Securitisation Regulations 2018

John Glen Excerpts

Wednesday 13th February 2019 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

As part of our obligations while the UK remains a member of the EU, it is our responsibility to ensure that domestic law is compatible with EU legislation. That includes this statutory instrument, which will, as the hon. Member for Oxford East (Anneliese Dodds) said, ensure that the EU securitisation regulation is effective and enforceable in the UK. It is not an EU-exit statutory instrument through which functions are transferred from an EU authority to domestic authorities. The instrument that does that—the Securitisation (Amendment) (EU Exit) Regulations 2019—was laid on 23 January and will be debated in due course.

It might be helpful if I gave the House some background information. The securitisation market’s slow recovery after the financial crisis reflects concerns among investors and prudential supervisors about risks associated with the securitisation process itself. The EU responded by proposing in 2015 legislative measures to promote a transparent and liquid market for securitisation. There were 120 responses to the 2015 consultation that gave rise to the regulations, which evolved over two years of EU discussions. They were then scrutinised in Parliament and were approved by the House of Lords scrutiny Committees in July 2017 and by the House of Commons European Scrutiny Committee in February 2017.

[Kirsty Blackman (Aberdeen North) (SNP)]

The Minister mentioned the number of consultation responses; were they from throughout the EU or just from companies and organisations in the UK?

[John Glen]

I am not certain, but I would imagine they were from the UK. It was an extensive consultation that led to the evolution of the regulations, which were then scrutinised at different intervals by the Lords and Commons Committees before their final approval in 2017.

The UK voted in favour of the package of reforms in 2017 because it ensures high standards of process, legal certainty and comparability through a greater degree of standardisation of products. The new rules bear no relation to the securitisation of sub-prime mortgages created in the US that contributed so significantly to the financial crisis. Along with other legislation, including on the overhaul of the credit ratings agencies and more stringent rules for mortgage and credit granting, the proposals build on the lessons learned from the financial crisis by improving regulation and oversight, and they implement standards introduced by the international supervisory community.

The EU regulation, which the instrument we are debating implements, is derived from the new international standards set by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. These two bodies worked to create a new framework of high-quality securitisations to introduce the degree of assurance around the information on securitisation that was necessary in the markets. Their work seeks to restore an important funding channel for the EU economy while making the market less risky and supporting financial stability.

At a time when bank lending is constrained, securitisation can boost credit and growth. It can help to free up banks’ balance sheets so that they can lend to households and businesses. The good functioning of and access to securitisation as a funding tool allows investors to diversify their investments and supports the real economy. It is for that purpose that effectively supervised securitisation is actively supported by the prudential authorities, including the Bank of England, which supported the EU initiative as playing

“an essential role in de-stigmatising European securitisation, helping the market to develop on a sustainable track”.

Let me turn now to the securitisation regulations. Although the EU rules themselves were agreed in 2017, the statutory instrument under consideration concerns empowering the regulators to effectively supervise the new securitisation rules that came into force at the start of the year. As the industry has prepared itself for the new regime, the Government are obliged to ensure that the new framework is operable. In essence, this SI simply gives effect to the directly applicable EU securitisation regulation and ensures that it is effective and enforceable in the UK.

The supervisory, investigative and sanctioning powers that this instrument delegates to the relevant competent authorities give effect to the EU framework. The hon. Lady mentioned the resourcing of the Financial Conduct Authority and the Bank of England. Both have been instrumental in the development of these regulations and are primed and ready to take on responsibility for them. The instrument fulfils the necessary obligations of the EU regulation in designating roles to the domestic regulators and provides them with the powers that they require to effectively supervise the market.

To summarise, the Government believe that this instrument is needed to ensure that the new securitisation regulatory regime works effectively. This will support a sound and transparent securitisation market in the UK, bringing real benefits to investment, jobs and growth while enhancing long-term financial stability. The whole purpose of the EU regulation is to address the challenges of the past and to ensure that mistakes prior to the financial crisis in respect of securitisation are not repeated by keeping the measures simple in form and more transparent. The proposal to revoke the instrument would only endanger that and disrupt the market as supervisors would not be able to enforce infringements to the rules that seek to better regulate the market.

