Financial Services Bill (Sixth sitting)
John Glen ExcerptsTuesday 24th November 2020
(4 years ago)
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Alison Thewliss
I meant more that the actions of businesses had slipped, but the hon. Lady is correct to point out that the Government have abandoned that commitment as well. I was going to go there with that point. If companies are not held to account, that slippage will become irreversible. Companies have worked so hard to try to bridge that gap, and going backwards really is unacceptable.
By bringing those elements together, companies across Scotland have shown that they can improve productivity and competitiveness and build sustainable growth in a way that achieves fairness, equality, opportunity and innovation. We have the UK’s highest proportion of living wage employers in Scotland because the Scottish Government made that commitment. That is what we can do with the limited powers that we have. If we were to put into legislation here far more responsibility and accountability, it would certainly move that agenda forward.
In addition, we believe that moves such as increasing worker representation on company boards, which is commonplace among our more productive, investment-rich European competitors, would promote much greater social responsibility among companies that had that representation, as would increasing the representation of women and minority communities on public and private sector boards.
Scotland is on track to ensure that all public sector boards have a 50/50 gender balance due to the statutory targets that we put in place. We would support similar UK legislation for the private sector, because if these things are not in place, it will take a very long time before we see any meaningful change. The evidence shows that it is good for companies and organisations to do that, because they do better when they better represent society.
It is important that we make sure that companies are held to account in this way. The amendments tabled by the official Opposition are good and sound. I am interested to hear why the Minister thinks that they are not good ideas worthy of pursuit.
The Economic Secretary to the Treasury (John Glen)
It is great to be under your chairmanship again, Dr Huq. I thank the right hon. Member for Wolverhampton South East and the hon. Member for Glasgow Central for their comments.
The right hon. Gentleman opened with a depiction of the appalling situation with Boohoo, the Levitt review and the challenge of securing widespread adherence to higher standards of corporate governance. He mentioned the actions of Sir Douglas Flint from Standard Life Aberdeen, with whom I have worked closely during the last three years.
Many of the particular aspects of that case are beyond the scope of the Bill, but the right hon. Gentleman uses it to illustrate the reasons why he tabled the amendments, which would introduce a new “have regard” in the accountability regime to which the Prudential Regulation Authority and Financial Conduct Authority would be subject when implementing the Basel standards and the investment firms prudential regime respectively. The amendments would require the PRA and FCA to consider higher standards in social practice and corporate governance when making new rules under the Bill.
It is unclear from the wording of the amendments whether regulators would need to look at their own best practices or those of the firms they regulate. Regardless, I fully support the intention behind the amendments. Indeed, I have chaired the asset management taskforce over the past three years: we have had 10 meetings with industry representatives, including Catherine Howarth, whose responsible investment charity ShareAction has done some significant work on stewardship and how we can get better transparency across the whole of the ESG agenda. Indeed, I believe that our report on that will be produced imminently.
There is no doubt that the regulators are committed to the highest levels of equality, transparency and corporate responsibility. For example, the UK has some of the toughest requirements on bonus clawback and deference in the whole world. The Government, working with the regulators, were also world-leading in the design of an accountability regime for senior managers in the industry; sequentially, over the past three years, that has extended to more and more parts of the financial services industry.
FCA solo-regulated firms are expected to have undertaken a first assessment of the fitness and propriety of their certified persons by 31 March 2021. The senior manager and conduct regime, implemented for all banks, building societies, credit unions and Prudential Regulation Authority-designated investment firms in 2016, was extended to cover insurance firms in December 2018 and most other FCA-regulated firms by December last year.
However, the track record of our regulators should not make us shy away from making them legally accountable for upholding the highest standards going forward. The fact is that the regulators, as public authorities, are already subject to the requirements under the Equalities Act 2010, as are businesses across the UK, including firms within the scope of the PRA and FCA remits. They already have existing powers and duties under the Financial Services and Markets Act 2000, which is being amended by this Bill, in respect of pay, transparency and principles of good governance. In fact, they are already responsible for making rules on remuneration under these two prudential regimes.
I recognise that when I think about the City, there are significant elements that need more work. For the past while, I have been responsible for the women in finance charter. I am currently conducting a series of challenges to the CEOs of banks, looking at what they are doing to address, beyond the targets, a pipeline of talent, so that there are better opportunities for more women to reach the executive level. I will speak more about that later this year.
Sound governance is necessary to support the regulator’s primary objectives of safety and soundness, market integrity and prevention of harm; a new legal obligation in this space would only be duplicative and redundant. It would likely conflict with existing obligations on the regulators in exercising their duties to ensure the sound governance of regulated bodies, creating confusion over whether these vaguer concepts conflict with the regulator’s general objectives.
I do not believe that this Bill is the right place for such changes, but there might be other routes to reassert how important we think these matters are. The Government are currently considering the policy framework in which the regulators operate through the future regulatory framework review, which I mentioned this morning and on Second Reading. I would welcome right hon. and hon. Members’ engagement on this important question—I really would. The matters that the regulators need to have regard to as part of this Bill reflect considerations immediately pertinent to these specific prudential regimes and, I believe, provide the right balance.
Abena Oppong-Asare (Erith and Thamesmead) (Lab)
I am really happy to put forward amendment 25, because it will require that, when making capital requirements regulation rules, the FCA must have a high regard to standards in social practice and corporate governance, including pay, adherence to equalities legislation, transparency and corporate responsibility.
We know that best practice corporate governance results in social and economic gains, and that is something the Government are particularly passionate about. Companies that persist in treating climate change solely as a corporate responsibility issue, rather than a business problem, are running a risky business and stand to lose out.
We have seen businesses turn the need to tackle climate change into successful business opportunities. For example, BrewDog, the world’s largest craft brewer, will remove twice as much carbon from the air as it emits every year, becoming the first carbon-neutral brewery. If companies can already shoulder this social responsibility and incorporate it into a successful business model, there is no reason not to hold all businesses to the high standards our country needs to tackle imminent social and political issues.
Climate change affects every facet of everyone’s lives. The effects of climate on companies’ operations are now so tangible and certain that the issue demands a strategy and leadership from the Government. Government intervention has worked before, and it will work again, particularly through amendment 25. Take the Equal Pay Act 1970, for example, which was mentioned previously. Business and civil society converged, and companies with over 250 employees were made to publish data on pay gender discrepancies, resulting in a win-win scenario. Excellent work is now being done to tackle this further and understand racial, gender and environmental concerns, which are intricately linked. We have to follow civil society’s work on equal pay and extend the reporting to data collections on the grounds of racial equality and environmental equity, because our actions will be futile if our evidence is not fertile.
There is no one-size-fits-all approach to climate change: each company’s approach will depend on the particular business and strategy. What we are calling for in this amendment is for the Government to support and enable employers to publish an action plan to tackle climate change and social inequalities, including initiatives to mitigate climate-related costs and risks in client value chains. Jesse Griffiths, the CEO of the Finance Lab, had some important advice for the Committee last week. He said:
“I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators.”—[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 113.]
Environmental engagement is economic effectiveness, and this amendment will improve the economic health of our businesses and the environmental health of our country.
The amendment would also ensure that regulators can act in accordance with social needs, and ensure that businesses maintain corporate responsibility while still thriving in a competitive marketplace. When the Government asked Ruby McGregor-Smith to review the diversity pay gap, I welcomed that initiative. Campaigners have moved mountains in terms of identifying the profitability, both social and economic, of deepening our commitment to diversity and opportunity of wealth and health creation for all. In McGregor-Smith’s review, “The Time for Talking is Over, Now is the Time to Act”, she highlights how for decades, successive Governments and employers have professed their commitment to racial equality, yet we see that vast inequalities still exist. We must ensure this does not happen with our commitment to environmental stability, and the amendment will help ensure that.
Racial equality, gender equality and environmental stability can never be achieved unless we understand the ways in which they are intricately linked. As Ruby says, the time for talking is over, and I am sure that all the young people participating in the mock COP as we speak agree. I know that I mentioned this earlier about young people, but they are important: they are our future, and we really need to take them into consideration. With 14% of the working-age population coming from a black or minority ethnic background, we know that employers have to take control and start making the most of our talent, whatever their background.
The point stands out when looking at the pay gap for disabled people in the UK. In 2018, the median pay for non-disabled employees was £12.21 an hour, while for disabled employees, it was £10.63. The Minister mentioned earlier that he sat on the asset management taskforce—
Abena Oppong-Asare
Chaired—apologies; I have bad hearing. He gave examples of shared actions and how to get better transparency, and mentioned that regulators are already committed to higher transparency. I am sure he agrees with me that businesses need to be held to account. The amendment will also help to create an environment that nourishes talent equality and protects our natural habitable environment.
The amendment basically brings huge financial, environmental and social rewards. Companies must realise they cannot ignore those issues anymore. However, we know that most companies will act only when they see a reason to do so. What we need is less talk and more action.
John Glen
I have listened carefully to the points made by the hon. Lady, who touches on a wide range of subjects, some of which I responded to in my response to the shadow Minister. I would just say that a number of initiatives are under way and intensifying. Just a few hours ago, I launched a piece of work with the Corporation of London on social diversity, a taskforce to bring people together to look at what we can do to improve access to financial services. That follows the work that we have been doing and that former Minister Mark Hoban is doing with the Financial Services Skills Commission. I mentioned the work of Women in Finance, but there are a lot of other pieces of work that my colleague the Exchequer Secretary is also looking at in her dual role as Equalities Minister.
I made clear in my response a few moments ago that I believe the provisions we have already give the regulators significant licence to operate in this area and, although I do not rule out any changes subsequently, I believe at this time that the amendments should be resisted.
Stella Creasy
The challenge that the Minister has with these instruments is exactly the issue around the gender pay gap. We were told that that did not need to be written into the legislation, because there would be a commitment. As we have seen this year, that commitment has not been absolute. It has been abandoned by the Government.
The Minister has said that he agrees with those commitments and the issues that the shadow Minister has raised, and that they might be put into legislation. Does he recognise that, for those of us who are committed to those high standards, the point of such amendments is to put it beyond doubt that they will actually happen? As we have seen, if we do not put them beyond doubt, it is tempting for future Administrations and future regulators to remove or weaken the protections.
John Glen
I thank the hon. Lady for those points. As public bodies, it is clear that the regulators are answerable and accountable to Parliament, and I have explained how that will be enhanced, but they are also subject to legal duties to publicly consult on the new rules and to how Parliament wishes to scrutinise them. I recognise the point that she is making, but I believe that putting that obligation into legislation in that way would not immediately lead to the outcome that she supports. Across those areas of completely legitimate aspiration, many of which I share in an identical form, this is something that we would need to look at in the round following the regulatory framework review.
Alison Thewliss
I appreciate the work that the Minister and other Ministers are doing in this area, but does he accept that he if puts it into the legislation, he might actually have less work to do, because everybody will then be obligated to do it, rather than him having to ask nicely?
John Glen
Unfortunately, I do not share that view. Given the arguments that I have made about the complications that it would bring, because of the overlap with existing provisions, I do not think that would be the right way to go. I am very sympathetic, however, to many elements of the speeches made concerning the aspirations that we should have to improve the overall quality of corporate governance and behaviour across the City.
Mr McFadden
I am sure that the Minister is completely genuine when he says that he supports this agenda and the aims behind the amendment, but anyone who has followed the issue over the years will realise that we have had taskforces galore on it in the City. We have had taskforces on women on boards and on diversity; now we have a new one on social mobility. I wish that well but, after all those taskforces, do those in the top jobs in this sector—the real pool of decision makers—reflect the country as it is today?
Mr McFadden
Of course they don’t. We cannot conclude that, for all the taskforces and all the well-meaning, great people who have been involved in them, they have made enough progress.
This is not just a British agenda by the way. I read in the news the other day that the upper echelons of German industry are having exactly the same debate about whether to mandate quotas on boards for so many women and about the broader equalities agenda that my hon. Friend the Member for Erith and Thamesmead referred to.
Mr McFadden
I will speak briefly in support of the amendment. I think it adds an interesting new angle to our considerations on the schedule. There is quite a lot in the schedule about the UK’s standing as a place to do business. Proposed new section 143G(1)(b) to the 2000 Act talks about the
“relative standing of the United Kingdom as a place for internationally active investment firms”.
Proposed new section 143G(2) says that
“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”
None of us has argued that those are not completely legitimate considerations. Of course we want to consider our standing in relation to other countries, but that is different from the trading aspect.
The amendment points out that decisions can be taken that are facilitated by the Bill, for example on divergence, which we have discussed and will discuss further, and those decisions can have one impact on competitiveness but a very different one on the ability to trade. That is particularly important when this equivalence decision is still on the table. I think these amendments on considering our trading position usefully add to the job description of the regulators, which should be about not just competitiveness, but market barriers, market access and our ability to trade into other countries. Considering both of these proposals would be a good addition to the “have regard to” list set out in schedule 2.
John Glen
It is a pleasure to respond to the hon. Member for Glasgow Central and the right hon. Member for Wolverhampton South East. The hon. Members for Glasgow Central and for Aberdeen South propose to introduce a new “have regard” for the FCA and PRA when making rules for the new investment firms prudential regime and implementing the Basel standards respectively. That would require the regulators to consider the likely effect of their rules on trade frictions between the UK and the EU, as the hon. Lady set out.
Again, I understand and share the ambitions for frictionless trade between the UK and one of our biggest trading partners, the EU, but, as I am sure the Committee will understand, I am not able to discuss the details of our ongoing negotiations. We want a free trade agreement outcome with the EU that supports our global ambitions for financial services, and we have engaged with the EU on the basis that the future relationship should recognise and be tailored to the deep interconnectedness of those relationships across financial markets. The EU has made it clear that it does not support such an approach. We remain open to future co-operation with the EU that reflects our wide, long-standing, positive financial services relationship, and we will continue to engage in a constructive manner.
The regulators do not have oversight beyond their financial services remit. It would therefore be highly disproportionate to require them to assess the impact of their rules on all trade matters, covering goods and services. Furthermore, trading partnerships with overseas jurisdictions are the Government’s responsibility, not the regulators’. We consider that regulators should not be asked to go beyond the scope of their capabilities and duties. We have already discussed the capacity of the regulators; the amendment would really go beyond that.
We agree that financial services firms care about the UK’s relationship with overseas jurisdictions, which has a real impact on them. That is why the accountability framework that the Bill will introduce already requires regulators to consider the likely effect of their rules on financial services equivalence granted by and for the UK. Financial services equivalence will be the main mechanism underpinning financial services relationships between the UK and overseas jurisdictions. I believe therefore that the accountability framework, as proposed, meets the aim of the hon. Member for Glasgow Central.
In addition, the amendments focus solely on the relationship between the UK and the EU. That is obviously a matter of enormous concern, but we need to make legislation that accounts for the future. Equivalence or trade in financial services considerations must relate to all jurisdictions. It is crucial that we recognise that in the context of financial services firms, which often have a global footprint and global operations. That also reflects the UK’s present and future ambitions.
The accountability framework recognises the importance to UK firms of our relationship with overseas jurisdictions in financial services matters, while upholding broader international obligations. The Bill already supports the intentions behind the amendment, and for that reason I ask the hon. Lady to withdraw it.
Alison Thewliss
I would prefer to press the amendment to a vote because it fits well with the other parts of the Bill. Asking the FCA to consider the UK’s international standing with other countries aligns with other areas in which it is taking on wider roles, and the amendment reflects that. Regulators should have regard to the wider impact of their decisions and to problems that their rules might cause to trade between the UK and the EU, which could be quite significant. It seems wise to put that in the Bill so that the regulators are mindful of it in the decisions that they make.
Question put, That the amendment be made.
Alison Thewliss
I very much agree with the proposals brought forward by the official Opposition. I congratulate them on their drafting and having found a way to put these amendments forward. Our attempt at this comes in new clause 32, and I will discuss that a bit further when we eventually get to it.
I agree that it is vital that there is scrutiny of these institutions and these powers. It is surely unacceptable that the Government have made so much play of taking back control from the EU only to hive it off to regulators because it is far too terribly complicated for us parliamentarians to worry our sweet heads about. That is not acceptable. That is not the way that it works in the European Union, and it certainly should not be the way Westminster operates. We should trust ourselves and our colleagues slightly more to do that scrutiny. If European parliamentarians, some of whom are now in this place, can do it, we can certainly look at a way that this can be done and that accountability can be taken for these powers.
I agree with those who have said that the Treasury Committee is stretched in its business. Having had a brief discussion yesterday in our pre-meeting about the sessions to come in the weeks and months ahead, I can tell the Committee that those sessions are already very full, running at two sessions in most weeks. We are certainly being kept very busy with all the important things our constituents bring to us, the responsibility the Committee has to scrutinise the Government and all the other things the Committee wants to do. The logic of setting up a new Select Committee to examine these things is certainly very compelling to me, because it will need that specialist knowledge in addition to the heavy burden of work it might have.
I noted that the hon. Member for Hitchin and Harpenden (Bim Afolami) made a very good plug for this on Second Reading. I think his feeling is that it helps out the Government to have this additional scrutiny. It helps everybody see what is coming, prepares the ground and tries to make decision making better, which should be in the Government’s interest—trying to get to the right thing for all our constituents and for the financial services sector as a whole.
So that is important, and we should have no less of a role in all this than MPs currently have. I draw the Minister’s attention to the evidence given to the House of Lords EU Financial Affairs Sub-Committee, whose reports I am sure he is an avid reader of, for International Regulatory Strategy Group, which also recommends enhanced parliamentary accountability and scrutiny. Its suggestion is a new system of Committee oversight in not just the Commons but the Lords, as we suggest in new clause 32.
The group has a series of principles it thinks such oversight should stand to, such as it being cross-party and apolitical—those are the principles of Select Committees, but it is important that we look at this. It mentions the ethos of the Public Accounts Committee in the way it goes about its business in scrutinising regulatory authorities. It also believes that oversight needs to be authoritative and expert, building up expertise within Committees, that it needs to be risk-based and mainly ex-post, and that it should be open to stakeholder input, which is incredibly important. We all know Select Committees do that; they take evidence and they have good records of bringing in expertise and evidence from people, but they need to be able to use that evidence in a practical way to inform the best strategy and best way forward as we take these powers back.
I very much recommend to the Minister the evidence given by the IRSG. What is he doing to meet this challenge of the “accountability deficit”, as the Finance Innovation Lab put it? We cannot have a situation where more powers are coming back, yet we give them away. That is certainly not what was promised on the side of any Brexit bus, and it should not be the way we go forward. As the honourable grandee, the hon. Member for Walthamstow, said, it stores up a risk that we do not see something coming, that we have not identified a problem on the horizon and that we all end up in a bit of a crisis because we did not have the opportunity to scrutinise properly, to look at the regulations as they come forward and to ensure we do what is best for our constituents and the wider economy. There is logic in having some form of Committee to look at this, in whichever format the House wants to bring that forward. It is essential that that scrutiny exists and that it is at least as good as what was done in the European Parliament.
