Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020

Baroness Penn Excerpts

Thursday 18th June 2020 Lords Chamber

Moved by

[Baroness Penn]

That the draft Regulations laid before the House on 6 May be approved.

Relevant document: 13th Report from the Secondary Legislation Scrutiny Committee

[Baroness Penn (Con)]

My Lords, noble Lords will be aware that since July 2018 Her Majesty’s Treasury has put in place legislation using powers under the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020, to ensure that the UK has an independent and coherent financial services regulatory regime at the end of this year, when the UK leaves the transition period.

This SI is part of that programme of work, and the approach aligns with the general approach established by the EU withdrawal Act 2018: providing continuity by retaining existing legislation at the end of the transition period, but amending where necessary to ensure that it continues to function and is effective in a UK-only context. This SI makes deficiency fixes to a new piece of EU legislation that has recently become—

My Lords, I apologise; I am speaking to the wrong SI. I will have to briefly get the correct SI, so I will defer to the Whip.

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[Baroness Penn]

My Lords, I apologise for the previous confusion. I believe I have already set out the programme of work that this SI—in addition to the previous SI—is part of, so I turn to the specific content of this SI.

The approach taken in this SI aligns with the general approach established by the EU withdrawal Act 2018: providing continuity by retaining existing legislation at the end of the transition period, but amending where necessary to ensure effectiveness in a UK-only context. While this SI makes amendments to approximately 20 pieces of legislation, the number and nature of these amendments are modest and minor. They act to preserve the effect of recent changes to EU legislation in the UK, and in doing so limit any impact on business that would otherwise arise at the end of the transition period.

Primarily, this SI fixes deficiencies in recently applicable EU legislation. For example, the fifth money laundering directive was transposed in the UK in January this year through amendments to the Money Laundering Regulations. This SI fixes minor deficiencies in the Money Laundering Regulations resulting from the recent transposition of this directive. These minor amendments remove references to EU institutions and regulatory distinctions between EEA and other third countries, and change a requirement for co-operation with overseas authorities into an ability to co-operate. This will ensure that the UK has an independent and coherent anti-money laundering regulatory regime at the end of the transition period.

As a further example, the EU has recently amended the benchmarks regulation to include two new categories of low-carbon benchmarks—the “Climate Transition Benchmarks” and “Paris-aligned Benchmarks”. The EU also extended existing transparency rules to reflect environmental, social and governance, or ESG, factors. This SI fixes deficiencies that will arise in retained EU law as a result of these EU amendments. It inserts definitions for a “UK Climate Transition Benchmark” and a “UK Paris-aligned Benchmark” into the retained EU law version of the benchmarks regulation. It also specifies disclosure requirements in relation to ESG factors. This will ensure that the UK continues to have an effective regime to enhance the transparency and comparability of low-carbon benchmarks, enabling investors to make informed decisions.

At the end of the transition period, there will be elements of retained EU law and domestic law that would not be appropriate to keep on the statute book. This SI therefore revokes certain pieces of retained EU law and UK domestic law—for example, elements of the European system of financial supervision regulations—that will not be relevant in a UK-only context.

This SI also makes a small number of minor clarifications and corrections to previous financial services EU exit instruments. Noble Lords will be aware of the unprecedented scale of the legislative programme that the Treasury has undertaken, and this has been carried out with rigorous checking procedures. However, it is unfortunately the case that errors are made on occasion, and when they arise it is important that they are corrected as soon as possible.

I note that this SI also includes provisions initially included in the Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019. This instrument was laid using the “made affirmative” procedure in October 2019, when it was necessary to ensure that the SI was in force prior to the previous exit date of 31 October. The SI subsequently ceased to have effect, but it is important that those provisions, which include amendments to the UK’s prospectus regime to ensure it remains operational in a wholly domestic context, are in force before the end of the transition period. These provisions have therefore been included in this SI. Noble Lords will be aware that this information was also identified by the Secondary Legislation Scrutiny Committee in its report published on 7 May.

Finally, I turn to the amendments this SI makes to a previous EU exit instrument: the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, which I will refer to as the equivalence SI. The equivalence SI enables the Treasury to make equivalence directions for EEA states, for specified provisions, during the transition period. Today’s SI adds additional equivalence regimes to the scope of the power for the Treasury to make equivalence directions for EEA states during the transition period—through the inclusion of provisions relating to central securities depositories, which are entities that hold financial instruments, and trade repositories, which collect and maintain records of derivatives trades.