The hon. Lady raised a number of points. I have clarified that this measure is not related to a no-deal situation. A point was made about the amendment to primary legislation and the fact that criminal offences already on the statute book will be affected. Although the EU regulation is directly applicable, the Securitisation Regulations 2018 make changes to UK law to ensure that EU regulations are fully effective and enforceable in the UK. The power under section 2(2) of the European Communities Act 1972 makes it possible to give effect in national law to measures in EU law by secondary or delegated legislation such as statutory instruments. Importantly, such secondary legislation can amend an Act of Parliament—section 2(4)—as the delegated legislative power includes the power to make such provisions as might be made by an Act of Parliament. So the instrument applies and modifies certain provisions of the Financial Services and Markets Act 2000 and other UK legislation both to create the new supervisory, investigative and sanctioning powers required by the EU regulation and to ensure that UK legislation is compatible with EU regulation, including applying and/or modifying necessary offences pursuant to sections 398 and 177 of the 2000 Act. This instrument allows an approach consistent with existing enforcement regimes elsewhere in the sector and with other financial services implementing SIs.

The hon. Lady referred to preferential treatment of capital for banks and risk retention and needing to have skin in the game. These rules are derived directly from international standards, which are set by the Basel Committee on Banking Supervision and by the International Organisation of Securities Commissions. There is no attempt to develop some bespoke UK regime. These measures are completely consistent, which has been acknowledged during the significant scrutiny process to which they have already been subject. The hon. Lady also mentioned the CMA. The CMA was not designated as it does not have a role to play under the EU regulation.

I think that I have dealt with the points that have been raised. These are straightforward regulations that give effect to the directly applicable EU securitisation regulation. When Sub-Committee A of the Secondary Legislation Scrutiny Committee looked at these regulations on 17 December, it cleared them without comment. This is an attempt to update the regulations appropriately to give more confidence in the markets. I hope that the House will join together in support of the continued application of this instrument, and to oppose the motion to revoke it.

--- Later in debate ---

[Madam Deputy Speaker (Dame Eleanor Laing)]

I call Anneliese Dodds.

[John Glen]

rose—

[Madam Deputy Speaker]

I beg your pardon. If the Minister would like to respond, and it is the wish of the House that he should do so, he may.

[John Glen]

Thank you, Madam Deputy Speaker. I feel it is appropriate for me to respond to the remarks of the hon. Members for Enfield, Southgate (Bambos Charalambous) and for Aberdeen North (Kirsty Blackman).

The Treasury has not undertaken a formal consultation on this SI, as the changes to domestic legislation required are minor, and the enforcement approach taken is in line with existing enforcement regimes in the financial services sector. We have worked closely with the FCA and the PRA throughout.

The hon. Member for Aberdeen North made some remarks about the resourcing of the FCA. It has additional resources through the onshoring programme, but this SI has nothing to do with that. This is a business-as-usual SI that would have happened anyway. There was certainly no attempt to slip it in amidst all the others that were taken through Committee. It was a consequence of these regulations being taken through the scrutiny process. I can confirm that there were 120 responses from across the EU as a whole in 2015 to the Commission’s proposals, which were then iterated over the two years before they were approved.

I agree with much of what the hon. Member for Enfield, Southgate said about the aspirations of the regulations underlying this SI. This will bring in more stringent underwriting criteria for mortgage and credit granting. It will overhaul the supervision of credit rating agencies. We have updated international standards on the amount of capital that banks need to hold against securitisations. It responds directly to the work of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. The process of consultation that led to the regulations being agreed in this House and through the Commission has lasted two years, from 2015 to 2017, and this SI is simply implementing them.

In conclusion, I believe that the securitisation regulations will enable the FCA and the PRA to supervise the new framework for securitisations agreed in the EU, which introduces stricter standards and makes securitisations simpler and more transparent.

[Kirsty Blackman]

On the point about the powers of the FCA and the changes that are being made to it—I am not suggesting that he is trying to slip out this particular one, but there do seem to have been various changes along the way—is it likely that the Government will come forward with something explaining how they expect the FCA to look in future and how we will get to that point?

[John Glen]

There are two or three things going on. There are 53 financial services SIs going through Committee in connection with no-deal preparations, which is certainly an additional burden on the FCA, and it has had the resources for that. The hon Lady asked about the Government’s holistic view of the role of the FCA. It is subject to a periodic review, having been formed under the legislation of five or six years ago, and that will happen in due course. We hope there will be more financial services legislation in future Sessions.

This instrument is necessary to enable the regulations to take effect. I hope that the House has found this afternoon’s debate on this matter informative and will be able to join me in opposing the motion.