John Glen
I am very pleased to address the points raised by the right hon. Member for Wolverhampton South East, the hon. Member for Walthamstow and the hon. Member for Glasgow Central. I have listened carefully to what they had to say, and their remarks go to the heart of the distinction between the provisions of the Bill that we are scrutinising in Committee and the broader questions around the future scrutiny mechanism, and the necessity to ensure that we do not undermine the legitimate and appropriate scrutiny by Parliament of our regulators.
It is critical that we ensure sufficient accountability around the new rules of the UK’s financial sector. Capital requirements for firms are extremely detailed and technical. It is right that we seek to utilise the expertise of the regulators to update them in line with international standards.
In return for delegating responsibility to the Financial Conduct Authority, this Bill requires it, under proposed new clause 143G of the Financial Services and Markets Act 2000, to publish an explanation of the purpose of its draft rules and of how the matters to which it is obliged to have regard have influenced the drafting of the rules. The Bill introduces a similar requirement for the Prudential Regulation Authority, under proposed new clause 144D of the Financial Services and Markets Act.
These matters concern public policy priorities that we consider to be of particular interest to Parliament. I have looked carefully at the amendments proposed by the right hon. Gentleman, and the amendments envisage Select Committees reviewing all investment firms prudential regime and capital requirements regulation regulator rules before they can be made. Under that model, Parliament would need to routinely scrutinise a whole swathe of detailed new rules on an ongoing basis. That is very different from the model that this Parliament previously put in place for the regulators under the Financial Services and Markets Act, where it judged it appropriate for the regulators to take these detailed technical decisions—where they hold expertise—within a broader framework set by Parliament.
It should not go unnoticed that, if Parliament were to scrutinise each proposed rule, the amendment does not specify a definite time period in which any Committee must express its view on them. That could bring a great deal of uncertainty to firms on what the rules would look like and when they would be introduced. That makes it more difficult for these firms to prepare appropriately for these changes. Ultimately, there is currently nothing preventing a Select Committee, from either House, from reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations. That is a decision for the Committee.
My officials have discussed this amendment with the regulators, and they have agreed that they will send their consultation draft rules to the relevant Committee as soon as they are published. The FCA and the PRA both have statutory minimum time periods for consultation and will take time to factor in responses to consultation—so this is not a meaningless process—providing a more than reasonable window within which the Committee can engage the regulators on the substance of the rules, should it desire to.
The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.
Before I conclude, I would like to address the point the right hon. Gentleman made concerning the document that was published a month ago on the future regulatory framework, and to address the supposition he very courteously made that, somehow, the Government believed that everything was fine and little needed to change.
The purpose of this extensive consultation is to do what it says: to consult broadly to ensure that, through that process, the views of industry, regulators and all interested parties and consumer groups are fully involved, such that, when we then move to the next stage of that process—I would envisage making some more definitive proposals—it would meet expectations on a broader and enduring basis. This Bill is about some specific measures that, as I explained earlier this morning, we need to take with an accountability framework in place, but I do not rule out any outcome.
The right hon. Gentleman made some observations about the prerogative of Government over mandating Parliament and Select Committee creation. I think we are some way away from that. We want to do these things collaboratively and end up with something that is fit for purpose, and I recognise the comments he made about the resourcing of such Committees with respect to the role they would play.
I do believe that this scrutiny process, as set out in the Bill, is extensive, and, for the reasons I have given, I again regret that I must ask the right hon. Gentleman to withdraw this amendment.
Mr McFadden
I cannot resist the irony of pointing out that the Government are resisting what could be termed the “take back control” amendment and do not want to add it to the Bill. There are many illustrious Members of this House we could name this amendment after; they have been arguing to take back control for many years.
The Minister said that the amendment would cause a lot of uncertainty; that it might be too much work; that it might require a Committee—whichever Committee it was—to look in too much detail at rules, when it would probably be more concerned with the broad direction. He also pleaded with us to allow the consultation to play out.
There is a serious point at the heart of this about the sovereignty agenda. There will be some kind of consequence at some point, possibly a backlash, that will draw attention to how this is done and the new powers that the regulators have. At that point, people will ask, “What was Parliament doing? What role was Parliament playing?”
John Glen
I beg to move amendment 1, in schedule 2, page 76, line 31, leave out “143O(4), (6) or (8)” and insert “143O(3), (6) or (8)(b)”
This amendment corrects a cross-reference to new provisions inserted by Part 1 of Schedule 2.
This is a technical amendment that corrects a cross-reference from section 395 of the Financial Services and Markets Act 2000 to new section 143O, as proposed in schedule 2.
Amendment 1 agreed to.
Question proposed, That the schedule, as amended, be the Second schedule to the Bill.
John Glen
Investment firms have a significant role to play in enabling investors to access financial markets, but the current prudential framework that applies to FCA investment firms was made for banks, which is why we need a new bespoke investment firms prudential regime. Schedule 2 contains relevant provisions that enable the FCA to implement a tailor-made prudential regime for non-systemic investment firms.
The new regime will set out new capital and liquidity requirements that will ensure that firms can wind down in an orderly way without causing harm. The right hon. Member for Wolverhampton South East and the hon. Member for Walthamstow are rightly concerned about consumer harm, so I draw their attention to the fact that the FCA will have to set those requirements in relation to the risks that firms pose to consumers, as well as the integrity of the financial system.
The FCA will also be required to make rules for parent undertakings of investment firm groups, because appropriate regulation and supervision are as important at the group level as at the individual firm level. Parents, as heads of the group, should be held responsible for the prudent management of the group.
It is right that specific rule-making responsibilities should be delegated to the FCA as an independent expert regulator, but those responsibilities must come with enhanced accountability. Schedule 2 requires the FCA to have regard to a list of important public policy considerations when making its rules in relation to the new investment firms regime, including any relevant international standards and the relative standing of the UK as a place for internationally active investment firms to carry on activities. To support scrutiny, the FCA will need to report publicly on how its consideration of those matters has affected its decisions on the rules in relation to the IFPR.
The FCA will also have to consider the impact on financial services equivalence, both by and for the UK, and consult the Treasury on that. Consulting the Treasury ensures that the FCA has appropriate accountability for technical choices that might have an impact on firms, while recognising that the Government retain responsibility for international relations and therefore equivalence. These three considerations are those that we have deemed to be immediately pertinent to the new investment firms prudential regime today.
However, as I have mentioned previously, the accountability framework is meant to reflect the changing context. That is why the Treasury will have power to add additional considerations, which would be done following discussions with the regulators and industry, and following parliamentary scrutiny. That is the overall framework that will allow greater scrutiny and transparency, and provide the direction the FCA will take in implementing the new regime in the UK, while rightfully leaving the detail to the experts.
In the longer term, any wider deregulation will need greater debate and the proper scrutiny of Parliament. The Government intend to address that part through the future regulatory framework, as I have discussed, which is now out for consultation. I therefore recommend that that this schedule stand part of the Bill.
Question put and agreed to.
Schedule 2, as amended, accordingly agreed to.
Clause 3
Transfer of certain prudential regulation matters into PRA rules
Mr McFadden
I beg to move amendment 23, in clause 3, page 4, line 31, at end insert—
“(9A) The Treasury must, within six months of making any regulations under this section, prepare, publish and lay before Parliament a report setting out—
(a) the reasons for the revocation of the provisions of the Capital Requirements Regulations being made under the regulations;
(b) the Treasury’s assessment of the impact of the revocation on—
(i) consumers;
(ii) competitiveness;
(iii) the economy.”
This amendment is intended to ensure the Treasury reports to Parliament on the impact of divergence from CRR rules.
In debating this amendment and this clause, I am hoping the Minister will be able to explain the relationship between this clause and clause 1. Clause 1 specifies the certain type of investment firms to which CRR rules need not apply, and he was at pains to say that that was a specific, targeted approach, but clause 3 looks to range very widely on the Treasury’s powers to revoke aspects of the capital requirements regulation.
The list in clause 3(2), on page 2 of the Bill, has many different headings, including business lends such as mortgages, retail investments, equity exposures and so on. Without getting into the detail of the technicalities of the Basel rules, not all capital is treated as equal. A pound is not just a pound. It depends against which line of business it is weighted. For example, financial institutions will argue that mortgages pose a particular category of risk, probably quite low risk, compared with another line of business where they may be lending against business loans, commercial property or some other activity. The Basel rules do not judge all these activities equally and they apply what are known as risk weights to them.
The clause allows the Government pretty sweeping powers, as far as I can see, to depart from and to revoke aspects of the capital requirements regulation, against all these different types of business. I would be very interested for the Minister to set that out and clarify it.
Through this process, the capital ratios are allocated. Again, I draw the Committee’s attention to the important paragraph (m) at the bottom of page 3 of the Bill, the leverage ratio. That is described in the notes on clauses as the “backstop.” I hope that that term does not cause too much excitement in the Committee. Like all backstops, it is there in case the list from paragraph (a) to paragraph (l) does not prove sufficient.
This particular backstop of the leverage ratio casts aside all this stuff about risk ratings. It takes the whole lending book and the whole lending business, and says that a certain proportion of capital must be held against the whole thing. It is a bit of an insurance policy in case the risk ratings do not do the job. It is true that the risk ratings are where this is open to all kinds of lobbying, as people will say that one line of business is less risky than another.
At the core of this is a debate between regulators who must consider the safety and resilience of the system as a whole, and individuals who will argue that if only they did not have to hold all this capital, they could lend more, stimulate more economic activity, and so on. That is the debate that takes place. Without wanting to go over all the ground that we covered this morning, the amendment asks for a report on the degree to which the divergence—the leeway powers, as we might call them—will be used, and the Treasury’s assessment of the impact on the economy. As I said this morning, we believe it is important that such a report should consider the impact on consumers, because they do not want to be on the hook for decisions that allow capital levels to fall too much, thereby weakening the resilience of the financial institutions in question.
This is a “lessons learned” amendment. It is important that the debate about capital ratios does not take place altogether in the dark—that it is exposed to what my hon. Friend the Member for Erith and Thamesmead called the daylight of scrutiny—and that we do not hear just from financial trade bodies. If they all genuinely have no intention of lobbying for a less safe system, have no desire for a race to the bottom and want the highest possible global standards on regulation, they have absolutely nothing to fear from this amendment. It does no more than ensure that we have reports from the Treasury on what happens when these powers are passed to UK regulators, and what happens if the divergence that is facilitated in clause 3—in this long list on pages 2 and 3 of the Bill—takes place.
John Glen
In addressing this amendment, I want to start by saying that the Government are fully committed to ensuring that this greater delegation of responsibility to the regulators is accompanied by robust accountability and scrutiny mechanisms. To pick up on the point made by right hon. Gentleman about clauses 1 and 3, they amend the existing banking framework for different reasons. Clause 1 only removes FCA investment firms from the CRR. Clause 3 enables the implementation of Basel standards for the remaining firms, credit institutions and PRA investment firms by enabling the Treasury to revoke parts of the CRR that relate to Basel. That is so that the PRA can fill the space with its rules.
Amendment 23 seeks to add a requirement for the Treasury to assess and report on the impact of its revocations of the capital requirements regulation on consumers, competitiveness and the economy. However, I would argue that the emphasis is in the wrong place. The Treasury will only make revocations to enable the introduction of the PRA’s rules. A stand-alone assessment of the provisions being deleted would not provide meaningful information for Parliament—it is unnecessary. Those revocations are to be subject to the draft affirmative procedure, so they will be explained to Parliament and Parliament will be able to debate their appropriateness before they are made.
I agree with the principle of scrutiny, but the emphasis should be placed on the PRA’s rule making, and that is what this Bill does. The Bill includes provisions requiring the PRA to publicly report on how it has had regard to upholding international standards and relative standing in the UK, as well as facilitating sustainable lending. Those are in addition to the PRA’s existing statutory objectives on safety and soundness of financial institutions and its secondary competition objective, so they overlap with the areas that the amendment attempts to address.
The provisions in this Bill sit alongside existing provisions in the Financial Services and Markets Act 2000, which require the PRA to publish a cost-benefit analysis alongside its consultation on rules. That will provide Parliament and the public with the information required to scrutinise the PRA’s actions. Therefore, the current provisions in the Bill, combined with those existing provisions in the Financial Services and Markets Act, already ensure that the information that Parliament is seeking will be in the public domain. The hon. Member for Walthamstow asked me to set out a vision, almost, for the conduct regulator with respect to the future operating environment. To some extent, that is deferred to the future regulatory review, but I will give her my view because this goes to the core of the future of financial services. We need an environment in which the regulator is accessible to consumer concerns. I recognise the work that she has done and the shortcomings that she perceives with the regulator’s current dynamic. We need Parliament to be at the heart of scrutinising its activities. The legislation would give it an obligation to report, but then we need meaningful scrutiny from Parliament.
The challenge is based on the work that the hon. Lady did after 2010—we came into Parliament at the same time—after which there was a rapid evolution in business models and new types of things. That is why I am delighted that Chris Woolard is doing a high-cost credit review and looking at some of the areas that she is engaged in, such as buy now, pay later. He is looking at that urgently so that we do not make the mistakes of the past and do not face some of the emerging challenges, in terms of behaviours—[Interruption.] She smiles. I suspect that she is not completely convinced by what I am saying about the provisions. We are resisting the amendment because in the narrow confines of what we need to achieve, with respect to the translation of these directives appropriately at the end of the transition period, that is distinct and different from an enduring solution. I look forward to her contribution to the regulatory framework review, because that will drive a meaningful discussion about how we achieve the sort of accountability that she and I want and think should be enhanced.
Stella Creasy
I am sure the Minister will have some delightful conversations about the regulatory framework that will keep many people wide awake for hours to come, but the two are not mutually exclusive. This amendment and this debate are about capital holdings.
Does the Minister recognise that what I said about what happened in 2008-09 is directly linked to this? We need to keep a tight eye on this, especially because of the global context in which it is happening. We cannot protect our economy and our constituents without some form of scrutiny and control. The Minister said that it is important to have parliamentary involvement, but he has just refused an amendment that would have brought the Select Committees into the process.
I am struggling to understand why in this instance, with this amendment and this requirement of the Bill, given the role of the FCA in overseeing capital requirements, the Minister feels that it would not be important to have the data, so that we are not in a position in which that subprime lending happens again in a different guise. If we have learned anything—this is not just about the high-cost industry—it is that these models evolve. It is like water: exploitation in the system will find a way through unless we have robust procedures. It is possible to have both this report and a regulatory framework; the two are not mutually exclusive. If there is not a reporting provision, the Minister leaves a gap until one is in place.
John Glen
This legislation provides the regulators with the responsibility and the reporting obligation to Parliament. What the hon. Lady has done is make an explicit relationship between conduct failure and capital requirement decisions. Decisions about the overall framework for accountability for the regulators are embedded within this Bill. The point of disagreement between us is whether there are sufficient obligations, in terms of reporting and scrutiny, for these narrow measures. We obviously disagree. I am trying to signal that, more broadly, on the wider issues of the future dynamic among Parliament, the Treasury and regulators, there is scope for significant review, and appropriately so given the changing nature of where these regulations are coming from. I do not have anything else to say.
Mr McFadden
The Minister said that he does not want to accept the amendment because he thinks it is in the wrong place. I would find that a little bit more convincing if I really thought he would accept it if he thought it were in the right place, but so far today, Members on the Government Benches have steadfastly voted against this kind of reporting back and reviewing of things to do with the capital rules, as well as the other amendments tabled. I am sure that the Minister has read the whole amendment paper, and will have seen that I have tried to come at the same issue from a number of different angles and different timetables. This morning, we pressed to a Division an amendment asking for a report after three years, which was defeated. I will not press this one, Dr Huq, but we will be coming to other, similar amendments very soon. I therefore ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
John Glen
The 2008-09 financial crisis led to significant economic hardship. Since then, post-crisis regulatory reforms set by the Basel Committee on Banking Supervision have supported financial stability, which underpins our economic prosperity. We in the UK intend to uphold our international commitment to the full, timely and consistent implementation of these reforms, alongside other major jurisdictions, and clause 3 creates the space in legislation for the financial regulator—the Prudential Regulatory Authority—to implement the remaining Basel standards. Like our approach to investment firms, our intention is to delegate the responsibility of implementing these to the PRA with enhanced accountability, as I have described. This is the right thing to do: the PRA has the technical expertise and competence to implement these post-crisis reforms as they should be implemented.
However, in delegating this responsibility, this Bill ensures that checks and balances are in place. First, clause 3 ensures that we transfer only some elements of the capital requirements regulation, or CRR, to the PRA, and that the extent of the Treasury’s powers to delete will be constrained to those areas of the CRR that are necessary to implement the Basel standards and ensure the UK upholds its international commitments. Secondly, this clause ensures that the deletions the Treasury makes take place when it is clear that adequate provision has been made by the PRA to fill the space. Those deletions will also be subject to the draft affirmative procedure, providing the opportunity for Parliament to scrutinise the Treasury’s actions. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and other PRA rules, amounting to a clear prudential rulebook that industry can follow.
Further, clause 3 enables the Treasury to make transitional and savings provisions to protect cliff edges from the deletion of certain provisions on the operations of a firm. This will allow the Treasury to save permissions already granted by the PRA, to modify capital requirements and avoid the need for firms to reapply for those permissions under new PRA rules where they are being replicated in the rulebook as a result of the Bill. This clause is essential to the delivery of our international commitments, and I therefore commend it to the Committee.
Mr McFadden
I do not want to force the Minister to go over the same ground again and again, but I am just trying to fully understand this. He used a phrase something like “the clause allows for departure from the CRR in order to implement Basel”, if I have understood him correctly. I am not trying to be obtuse, but I want him to explain fully to the Committee what that means. Why do we have to “depart” from the capital requirements regulation in order to implement the Basel rules? On the face of it, the list contained in clause 3 is a very wide list of things from the CRR that the Treasury is taking powers to revoke, and I am therefore trying to fully understand what the effect of this clause is. Is it just to implement Basel, or does it give a wider, ongoing power to the regulator to change capital ratios against these lines of business that are set out in the amendment? I genuinely want to understand that.
My second question is about the potential impact on risk weightings and how capital ratios can look. There is a potentially perverse effect here—almost a mathematical one. Because these things have risk weightings attached to them, if the regulator makes a decision to reduce that weighting—from 50% to 40%, for example, or whatever it is—but the bank still holds the same amount of capital against that stream of business, it has the effect of making the bank look more safe and secure, even though it does not have any more capital—even though nothing has changed.
