Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021

Baroness Penn Excerpts

Thursday 10th June 2021 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021.

Relevant documents: 3rd Report from the Secondary Legislation Scrutiny Committee

[Baroness Penn (Con)]

My Lords, prior to the end of the transition period, the Treasury undertook a significant programme of legislation, introducing more than 65 statutory instruments under the European Union (Withdrawal) Act 2018. As noble Lords will know, these SIs covered all the essential legislative changes that needed to be in law to ensure we had a coherent and effective financial services regulatory regime at the end of the transition period.

This statutory instrument amends a transitional regime created in an earlier financial services EU exit instrument. It is intended to ensure that the transitional regime continues to provide continuity for UK firms, as was originally intended. The instrument, broadly speaking, concerns insolvency-related protections that are provided to systems under the EU settlement finality directive, or SFD. In this instance, these systems are financial market infrastructure such as central counterparties, central securities depositories and payment systems, which provide essential services and functions relied on by the financial services sector.

Prior to the end of the transition period, if an EEA-based system was designated under the SFD it received specific protections in insolvency law. For example, where a designated system had received funds or securities from a system user—for example, a UK bank—those funds and securities could not be clawed back in the event of the UK bank being subject to insolvency proceedings. Importantly, this framework ensured that these vital elements of the financial plumbing were not at risk when individual members were in insolvency procedures. Now that we have left the EU, providing such insolvency protections is sometimes also a requirement for UK firms’ continued membership of these systems. Designation is therefore important, as it facilitates the smooth functioning of, and confidence in, financial markets.

Under the SI that we are amending today, a UK framework was established for designating any non-UK system so that it can receive settlement finality protections under UK law. It also established a temporary designation regime to provide settlement finality protections for a period of three years to existing designated EEA systems that intended to submit an application under the UK’s framework. The purpose of temporary designation is to allow time for applications to be processed by the Bank of England, while ensuring continuity of access for UK firms to relevant EEA systems.

However, there is a requirement in the temporary designation regime for EEA systems to submit an application under the UK framework by 30 June 2021; they will otherwise lose UK insolvency protections. This instrument amends the consequences for EEA systems failing to submit an application by this deadline. Instead of immediately losing settlement finality protections under the temporary designation regime, EEA systems will retain protections for an additional two years. This ensures that UK firms using those EEA systems have sufficient time to put mitigants in place should access to those systems be impacted.

The Treasury has worked closely with the financial services regulators in the drafting of the EU exit instruments amended by this instrument. We have also engaged extensively with the financial services industry on the instrument to which this SI relates. I also note that the Secondary Legislation Scrutiny Committee has reported on this SI as an instrument of interest.

In summary, the Government believe that the proposed legislation is necessary to ensure continuity for UK firms following 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 (Con)]

My Lords, I thank both the noble Lord and the noble Baroness for their contributions to this debate and for their ongoing participation in debates on financial services and the expertise they bring to them.

As the Committee will know, the Treasury took extensive action to provide certainty for firms around the end of the transition period, and the Government continue to engage extensively with industry. I hope the Committee can rest assured that the Government will continue to do what it takes to ensure that the UK remains the best place in the world to do financial services business.

I am happy to provide the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Bowles, with an update on the negotiations with the EU on financial services, although I note that the provisions within this statutory instrument are not subject to any further negotiations or equivalence decisions. Indeed, the EU does not have an equivalence process or a third-country regime for settlement finality, thus the UK created the third-country regime to designate non-UK systems as part of the original statutory instrument.

However, on the broader question of ongoing negotiations on financial services, technical discussions with the EU on the text of the memorandum of understanding on financial services regulatory co-operation have now concluded. The MoU, once signed, will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues, including our respective frameworks and any discrete equivalence issues or changes. This is an important step forward in normalising the future relationship on financial services between the UK and the EU. The Treasury is now working to operationalise our future relationship with the EU on financial services, on the basis of the trade and co-operation agreement and the MoU.

In reply to the noble Baroness, Lady Bowles, I say that the original design of the temporary designation regime was to allow three years for the Bank of England to assess all applications for permanent designation under the UK regime. The amendment proposed in this SI does not change that, and we still expect all applications to be assessed by the end of 2023. We expect UK firms that are members of EEA systems which enter into the run-off regime to put contingency plans in place to ensure that they are prepared for any actions that those systems may take as a result of losing UK insolvency protections on 30 June 2023.

The Bank of England publishes a list of all EEA systems that are in the temporary designation regime. The list currently published is of those who notified to enter the regime. After 30 June, only those which submitted an application will remain and a new list will be published so that firms using the services of these organisations will be aware of who has entered the application process, and who has entered the run-off period and does not seek to be designated.

I thank the noble Lords and the noble Baroness once again for this short debate. I commend this instrument to the Committee.

Motion agreed.