[Anneliese Dodds]

If I may, I will start my remarks with a brief observation. Far too often in this House, I have heard hon. Members suggest that the financial crisis was somehow the result of the then Government’s policies. I am very pleased to have heard the opposite from the Minister today. In fact, it was the correct interpretation of what precipitated the global financial crisis, which did indeed, as he intimated, begin with the sub-prime mortgage collapses in the United States and then spread through the financial system, particularly through the use of complex financial instruments.

[John Glen]

rose—

[Anneliese Dodds]

I am very happy for the Minister to agree with what I am saying.

--- Later in debate ---

[John Glen]

I am very happy to draw the hon. Lady’s attention to the fact that the default rate for triple A rated bonds in the EU was 0.6%, while in the US it was 16%. The key point that the Conservatives have always wished to stress is that the spending profile from 2002 and 2007 massively compounded the difficulties we found ourselves in.

[Anneliese Dodds]

The Minister—[Interruption.]

Reinsurance (Acts of Terrorism) Act 1993

John Glen Excerpts

Wednesday 13th February 2019 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

In a written statement on 22 March 2018 [HCWS579], I informed Parliament that the Government intended to amend the Reinsurance (Acts of Terrorism) Act 1993 to enable the Government’s agreement with Pool Re, the terrorism reinsurer, to be expanded to include business interruption losses that are not contingent on damage to commercial property. This was achieved with Royal Assent of the Counter-Terrorism and Border Security Act on 12 February 2019. This demonstrates the Government’s commitment to ensuring that businesses can continue to secure insurance against the financial costs of terror attacks, and that Pool Re can maintain its position as an example world-leading partnership between Government and the insurance sector.

[HCWS1329]

Draft Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019

John Glen Excerpts

Tuesday 12th February 2019 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019.

May I say what a pleasure it is to serve under your chairmanship, Sir Edward? As the Committee will be aware, the Treasury has been undertaking a programme of legislation under the European Union (Withdrawal) Act 2018 to ensure that if the UK leaves the EU without a deal or an implementation period there will continue to be a functioning legislative and regulatory regime for financial services in the UK. This statutory instrument is an important part of that programme. It will address deficiencies related to the EU’s equivalence framework for financial services once the UK is no longer an EU member state, and will make provision for elements of the UK’s stand-alone equivalence framework in a scenario where the UK leaves the EU without an agreement.

Many members of the Committee will be familiar with the EU’s framework for equivalence. The EU’s internal market for financial services works by harmonising prudential regulation and supervisory standards. Common rules aim to provide adequate consumer protection and financial stability, so that financial services can safely be sold across borders within the EU. For the same reasons, the EU also harmonises to some extent the rules permitting financial services firms outside the EU to sell to consumers in the EU. EU legislation allows the European Commission to determine that a country outside the EU, often termed a third country, has a regulatory and supervisory regime in a particular area of financial services that is equivalent to the corresponding EU regime.

Equivalence provisions exist in several areas of EU financial services legislation. The ability to grant equivalence is a key component of financial services regulation and supports cross-border activity. Equivalence decisions can reduce or eliminate overlaps in regulatory and supervisory requirements, thus decreasing the regulatory burdens on firms. Some equivalence decisions can also provide improved prudential treatment or facilitate the exchange of services and products. This can lead to increased competition, which has benefits for firms and consumers, while protecting consumers and financial stability in the EU from risks associated with buying financial services from outside the EU.

Before making an equivalence decision, the Commission will undertake an assessment of the third country’s regulatory and supervisory regime. The Commission may also ask the European supervisory authorities—ESAs—for technical advice to support its assessment. As an EU member state, any equivalence decisions made by the Commission currently have effect in the UK. After exit, the Commission’s current decisions will be retained EU law and will continue to permit third country firms to be treated as they are now.

In a no-deal scenario, the UK will be outside the European economic area and no longer part of the EU’s equivalence framework for financial services. The UK will become a third country to the EU. We need to amend retained EU law to reflect that new relationship. The Government place significant importance on the need to have a functioning stand-alone equivalence regime, which will support our future relationships with the EU and other financial centres with which we want to build stronger partnerships.

Members of the Committee will be aware that other Treasury SIs that have completed their passage in Parliament have already transferred equivalence responsibilities from the Commission to the Treasury and functions from the ESAs to the UK financial regulators in a no-deal scenario. While maintaining the same substantive criteria that the EU currently uses to judge equivalence, this SI will help to complete the UK’s framework and ensure that the UK has a stand-alone regime.