John Glen
I thank the right hon. Gentleman for his points. On the first point about why we are deleting what we are deleting, we are deleting elements of the capital requirements regulation to the PRA so that it can implement the provisions of capital requirements II, which the EU is commencing, in the appropriate way for our firms—that is basically it. The EU is on a journey of implementing CRR II, and we need to do what is appropriate for our firms, as I have discussed.
John Glen
The future in terms of the evolving rulebook of the EU and other jurisdictions and how we seek to do that here will be subject to the future regulatory framework. We cannot anticipate the future evolving regulatory direction of new directives that have not yet been written elsewhere. What we have to do is to build the right framework for origination of rules in the Treasury and from the regulators, with the right accountability framework in place.
The problem we have conceptually in this discussion is that we are coming out of an embedded relationship in which we have auto-uploaded stuff that we have discussed, crudely, elsewhere. We have a legacy set of issues over which we have not had complete control this year that we are obliged to implement, but as we approach the end of the transition period, we have to make provision for things that actually make sense and we want to do anyway, in an appropriate way.
The driver of the right hon. Gentleman’s remarks— I understand why—is this desire to scrutinise the appetite for a sort of ad hoc, and I do not mean to be pejorative, but almost opportunistic, divergence, when what we are trying to do is to enable the regulator to do what is appropriate for a set of entities that will not naturally conform to the enduring direction of travel of the CRR II within the EU, because of the different nature of our firms and, as we have discussed, the different treatment of capital that is appropriate, given what they are actually doing vis-à-vis banks.
Secondly, he asked some detailed questions about risk weight.
Mr McFadden
Before the Minister moves on to the potentially perverse effects, does clause 3 simply give the regulators the powers to implement Basel 3.1, or does it give the regulator broader powers to change risk weightings against those lines of business in ways other than under Basel 3.1?
John Glen
My understanding is that the licence to operate given to the PRA is to make it consistent with Basel 3.1, in the context of the evolving rules that are being implemented elsewhere, but the notion that there is a single downloadable format of the Basel 3.1 rules in every single jurisdiction is a false proposition. Every regulator in different jurisdictions will do that in different ways. It is important, therefore, that whatever decisions they come to around the specific decisions on different entities will be published and scrutinised, such that it could be justified against the international standing and the other factors that we have put in place as a meaningful accountability framework.
I am probably close to the limit of my capacity to answer further on this point, but I am happy to reflect further and to write to the right hon. Gentleman and make it available for the Committee, to clarify anything that would be helpful to the Committee.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
Clause 4 ordered to stand part of the Bill.
Clause 5
Prudential regulation of credit institutions etc by PRA rules
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 1—Annual review of the CRR rules—
“(1) The Secretary of State must, once each financial year, prepare, publish and lay before Parliament a review of the changes to CRR rules made by the PRA in the relevant financial year.
(2) The review must include an assessment of the impact of any changes to CRR
rules on—
(a) consumers;
(b) competitiveness; and
(c) the wider economy.”
This new clause would require regular reviews of any departures from the current regime of capital requirements.
Mr McFadden
This is my third attempt to get the Government to commit to reporting on the impact of these measures. Clause 5 and the accompanying provisions in schedule 3 insert new part 9D into the Financial Services and Markets Act 2000. This new part 9D will empower the PRA to make changes to capital requirements regulation rules. Schedule 3 also sets out the accountability framework, which we have discussed quite a lot throughout the day.
New clause 1 is an attempt to understand and explain the effect of changing these rules. It calls for an annual review to be published of changes to the CRR rules and their impact on consumers, competitiveness and the wider economy. As with similar amendments, all of this is an attempt to ensure that we do not simply pass all these powers from the EU to UK regulators without having processes in place, making clear what the changes we are making do and giving Parliament a proper voice in debate over these matters.
As I have said in relation to other amendments that, as things stand, unless we strengthen the parliamentary side of this, we could end up having less input to these issues in the future than we do at present. All these capital rules are there for a reason. We have thrashed it out today. It is important that we have proper transparency and a full understanding of the consequences if we depart from these rules in a significant way in the future.
My hon. Friend the Member for Walthamstow described these amendments as mild. I think they are mild. None of them say even that we should not have any of these departures. They simply ask for some process to understand the effect of them, which is open to Parliament. That is what new clause 1 would do.
John Glen
I really respect the right hon. Gentleman’s approach to this. It is very constructive. I accept his frustration with what I am saying, but I do respect his patience with me through this process. Each time, I will try to justify what we are doing.
This Bill enables the implementation, as the right hon. Gentleman understands, of the Basel standards. That will be done by deletion of parts of the capital requirements regulation that need to be updated, so that the PRA can make those Basel updates in their rules. As a result, we will see a split in this prudential regime, perhaps temporarily, depending on the end result of the future regulatory framework across legislation and regulatory rules.
The regime is already split in this way to an extent, with some rules for firms set directly by regulators and others contained in retained EU law or law that has originated in this Parliament, and it will continue to work in this way. However, we will seek to ensure that this is done as effectively as possible through clause 5. Clause 5 ensures that cross-references between legislation and PRA rules work properly on an ongoing basis. It also requires the PRA to publish an explanatory document outlining how it all fits together. Finally, the clause introduces schedule 3, which contains further detail to ensure that the regime works. As the elements contained in the clause help to ensure a workable framework for the UK to remain Basel-compliant, I recommend that the clause stand part of the Bill.
New clause 1 seeks to add an annual reporting requirement, as the right hon. Member for Wolverhampton South East said, for the Government to carry out and publish a review of PRA rules that implement the Basel standards, including an assessment of the impact of changes to the rules on consumers, competitiveness and the wider economy. The Bill will require the PRA to demonstrate how it has regard to several considerations: the international standards that it seeks to implement, the relative standing of the UK and the ability to finance businesses and consumers sustainably.
However, I regret that the amendment has the potential to duplicate the PRA’s reporting duties. I respectfully contend that this additional annual reporting requirement is not necessary, because through the Bill the PRA will also be required to publish a summary of the purpose of the rules it makes when implementing the Basel standards and an explanation of how it has complied with its reporting duties. Furthermore, the Financial Services and Markets Act 2000 already requires the PRA to make an annual report to the Chancellor on its activities, including on the extent to which its objectives have been advanced and how it considered existing regulatory principles in discharging its functions. The Chancellor must lay that report before Parliament.
I therefore question whether the proposed review would really provide much more insight than what the current reporting arrangements already achieve. I have myself checked whether there are no reporting requirements and we are entering some sort of wild west environment, but I do not think that that is the case. The amendment duplicates efforts that are already in place. Ultimately, to require the Treasury to undertake such an assessment would undermine this delegation and the regulator’s independence. I therefore ask the right hon. Gentleman not to move the amendment.
Mr McFadden
The Minister has given a pot 3 defence. I apologise for using that in-joke from this morning’s session; I am happy to explain it to you later, Dr Huq. A pot 3 defence means that it is already covered. It is my pleasure not to move the amendment.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Schedule 3
Prudential regulation of credit institutions etc
Alison Thewliss
I beg to move amendment 40, in schedule 3, page 79, line 25, after “activities” insert
“in the UK and internationally”.
This amendment would ensure the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities are considered both in terms of their UK and international activities before Part CRR rules are taken.
This is quite a modest amendment. The Bill is supposed to ensure that Scotland, the City and the rest of the UK remain internationally competitive but robustly regulated, as the sector and everyone beyond a few marketeer ideologues are looking for. The amendment seeks simply to ensure that the FCA has regard to the standing of the UK as a base for financial firms that operate internationally. It is a kind of reflection amendment. It is common sense. It is really a drafting amendment. There is not terribly much more to it.
John Glen
As I have said, the UK is committed to maintaining its high standards. We heard during evidence sessions last week that these high standards will not hinder the UK’s ambition to remain an attractive place to carry out business. None the less, the Government want to ensure that our regulators have specific regard to these ambitions, particularly for international businesses, which bring jobs and innovation and, I believe, improve our economic prospects and prosperity.
The amendment aims to ensure that that is the case, and I welcome the intention, but I reassure the Committee that the Bill as drafted will deliver that. I highlight in particular to the hon. Member for Glasgow Central that subsections (1)(b) and (2) of proposed new section 144C to the 2000 Act requires the PRA to
“consider the United Kingdom’s standing in relation to the other countries and territories”
that could affect where international firms
“are most likely to choose to be based or carry on activities.”
I believe that that is adequate to address the concerns that have been raised.
Mr McFadden
I beg to move amendment 27, in schedule 3, page 80, line 8, at end insert—
“(7) The PRA must, at least once every five years, review the provisions of this section.
(8) The Treasury must lay before Parliament a report setting out—
(a) the outcomes of this review; and
(b) any changes the Treasury proposes to make as a result of this review.
(9) The Treasury may by regulations make any changes identified in subsection (8)(b).
(10) Regulations under subsection (9) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.”
This amendment would ensure there is a review of the accountability framework for regulators once in each Parliament and give it a role in approving subsequent changes to the accountability framework.
This will be my last attempt. I have tried to get reviews after six months, one year and three years; this is the attempt at once in every Parliament. Of all the mild amendments, this has to be the mildest. Once in every Parliament, we are asking for the PRA to review the provisions of proposed new section 144C in schedule 3, and for the Treasury to lay before Parliament a report setting out the outcomes of that review and any changes that it proposes to make as a result. I really think it reasonable to expect that as a minimum, given the sensitivity and potential combustibility of the provisions, which is why we have tabled the amendment.
John Glen
On a human level, I have found this process quite challenging, because my instincts are to try to accommodate the right hon. Gentleman when he sounds so reasonable and plausible. The amendment seeks to introduce a requirement to review the PRA’s accountability framework for Basel implementation and, as he said, it would require the PRA to conduct a review every five years, which is the least demanding of his requests today.
It is right to ensure that the accountability framework is fit for purpose and up to date. Indeed, that is one of the aims that we want to achieve through the Bill: flexible and agile regulation. The Bill’s purpose is to enable the implementation of the Basel standards, and the international deadline for Basel 3.1 reforms is 1 January 2023. By 1 January 2023, the bulk of Basel-related rules made as a result of the Bill should therefore already be published. The accountability framework that the Bill introduces for the PRA to make rules to meet Basel requirements relates only to the implementation of the specific so-called Basel 3.1 rules and does not relate to the ongoing prudential regulation of financial service firms that is being considered by the future regulatory framework review. The review is consulting on the important split of responsibilities between Parliament, Government and the regulators now that the UK has left the EU.
Reflecting the wisdom of the right hon. Gentleman with respect to the value of reviews, in that context a five-year review would clearly be appropriate. However, in the current context, it would be inappropriate to ask the PRA to report on an Act of Parliament given that the Bill already includes a more appropriate reporting requirement for the PRA, as set out in proposed new section 144D, that is adapted for the CRR rules. That requirement is to publish an explanation of how the matters in the accountability framework have impacted on the PRA’s rules whenever it consults on and publishes final rules to implement Basel. That will directly attend to the logic and rationale for what it has done.
The amendment would also add a new power for the Treasury in relation to the accountability framework. The Treasury already has a similar power in the Bill to add additional matters for the PRA to consider. The power proposed in the amendment goes further, allowing the Treasury to amend the list, including removing matters from it. It is not clear to me why the Treasury should ever remove, for example, the requirement for the PRA to have regard to the Basel standards. Such matters are immediately pertinent to the prudential regime and would have been agreed by Parliament through the Bill process. Therefore, the existing provisions in the accountability framework already appear to achieve the aims intended in the amendment in the best way possible and, as such, do not need to change. For those reasons, I regret to ask the right hon. Gentleman to withdraw the amendment.
Mr McFadden
Is the Minister saying that if there were a Basel 3.2 or a Basel IV process—that is quite likely, because at some point there will be a revision to the capital rules because things change and the system has to evolve—somehow the part 9D provisions cannot be used? Are they only for Basel 3.1? That is the implication of his response. I would have thought that giving the regulator powers over all those areas would be applicable to future Basel revisions and not just this one. In other words, we are not making a regulatory snapshot; we are creating a movie. This is a genuine question: the part 9D rules must be applicable to any future revisions of the Basel process, too. If so, there is a strong case for a once-in-a-Parliament review of how that is going.
John Glen
Those rules will have regard to future Basels. The reporting mechanism we have and the accountability to Parliament when those rules are published is more immediate and comprehensive. My contention is that a five-year provision would be out of date because we would have done it by then. That is why I am apprehensive about the right hon. Gentleman’s suggestion.
However, within the context of the future regulatory review—I cannot be bound on the outcome of that, because it is genuinely consultative—and what would be the appropriate reporting, there is a difference between short-term reporting on a particular measure or decision and a more fundamental review of the strategic dynamics of the relationship between the regulators, which we have seen evolve over decades. On the principle, there may be the need to have something like that. I am straining to be positive and constructive in my engagement with the right hon. Gentleman.
Mr McFadden
The truth is that there is no science about what is exactly the best timetable for reviewing these things. I am not pretending that one of the various timescales that we have mooted is perfect, and there is probably a legitimate debate to be had about that. However, as the Minister has just confirmed that we have given the regulator the power to make rule changes regarding future Basel changes on an ongoing basis—I am sure he is right about that—having a review and a report on this once every five years is a reasonable timescale to say what the impact of these things has been. I therefore wish to push the amendment to a Division.
Question put, That the amendment be made.
John Glen
I beg to move amendment 2, in schedule 3, page 84, line 19, leave out paragraph (b) and insert—
“(b) section 144D (explanation to accompany consultation on rules);
(c) section 144E(1) and (4) to (7) (exceptions from sections 144C and 144D).”
This amendment corrects the explanatory words in a list of provisions that apply to section 192XA rules that are not CRR rules.
This technical amendment corrects a reference to words contained in parentheses to make it clear that those words apply only to proposed new section 144D to the 2000 Act, and it adds the correct words in parentheses to the references in proposed new section 144E. The words in parentheses explain the scope of the clause.
Amendment 2 agreed to.
Schedule 3, as amended, agreed to.
Clause 6
Power to amend the Credit Rating Agencies Regulation
Question proposed, That the clause stand part of the Bill.
John Glen
The Basel standards include rules relating to credit assessments—also called external ratings—which some firms use to assign risk ratings. Risk ratings are used to determine the minimum amount of capital that must be maintained by a firm, and the right hon. Member for Wolverhampton South East has already drawn attention to this matter.
In the UK, credit ratings agencies, or CRAs, that issue credit assessments are regulated by the credit ratings agencies regulation, and the changes needed to the CRA regulation to implement Basel are minor. Consistent with the 1 January 2023 international deadline, however, the PRA has yet to issue its rules implementing the Basel 3.1 reforms, and it makes sense to consider changes to the CRA regulation as part of the wider 3.1 package of changes. Therefore, the clause gives the Treasury a power to amend the CRA regulation while requiring it to consider the Basel standards when that power is exercised. That confirms our intention to use the power only to implement changes stemming from Basel. The changes to the CRA regulation will help to ensure that the UK is fully Basel-compliant.
Mr McFadden
I have a couple of questions, because credit rating agencies did not cover themselves in glory in the financial crisis, so I want to be clear about what clause 6 does and does not do with regard to them. How does the credit rating agencies regulation regulate them at the moment, and how will that be altered by the provisions in clause 6? For example, does clause 6 deal with the situation where a credit rating agency charges a fee to those who are asking for a rating and with the potential conflicts of interest involved in that process? That played out in the financial crisis, as anyone who has watched the movie “The Big Short” will have seen. The clause does talk about the regulation of the credit rating agencies, so I wonder if the Minister could explain a bit more how they are regulated and how that would be altered by the clause.
John Glen
I am happy to do my best. In terms of the changes and why they are not set out in the Bill, the changes that need to be made to the CRA regulations stem from “Basel III: Finalising post-crisis reforms”—the Basel document—which is part of the most recent Basel 3.1 package of reforms. Most of those have not been legislated for in the UK or the EU, and it makes sense to consider changes to the regulation as part of the wider implementation of the 3.1 package, which will be done through the future rules. They will be consulted on prior to the deadline.
The power to amend the regulation will be used solely to implement Basel 3.1. There are a number of minor amendments contained in that “Basel III: Finalising post-crisis reforms” document of December 2017. The two eligibility criteria that credit rating agencies need to satisfy are added. The power in clause 6 safeguards that intent as it requires the Treasury to have regard to the standards rather than making other amendments for unrelated reasons.
In terms of the other limited changes made in schedule 4 as part of the implementation of the UK regime equivalent to the EU’s second capital requirements regulation, they again relate to earlier Basel III standards. I do not think I can answer with enough specificity to do justice to the right hon. Gentleman, so I think I will need to write to him on this matter.
In what I have said, I hope that I have explained the confines and drivers of the reform; the powers that we are giving to the regulator; and the consistency with which they will be exercised to the Basel 3.1 proposal. I have previously spoken about accountability for that. I need to write to the right hon. Gentleman to give more clarity, and I am happy to address the issue at further stages in the Bill’s passage.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7 ordered to stand part of the Bill.
Schedule 4
Amendments of the Capital Requirements Regulation
John Glen
I beg to move amendment 32, in schedule 4, page 89, line 11, at end insert—
“11A (1) Article 500d (temporary calculation of exposure value of regular-way purchases and sales awaiting settlement in view of COVID-19 pandemic) is amended as follows.
(2) In the heading, omit ‘Temporary’.
(3) In paragraph 1, omit ‘until 27 June 2021,’.”
This amendment removes the time limit on the availability of the derogation under Article 500d of the Capital Requirements Regulation.
This is a minor amendment. In 2017, as I mentioned, the Basel Committee on Banking Supervision introduced favourable treatment for firms in how they calculate the leverage ratio. The EU was due to introduce that treatment through its second capital requirements regulation on 28 June 2021. Given that the revised calculation will reflect the leverage of a transaction more appropriately, and at the same time increase the capacity of an institution to lend and to absorb losses amid the covid-19 pandemic, the EU brought this provision forward through a derogation to the first capital requirements regulation that is currently in effect. The UK supported that approach. This derogation is time-limited in the EU to 28 June 2021, as that is when the relevant EU CRR II comes into force, which will put in place the new permanent provisions on leverage ratio.
As the Committee will be aware, the European Union (Withdrawal) Act 2018 provides that EU law, as it is in effect at the end of the transition, will continue to apply in the UK. This means that the first capital requirements regulation as it exists on 31 December will remain in place in the UK until it is amended by this Bill. That means that the derogation would also cease to have effect in the UK on 28 June 2021, because we will have adopted it on the terms that it is now live in the EU. The UK has not legislated a date by which to update its prudential regime in this Bill, because it is most important that our regulators get the rules right and have enough time to consult and finalise them, and also to minimise disruption.
