FCA also recently issued a discussion paper to consider whether wider changes to the asset management regime should be undertaken in future to boost UK competitiveness using the Brexit freedoms introduced by this Bill. This will allow the Government and the regulators to consider what replacement is appropriate for the legislation before commencing its repeal. For these reasons, I ask my noble friend to withdraw his amendment.