The instrument does three main things to support the development for a stand-alone UK equivalence framework in the event of a no-deal exit. First, it corrects deficiencies in existing equivalence decisions made by the Commission, which will be transferred to the UK’s statue book as retained EU law on exit day. An example of this deficiency fix is replacing references to “the Union” with references to “the United Kingdom”, to reflect the UK’s new position outside the EU. Fixing those decisions is important to minimise disruption for some firms with business in equivalent countries and for some overseas firms that currently rely on them. This will help to avoid disruption to the UK’s relationship with non-EU countries.

Secondly, the instrument replaces the functions given to the ESAs with functions for the UK financial services regulators. When undertaking new equivalence assessments, the Treasury may obtain technical advice from the UK financial services regulators—the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England. The SI also creates an obligation on the Treasury and the UK regulators to enter into a memorandum of understanding that sets out in more detail the operational processes to support equivalence assessments.

Thirdly, the SI creates a temporary power for Ministers to make equivalence and exemption decisions for EU and EEA member states by direction for some specified equivalence regimes listed in the SI. That is separate from and in addition to the permanent arrangements for making equivalence decisions after exit, which require a negative resolution instrument in Parliament. The temporary power is needed to prepare for the particular circumstances we would face if the UK left the EU without a deal. As an EU member state the UK has not previously needed powers to determine whether the EU is equivalent, but in a no-deal scenario it will be important for the Treasury to have powers to make such decisions in time for exit day, to respond quickly and effectively to any risks to the financial system and to avoid disruption for firms and markets.

Let us be clear: in such a situation, the UK would need to be nimble and able to act quickly to find the EU equivalent to the UK and support market functioning. Having an effective and time-limited power puts us in the optimum position to work with the European Commission to find each other’s regimes equivalent, which would be the most sensible outcome to protect cross-border economic activity and avoid disruption, although, failing that, equivalence decisions by the UK of the EU should not be assumed.

To illustrate why the powers are required, I point out to the Committee that the Commission has published several draft legal acts granting exemptions to UK bodies in a no-deal scenario. That shows our shared view that some equivalence decisions are important to have in place for day one of exit. The power is intended to be used to mitigate risks around exit and would expire 12 months after exit day; thereafter, any future equivalence decisions for the EU and EEA member states would need to be made by regulations subject to the negative procedure, as they would for all other foreign countries. To ensure transparent use of the temporary power, the SI obliges Ministers to lay any direction before Parliament and to publish it.

The Treasury, as is customary with all these SIs, has worked closely with the Bank of England, the PRA and the FCA in the drafting of this instrument. It has also engaged the financial services industry on this SI and will continue to do so. The regulators and key industry stakeholders have expressed support for the provisions in the instrument as necessary to mitigate disruption and provide legal certainty about the UK’s equivalence system.

The Government believe that the proposed legislation is necessary to ensure that the UK has a clearly defined and operable equivalence framework in a no-deal scenario. The powers it contains are necessary to ensure that the Treasury and UK regulators are able to respond if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the regulations, which I commend to the Committee.

--- Later in debate ---

[John Glen]

I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their observations. I will first attend to the general points about readiness and the intention of the Government, which is clearly to secure a deal.

I assure hon. Members, as I have on previous occasions, that there is no secret agenda in the Treasury to grab power. The SI is about contingency arrangements for the unwelcome outcome of no deal. We take this responsibility very seriously. An impact assessment was published on 7 February stating that there will be no new operational requirements for firms owing to the draft instrument.

I will now seek to address the specific points raised by Opposition Front-Bench Members. The hon. Member for Stalybridge and Hyde asked, in essence, why we need these extraordinary powers to grant EU and EEA equivalence on exit day. It is important to stress that this temporary power is intended only to mitigate cliff-edge risks and to support UK market activity and the continuity of cross-border business. The power is time limited; it will expire 12 months after exit day, which was determined following engagement with the industry and regulators. Thereafter, any further equivalence decisions regarding the EU and EEA will need to be made by regulations via the negative procedure.

The hon. Gentleman asked about the resources in the Treasury. The Treasury has been preparing to take on these additional functions and is well equipped, given its existing responsibility for financial services policy. We have worked closely with the FCA and the PRA during the development of the draft instrument, and we are confident that we are well placed to make future equivalence decisions.