The UK is targeting 1 January 2022 for firms to have implemented the PRA CRR rules. This decision was made after introduction of the Bill, in response to industry concerns about the general volume of regulatory reform in 2021. I referred earlier to the future regulatory framework review. The first stage of that was a piece of work that the Treasury did with industry and the regulators following Chancellor Hammond’s work 18 months ago, which sought to rationalise and understand the range of regulatory interventions that were ongoing.
UK financial services providers would have to revert to the previous rules from June for a period of approximately six months, which would be costly for industry and inconsistent with the EU regime during that period. This amendment therefore removes the time limit on the derogation, so it will remain in place until the new permanent provisions are in place in the UK, giving clarity and certainty, and not seeking to cause disruption. That is why I ask hon. Members to accept this amendment.
Mr McFadden
Can I ask a question about this? The Minister said that the leverage ratio had been changed so that institutions could lend more. I assume that means it is being reduced as a temporary measure during the covid crisis. He then said that, while at EU level that was to be for six months, the UK had not decided when such a change should end. The implication is that we are allowing a reduction in the leverage ratio without an end date. That is potentially very significant in terms of the discussions that we have had about capital today.
I appreciate that it is late in the afternoon and all the rest, but having listened to the Minister, and given how sensitive this issue of leverage ratio is—how can I best put this?—I would be grateful if he could undertake to write to the Committee with more detail on how this will operate. A permanent or long-term reduction in the leverage ratio would be a very big regulatory decision and would be precisely the kind of thing that we have been talking about all day, and precisely the kind of thing that we have been saying should have proper reports back, which those on the Government Benches have been resisting all day. I would like to find out more about what exactly this means and how long it will last for.
John Glen
To the right hon. Gentleman’s point, the UK has not legislated a date by which to update the prudential regime in this Bill, because it is most important that our regulators get the rules right. On the amendment made for the covid crisis that we have aligned to, which essentially ends next year, he is asking about the potential for us not to end it and therefore to be at odds with the prevailing new situation in the EU after 28 June.
John Glen
Well, whatever the enduring reversion environment is in the EU following the end of this special measure. I will be happy to write to the right hon. Gentleman on that, but the key point is this: it would not be appropriate for the UK to determine where we would be beyond 28 June in advance of the regulator’s looking at those matters, when at the same time the EU’s definitive position at the end of June is not yet known. I will write to him, because I recognise that he is saying that he is apprehensive about the fact that we will have an apparent 18-month period from next June until January 2022 where we are at odds with the prevailing norms, and that is a risk. If I have understood him correctly, I am happy to address that point.
Mr McFadden
I am grateful to the Minister, but it is not an EU alignment point that I am making. He is right that, yes, this has arisen because of a disalignment with the EU, but my point is not that we have to always look at this through the lens of being aligned with the EU on capital requirements. I am talking about a public safety point; I am talking about a UK regulator taking a view on the leverage ratio, not necessarily in the light of what the EU is doing after June, but precisely because of all the points we have been making about the importance of capital after the financial crisis.
John Glen
I am happy to restate what I said. We have inherited an environment and indeed we have been obliged—quite reasonably—to absorb into law where the EU has got to at the end of the transition period. My point is that, in order to get the right enduring solution for our capital requirements for the UK, as it is in the UK, we have to allow a regulator to do that work.
The point the right hon. Gentleman is making is about the potential deviation of that enduring solution, and the gap between its implementation and the capital requirements that are normative globally, next June. I will undertake to clarify how we consider, in essence, the trade-off between that potential deviation and the disruption to firms. However, what I have tried to convey throughout today’s proceedings is that our desire is not to deregulate or to deviate from international norms, but to set out a UK framework that is necessary and appropriate for the institutions that exist in the UK.
Financial Services Bill (Third sitting)
John Glen ExcerptsThursday 19th November 2020
(4 years ago)
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Mr McFadden
I have no further questions, although my colleagues might have.
The Economic Secretary to the Treasury (John Glen)
Q
There is a Law Commission consultation going on. We have fully transposed the fifth anti-money laundering directive in line with international best practice. You gave us some perspectives on Germany and Holland in terms of future orientations, which is something that I imagine we would look at in the context of that review. How would the provisions of the Bill help?
Dr Hawley: Obviously, we have welcomed the leadership that the Government have taken on beneficial ownership and the implementation of the fifth AMLD. My colleagues from Transparency International, who are giving evidence later to the Committee, have done more work on the beneficial ownership side. They are the people to talk in more detail about how the Bill specifically relates to that.
We hope that there will be other legislative vehicles brought forward soon to introduce the property register of beneficial ownership and the Companies House reforms. It is excellent that that consultation has now come out and the Government have taken strong steps towards looking at how Companies House can be strengthened, because, as FATF noted, it was, as you have mentioned, an area of weakness.
I do not want to bang on about it, but FATF also highlighted the lack of high-end money laundering convictions in the UK and questioned whether that was really reflective of the risk within the UK. We are carrying out some analysis into what is happening with regulatory fines in this space. The number of fines seems to be going down dramatically, and we are not seeing an increase in high-end money laundering convictions. To be honest, we are a bit worried that the Law Commission review, which we really welcome, will take too long.
John Glen
Q
Dr Hawley: I am actually saying something different. That review rightly focuses on the identification doctrine that was the primary focus that the Law Commission was given, and it is absolutely right that the Law Commission does that. We monitor bribery cases as they go through the courts, and we have seen that, even with the Bribery Act, there is still an ongoing unfairness. A small company can be prosecuted for a main offence and a “failure to prevent” offence. We have heard directly from prosecutors that they can say to a small company, “Look, if you co-operate with us, we will only prosecute you for failure to prevent. But if you don’t, we will prosecute you with section 1 or section 2.” We also have the fact that a section 1 or a section 2 offence incurs mandatory debarment from public procurement and a “failure to prevent” offence does not. So small companies face the risk of being excluded from public procurement in a way that large companies do not. We think that that is not compatible with the Government’s stated intention of levelling the playing field for small companies in public procurement.
What we would say—and it is something we have always said—is that we absolutely need the Law Commission to look into the identification principle, but we do not think it would pre-empt the review to introduce the “failure to prevent” offence for these crimes, because we already have that offence for bribery and tax evasion. That would complement the Law Commission’s work. We still need the review of the identification doctrine, and that cannot be done by anyone other than the Law Commission.
Stephen Flynn (Aberdeen South) (SNP)
Q
“However, there is no corporate offence in the FSA and it is therefore not clear that prosecutors would be able to hold companies to account were similar conduct to reoccur.”
I will be open and honest with you: I do not have a legal background, so perhaps you could elaborate on that further. Either there is the ability to do something or there is not. That ties in with the remarks about Barclays in point 21, which quotes remarks that it
“effectively removes companies with widely devolved management and functioning boards”.
The term “effectively” implies that it could or could not. Can I have a little more clarity on that point?
Dr Hawley: Yes, absolutely. We have checked that with lawyers, and it is the case currently under the Financial Services Act that if you wanted to bring a prosecution for misleading statements on benchmarks—let us hope that will not happen again because financial institutions have learned the lessons from last time—the only way that you could hold a company to account would be under the directing mind principle that I mentioned earlier. You would have to show that one of the directors knew and intended for this to occur. There is no comparative offence, as there is under the Bribery Act, of a failure to prevent misleading statements being made, for which there could be a corporate fine. That would be almost impossible to do if a bank were making misleading statements.
The Barclays judgment has made that even more difficult and narrower. Prosecutors and the Serious Fraud Office can no longer say, “We’ve got the evidence on the CEO and CFO, and we think we can prove it, so we will take this to court.” The court then turns round and says, “No, it’s not just that. You have to show that the board actually delegated authority to these people.” It set a whole new hurdle for how you hold corporates to account. What we are hearing from people is that this is going to lead to a massive decrease in corporate prosecutions, because the grounds for bringing a company to account are so narrow now that they are almost impossible. I cannot say that it would not happen, but I can say that it would be an extremely brave prosecutor to risk public money in the courts to try.
Financial Services Bill (Fourth sitting)
John Glen ExcerptsThursday 19th November 2020
(4 years ago)
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The Economic Secretary to the Treasury (John Glen)
Q
I would like to probe your views on the measures that we are introducing with respect to access arrangements between the UK and Gibraltar for financial services firms. How do you see the issues around maintaining the same quality of regulation between the Gibraltarian and UK regimes? Do you foresee any challenges with that? How important do you think that that level playing field will be?
Hugh Savill: A level playing field between Gibraltar and the UK is essential. I think that about 20% of the British motor insurance market is in fact serviced by firms from Gibraltar so, clearly, whether people are working from the UK or from Gibraltar, that needs to be on the same basis. Given that you have two regulatory authorities, and that can always be quite awkward, we think this strikes a good balance. There is good dovetailing of the relationship between our regulators and the Gibraltarian regulators, and we really hope that the Gibraltar authorisation regime works and provides a smooth basis for business in the future.
John Glen
Q
Hugh Savill: This is mainly derived from our experience of conduct regulation at the European level over the past 10 years or so. To be honest, it has not shown the European Union at its best. We have the PRIIPs regulation, which is mentioned in the Bill—well, we are having to correct it—and there have been other measures, such as the insurance distribution directive, which, frankly, have been no better. It is not entirely to do with the way that the European Union makes rules; it is because consumers expect different things in different countries. All you have to do is put together all the things that consumers want. It makes for a very heavy-handed—[Interruption.]
The Chair
I’m sorry, Hugh, could you please pause for a moment? We have a noisy bell. It is gone now, so please carry on. Can you start that sentence again?
Hugh Savill: Worse things might happen at my end.
John Glen
We won’t go there.
Hugh Savill: The fact is that consumers expect different things; they have different traditions. Introducing conduct regulation at the international level—setting what people expect from their bank, so that it fits the conditions in Japan, Brazil and the UK—is too big an ask. You will end up with a very unwieldy rule book that is not particularly suitable for British consumers. We think the retail conduct rules need to be set with British consumers in mind.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Q
Hugh Savill: I should say that we are equally blunt when we see shortcomings in British regulation, as well as European regulation, but, yes, we have criticised some of the European rules. In effect, the Bill sets out the first step towards a UK regime for financial services, and there will be others that follow. Really, this needs to be tailored to the needs of the British market—first to the needs of British consumers and secondly to the needs of British providers of financial services. Now that we have left the European Union, we think that is the way to go forward, and that is what we are hoping our legislators and regulators will concentrate on.
John Glen
Q
This Bill ensures that HMRC retains its ability to access information on the ownership and beneficiaries of UK-linked overseas trusts, building incrementally on things that have been done previously. Can you explain why this information is important? This is a key measure and, I would have thought, the most relevant.
Duncan Hames: It is certainly a welcome measure. We have found that some of the complexities of the structures and design of different corporate entities have proved difficult, in terms of the implementation of existing legislation. That was a feature of the recent Baker et al case in relation to appeal against an unexplained wealth order; there was a South American foundation, which was perhaps not the corporate structure that Members of this House had in mind when that legislation was being decided.
Addressing trustees and overseas entities, to strengthen and ensure there are no loopholes in existing legislation, is definitely to be welcomed. In the past, when the House has been considering legislation to address money-laundering risks—do not forget that another piece of legislation related to leaving the European Union is the Sanctions and Anti-Money Laundering Act 2018—it has focused on what can be done about the transparency of ownership, and not just of UK limited companies but of overseas entities, too.
John Glen
Q
Duncan Hames: Certainly. Although some of the things we have already discussed this afternoon are not in the economic crime plan, there is much in that plan that we welcomed at the time. It was about 15 months ago that that plan was adopted by the Government. Some of the measures in that plan require legislation, and I am sure the Minister is itching for legislative opportunities to enact his policy.
John Glen
Q
Duncan Hames: Indeed. I think we have recently completed a consultation on it, and I hope, therefore, that it will be in the Queen’s Speech.
The register of beneficial owners of overseas entities enables us to know who really owns the foreign companies that own property real estate in this country. It was a Government commitment announced around the time of the London anti-corruption summit, which was four and a half years ago. Although that legislation has already been through pre-legislative scrutiny in both Houses, the conclusions of which were, “Get on with this; we must advance quickly,” it still has not been brought forward. These are both measures in the economic crime plan. It is great that they are in the economic crime plan, but it would be much better if they were implemented. I hope that that will be addressed very soon, but, equally, given how long one waits for legislative opportunities to keep up with the pace of nefarious actors in economic crime, if you have an opportunity to make progress in this Bill, in any additional manner, we would obviously be keen to see you take it.
John Glen
Q
Duncan Hames: I think we would see the creation of OPBAS as a very helpful staging post in addressing this problem of inadequate supervision, albeit that it can address and challenge only the professional body supervisors. HMRC has been found wanting, and I have already criticised the level of its fines. OPBAS cannot do anything about HMRC, and I think we have been party to discussions about that in other proceedings of the House.
What OPBAS has found is pretty devastating. In its 2018 report, 62% of accountancy supervisors had some overlap between their advocacy and regulatory functions. Those represent a conflict of interest. There are some really choice quotes from OPBAS in that report, about what supervisors said about the impact on their membership income, were they to take more assertive enforcement action. That really is a conflict of interest in these supervisory bodies.
I think what we need, Minister, is for you or your colleagues to have the ability to respond to these reports—I think we have now had two annual reports from OPBAS—and, where necessary, to strip the supervisory duties from bodies that are failing in this regard. Obviously, all bodies should address their own conflicts of interest, but performance is a really important issue.
The report I was referring to earlier was HMRC finding that about half of the businesses it had reviewed were non-compliant with its anti-money laundering regulations. So, the changes that have been made recently to the regulatory landscape, in and of themselves, are not enough to address the holes in our money laundering defences that are overseen by this very fragmented regulatory arrangement. I said there were more than 14 accountancy sector supervisors; I think we are at 25 anti-money laundering supervisors, altogether.
The Chair
I call the third Front Bencher, Alison Thewliss, for the Scottish National party.
Alison Thewliss
Q
Duncan Hames: I think trusts are intended to be in the scope of the registration of overseas entities Bill. That is definitely something required by the fifth anti-money laundering directive as well, so we should consider them within scope. Whether we have yet got that working, I am not so confident. For example, if we take something that I am sure is of interest to you—Scottish limited partnerships—the Financial Action Task Force report, which the Government are very pleased with, noted that there remains a weakness in terms of scope for abuse of that corporate structure. I should acknowledge that those are regulated by UK law, not by decisions made in Scotland. Those partnerships can be partnerships with two corporate entities—so, no human personality. If those two corporate entities are registered in jurisdictions where beneficial ownership is not clear—it is not public—we essentially have a UK entity that has got around all of the strictures that the Government are very proud of, in terms of the transparency that the UK’s own registry demands.
There are other issues with having corporate partners of a legal partnership. Obviously, it all comes down to accountability. It is very important if we want to be able to hold corporate entities accountable for their role in economic crime. I am afraid that many such complexities remain to be addressed. We cannot just take the bits we like when a report like that is presented.
The Minister is correct: the UK outcome was very favourable compared with other FATF evaluations. I hope, by the way, it will give the Treasury the confidence next time around to invite civil society representatives to give evidence to the FATF assessors. None the less, FATF came up with a number of things that it identified needed to be addressed, and the Government have a plan, but we seem to lack a timetable for implementing a number of these things. If the Minister is able to give us a timetable for when the legislation to introduce measures such as robo, which is in the economic crime plan, will be introduced, I think we would all be very glad of it.
John Glen
The point is, as Duncan well knows, that a whole range of interventions have been provoked by that FATF report. I am glad he acknowledges its world-leading nature for the UK. It is good that we should be pleased about that, but there were significant elements that need to be worked on. They are obviously taken in different ways across Whitehall, and there will be more to be said about that in due course. I am responsible for what I am responsible for in this Bill, and the purpose of this conversation is about that.
Alison Thewliss
Q
Duncan Hames: I doubt you need primary legislation to fix that. I expect that secondary legislation giving direction to Ministers and regulatory bodies to ensure that fines are commensurate with the level of offending would be helpful. I suggested that the level of fines by these professional bodies supervisors and by HMRC is just not commensurate with the financial advantage of taking part in these transactions.
Indeed, if you are a solicitor, and someone complains to the Solicitors Regulation Authority about you because you have been holding up a transaction, that will still be investigated. You will still incur quite a discomfort in responding to that investigation. That is quite a powerful incentive just to go along with the transaction, whereas the fine you might receive for having gone along with a transaction that you should not have could well be less consequential for you. That needs to be addressed.
Fines wielded against trust and company service providers by HMRC, for example, are pitifully low. We were told by the trade body that its experience of fines imposed by HMRC on trust and company service providers was typically no more than £1,000.
The Chair
Thank you. We will return to the traditional format with questions first from the Minister and then from the two Opposition spokespeople.
John Glen
Q
Fran Boait: Shall I kick off? This is definitely one of the key issues in the Bill that I wanted to raise. Although I understand that the Bill is about regulation and tidying up a few things, it does set the framework and direction for future financial regulation. It is important to say at the outset that we are only 11 years on from a global financial crash that resulted from deep regulatory failures. Neither my organisation nor Jesse’s existed 10 years ago—they were formed since the crash. Without a number of amendments to the Bill, it could pave the way for a repeat of that failure.
To put it in context, I remind you that, according to the Bank of England’s chief economist, Andy Haldane, the banking cash cost Britain about £7.4 trillion and it would take the financial services sector’s tax contribution about 100 years to make up for that. It is a really important Bill that sets the direction, but accountability and transparency are severely lacking in its current form. The civil society sector is tiny, relative to the industry lobby. Although we have engaged in FCA and PRA consultations, the fact that we are onshoring so much legislation right now means that we need to think about the balance of input from the industry and civil society. It is worth noting that the EU, which obviously to date has been where the scrutiny for much of this legislation has been, funded civil society consumer, environmental and social groups in order to provide a balance to the industry lobby, because it recognised that this area is severely complex and critical.
The substantial transfer of power to the financial regulators—the Treasury, the FCA and the PRA—is concerning if there are not increases in parliamentary scrutiny and more detail about the accountability framework. I noted this morning that a number of amendments have been put forward, and I think a lot of them enhance accountability and require parliamentary scrutiny and reporting. I would really welcome that. I could list them—I have some of the numbers. An MP put forward a suggestion for a new specialist financial services Joint Committee between the Commons and the Lords, and that would be welcome, especially if it engaged with civil society.
From where we are starting, in its original form the Bill really is quite concerning in relation to accountability and transparency, but we would welcome all the amendments being put forward—and more—to improve those aspects.