This SI also amends the existing drafting on the length of the direction power to tie it to the end of the transition period. This will enable Ministers to make directions during the transition period to come into force at the end of the transition period, granting equivalence to those EEA regimes. Finally, it clarifies that Her Majesty’s Treasury can impose limitations on the application of state-level equivalence decisions when granting equivalence to the EEA; for example, in response to EU conditions placed on the UK.

The Treasury has been working closely with the financial services regulators in the drafting of this instrument. The Treasury is also engaged with the financial services industry on this SI, as it has been extensively over the course of its financial services EU exit legislation programme. In summary, the Government believe that this instrument is necessary to ensure that the UK has a coherent and functioning financial services regulatory regime at the end of the transition period. I hope noble Lords will join me in supporting these regulations. I beg to move.

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[Baroness Penn]

I thank all noble Lords for their contribution to this debate and for their forbearance with my confusion at the beginning of it.

I will first address three points which many noble Lords raised. The first is about the coherence of the UK strategy in the process for leaving the EU and setting up a system of financial services regulation after the end of the transition period. There is a clear, coherent and consistent strategy when it comes to this: a simple—that is the wrong word; I should say “clear”—process for onboarding existing EU regulation, without policy changes, into UK law, so that there are no changes on the day at the end of the transition period, apart from where it may be to correct inconsistencies that may arise from the fact that we are no longer part of the EU and therefore no longer part of EU bodies. That is the strategy and that is what we are pursuing. This SI is part of that, as so many others have been.

The next question is on what we do after day one, when we have left. Many noble Lords also raised the question of divergence. I will say three things on that point. In taking the decision to leave the EU and the single market, we have had feedback from the financial services sector that it is important for it to have regulatory autonomy and control and not be a rule-taker from the EU. We are therefore committed to regulatory autonomy, and this process reflects that. However, the freedom to change rules does not mean pursuing divergence for the sake of it. The UK is committed to high standards of regulation and appropriate levels of supervisory oversight, and, in many areas, we go beyond that which the EU rules require. Where we make any changes, they will be for good reasons, and our starting point will be what is right for the UK, to protect our economy and our financial stability.

That brings me to the point about the equivalence procedures and the process for securing an equivalence agreement with the EU, which remains our aim. I reassure the noble Baronesses, Lady Northover and—if she is still listening—Lady Kramer, that we take that very seriously. We are committed to meeting the June deadline for those assessments to be made. As part of that process, we have received questionnaires from the EU, as part of its assessment process. The Treasury is working closely with the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and others on this process.

The noble Baroness, Lady Northover, my noble friend Lord Holmes of Richmond and others raised the question of Gibraltar. We have liaised closely with Gibraltar during this process, and this SI is consistent with government policy to preserve the pre-withdrawal relationship between the UK and Gibraltar on financial services.

A number of noble Lords, including the noble Baroness, Lady Northover, and the noble Lords, Lord Livermore and Lord Purvis, raised the question of the duty to co-operate on anti-money laundering versus a power to co-operate. I reassure noble Lords that this is not an intention to dilute that commitment. It is merely that a duty to co-operate requires both sides to be under that duty, so the power reflects that the other side is not under the same duty. However, there is no intention to reduce the commitment to seek and use that co-operation in this area.

On prospectus exemptions, raised by my noble friend Lady McIntosh, we will keep the time period and that measure under review as regards going beyond two years.

The noble Baroness, Lady Jones, talked about the priority that the UK gives to green finance. The UK wants to become a global hub for green finance. She will know that, as part of our hosting of COP 26, we appointed the former Governor of the Bank of England, Mark Carney, to lead on work in the area of green finance. As regards to the environmental standards that this SI brings into UK law, the intention is to maintain the same, if not better, standards than those which the EU has on this.

The noble Lord, Lord Purvis, raised a number of issues to do with trade. They go slightly beyond the scope of this SI, the purpose of which is to bring in existing EU regulations so that we have certainty, in the context of having or not having a deal with the EU at the end of the year.

The importance of having a regulatory regime in place was raised by the noble Lord, Lord Hain, at the outset. Of course, this SI is part of the process of getting us ready for the end of the transition period, but I assure noble Lords that we are working hard to reach a deal with the EU. The Prime Minister met the Presidents of the EU Commission and the EU Council this week. The result of that meeting was an agreement to intensify efforts to reach an agreement during July, which we hope to do.

I hope I have covered most of the points raised during this debate and I commend the regulations to the House.

Motion agreed.