The hon. Gentleman asked about the appropriateness of the Treasury making equivalence decisions, rather than the regulators. Under the EU’s equivalence framework, the European Commission is responsible for making jurisdiction-level equivalence decisions. The European supervisory authorities are responsible for providing technical assessments to the Commission when requested and for making firm-level recognition decisions on third country firms. Our approach will ensure that there is a functioning equivalence framework in the UK after exit that mirrors the current split in responsibilities between the Commission and the ESAs, with the Commission’s function transferring to the Treasury and the ESAs’ functions transferring to the relevant regulatory authorities. That is consistent with what we have done in the other SIs.

The hon. Gentleman asked whether a central register of equivalence decisions will be created. All decisions will be laid in Parliament and published on gov.uk, so they will be publicly available. There are no plans at this point to have a central register, but the process is intended to be completely transparent.

The hon. Member for Glasgow Central asked whether Parliament would be consulted on a decision to revoke equivalence. In the future, equivalence decisions will be made and revoked by regulations subject to the negative procedure. This is a well-established procedure that allows Parliament to scrutinise proposed secondary legislation and to object if it has concerns, including about any decision to revoke an equivalence decision.

The hon. Lady asked about good will towards the EU and what will be the best decision. Clearly, we share a common heritage; the United Kingdom as a whole, including the excellent financial services located in Glasgow and Edinburgh, has contributed richly to the development of the EU regulations. We will obviously start from a common starting point. However, decisions around equivalence will be matters for both sides to come to terms with, and we will seek to do the best thing for the UK financial services industry in whatever prevailing conditions exist. We cannot anticipate that degree of co-operation, so we cannot make decisions proactively, as we might wish to do had we a deal and an implementation period, which would allow us to work such things out—as we intend.

[Alison Thewliss]

I understand what the Minister is saying, but surely it is in our interest—ours and the EU’s—if we want to continue to interact as we do now, to do things in a similar way.

[John Glen]

Absolutely it is, but what we cannot do until we have a deal is to determine what no deal would look like. It is therefore appropriate for me, as the Minister responsible for the UK financial services industry, to seek to reserve those powers, as the Commission is doing now—largely.

The hon. Lady caught me out, as she has often done before, when she asked about the number of people working on equivalence at the regulators. All I can say is that the Treasury is confident that the regulators have in place the resources to meet that function and they have devoted significant time to preparing for changes. I do not have a specific figure, but I am confident in their overall provisioning for that programme of work. I draw attention to schedule 1, which sets out the files in question.

The statutory instrument is needed to ensure that the UK has a clearly defined equivalence framework once outside the EU and is able to support the continuity of cross-border business in any scenario, and that the legislation functions appropriately if the UK leaves the EU without a deal or an implementation period. That is not our intention, but I am confident that, given the engagement we have had with the regulators and the industry, the SI is required. I hope that the Committee has found our sitting informative and will now support the draft regulations.

Question put and agreed to.

Financial Services (Implementation of Legislation) Bill [Lords]

John Glen Excerpts

2nd reading: House of Commons & Money resolution: House of Commons & Programme motion: House of Commons & Ways and Means resolution: House of Commons
Monday 11th February 2019 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

I thank all Members for their contributions to the debate. As my right hon. Friend the Financial Secretary to the Treasury set out earlier, the Government do not want a no-deal scenario, but our job as a responsible Government is to prepare for all possible outcomes, including reaching 29 March without a deal. The Bill forms an important part of those preparations. In a no-deal scenario, it would ensure that we could maintain the UK’s reputation as a global leader and that the competitiveness of our financial services industry would be maintained. The UK has in many cases played a leading role in shaping these proposals over a number of years, and they will bring benefits to UK consumers and businesses once they have been implemented. I want to talk about the four or five themes that have been raised in the debate, after which I will address the points made by the hon. Member for Wakefield (Mary Creagh).

[Mr John Baron (Basildon and Billericay) (Con)]

I refer the House to my entry in the Register of Members’ Financial Interests. The Economic Secretary to the Treasury will be aware of our exchanges in Committee regarding EU regulations as they relate to key information documents and how KIDs are adversely affecting the assessment of investment trusts. The trade bodies oppose them, including the Association of Investment Companies, which has suggested that the investors’ response to them should be to “Burn before reading”. Can the Minister report back on his deliberations with the Financial Conduct Authority, which has been rather slow out of the blocks? Ultimately, it is the Government’s responsibility to get this right.