John Glen
Q
The Financial Services and Markets Act 2000, introduced under the previous Labour Government, was about setting an approach for how the regulators worked, looking at an outcome-based approach with the observation of technical standards. I note that you refer to the proposal about Parliament’s role. Are you really saying that you do not support that fundamental architecture? Given the complexity of the regulations and technical standards, do you think it is realistic for Parliament, in terms of capacity and expertise, to offer the sort of scrutiny that you think is lacking?
Fran Boait: Fundamentally, we want robust frameworks that allow for input and do not just allow legislation, such as the capital regulation requirements, to be changed without scrutiny, because they have really significant consequences for the whole UK economy. That is why I started by laying out how critical the direction of financial services is.
It is worth saying that we are not out of the repercussions of 10 years ago, so we do not want in any way to go back to the days of regulation being done behind closed doors. I understand that there is a capacity issue, but is about having those opportunities for both Parliament and the wider public—civil society—to feed in.
It is also worth thinking about the regulators themselves. For example, one of the things that the new chief executive of the FCA has said is that they will also be liable for legal attacks on what they are having to implement, so putting all the onus on them is an issue. At the same time, we know that there has been an issue with the revolving door between our regulatory bodies—the Treasury, the FCA, the PRA and the Bank of England—and the industry.
There is a grave concern about this transfer of power. If capacity is an issue, Parliament surely wants to be looking at how to resource things better, in terms of more Clerks or staff, plus thinking about how the EU funded civil society, rather than saying, “Actually, no, it’s fine. We will just have reduced transparency and accountability.”
John Glen
Q
Jesse Griffiths: Thank you. I think they are extremely important questions, and that is one reason why this Bill is so important as part of the other important consultations and discussions that you have mentioned—because we are now setting, if you like, the precedent for how we might deal with financial sector regulation in the new era, where the focus will be in London and not in Brussels. Actually, I worked for seven years in Brussels on related issues, so I have some experience from there to share.
I think I agree with the points that Fran has made about the fundamental importance of trying to find ways to support broader civil society engagement in these types of discussion. Perhaps it links to another important point on the Bill, which is that part of the issue will always be ensuring that the purpose of the regulations and the regulators includes social and environmental purpose, so that it is clear that that is an extremely relevant angle from which to discuss these things. One thing that definitely came out of my experience in Brussels was that the role of Parliament is very important, or can be very important, not just because it is important in itself, but because it does open a window for broader input and discussion.
I will explain one particular amendment or change we would welcome. As I understand it, the current Bill allows changes to capital requirements and other regulations under the affirmative procedure. That is obviously more welcome than the negative procedure, but it does not actually specify a role for specialised Committees, so finding a way in which specialised Committees in the House of Common or Lords, or both, could have input would be both a useful step and an entry point for a broader discussion for groups likes ours to help to support the new framework.
Could I say one other thing on a kind of related point? We recognise that it is important that different institutions have different regulatory frameworks and that this is not just about making every single type of institution abide by extremely stringent regulations. That sort of principle is involved in the Bill, and we would welcome that being extended to, for example, the nascent mutual banking movement. We know that the co-operative banking movement is struggling to get off the ground, because the regulations are not tailored to its particular circumstance. I would be willing to talk more about that. It is something that could perhaps also accompany this Bill as a commitment and that Government might like to think about.
Mr McFadden
Q
The Bill, in schedules 2 and 3, sets out new accountability frameworks for the regulators. They are to abide by relevant international standards and to have regard to the relative standing of the UK as a place for internationally active investment firms to be based, or to other matters specified by the Treasury. I would like to ask whether you think it is appropriate for broader goals to be considered in that regulatory framework, and I am thinking particularly of environmental, social and governance goals. The UK wants to be a leader in that area. The Chancellor of the Exchequer set out an ambitious environmental agenda for our financial services industries in his statement about 10 days ago. Do you think that the Bill is an opportunity to put regulatory weight behind the ESG agenda?
Fran Boait: That is a really great question. It is definitely something that stood out for me when I first read through the Bill. The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash in 2008.
As you mentioned, there is clearly cross-party agreement, and we have had announcements from the Government this week and last week on wanting to be a leader in green finance, especially ahead of COP26. There is also pretty much cross-party agreement on issues such as the banking sector severely under-serving small and medium-sized businesses. In his speech yesterday, Andy Haldane, the chief economist at the Bank of England, mentioned that the funding gap is £20 billion. We know there is cross-party agreement on wanting more of our productive and manufacturing sectors to grow, and we need to level up. Some Conservative MPs, such as Kevin Hollinrake and Danny Kruger, have done reports on that and on the need for a different banking system. We have to recognise that that will all require quite a significant shift in the direction of financial regulation, yet there is not anything in the Bill that suggests that such a shift in direction is something that the Treasury is interested in at the moment.
We would certainly support the hardwiring of ESG considerations into the regulation. I looked this morning at the proposed amendments, and we would be very supportive of amendments 20 and 24, which have regard to climate and net zero in terms of investment firms and CRR—that is on climate and environmental. There are some other amendments on social practice and corporate governance that are really important, and there are potentially bigger amendments that we could be thinking about, which would embed sustainability in the regulatory framework of our regulators, such as the FCA and the PRA. That would involve further amending the Financial Services and Markets Act, which I know is being amended already in the Bill, but we could add an environmental sustainability objective, for example, to the FCA’s or PRA’s objectives.
It is worth noting that the UK’s financial institutions are among the worst culprits in Europe for fossil fuel financing. HSBC and Barclays alone have funnelled about £158 billion into fossil fuels since the signing of the Paris agreement. If the UK really wants to be a leader in green finance in a serious way, we need our regulators to be on board with that mission. Obviously, that starts with this piece of legislation and others. We would fully support the amendments to the Bill that have been put forward already, and we would potentially suggest further ones.
Jesse Griffiths: I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators. I do not think it would take a huge change, or huge amendments to the Bill, to set that precedent and really kick-start what I agree is a cross-party consensus that we need to deal with the climate crisis and the rising problems —inequalities caused by covid and so on—and that the financial system is central to that. How it is regulated determines a lot about how it will react to those points.
I can give some examples. Of course, it would be helpful if the Bill required the FCA to refer to the Climate Change Act when preparing secondary legislation. If you wanted to be more ambitious, it would obviously be helpful if capital requirements for investment firms introduced weightings on environmental, social and governance issues—for example, by penalising assets that have climate risks.
I know the Bill covers legislation on PRIIPs—packaged retail and insurance-based investment products—which is a huge, €10 trillion market in the EU. One specific example we have suggested is that, if we could improve the key information document that investors receive when they are looking at PRIIPs to include disclosure on environmental, social and governance issues, and ask the FCA to ensure that that happens, that would be an important signal.
I think that there are real opportunities here to change the nature of the discussion and set the UK as a leader in this area. We know that the direction of travel is towards much greater ESG integration across the financial sector. Investors are pushing for it. We do a lot of work with the big four banks in the UK, and many of them are pushing a purpose-driven agenda. It is the way that we are going, and I think about this as a real signal that the UK wants to be the leader in this field and takes it very seriously.
John Glen
Q
Albert Isola: I thank you and your team in the Treasury, as well as the regulators at the PRA and the FCA, who have engaged with us over a three-year process of looking at all the areas of market access, all the challenges and opportunities, and how, post Brexit, we can best replicate what we had under the European Union, as that ends and we begin something new. It has been an interesting and almost enjoyable journey. It has been extremely hard work, but the professionalism of your team has been exemplary, and I am extremely grateful to all of them for the conversations that we have had. Sometimes they were difficult, but they were always positive and proactive in looking for solutions, for which I am extremely grateful.
On the relationship between Gibraltar and the United Kingdom on financial services, it is important to remember that when the United Kingdom joined the European Union in 1973, because the United Kingdom was responsible for Gibraltar’s external relations, we joined with you. As a consequence of that, for many years, up until 2001, we were striving to enjoy the benefits of that membership. With that came the responsibilities of adhering to the many directives and complying with regulations that were passed from Brussels.
We talk about 28 or 27 member states, but there was another competent authority, the Gibraltar Financial Services Commission, in financial services; it was able to issue a banking licence, an insurance licence or any other financial services licence in exactly the same way as all the other competent authorities within the remainder of the European Union. I ask the Committee to think through the fact that Gibraltar has complied with all European Union directives and legislation in all areas, including financial services. That includes all the anti-money laundering perspectives, which you may wish to discuss later.
For all intents and purposes, Gibraltar and the UK, from a financial services perspective, are aligned. We have the same rules. As we discussed with your teams over the past few years, this is about outcomes—where we get to, and how we get there. We have been through a very long assessment with an independent contractor that was jointly engaged by Her Majesty’s Government and the Government of Gibraltar to deep-dive into insurance, which is the largest area of interest between the United Kingdom and Gibraltar, to analyse in enormous detail, and to conduct a sort of gap analysis of whether we were getting to the same outcomes. Where we felt that we were not, we have dealt with that.
Parallel to that process, we also had what you call the legislative reform programme, which was a three-year piece of work, which started before Brexit, to completely redo our financial services legislation. Before, we had 87 pieces of legislation; we now have one Financial Services Bill, which encompasses everything, and is far more aligned to the Financial Services and Markets Act 2000 than we were previously.
This legislation came into play in January this year. Section 20(2) refers to the Gibraltar regulatory regime aligning its standards and supervisory practices with that of the United Kingdom. We had that before, and we again have it in 2020. We are drawing closer together under the new regime that we are discussing; that relationship should continue and prosper, so that consumers in the United Kingdom can have more choice and competition. At the same time, we can know that our aligned standards of law and practice match those of the United Kingdom. I apologise if I have gone on a bit long, but I thought it was important to put today’s discussions in context.
DRAFT BANK RECOVERY AND RESOLUTION (AMENDMENT) (EU EXIT) REGULATIONS 2020
DRAFT SECURITIES FINANCING TRANSACTIONS, SECURITISATION AND MISCELLANEOUS AMENDMENTS (EU EXIT) REGULATIONS 2020
DRAFT FINANCIAL HOLDING COMPANIES (APPROVAL ETC.) AND CAPITAL REQUIREMENTS (CAPITAL BUFFERS AND MACRO-PRUDENTIAL MEASURES) (AMENDMENT) (EU EXIT) REGULATIONS 2020
DRAFT BEARER CERTIFICATES (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 2020
John Glen Excerpts(4 years, 1 month ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020.
The Chair
With this it will be convenient to consider the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020, and the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020.
John Glen
Thank you, Sir David. It is a pleasure to serve under your chairmanship yet again. The second bank recovery and resolution directive updates the EU’s bank resolution regime, which provides financial authorities with powers to manage the failure of financial institutions in a way that protects depositors and maintains financial stability while limiting the risks to public funds. Under the terms of the withdrawal agreement, the UK has a legal obligation to transpose the directive by 28 December 2020, and the first statutory instrument satisfies that obligation.
In transposing the BRRD II directive, the Government have been directed by the commitment to maintain prudential soundness alongside other important regulatory outcomes, such as consumer protection and proportionality, when leaving the EU. We have also taken account of concerns raised by industry on elements of the directive that could pose potential risks to financial stability and consumers by tailoring the approach for the UK market.
Subsequently, we are not transposing the provisions in the directive that firms do not need to comply with until after the end of the transition period. We are also sunsetting specific provisions so that they cease to have effect in the UK after the end of the transition period, as well as inserting provisions to ensure that the elements that remain in effect after the end of the transition period continue to operate effectively. The sunsetted provisions will cease to have effect in the UK from 11 pm on 31 December 2020. Our approach meets our legal obligations and ensures that the UK’s resolution regime remains robust and in line with international standards. We have interacted with industry and stakeholders to help explain exactly what the change means for them.
Turning to the content of the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, the SI is vital in ensuring that the UK has a fully effective legal and regulatory financial services regime at the end of the transition period. The approach taken aligns with the general approach established by the European Union (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. Specifically, this SI amends and revokes aspects of retained EU law and related UK domestic law, makes a small number of necessary clarifications and a minor correction to earlier financial services EU exit instruments, and provides sufficient supervisory powers for the financial services regulators to effectively supervise firms during and after the end of the transition period.
Moving on to the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020, the fifth capital requirements directive—known as CRD V—continues the EU’s implementation of the internationally agreed Basel standards, which further enhance international prudential standards and regulation and aim to help ensure the safety and soundness of financial institutions. This instrument will allow for the transposition of CRD V into UK law, as is legally required under the terms of the withdrawal agreement. It will also ensure that the legislation that transposes CRD V continues to operate effectively in the UK after the end of the transition period. As with previous capital requirement directives, the Government will delegate the majority of the responsibility for implementation to the independent Prudential Regulation Authority, which has the requisite technical knowledge and expertise to ensure an effective and proportionate implementation. This instrument therefore only includes provisions that are legislatively necessary to ensure that the PRA can effectively implement CRD V.
The instrument makes changes to the macroprudential toolkit to preserve the current level of macroprudential flexibility. The most important of these is enabling the PRA to apply an “other systemically important institutions” buffer and a systemic risk buffer to relevant institutions to address particular financial stability risks. In line with requirements of article 21a of CRD V, the instrument also allows holding companies in scope to apply for supervisory approval. The framework and scope of the approval regime will be administered by the PRA and the instrument will also ensure that the PRA has the appropriate tools to ensure compliance with it.
Although the capital requirement directives were created with banks in mind, they also extend to investment firms. However, the risks faced and posed by investment firms are substantially different to those of banks. The instrument therefore excludes non-systemic investment firms from the scope of CRD V. Until the Financial Conduct Authority introduces a prudential regime for investment firms, about which I have spoken to the chief executive just today, following Royal Assent to the Financial Services Bill, investment firms will remain subject to the existing prudential framework.
Finally, let me turn to the content of the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020. The UK has played a leading role in transforming tax authorities’ ability to work across borders to tackle emerging international tax risks. Maintaining the UK’s position and driving forward this agenda is a central pillar of the Government’s no safe havens strategy, which aims to improve offshore tax compliance so that everyone pays what they owe. Bearer certificates are anonymous and infinitely transferable, making them an easy means of facilitating illicit activity such as tax evasion or money laundering. It is for this reason that UK companies have been prohibited from issuing them since 2015.
A 2018 report from the OECD’s global forum noted that although the UK had mostly addressed its 2013 recommendations on the prohibition of bearer shares,
“a small cohort of entities and arrangements…are still able to issue bearer shares or equivalent instruments.”
The report went on to recommend that the UK abolish bearer shares. This instrument implements that recommendation and prohibits the remaining entities capable of issuing bearer shares or certificates, which include certain types of collective investment schemes, from doing so. It also makes arrangements for the conversion or cancellation of any existing bearer shares. It brings those remaining collective investment schemes, including open-ended investment companies formed before 26 June 2017 and all unit trusts not authorised by the Financial Conduct Authority, in line with companies formed under the Companies Act 2006, which are already prohibited from using bearer shares by the Small Business, Enterprise and Employment Act 2015. Complying with the global forum’s recommendation will help ensure that the UK maintains its position at the forefront of the international community, continuing to set standards that help improve offshore tax compliance and fund our vital public services.
In summary and in conclusion, the Government believe that these four instruments are necessary and vital for the UK’s financial services regulatory architecture, and I sincerely hope that the Committee will join me in supporting the regulations this afternoon.
John Glen
I listened carefully to what the right hon. Gentleman had to say, and he is, as always, the model of courtesy and constructive opposition. The substantive challenge that he offered was about the value, legitimacy and appropriateness of a four-in-one SI debate. It is vital that we deliver each of these financial instruments before the end of the transition period both to ensure continuity and a fully functioning and effective legal and regulatory regime from 1 January 2021 and, in the case of the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020, to ensure that the UK meets its international obligations.
Given the links across each of the financial services instruments and the importance of them coming into force before the end of the year, it is appropriate for the Committee to consider them together, and it is the most effective use of parliamentary time. It is also the case that the SIs could not have been brought forward sooner. Several of the provisions in the instruments fix deficiencies in changes to EU regulations that have only recently become applicable during the transition period.
The right hon. Gentleman asked three specific questions about the SIs and then one about the process. He first asked about the extent of the changes from the BRDD II resolution regime. Under the terms of the withdrawal agreement, the Government will implement EU legislation, such as this regime, that evolved during the transition period. In our transposition of BRDD II, we have considered which provisions would not be suitable for the UK resolution regime after leaving the EU, while still maintaining that prudential soundness and the other important regulatory outcomes, such as consumer protection and proportionality. We have also taken into account concerns raised in consultation responses about the potential risk to financial stability and consumers. Given the complexity of those considerations, I am happy to write to the right hon. Gentleman to set things out more clearly.
The right hon. Gentleman asked about the extent to which CRD V changes the capital requirements regime. The capital buffers instrument is being introduced partly to ensure that the current macroprudential flexibility is maintained. The purpose of the buffers is to allow the regulators to continue to be able to address financial stability risks, including those posed by large institutions.
The right hon. Gentleman asked about hidden charges in remittances and referenced an answer I gave on 3 July about their cost. I am sorry, but I will have to write to him on that matter as well. I am sorry that I cannot offer him a clear answer now. I do not want to busk it.
Mr McFadden
No, I am grateful to the Minister for giving way. I would be grateful if he clarified the point. Let me be clear why. A clarification from him that the intention is to make transparent the full cost of fees and charges will help the regulators to police the charging of the instruments. If the Minister clarifies the matter in that way, that might help stop some of the practices that we have seen in the past whereby charges are hidden, to consumers’ cost. Clarification would therefore be helpful.
John Glen
I respect that point and I am happy to give that clarification at the earliest opportunity.
The final process point that the right hon. Gentleman set out is the relationship between the onshoring programme and the Financial Services Bill that is now in Committee. The EU exit legislative programme, known as the onshoring programme—I seem to have been engaged with it all my life—is about ensuring a fully functioning legal and regulatory financial services framework at the end of the transition period.
The Financial Services Bill is an important step in taking responsibility for our financial services regulation, ensuring that we maintain the highest regulatory standard and remain an open and dynamic global and financial centre now that we have left the EU. It will deliver several existing Government commitments and ensure that the UK maintains that world-leading standard. It goes beyond the simple process of onshoring what we have had to date and what has gone live this year. It looks forward and sets out, with a new accountability framework, how the regulators will act. It also enacts a number of other smaller measures. However, I concede that it is a complex process—I do not mean that to sound patronising—whereby we have been trying to onshore and then look forward. The Bill, which we will hopefully take through Parliament, is the first in a series of steps that will involve legislation in subsequent Sessions.
I hope that I have substantively, if not exhaustively, addressed the points that have been made. As ever, I thank the right hon. Gentleman for the constructive way that he has brought his points to the Committee. I hope that the Committee is sufficiently satisfied to support the regulations.
Question put and agreed to.
DRAFT SECURITIES FINANCING TRANSACTIONS, SECURITISATION AND MISCELLANEOUS AMENDMENTS (EU EXIT) REGULATIONS 2020
Resolved,
That the Cttee has considered the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020.—(John Glen.)
DRAFT FINANCIAL HOLDING COMPANIES (APPROVAL ETC.) AND CAPITAL REQUIREMENTS (CAPITAL BUFFERS AND MARCRO-PRUDENTIAL MEASURES) (AMENDMENT) (EU EXIT) REGULATIONS 2020
Resolved,
That the Committee has considered the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020.—(John Glen.)
DRAFT BEARER CERTIFICATES (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 2020
Resolved,
That the Cttee has considered the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020.—(John Glen.)
Financial Services Bill (Second sitting)
John Glen ExcerptsTuesday 17th November 2020
(4 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Economic Secretary to the Treasury (John Glen)
Q
Chris Cummings: Thank you for the opportunity to speak to one of the most central parts of the Bill. May I take a moment to congratulate you and your team on introducing the Bill? It provides much-needed reassurance to my industry, so thank you for that.
The industry is very pleased to see the overseas funds regime introduced as part of the Bill. Around 9,000 funds are currently available to UK investors as a result of the current regime. The reason we feel it is in the interests of UK savers and investors to have access to such a variety of funds is that it brings to the market not only choice but much-needed competition. It means that individual investors have greater choice and an ability to tailor their portfolio in a way that makes sense to them and reflects their risk profile. It is really the foundation of why the UK is the pre-eminent fund centre, not just in Europe, but globally. As the Minister knows, the UK has long enjoyed a reputation for being an attractive centre for fund management. That is built on the ability of UK investors to access an innovative and ever-adapting fund market.
We support this measure in the Bill wholeheartedly. At the moment, as the Minister knows, we manage around 37% of Europe’s assets, which is enabled through measures such as this. It is important for UK savers and investors; having such a variety of funds goes to the heart of having such a sophisticated savings environment in the UK.
It is important to note that if there was a cliff edge—if UK investors were not able to access these funds—that would constrict consumer choice. In trying to replicate something akin to what we have at the moment, we would bring a heavy burden of extra costs on to the industry and greater bureaucracy. It would reduce significantly the number of funds to which UK investors could have access. That is why we believe that the overseas fund regime is material.
It is worth contrasting that with what we see at the moment. In order to help navigate these turbulent waters through the Brexit period, I was delighted that the Government heard our calls to introduce a temporary permissions regime with the Financial Conduct Authority. I am pleased to note that the Bill extends the period from three to five years for that requirement, which is very good. It also allows us to tackle two particular issues wrapped up in the overseas funds regime.
First, there is a review of section 272, which is the current structure by which a fund sponsor or investment management company would seek to have their fund recognised by the FCA—our regulator here in the UK. Section 272 is okay, but it is rather cumbersome. It does not stand up well compared to international comparators. It is a rather lengthy form, which takes a while to complete and gives the FCA a six-month period to look at approving that particular fund.
The proposals in the Bill take us to a completely different level, where the FCA is able to look at fund structures across the piece rather than at each individual fund. We feel that is a big step forward. While section 272 could be reviewed and reformed, there is a different category of opportunity presented by the Bill and that is why our industry is so keen to see the Bill come forward and have the overseas fund regime baked into it as a measure that goes ahead. I will pause there in case there are comments before I move on to comment on equivalence, as you were kind enough to mention.
John Glen
Q
Chris Cummings: Currently, we enjoy unfettered marketing right across the whole of Europe and the EEA. Post Brexit, naturally, that will come to an end. The way that the regulatory authorities assess whether a particular fund is suitable is to judge the equivalence of the regime of the sponsoring organisation or where the organisation is based. Having that judgment of equivalence has been one of our industry’s clear calls throughout the Brexit process.
We were pleased that the Chancellor took a step forward in recognising and granting equivalence to a limited measure in the House of Commons in his statement last week. We think that was absolutely in the right direction. We have been unstinting in our calls for the European Commission and our European regulator, the European Securities and Markets Authority, to respond to those in kind and move forward so that the equivalence determination could have been made by now and be working. We were sorely disappointed that in June ESMA decided not only not to make a decision on equivalence, but to defer it for a period of time until after the IFR comes into effect.
We feel that that was a missed opportunity to settle the fact that the UK and the EU would be equivalent, which we currently are, having adopted, rather in full vigour, the European rules under which our industry labours. We are hopeful that continuing industry efforts to encourage ESMA and the European Commission to recognise the UK as equivalent will come through, but we are more than pleased with the steps that the Chancellor announced and the comments that are carried forward in the Bill. At the moment, we see that as a first step, but we look forward to greater work being done on this in the months and years ahead.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Q
The Bill does lots of different things, but I would like to mention two. First, it onshores or incorporates a significant body of EU law through different directives into UK law and gives the governance of those to the UK regulators. Secondly, it sets up this overseas fund regime, by which it grants equivalence on a country-by-country basis. It says that the Treasury will make these equivalence decisions as well. The Chancellor announced the direction of travel last Monday.
How do you see the relationship between these two different parts of the Bill? In theory, in future, having onshored the body of EU law and the directives, we are now at liberty to depart from them if we so choose. Do you see a relationship between that debate around divergence and the degree of divergence that the UK decides to opt for and the equivalence decision that we now need from the rest of the EU?
Chris Cummings: It is worth reflecting on the good work that has been done so far in trying to bring the different regimes together and match equivalence. Looking to the future, there is a strong argument for the UK to continue to bolster its presence in the international standard-setting fora, whether that is the Financial Stability Board, the International Organisation of Securities Commissions, Basel, and so on. Our authorities can continue to play a very strong role in arguing for what our industry would prefer, which is global and international standards.
We continually push for international standards as a global industry because that allows us to operate with reduced bureaucracy and by taking costs out of the organisation so we can really focus on looking after client needs. The UK has an outstanding track record of having its policymakers and regulators taken seriously in those international fora, because of the scale of the market that we have in the UK and the sophistication of our capital market in particular. At that level, if we can push for international standards in an international environment, that reduces some of the potential friction between the EU and the UK or other jurisdictions about where divergence may or may not be happening. That is the first thing we would like to stress—the international nature.
Secondly, something that has become part of the discussion in terms of the future relationship of the UK and the EU, and which our industry thoroughly supports, is a much clearer focus on outcomes and outcome-based regulation. It is noticeable that across the EEA there are different approaches in different European jurisdictions, all of which have been judged equivalent so far. Recognising that different jurisdictions will walk up to the same issue from different directions, yet seeking to achieve the same thing, that is the material part.
The third area I would just point to, if I may, is the depth of relationship between the UK authorities and those across the EU, not just in ESMA, our European regulator, but in the national domestic regulatory authorities. It is still absolutely the case that the UK policy-making apparatus—the UK regulatory bodies—is seen to have considerable expertise to offer. So just because we start in different places, it does not mean that we should not see the UK taking a little leadership and the EU tacking towards us in terms of lessons learned because of the sophistication of the market that we can offer. That was one of the reasons why we in the IA, among many other organisations, through the Brexit process was keen to press for a regulator to regulate a dialogue, which could be technically oriented, focused on bringing market and regulatory understanding to bear and making sure that there was a no-surprises, keeping-markets-open focus through the process that we have been through.
So I do not see equivalence and divergence as axiomatically pulling in different directions. I think what we will undoubtedly see is a period where the definition of equivalence needs to be—we need to have a thoughtful discussion, actually, about the substance of equivalence, moving away from its ephemeral nature and the fact that it can be granted or dismissed within a 30-day notice period. We need to have a much more joined-up and mature discussion about how two major markets can keep on doing business together, particularly in investment management when, as I mentioned earlier, 37% of Europe’s assets are managed here in the UK and when, for certain member states, whether it is the Dutch pensions industry or something else, the quality of investment management conducted here in the UK is seen as a prized asset and something that they want to learn from and continue to enjoy the benefit of.
John Glen
Q
Emma Reynolds: Thank you, Mr Glen. We support the measures in the Bill, and both the overarching and the stated objectives. It is absolutely right that the UK Government are onshoring the regulations. There are obviously other measures within the Bill that are extraneous to that, which we support. The Bill is a welcome first step, but we look forward to working with the Government to develop an overall strategy for the financial services sector that could pull all the different strands together, building on what the Chancellor said last week, which was very welcome.
John Glen
Q
Emma Reynolds: It is a very welcome first step. All I would say is that we, as an industry, have a broader agenda about our industry’s long-term competitiveness going forward. I would not have expected to see that in this Bill. We had a very good relationship with Government, particularly with the Treasury, but some of the other issues that we are concerned about relate more to other Departments, whether it is access to skills and talent from abroad or green finance or other issues that are not in the Bill. It is a welcome first step.
John Glen
Q
Catherine McGuinness: Thank you for inviting me to give evidence. I cannot answer on the technical ability of the regulators in detail, other than to say that, in our experience, they are very capable of adapting and innovating. Indeed, we heard last week at Mansion House from both the Financial Conduct Authority and the Prudential Regulation Authority about their plans. Obviously, the regulators will be gaining significant powers under the Bill. It is important that we look at how those powers are scrutinised, including by Parliament.
On that front, the International Regulatory Strategy Group, which both TheCityUK and the City Corporation support, has suggested that parliamentary scrutiny be strengthened and reordered, and that the role of the Treasury Committee be complemented by setting up a joint Select Committee on financial regulation to look in detail at specific pieces of financial services regulation. That would be important to strengthen scrutiny, as we hand more responsibility to the regulators. It would also be useful––and the IRSG has recommended it––to increase the transparency of decision making by both the Treasury and the regulators, and to improve scrutiny. I am not sure if I have fully answered your question.
Mr McFadden
Q
The Bill does lots of different things but two big things are that it transposes, or onshores, lots of different parts of EU regulation from many different directives. It gives powers to the UK regulators to govern all that. In doing that, as we come to the end of the transition process, there is greater freedom for either the Treasury or the regulators to diverge from that body of EU law. The Bill does that, but it also has this overseas markets vision, which is granting equivalence on a country-by-country basis, to the 9,000 funds that are domiciled overseas but which operate in the UK. I want to talk a bit about these two different parts of the Bill. Starting with you, Emma, what do you think your members’ attitude is to onshoring this body of EU law? Do they broadly regard it as something that they would like to stick with or are there areas that they would quite quickly want to diverge from and, if so, what would be the most prominent areas?
Emma Reynolds: We were delighted that the Government took the unilateral decision last week to grant the EU equivalence in a number of different areas. We are still hopeful that the EU might follow suit. We have been calling for a technical outcome-based approach to equivalence for some time now. Within that, you could have different rules but the same outcomes. Even if there are pinch points around Solvency II—only some elements of Solvency II—you could have different rules in the UK that achieve the same objective.
From now until 1 January, we will remain technically equivalent. Inevitably, over time, there will be some changes in regulation, both on our side in the UK and in the EU. The EU is currently reviewing some of its own directives, MiFID being a case in point, but there are others too. We do not want to see divergence for divergence’s sake. We would like to encourage a strong dialogue between regulators in the UK and the EU. There already is that dialogue, but we would like to see a framework for that plan. If you are a member of ours who trades across borders, you want similar or the same rules.
John Glen
Q
Adam Farkas: I will try to answer the first part of the question, but then I will leave it to Constance. because this is one area where I was personally involved, and I am not allowed to comment.
On the first part of the question, it is beyond doubt, and everybody in the public and private sector recognises it, that the UK as part of the European Union was playing a leading role in shaping and forming financial services regulations in the Union. That is clearly evidenced by the leading role of London and the UK more broadly as the financial services centre or hub of the Union. That is beyond any doubt. It was respected as such, and had a very strong voice in shaping the different regulatory initiatives. For the future relationship, it is important to have engagement and openness, and that a co-operative attitude, or co-operative setting, is retained, with two autonomous decision-making jurisdictions, in which the two sides can co-ordinate, exchange views and possibly even influence each other’s new initiatives or the evolution of their respective regulatory frameworks, with the potential aim of maintaining as much consistency as possible and practicable. On the investment firms regime, I pass the floor to Constance, because I was part of the development of the standards at the EBA, so I must refrain from comment.
Constance Usherwood: With the investment firms prudential regime, the UK authorities have played a key role in the development of the prudential regime that is specifically targeted to the business models of investment firms and making sure that it is proportionate. In that respect, we fully support the approach that is being taken today. In terms of the application to the different prudential frameworks and of the regimes versus the CRR, the bulk of our membership will probably not be directly impacted by the regime due to their size and activities. That would also tally with the approach that the EU has taken.
John Glen
Q
Constance Usherwood: Yes, I would agree with that, absolutely.
John Glen
Q
Constance Usherwood: I am going to apologise, but I think that Adam is probably best placed to come in on this one.
Adam Farkas: We very strongly support the clear and oft-repeated message of the UK authorities that active transition by transaction parties to the new risk-free rate is the only way to achieve certainty of outcome in the transition. We have promoted this message regularly and we have developed market standard language to support it that can be used by investors to assist them in this process.
A very difficult part of the transition process relates to what happens to legacy contracts already in place that reference the old LIBOR rates that are being phased out. Within legacy contracts, there are the so-called tough legacy contracts, which are very difficult to repaper or change the reference in. They cause the most complex challenges for end users as well as for members of AFME or other financial services providers. We therefore very much welcome the provisions of the Financial Services Bill that give the FCA new powers to mitigate that risk by directing the administrator to change the methodology of LIBOR if doing so would protect the consumer and market integrity. That would enable the FCA to stabilise certain LIBOR rates during the wind-down period so that their limited use in legacy contracts can continue. The answer is yes, we are very supportive. None the less, we welcome the further clarity which, I think, will be forthcoming on 25 November from the FCA and the Treasury on what steps the authorities are planning to further this objective, because there are some outstanding questions that require clarification. I would be happy to go into them, but in the interests of time, I will stop there.
John Glen
Q
Adam Farkas: That is a difficult question to answer because we have not speculated on different outcomes, but certainly the path that the Bill is taking is something that we can very strongly support.
Mr McFadden
Q
Adam Farkas: Very briefly, equivalence determinations provide the major legal framework for different jurisdictions to provide access to service providers that are licensed and supervised in each other’s markets. To answer your question, if equivalence determinations by the EU are not forthcoming, or not brought forward at pace or with the width that is expected, that will put limitations on the access of service providers—financial services companies and firms—to the EU market. This is really an issue of market access.
The Chair
Thank you very much. We are going to follow the time-honoured tradition of going first to the Government, then to the Opposition, and then to other members of the Committee. We will start with the Minister, John Glen.
John Glen
Q
Gurpreet Manku: We welcome the Financial Services Bill as it implements a prudential regime for investment firms that is tailored to the specificities of the UK market while maintaining world-class regulatory standards. To give you some context, the UK has already regulated private equity and venture capital firms. Broadly, there are two categories. First, we regulate the managers of private equity and venture capital funds. Those entities are regulated under the alternative investment fund managers directive. We also regulate advisory entities under MiFID. Those firms will be most impacted by the investment firms prudential regime. These advisory firms advise on and arrange private equity transactions for other regulated fund managers, sometimes within the same group. Those other managers tend to be based overseas, including in the US, Asia and Europe.
That is important because the fact that the UK has a lot of those advisory entities signifies that the UK is a global hub for private equity and venture capital. Many international firms choose to make the UK a base for carrying out UK, European and, in some cases, international investment and fund-raising activity. Since the inception of the investment firms review, the BVCA has been in dialogue with both the FCA and the Treasury about its implementation.
We welcome the introduction of a tailored regime that appropriately covers the activities of these firms, as well as their size, and the relative risk they pose to the financial system when compared with other banks and financial institutions. The new regime will lead to additional requirements for some of those firms, particularly the advisory entities that I mentioned, including higher capital requirements. We submitted feedback to a recent FCA discussion paper on the need to calibrate these new requirements for the risk posed by those firms. Our key ask for the FCA and the Treasury is that an appropriate transition period is available to those advisories.
Interestingly, the FCA’s discussion paper acknowledges that while there are transition provisions in place for other categories of investment firms, there is a gap for the category that includes these private equity advisers. That FCA category in the UK is known as exempt CAD—capital adequacy directive—firms. That is not just an issue for private equity and venture capital firms. There are many other types of firms in this category. My understanding is that they tend to be smaller financial services firms, such as corporate finance advisory boutiques and other consultants. That reflects the UK market, which has a huge number of financial services firms at the smaller end.
We think that the omission of this transitional period in the EU text was not deliberate and was just a mistake. The category of advisers that we are referring to should also have a transition period. The benefit of the Financial Services Bill is that it will enable the FCA to correct this omission and ensure that all types of investment firms benefit from transition rules.
Finally, I welcome the confirmation that the target implementation date is January 2022, because I think that will give sufficient time for the FCA to consult on the detailed rules and we need that lengthy consultation period. It will also give firms the time that they need to implement them.
John Glen
Q
Gurpreet Manku: Interestingly, we have been speaking to the FCA about this since 2016. The need for a special investment firms prudential regime emanated out of discussions in the UK, because there was a recognition that regulatory requirements that apply to banks do not necessarily work in an investment firms context.
The FCA does understand the breadth and variety of firms that operate in the UK. The confirmation that there will be a bit more time to think through how the detailed rules will operate in practice is really welcome. If I had one ask, it would have been for more time to look at the details of what would follow.
The Chair
We will now move on to our final panel of the afternoon. It is another one-man virtual panel, with Peter Tutton from StepChange joining us remotely. We have until 5 o’clock, when we must adjourn. Peter, could you introduce yourself for the record and for the members of the Committee?
Peter Tutton: Good afternoon, everyone, and thanks for inviting me. My name is Peter Tutton; I am head of policy at StepChange Debt Charity.
John Glen
Q
Peter Tutton: That is a good question. We are delighted that the two new debt schemes are going forward. We think that they will be a very important help for people who are struggling. What we think they will do is partly driven by our experience of being a deliverer of the debt advice scheme in Scotland. From when we have spoken to our clients, we know that the protections that both the breathing space scheme and the statutory debt repayment plan will offer––a sort of guarantee that if you keep up with your payments you will have protection from your debt spiralling, from collections activity, with people asking you to pay money that you cannot afford, and the threat of enforcement action––deal with the things that frighten people and make them stressed and anxious. They damage people’s health and lead them to do things like borrowing more to cope with unaffordable demands. The lack of a guarantee of forbearance can really impede people’s recovery from debt and financial difficulty.