[John Glen]

I am happy to respond to my hon. Friend’s intervention. I acknowledge his expertise in this area and his excellent article in the Investors Chronicle this week. I would point out that, just last summer, the FCA issued a call for input and sought industry views on the next steps for packaged retail investment and insurance products—PRIIPs. That consultation closed on 28 September and the FCA is reviewing the responses carefully. It will publish a statement in the first quarter of this year. When I next see the chief executive of the FCA, I will challenge him on that publication date.

Let me turn to the substantive thrust of the concerns raised in the debate. The first relates to the desirability of no deal. As I have said, we do not want a no-deal scenario, but we need to be responsible and to plan for all eventualities. Our priority remains getting approval for the deal that we have negotiated with our European partners, which will deliver on the democratic choice of the British people.

Turning to the other preparations, we have now laid 50 statutory instruments before Parliament. The allegation from the hon. Members for Oxford East (Anneliese Dodds) and for Stalybridge and Hyde (Jonathan Reynolds) was that there had been no coherence to the Government’s work, but as the hon. Lady will know, we will have had 53 statutory instruments. We have more debates tomorrow and on Wednesday, and I think several more next week. We are addressing the deficiencies in all the major EU files and the relevant domestic legislation. This will ensure that we have a functioning financial services regime at the point where we leave the EU in a no-deal scenario. Our aim throughout this work has been consistently to minimise disruption for firms and their customers and to provide a smooth transition when we leave the EU.

The hon. Member for Glasgow Central (Alison Thewliss) made a point about the breadth of the power in this legislation. We have worked hard to ensure that this is a clearly defined power and that changes cannot be made such that the implemented files depart in a major way from the original legislation. However, the Government will retain some flexibility to make adjustments to take account of the UK’s new position outside the European Union. The amendments proposed by the Government require the Treasury to publish draft SIs at least one month in advance of laying, as well as a report detailing where there have been omissions and changes and giving the justification for those changes. We believe that the report will allow parliamentarians to scrutinise the changes before the SIs are laid. If the UK were forced to take on EU legislation either in whole or not at all, it is likely that we would be able to domesticate very few of these files in good time, so even the positive aspects of the reforms would be delayed. This is a pragmatic measure to deal with the reality of a very undesirable situation, and our approach has been endorsed by the industry, with which we have engaged in the preparation of the Bill.

[Alison Thewliss]

The Minister talks in his letter about how things are deemed to be beneficial for the UK, but he and I will have very different opinions on what would be beneficial for the UK, or indeed on whether Scotland should be part of the UK, so how can he say that that is not a policy decision?

[John Glen]

We are talking about a no-deal scenario, which we cannot fully anticipate or set out in legislation. However, there would be a full discussion and additional legislation in those circumstances.

For the benefit of the House, I want to clarify the industry engagement that has been undertaken on this Bill. The Treasury engaged with industry ahead of the introduction of the Bill, and the financial services industry has been expecting many of the files for some time. For example, the industry will be generally supportive of the changes that will be implemented with the European market infrastructure regulation regulatory fitness and performance programme—EMIR REFIT—file, which introduces changes to regulations for clearing and reporting requirements, to make them more proportionate and to provide further clarifications. We have been engaging to deliver what the industry expects.

With respect to accepting EU laws after exit, the Bill is not about accepting such laws wholesale. We will be able to implement only those pieces of legislation that are beneficial to the UK, because we will be able to choose the files, or specific provisions within those files, that we are going to implement. For those files that we have already agreed at EU level but not yet implemented, we will be able to fix deficiencies similar to what was done in relation to the European Union (Withdrawal) Act 2018. For those files on which negotiations will be ongoing at the point of exit, we will be able to make some adjustments to them to take account of the fact that we will not be around the negotiating table when they will be finalised.

Moving on to the model for financial services regulation more generally, the Government of course recognise that this legislation should apply only for an interim period while we consider a sustainable, longer-term approach that balances the need to ensure appropriate parliamentary oversight of financial services legislation after leaving the EU with the need to maintain the flexibility and competitiveness of our regulatory regime. That is why the model in the Bill would apply only for a temporary, non-extendable two-year period post exit, specifically in a no-deal scenario, and to specified EU files only. The Government will take forward our approach for a sustainable long-term model in due course.