We are very pleased: those protections have existed in England and Wales for insolvency solutions for some time but not for people who are able to repay their debts. Very often, clients will come to us after an income shock. As we sit here now, people are losing their jobs, having income reductions or falling ill. Their income will drop significantly for a time, but then it takes time for them to recover and get back on track. In those cases, these kind of schemes, first the breathing space scheme to help people to get advice and then the statutory debt repayment plan to help people pay their debts off within that safe space, will be really important in helping people. A lot of the fine detail about how they will work has still to be worked out. It will be important to ensure that they are accessible and that they fit together.
One thing we are interested in is when someone gets to the end of their breathing space scheme. If someone is still recovering, as we call it, from their financial difficulties, will they be able to go into the statutory debt repayment plan, where it may not be apparent that they can pay their debts within their long-stop period at that point, but where we have good reason to believe that their income will recover and that they have a good chance of getting back into work? It would be useful if the two schemes aligned so that people do not, first, get protection, then fall out of protection and only come back into it later. There could be a position where creditors could all pile in to take enforcement action or debts could begin to grow again. That is one of the things where we are keen to see the detail to ensure that the two schemes align and that we can move people from one to the other, with a long-stop on “How long is a reasonable period to repay their debts?” but one that is not worked out very strictly at the beginning while people’s circumstances are still fluid.
There is lots of fine detail to work out. We are going through the process at the moment with the Insolvency Service creditors and debt advice. Agencies are working out the detail of how the scheme will work in practice. What is important for both schemes is that we as debt advisers need to be able to administer them without significant extra cost. We might come to that later. With breathing space, there is no direct funding so the cost situation is very important. If it is very burdensome for us to deliver, it may be hard to do. We then need to do some work still with the creditors to make sure that everyone is getting the information that they need to get protection quickly to people who need it. There is a bit more work to be done there. Likewise, with regard to the way in which the statutory debt repayment will work, there are practical details such as how people will go into the scheme; how the “fair and reasonable” test will work—there is a need to make sure that it is not too cumbersome, and that it is effective and cannot delay protection unduly—and ensuring that creditors do not abuse the right to object, although they must have that right, in a way that can slow the whole scheme down. These are the sorts of things we will need to work out.
John Glen
Q
Peter Tutton: I think this is a necessary measure. We should cast our minds back to the child trust fund. In some ways that was similar, as it was a way of encouraging people to build up savings, although in that case the savings were for their children. As you may remember, one aspect of the child trust fund is that people got a voucher and then had to put it somewhere. A huge number of those vouchers ended up in default. We know that, especially among people who are less experienced in using financial services and in lower income households, it can be quite daunting when a choice has to be made between a number of different savings products that they do not really understand, and when they do not really know the difference.
That can create inertia. It makes a great deal of sense to give a safe way of moving people automatically into a successor product so that we do not have that problem of trying to contact them to get them to make a decision. The clause is worded so as still to allow people to make their own decision, which is quite right, and having safeguards seems sensible. We are big supporters of the Help-to-Save scheme, which is a cracking scheme. Our own research shows that having a pot of precautionary savings can significantly reduce people’s chances of falling into debt. If I had one criticism—
John Glen
I agree with that. We are trying to do what we can to improve awareness and get people to use small amounts; I think they can put by up to £1 or £2 minimum.
Peter Tutton: But it is a good scheme, and it is sensible to allow people who have saved into the scheme to put their savings somewhere else. They can make a choice if they want to, but we know that some of the people whom the scheme is designed to attract may struggle to choose between superficially similar financial service providers and get stuck in the middle. This makes sense.
Mr McFadden
Q
Peter Tutton: In an ideal world, we would like the breathing space period to be longer. We can understand why it has been set up as it has. It is very good that it includes, for instance, Government debt; it is a new thing that people will have protection from Government and local government debt; things like council tax are a very big problem for our clients. We can see that the Government may be nervous about a longer scheme. Perhaps if there was a way of looking again soon, once we are satisfied that it works okay, we could give that breathing space a bit more time. There are two things that the breathing space can do. There is what it does at the moment, which is largely about allowing people to get advice and get into a debt solution, but there is also time during which people need to recover.
As I said earlier, when people come to us they are often still in quite a degree of difficulty and their circumstances have not resolved themselves. We cannot always instantly put them into a stable long-term solution. One of the things that might help that would be a longer period of breathing space while they are recovering. In lots of cases, there is an obvious solution to put people into; if their circumstances are not going to improve and debt relief is the right solution, we will put them into that. We may be able to deal with that by articulating the statutory debt repayment plan and the breathing space such that there is a gap in the middle. Ideally, a longer period would be good. There may be a way of effecting that just by making sure those two things align, so that people whose circumstances are still recovering—they come to us and have a very small amount of money, but we believe that they will back into work, and for a lot of our clients that is what happens—can keep that protection going through until their circumstances improve and they can get back on the track of repaying their debts. That would be the one thing, instantly, that we would think about changing.
Another thing is that in the Treasury policy statement, including this legislation, there is a provision for funding the statutory debt repayment plan. The Treasury policy statement talks about that funding for debt advice providers being around 9% if you distribute funds as well. That is something that may need to be looked at again—not a lot, but a bit. That 9% is a bit less than the funding that we currently get from what is called fair share funding, which is [Inaudible] funding we get for helping clients with debt management plans. That funding actually allows us to do a lot of things.
One of the things that we are not yet sure about and are not able to model is what the additional costs of the statutory debt repayment plan will be. For instance, there is a provision in there for creditors to have a vote as a safeguard before a plan can be accepted. If we have to administer that vote in some way, for instance, it would mean an extra cost. There are some bits and pieces around that that may need looking at a bit more once the precise details of the debt repayment plan scheme are better understood.
Financial Services Bill (First sitting)
John Glen ExcerptsTuesday 17th November 2020
(4 years, 1 month ago)
Public Bill CommitteesRead Full debate Financial Services Bill 2019-21 View all Financial Services Bill 2019-21 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 November 2020 - (17 Nov 2020)
The Chair
Q
Victoria Saporta: Good morning everyone, and good morning, Chair. I am Vicky Saporta, executive director for prudential policy in the PRA within the Bank of England.
Sheldon Mills: Good morning. I am Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority.
Edwin Schooling Latter: Good morning all. I am Edwin Schooling Latter, director of markets and wholesale policy at the Financial Conduct Authority.
The Economic Secretary to the Treasury (John Glen)
Q
Victoria Saporta: Thank you for the question, Mr Glen. Yes, we worked closely together, as you would expect for a Bill that proposes to revoke elements of the acquis and give the regulators specific powers. Ultimately, of course, it is for the Government to introduce the Bill and for Parliament to take it forward. However, the working relationship was very close, and because of that we are content with the content of the Bill and the proposed measures.
John Glen
Q
Sheldon Mills: We have had close interaction with you and your officials throughout the drafting of this Bill, and also the preparations for a new UK financial regulatory system, as we move to exit from the EU. We think it is important that there is an agile and confident UK financial services regulatory system, which will support the UK financial services industry and, importantly, also protect consumers and ensure market stability. We feel that the Bill is a good first step in that direction, to enable us to play our role in those goals and objectives for the UK financial services industry.
John Glen
Q
Edwin Schooling Latter: Yes, of course. Committee members will be aware that LIBOR is a benchmark that has had a troubled past. It is also a benchmark that probably does not suit the needs of its users as well as some alternatives; but it is very deeply embedded in the financial system, so while we think it is the right thing to move towards the end of LIBOR and its replacement with better alternatives, we need to be able to do that in an orderly way. The provisions in front of you contain some important measures to enhance the FCA’s powers to manage an orderly wind-down—for example, to identify the point at which the benchmark is no longer sustainable and to take measures to ensure that its publication ceases in the least disruptive way possible for the many hundreds of thousands of contract holders who have mortgages or more complex financial instruments that reference the benchmark in some way.
Mr Pat McFadden (Wolverhampton South East) (Lab)
Before I begin, can I get some sense from you, Mr Davies, about whether we can have a few questions?
The Chair
I remind colleagues that we have until 10.55 am for this session, so it is much shorter than the previous one. I hope that colleagues will be mindful of that.
John Glen
Q
Simon Hills: It is important to recognise that the Prudential Regulation Authority has been a strong supporter of Basel 3.1. It has been very influential in the way it was finalised, and I think that it is committed to implementing the Basel 3.1 framework in an internationally aligned way. That is important for our members, particularly if they are internationally active, because they want a coherent and harmonised regime across the world. If you are a UK bank operating in the UK, North America, Europe and Asia, you want one version of Basel 3.1 and you want it to be implemented in a coherent way. If not, and if there are different approaches to regulatory reporting, to how credit risk is assessed and to liquidity requirements, you have to implement a number of different versions of Basel 3.1, which will be more difficult.
In terms of UK Finance’s competence in, if you like, holding the PRA to account, we have a wide range of members for whom Basel 3.1 implementation is very important. I am pleased to say that I have good working relationships with Vicky and her colleagues at the PRA.
John Glen
Q
Daniel Cichocki: Certainly, the issues with the lack of sustainability of the LIBOR benchmark are very well documented, and it is important, as the Financial Stability Board has acknowledged at an international level, that we move away from LIBOR on a smooth and timely basis. It is also very important, certainly from an industry perspective, that as a result of moving away from LIBOR on to more robust reference rates, customers who have contracts referencing LIBOR are not inadvertently affected by that transition.
What this Bill seeks to do—and we are very supportive of its provisions—is to make sure there is a safety net in the form of powers being granted to the FCA, to ensure that those contracts that cannot be migrated on an active basis before LIBOR ceases have a solution so that the customer has a clear outcome for the contracts beyond LIBOR cessation.
These powers are important because before 2017, and the acknowledgement that LIBOR would cease, many contracts did not have clear, robust terminology setting out what would happen if LIBOR ceased. They may include terminology addressing if LIBOR should be unavailable for a day or two, and that might be the reference point those contracts would take. In that instance, without these powers, we may have seen customers falling back on to the last available LIBOR rate to the point of cessation, essentially becoming a fixed-term contract. We may have seen customers falling back on to cost of funds, which would create very diverse and disadvantageous outcomes for them. Equally, we would have seen fairly significant levels of contractual disputes beyond the end of 2021. These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.
Mr McFadden
Q
Simon Hills: I am not sure that we would want the UK Government and authorities to diverge significantly, if at all, from other standards. We are not sure yet what Europe will do in respect of Basel 3.1. We do not expect draft legislation from the Commission until around Easter next year. That said, from the way in which the Commission has implemented previous iterations of Basel, I would expect it to stick quite closely to that Basel 3.1 framework, for the same reasons I have mentioned: international coherence and harmonisation, and easing the comparison of different banks and jurisdictions.
The Chair
Q
Paul Richards: I am Paul Richards. I am a managing director at ICMA, which is the international bond market association. I am here to give evidence on the transition from LIBOR. I am involved in the transition from LIBOR to SONIA—the sterling overnight index average—because I chair the bond market sub-group, which consists of issuers, banks, investors and four major law firms. We work closely with the FCA and the Bank of England. If you will permit me, I shall make a short introductory statement.
I hope to be able to give you a bond market perspective on the Bill but, for the market as a whole, we are all trying to move away from LIBOR to risk-free rates while minimising the risk of market disruption and litigation. The Bill is welcome and very important for the bond market because it will give the FCA extra powers to deal with tough legacy LIBOR contracts and wind them down in an orderly manner.
There are three main points on which it would be very helpful if the Committee was willing to strengthen the Bill. First, the Bill needs to provide continuity of contract between the current definition of LIBOR and the new definition of LIBOR for legacy transactions once LIBOR is prohibited for new transactions. Legacy contracts referencing LIBOR under the current method of defining LIBOR need to be read as references to LIBOR under the new definition as determined by the FCA, so that there will be continuity there—this is sometimes called a deeming provision. This will reinforce the message that LIBOR will continue to appear on the same screen page, and it should also help to remove uncertainty and minimise the risk of a legal challenge on the basis that the current definition of LIBOR and the new definition are not the same and one party or another is worse off.
This is particularly a risk in the bond market in cases where LIBOR is specifically defined in legacy bond contracts in terms of its current definition. Continuity of contract or deeming provision like this was used when the euro was launched in 1999, and it worked well. Clearly, it would need to be drafted with the help of the Treasury and it would probably need to be drafted in terms of an article 23A benchmark in the way that the Bill is looked at. That is the first point.
The second and related point on which I hope the Committee will help is that the provision of the continuity of contract under the Bill needs to be accompanied by a safe harbour against the risk of litigation. This would provide that the parties to contracts would not be able to sue each other as a result of the change in the definition of LIBOR, and it would allow them to make conforming changes to bond market documentation.
The third point on which I hope the Committee will help is that the safe harbour and contract continuity provisions in the Bill need to be drawn as widely as possible, to protect any entity that uses the new definition of LIBOR for legacy transactions in place of the current definition of LIBOR. This would need to cover not just supervised entities in the Bill, but non-supervised entities, as the range of institutions involved in the international bond market is very wide.
Finally, I would like to draw your attention to two other points where there are significant legal risks under the Bill. One is that there needs to be equal treatment between legacy LIBOR bonds when the new definition of LIBOR takes over from the current definition, so that some legacy bonds are not preferred to others and there is no discrimination between them; otherwise, legal problems may arise. This would be a matter for the FCA under the Bill.
The other point is that there needs to be alignment internationally between the Bill and the similar legislation that is being introduced in the US and the EU, so that the rate used for legacy dollar bonds under English law and legacy dollar bonds under New York law is the same. Thank you, Mr Davies. I would be very happy to do my best to answer your questions.
John Glen
Q
Paul Richards: Thank you, Minister. First, as I mentioned, we welcome the Bill. The only question is: can it be improved to minimise disruption and litigation? The essential point is that, in the bond market, we have moved to SONIA as the risk-free rate, and new issues have been in SONIA for over two years now. That is the first step in the process.
The second step in the process is that we actively convert as many bonds as we can from legacy LIBOR to SONIA. We are making some progress there, but the third point is that we will still have tough legacy contracts that cannot be converted, either because they are too difficult to convert or because there are too many to convert by the end of 2021. In those circumstances, the provisions in the Bill are extremely helpful, because they provide for an orderly wind-down of tough legacy contracts. From that perspective, the Bill is very helpful. My questions relate to when the current definition of LIBOR is replaced by a new definition. Will there be contract continuity and a safe harbour to minimise the risk of disruption in the market and litigation?
Mr McFadden
Q
Paul Richards: LIBOR was set by a panel of banks. As the market no longer uses the underlying information that it used to use for banks, it has now changed, or will change, with the admission of SONIA, to a different definition. SONIA is essentially an overnight rate. It is a robust rate, because it is used widely in the market, whereas LIBOR is no longer used in the market as it was 30 or 40 years ago. That is one difference. A second difference is that LIBOR is a term rate—it is expressed over one month, three months or six months—whereas the liquidity in the SONIA rate is focused on the overnight market, which is therefore a much more representative selection and does not require expert judgment, unlike LIBOR.
A third point, perhaps, is that it is not just a UK proposal to replace LIBOR with risk-free rates in SONIA. A similar change is taking place globally. In the US, USD LIBOR is being replaced by the secured overnight financing rate, which has a similar sort of construction, and the situation is similar around the world. Those are the main reasons for the change.
Economic Crime Plan: Action 19
John Glen Excerpts(4 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
As part of the Government’s July 2019 Economic Crime Plan[1], the Treasury undertook to consider the case for a Government power to block listings[2] on UK financial markets on the grounds of national security. This work has concluded and indicates that there are possible scenarios in which a proposed listing may potentially give rise to national security concerns. Therefore, alongside today’s introduction of the National Security and Investment (NS&I) Bill, the Government are announcing their intention to bring forward a precautionary power to block listings on national security grounds.
In designing this power, the Government will take full account of the fact that companies from all over the world come to the UK, as a world-leading financial centre, in order to raise capital. They are attracted by the depth, breadth and openness of our markets as well as London’s reputation for clean and transparent markets. This power will reinforce that reputation and help us maintain London’s status as a world-class listings destination. The Treasury will publish a full consultation to inform the design of the power, which we expect to launch in early 2021. Further information will be set out in the consultation document.
[1] https://www.gov.uk/government/publications/economic-crime-plan-2019-to-2022/economiccrime-plan-2019-to-2022-accessible-version.
[2] When a company wants to raise capital, it can do this through “listing” its securities on a public market, such as the London Stock Exchange (LSE).
[HCWS570]
Support for SMEs: Covid-19
John Glen Excerpts(4 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
May I say what pleasure it is to serve under your chairmanship, Sir Edward? I join the other Members who have congratulated my hon. Friend the Member for Carshalton and Wallington (Elliot Colburn) on securing this important debate. I have listened extremely carefully to every speech, and we have had a wide-ranging discussion of a range of industries that have, obviously, been adversely affected by the experience of covid up and down the country, including the wedding industry and the retail sector in particular, with the impact on the high street. I listened carefully to what the hon. Member for Kingston upon Hull West and Hessle (Emma Hardy) said about the coach industry. I will seek to address as many points as I can. I thank colleagues for their insightful and constructive contributions.
Like everyone in the Chamber this afternoon I share the concerns that hon. Members have expressed for the financial wellbeing of the UK’s SMEs. It is difficult to overstate their place in and contribution to the UK economy. In 2019, the number of SMEs in the UK reached 1.4 million—a 31% increase in five years. As constituency MPs, we all know the contribution that SMEs make to our communities, and they now employ over half of the UK workforce. Given that, it is no wonder that helping them endure and adapt to these trying times has been a cornerstone of the Government’s response to the pandemic. They are at the front and centre of our thinking and, as hon. Members know, our strategy has been to protect jobs, crucially including those in small and medium-sized businesses. Much of the support we have provided has been with them in mind, including our generous wage support schemes; access to finance through millions of Government-backed loans and billions of pounds of grant funding; and targeted measures to help with fixed costs, such as statutory sick pay rebates and tax deferrals.
We have already helped keep millions of people in employment through the coronavirus job retention scheme. As of 18 October, we had helped 1.2 million employers furlough 9.6 million jobs, and paid £41.4 billion in grants. However, importantly, we understand that the economic effects of restrictions to tackle the pandemic outlast the restrictions themselves. That is why, last week, the Chancellor announced that he was extending the coronavirus job retention scheme until the end of March 2021. I respect the point that some have made about the changing nature of the support, but I suggest that is because of the changing nature of covid, which has driven the response of this Government. The Chancellor has moved very quickly when new health interventions have been made. This scheme will help protect millions of jobs in the coming months, and will allow smaller businesses to get back on their feet quicker when the time comes.