Turning to the points made by the hon. Member for Wakefield, the UK has publicly led on the development of sustainable finance, as she set out, and the Government are committed to the sustainable finance agenda and are a leader in green finance. That is why we have included these files in the Bill. We recognise that the files form part of the EU’s response to the Paris climate change agreement and the UN sustainable development goals. The Government support the aims of the files and do not consider them harmful to industry at their current stage of development. As such, we were pleased to add them to the schedule to the Bill, and we thank the noble Lords who recommended their inclusion.

I stress again that this legislation involves a temporary measure, with the delegated power limited by a two-year sunset clause and subject to the affirmative procedure in each and every instance of its use. Following constructive engagement in the other place, the Bill is clearer about the power contained within it and has much stronger reporting requirements than at its introduction.

I thank all right hon. and hon. Members for their contributions to this debate. I am sure that we can agree on the importance of continuing to support the UK’s world-leading financial services industry in any future scenario. I look forward to discussing the Bill further in Committee, and I commend it to the House.

Question put, That the Bill be now read a Second time.

Closure of Santander Banks

John Glen Excerpts

Thursday 7th February 2019 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

I commend the hon. Member for Lanark and Hamilton East (Angela Crawley) for securing the debate. Just before I came over from the Treasury, I noticed that there will be a three-hour debate on the matter next Thursday, in which rather more Members will be able to contribute. I know that bank branch closures can be difficult for the communities affected, and particularly for the most vulnerable customers. The Government are keenly aware of that, and later I will go into more detail on what support is in place for those customers. After lobbying from SNP Members, I had the opportunity to visit Scotland last autumn, when the Royal Bank of Scotland was carrying out a review, so I am very engaged in this matter.

It is clear that the way we bank is changing. More and more of us—the process is very rapid—are choosing to bank online or through an app, and fewer people are choosing to visit a traditional branch, as we used to. Between 2011 and 2016, branch usage declined by 42%, whereas mobile banking usage increased by 354% between 2012 and 2017. That is unprecedented consumer change, and banks have obviously had to adapt to remain competitive in the circumstances. That adaptation has involved virtually all the main banks taking tough decisions about their respective branch networks.

Decisions on branch networks can be unpopular, and I understand why, but they are not ones that the Government can make. To be fair, the hon. Lady recognised that in her observations on the Santander decision. Branch network decisions are commercial decisions for the bank’s management team, and the Government do not intervene in them because we believe that commercial firms are best placed to make commercial decisions. The flexibility to respond to changes in the market is what makes the UK’s financial services sector one of the most competitive and productive in the world.

[Dr Philippa Whitford (Central Ayrshire) (SNP)]

The closure in my constituency will be the fourth bank that my town has lost, and the town has a high proportion of retired people who do not bank online or use their phone for contactless payments. My mother will never bank online. It is really two decades too early to withdraw these banks. Their ATMs go, too, so there is a problem for people who want cash in our town.

[John Glen]

I will talk in a few minutes about the ways in which we have intervened to try to find solutions to the circumstances in which the hon. Lady’s constituents find themselves. As I am sure those Members who have spoken are aware, the UK financial services sector is a whole-UK phenomenon, and Edinburgh in particular is important to financial services. The Government want to protect the sector, which is why we do not make the direct intervention that some may be looking for.

The Government firmly believe that the impact of branch closures should be understood, considered and mitigated, where possible, so that all customers, wherever they live, can continue to access over-the-counter banking services. The first step is to ensure that customers feel informed and supported when a branch closes, which is why the Government support the industry’s access to banking standard. All the major high street banks have signed up to the standard, which commits banks to a number of outcomes when a branch closes. First, they commit to give at least three months’ notice of a closure and explain their decision clearly; secondly, they commit to consider what services can still be provided locally, and communicate alternative ways to bank clearly to customers; and thirdly, they commit to ensure that support is available for customers who need extra help to bank online or, where that is not possible, to access services at the local post office. The standard is not just a checklist that banks need to go through; it is about being considerate of customers’ concerns when a branch closes.