We have also supported workers through the self-employment income support scheme, one of the most comprehensive and generous support packages for self-employed people anywhere in the world. On top of the £13.7 billion already claimed by 2.7 million self-employed people through that scheme, a third grant will be available until January, covering 80% of trading profits. A fourth grant will be available from February to April next year, with further details to be provided in due course.
However, the practical issues that prevented us from including company owner-managers—namely, not being able to verify the source of their dividend income—without introducing unacceptable fraud risks still remain. Further, the issues around the newly self-employed in 2019-20—namely, that HMRC will not have access to their self-assessment returns in time to verify their eligible income—also remain. The latest year for which HMRC has tax returns is 2018-19, and the 2019-20 returns are not due until 31 January 2021. Of course, Government and the Treasury continue to look carefully at all the representations made on these matters to seek a way forward, but we have to be cognisant of those facts and how we would meaningfully deal with them. However, we have pulled out the stops to provide businesses with the credit they need at this difficult time.
I will now address some of the points that have been made about the bounce back loans and the coronavirus business interruption loan scheme. As of 20 September, SMEs and other businesses had applied for and received over £50 billion worth of CBILs and bounce back loans. As ever, my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) is very well informed on these matters, and made a number of suggestions about the challenges that some businesses face when securing loans. We have 28 providers that are accredited for bounce back loans, and 100 that are accredited for CBILs, but in this situation, we have non-bank lenders who are seeking to be part of that scheme and are struggling to access the finance. As he well knows, access to the term funding from the Bank of England is a matter for the Bank of England, and we have tried to look at those matters and see if more can be done.
The bigger issue that we have to learn from during this experience is that we have differentiated regulation between different banks and different entities that are providing finance. It is a challenge both to provide consumer protection universally and to have the right level of capital requirements for different entities, and in extreme times, these are very challenging things to come up with a neat intervention on. However, I will continue to work with my hon. Friend and others across the House to seek ways forward.
The Opposition spokesman, the right hon. Member for Wolverhampton South East (Mr McFadden), asked about the fraud risk. There is a big distinction to be made between fraud in applications and default risk. When we designed those schemes, and the bounce back loans in particular, that self-certification form—where businesses were obliged to make estimates of their turnover and could access a percentage of that—was designed to be as accessible as possible. However, businesses also had to state clearly what the facts were around their situation. The Cabinet Office is leading a piece of work across Whitehall to look at fraud risk and even more collaboration between the banks, sharing data about duplicate applications, and we will continue to work very carefully on that. We are also allowing businesses who have borrowed less than their maximum to top up their bounce back loans and extend their repayment period.
I appreciate that it must sometimes feel as if Government statements in our response to the pandemic are just a long list of measures we have taken or are taking, but this is a consequence of the range of things we are doing. Forgive me, Sir Edward, but I will list a few more ways we are helping businesses, which my hon. Friend the Member for Carshalton and Wallington is right to be concerned about. They include £11.5 billion of grant funding to more than 900,000 business premises, with new grants to come through the winter months, and an additional £1.1 billion of discretionary grant funding for English councils—that is cash grants of up to £3,000 for every four weeks of closure for English businesses forced to close. Backdated grants provide up to £2,100 per month of support in arrears for eligible businesses that have suffered from reduced demand in recent months. Those schemes are available nationwide. As the Chancellor announced last week, the up-front guarantee of funding for the devolved Administrations is increasing from £14 billion to £16 billion.
John Glen
In the interests of time, I will not. It is for the devolved Administrations to decide how to use that guaranteed funding, irrespective of how the UK Government provide support. However, this uplift will support businesses across the United Kingdom. We are also protecting businesses with extensive tax breaks, deferrals, and repayment flexibility through the time-to-pay scheme. Further Government support mechanisms enjoyed by SMEs include the statutory sick pay rebates and eviction protection for commercial tenants until the end of this year.
I hope I have illustrated that SMEs are at the forefront of our minds through this crisis. Support measures available to those businesses represent a significant part of the £200 billion package of support that the Government have put forward. The IMF recently described the UK’s economic plan as “aggressive”, successful in “holding down unemployment” and business failures, and
“one of the best examples of coordinated action globally”.
However, I accept that it is never going to save every business and every job, and we will continue to engage with colleagues across the House. To the hon. Member for Midlothian (Owen Thompson), I will look into the meeting that has not happened yet and ensure that it does. [Interruption.] I will also engage with the hon. Member for Kingston upon Hull West and Hessle, but I must give my hon. Friend the Member for Carshalton and Wallington a few minutes to respond.
We will continue to listen carefully and we will maintain a flexible approach. As the Chancellor said in the House last week, things need to change when circumstances change. What that means for SME business owners up and down the country is simply this: where and when necessary, we will take swift action to provide the support they need. We will continue to do so as we work through this awful crisis that has befallen our country.
Online Scams
John Glen Excerpts(4 years, 1 month ago)
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This information is provided by Parallel Parliament and does not comprise part of the offical record
The Economic Secretary to the Treasury (John Glen)
May I say what a pleasure it is to serve under your chairmanship, Mr Dowd? I thank the hon. Member for Makerfield (Yvonne Fovargue) for securing a debate on this important topic. I pay tribute to her general competence and knowledge on consumer issues. I have engaged with her a number of times as a Minister, and I always appreciate the constructive way she approaches this topic. She has demonstrated again this afternoon her comprehensive awareness of the complexity of this subject, and how it impacts so many of our constituents.
I know very well how this issue matters to many colleagues across the House, because it has impacted so many across our constituencies. As a constituency MP, I have encountered the financial and mental impact, and the anguish it causes individuals in my surgery.
I assure Members that the Government are committed to tackling this complex problem. I will set out the context. There have been rapid changes to modern payments, which bring great benefits and opportunities to many, but with new opportunities come new risks, such as the type of scams the hon. Lady set out. More people and businesses are buying and selling online. People are using a range of innovative ways to make payments via card, mobile and electronic wallets. In 2019, over two-thirds of UK adults used online banking, half used mobile banking, and for the first time cards accounted for more than half of UK payments. Those new technologies and products have helped to make payments faster and cheaper, and provided exciting opportunities for UK businesses and consumers.
Alongside those innovations, as the hon. Lady rightly said, criminals are becoming increasingly devious and sophisticated, and are ruthlessly exploiting these new technologies and the digitisation of commerce to perpetrate scams. The truth is that there is no silver bullet. I wish there was. Success in the matter depends on quite sophisticated collaboration between Government, the regulators, banks and online platforms, and between customers and the services they use. The Government are committed to playing their part to facilitate that better collaboration.
Turning to the current situation and what is already being done, authorised push payment scams—APP scams—have become a major problem in recent years. Fraudsters use sophisticated techniques to trick people, often, as the hon. Lady said, by forming phony relationships and defrauding people into authorising payments to criminal-controlled accounts. According to UK Finance, £456 million was lost to these scams in 2019, up from £354 million the year before.
Last week, I met with the managing director of the Payment Systems Regulator and raised concerns like those we have heard today. We agreed that more needs to be done to ensure victims are protected. To that end, the Payment Systems Regulator and industry are working together to improve the level of protection provided to consumers through the existing voluntary code, known as the contingent reimbursement model code, which the hon. Lady referenced.
Banks that have signed up to that code have agreed to reimburse victims of APP scams, so long as they took a reasonable level of care when making the relevant payment. As the hon. Lady will know, the code has been operating since May 2019, and its effectiveness is currently being reviewed by the lending standards board, the body responsible for governing it. I look forward to the conclusions of that review. The hon. Lady cited statistics, which I recognise require thorough examination.
When it comes to fraud, prevention is just as important as any cure. That is why the authorities are taking steps to ensure that fewer people fall foul of the scams in the first place, notwithstanding the sophisticated nature of the interactions that lead to them. At the request of the Payment Systems Regulator, the six biggest UK banking groups have introduced a process known as confirmation of payee. Under that process, the bank account and sort code numbers are checked against account names, to ensure that payments are going to the intended recipients. It is early days, but we are confident that this innovation is an important step forward in preventing scams from succeeding in the first place.
The challenge is that for a number of those measures—we are probably all familiar with them from doing payments ourselves—it comes down to where culpability lies. The hon. Lady made observations about the sophisticated relationship and the conditioning that has sometimes taken place. That is what we are dealing with and what we have to get to grips with.
The financial services sector is just one part of the equation in combatting fraud. Other industries, including online platforms, which have been mentioned, have a role to play. The National Cyber Security Centre has been leading the way in ensuring that online scams are taken down as quickly as possible, and this year it launched a new suspicious email reporting service, making it easier for the public to highlight suspicious emails and websites. The service has already led to more than 3.6 million reports and more than 18,000 scams being removed, but I recognise that more needs to be done.
The Financial Conduct Authority’s ScamSmart website, which is not limited to online scams, also aims to help consumers protect themselves against investment scams. It does that by allowing users to search a warning list to check an investment opportunity and report scams or unauthorised firms. Anybody who falls victim to such scams should contact Action Fraud UK to help us catch the criminals. As the hon. Member for Upper Bann (Carla Lockhart) mentioned in her contribution, this is a universal problem, and I recognise her anxiety about the sufficiency of the measures. As I say, I am happy to continue the discussion about what more can be done.
The private sector has its own responsibility to protect customers online. We have been working with online platforms and industry to take down fraudulent materials and websites. The specialist Dedicated Card and Payment Crime Unit is a great example of that partnership at work: it is a proactive police unit and involves UK Finance, the City of London police, the Metropolitan police and the Home Office. It continues to develop new partnerships with social media companies to take down accounts being used for various fraudulent ends and to stop the recruitment of people as money mules.
As well as working to prevent scams, we need to look after those who fall victim to them. We need to consider the emotional, as well as financial, harm that victims experience. That is why we are working with national and local policing, including police and crime commissioners, to support the victims of these terrible crimes. Even where it is not possible to investigate a case further, the Action Fraud economic crime victim care unit supports victims by helping them to recover and better protect themselves in future. What about the next steps? A lot of good work is being done, but we cannot rest on our laurels. This is a sophisticated problem: just as the wider banking, online and commercial landscapes continue to evolve, so the methods used by criminals to defraud customers evolve. In June 2019, the Treasury announced a review of the payments landscape, and we recently held a call for evidence as the first stage. That call for evidence reflected on the success of the Faster Payments Service as a 24/7 real-time payments system, but it also noted that Faster Payments currently lacks scheme rules to resolve disputes and assign liability when payments go wrong, including—crucially—in the case of APP scams. The Government have concluded that a set of comprehensive rules in the Faster Payments Service could make a real difference to tackling that problem. We have sought views on the issue and will outline our next steps in due course.
Yvonne Fovargue
Will the Minister also look into the fact that many criminals, particularly in romance-type frauds, have moved on to asking for Amazon vouchers? What can be done in cases such as that of my constituent, who bought thousands of pounds-worth of Amazon vouchers and sent them abroad?
John Glen
I thank the hon. Lady for her intervention. Although I have not personally experienced that, through either my constituency or ministerial work, she makes a sensible point about the evolving nature of those frauds. In that particular example, it would be reasonable to expect the platform to observe the obvious unusual nature of such a purchase. This is not territory with which I am directly familiar, but I will take it back to my colleagues in Government, including at the Department for Digital, Culture, Media and Sport.
More of us are transacting online than ever before, opting for the speed and convenience of new forms of banking and payments, but sadly fraudsters are taking advantage and developing ever more sophisticated ways of scamming people. We cannot row back on digital innovation and, given the immense benefits, nor should we, but it is crucial that people have confidence in how they transact online.
Carla Lockhart
The Minister mentioned Action Fraud and the police. The problem is that Action Fraud does not seem to have the capacity to deal with the volume. It then passes cases to the London police, who cannot investigate them. Action Fraud needs to be bolstered—it needs support to investigate what is going on beneath the surface.
John Glen
I am grateful to the hon. Lady. The challenge is that there are multiple streams of activity because of the sophisticated nature of this problem. I certainly understand the risk of confusion about who to go to, but Action Fraud is the first port of call. I accept that there needs to be clarity over what happens subsequently.
Government regulators in a wide range of industries are already taking action to ensure that there is progress. For our part in the Treasury, along with other Whitehall partners, we will continue to actively explore what more can be done. I feel very uncomfortable with this situation not being resolved and I am not complacent in the least about it. I will continue to engage with industry partners on this and I am very grateful—sincerely—to the hon. Member for Makerfield for raising this matter.
Question put and agreed to.
Financial Services for the EEA: Ministerial Equivalence and Exemption Directions
John Glen Excerpts(4 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (S.I. 2019/541) provides powers for the Treasury to make equivalence directions and exemption directions for the European Economic Area (“EEA”) states, including the member states of the European Union (“EU”), before the end of the transition period.
I have today laid before Parliament eight directions which exercise the powers across an extensive range of areas. The directions cover 16 equivalence decisions in total, which serve to maintain the stability and openness of the UK financial services sector beyond the end of the transition period.
For the decisions below, it is both the legally binding requirements, and the effectiveness of the regulation and supervision of adherence to these requirements in the EEA states, which have been deemed equivalent on an outcomes basis.
The European Market Infrastructure Regulation (Article 13) Equivalence Directions 2020 determine that, for the purposes of paragraphs 1 and 2(a) and (d), of article 3 of the European market infrastructure regulation (intragroup transactions), the legal, supervisory and enforcement arrangements of EEA states are equivalent to articles 4 and 11 of the European market infrastructure regulation, as it will form part of UK law at the end of the transition period (“EMIR”). This decision paves the way for UK firms to seek or apply an exemption from the requirement to clear through a CCP or meet margin requirements for transactions with an EEA entity in the same group. The granting of this decision means these exposures can qualify as intragroup exposures in the credit valuation adjustment (“CVA”) calculation, ensuring that UK firms will in many cases not have to capitalise CVA on over the counter (“OTC”) exposures to EEA affiliates.
The Capital Requirements Regulation Equivalence Directions 2020 determine that each EEA state (i) applies prudential, supervisory and regulatory requirements equivalent to those applied in the UK, for the purposes of article 107(3) and 391 of the capital requirements regulation as it will form part of UK law at the end of the transition period (“CRR”); and (ii) applies supervisory and regulatory arrangements equivalent to those applied in the UK, for the purposes of articles 114(7), 115(4), 116(5), 132(3) and 142(2) of CRR. For UK firms, equivalence here ensures they will not be subject to increased capital requirements as a result of their EEA exposures.
The Solvency 2 Regulation Equivalence Directions 2020 determine that for the purposes of Commission Delegated Regulation (EU) 2015/35 (supplementing the solvency II directive on the taking-up and pursuit of the business of insurance and reinsurance): (i) the solvency regime of each EEA state that applies to certain reinsurance activities is equivalent to that laid down in the relevant UK law; (ii) the solo prudential regime of each EEA state is equivalent to that laid down in the relevant UK law; and (iii) the groups prudential regime of each EEA state is equivalent to that laid down in the relevant UK law. In doing so, The Solvency 2 Regulation Equivalence Directions 2020 cover all three solvency II equivalence decisions, i.e. articles 378, 379 and 380 of the solvency II regulation. Solvency II is an EU regime which will form part of retained EU law in the UK from 11pm on 31 December 2020 (in accordance with the European Union (Withdrawal) Act 2018) so that it continues to apply in the UK.
The European Market Infrastructure Regulation (Article 2A) Equivalence Directions 2020 determine that, for the purposes of article 2A of the EMIR, markets in each EEA state comply with legally binding requirements which are equivalent to the requirements laid down in UK law, and are subject to effective supervision and enforcement in each such EEA state. This will enable UK firms to continue to treat derivatives traded on EEA regulated markets as exchange traded derivatives rather than OTC derivatives. Facilitating this continuity for firms minimises the disruption they will experience following the end of the transition period.
The Central Securities Depositories Regulation Equivalence Directions 2020 determine that central securities depositories (“CSDs”) in each EEA state comply with legal requirements which are equivalent to the central securities depositories regulation as it will form part of UK law at the end of the transition period (“CSDR”) and are appropriately supervised in the relevant EEA state. With equivalence granted, the Bank of England can then assess CSDs in the EEA for recognition (subject to establishing co-operation arrangements with the relevant EEA authorities), allowing those CSDs, once recognised, to continue to service UK securities and to exit the transitional regime contained in onshored article 69 CSDR and part 5 of The Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.
The Benchmarks Regulation Equivalence Directions 2020 determine that benchmark administrators in each EEA state comply with legal requirements which are equivalent to the benchmarks regulation as it will apply in UK law at the end of the transition period (“BMR”), and are appropriately supervised in the relevant EEA state. This equivalence decision acts as a mechanism to enable such administrators to be added to the FCA’s benchmarks register, and to enable them to provide benchmarks to supervised entities in the UK.
The Credit Rating Agencies Regulation Equivalence Directions 2020 determine that, for the purposes of article 5 of the credit rating agencies regulation as it will form part of UK law at the end of the transition period (“CRAR”), the legal and supervisory framework of each EEA state ensures that credit rating agencies (“CRAs”) authorised or registered in each EEA state (i) comply with legally binding requirements which are equivalent to the requirements resulting from CRAR; and (ii) are subject to effective supervision and enforcement in each such EEA state. This means non-systemic credit rating agencies authorised or registered in the EEA can apply to be certified in the UK.
The Short Selling Regulation Equivalence Directions 2020 determine that EU markets are subject to the appropriate law and supervision for the purposes of article 17 the short selling regulation as it will form part of UK law at the end of the transition period (“SSR”). This means that EEA market makers will be eligible to make use of the exemption in article 17 of SSR (which disapplies certain short selling restrictions and reporting requirements) subject to complying with certain regulatory requirements.
Alongside the above directions, today I am also laying before Parliament The Central Counterparties (Equivalence) Regulations 2020 pursuant to regulation 14(1) of the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184). The former statutory instrument specifies that the regulatory framework for central counterparties in EEA states is equivalent to the UK’s framework. After the end of the transition period, these regulations will have effect as if made under article 25(6) of EMIR. Therefore, subject to entry into an appropriate co-operation arrangement between the Bank of England and the relevant national competent authority in that EEA state, and a CCP-specific recognition determination by the Bank of England, after the end of the transition period UK firms will be able to continue using EEA CCPs and to exit the transitional regime contained in part 6 of The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2018/1184).
The Department for Business, Energy and Industrial Strategy will be laying The Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) (No. 2) Regulations 2020 to grant audit equivalence to the EEA states and approve as adequate their audit competent authorities.
To provide clarity and stability to industry, we are announcing as many decisions as we can in favour of openness, and where it makes sense to do so. The granting of these equivalence decisions provides a broad range of benefits in terms of having open markets that are well regulated, facilitating firms’ ability to pool and manage risks effectively, and supporting UK and EU clients’ access to financial services and market liquidity.
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