In the case of Santander, I am pleased to inform the House that it took a number of steps when announcing the restructure of its branch network. Not only did it proactively contact all customers, as per the requirements of the standard, but it set up a dedicated phone line for customer queries about the changes for the duration of the closure programme. Furthermore, its branch teams will be proactively contacting known vulnerable customers to ensure that they are properly supported and advised on how to continue to bank locally. This includes all customers over the age of 75 who have visited the branch in the past 12 months, as well as those customers who have sight impairments or mobility issues, power of attorney, or are known by the team to be vulnerable. Where needed, this support can include: walking customers to the post office to introduce them to the post office team and demonstrate how they can carry out their banking; introducing them to staff in a neighbouring Santander branch; or helping customers to switch their account to another nearby provider. The teams will also take the time to talk to vulnerable customers about how they bank, changing the frequency of their statements and ordering cash cards, and to demonstrate how to use ATMs and contactless cards.

I acknowledge the point made by the hon. Member for Central Ayrshire (Dr Whitford). My father died a couple of years ago and I have been trying to migrate my mother to do more of this stuff online, otherwise the burden falls to me. I recognise that there are limits to that process but, in this case, a great deal of sensitivity has been shown to help customers to adapt to the new environment.

[Angela Crawley]

I appreciate what the Minister has said about the measures that Santander has taken. It is very noble of the bank to offer to walk someone to a post office—or to take them on the train to Glasgow in my case—but I am not hearing from him what the Government are doing to regulate financial services when they continually close branches across the UK. That is what I want to hear from the Minister.

[John Glen]

I promise the hon. Lady that I will come on to talk about that. It is about the relationship between the banks and the post office in the instance where it is the last bank that is closing. I am not here to defend the commercial decisions of banks, but I do think that the measures taken in this case look quite comprehensive with respect to dealing with vulnerable customers.

[Liz McInnes]

I am grateful to the Minister for giving way. He paints a rosy picture of what Santander is doing to help vulnerable customers, but the fact is that it told my constituents in Middleton that they could bank at Middleton post office, which is earmarked for closure and will be moving into a branch of WHSmith, so in my constituency it most certainly is not in touch with what is going on in the town centre.

[John Glen]

I am not seeking to paint a rosy picture. I am setting out plainly the facts about what the bank has undertaken. I obviously cannot account for the way in which every single branch has handled things. I note the hon. Lady’s observations and I am very happy to look into what she says, or to make a link to Santander for her.

I hope that the hon. Lady will agree that this support demonstrates that there is a commitment to the spirit, not just the letter, of the standard, which is warmly welcomed. To ensure that all banks meet the requirements of the standard, the Lending Standards Board monitors and enforces it. Last year, it published its annual report on banks’ adherence to the standard and found that, overall, firms’ engagement was positive and genuine. However, there were some areas where banks could do even more, and the Lending Standards Board is using the full range of tools and sanctions at its disposal to work with banks where they fall short.

[Marion Fellows (Motherwell and Wishaw) (SNP)]

I thank the Minister for giving way. I wish to raise again the kind of work that Santander is doing in introducing people to post offices. Is he aware of the appallingly low rates of pay given to sub-postmasters for doing banking work, especially in places where there are no banks left?

[John Glen]

I am aware of the concerns raised in that area and I have met postmasters about that. That area is the responsibility of my colleagues in the Department for Business, Energy and Industrial Strategy, but I note the point the hon. Lady has made.

I have recognised when I have participated in debates over the past 13 months that there have been some concerns around the provision of post office banking services. The Government recognise that some customers just prefer, or need, to carry out their everyday banking over the counter. That is why we support the Post Office’s commercial agreement with 28 high street banks and building societies, which enables 99% of personal banking customers and 95% of small business banking customers to carry out their everyday banking at one of the 11,500 post office branches. While I concede that the range of services offered by post offices may be more limited than that offered in a traditional bank branch, the services provided through the extensive post office network ensure that essential banking facilities, such as depositing and withdrawing cash, or depositing a cheque, remain available in as many communities as possible.

[Marion Fellows]

I know that this is a Department for Business, Energy and Industrial Strategy fiefdom, but the Minister is saying that banks are closing and post offices are good, yet post offices are also closing simply because of the low return that sub-postmasters are receiving for doing banking business. That takes so much of their time and they are earning much less than the minimum wage per hour.

[John Glen]

I note the points that the hon. Lady raises but, as I have said to her, I cannot comment on this matter directly from my vantage point in government. However, I would just point out that since 2010, post office branch numbers have been at their most stable for decades, and 99.7% of the national population now lives within 3 miles of a branch and 93% lives within a mile of their nearest post office. I am very sympathetic to discussions of rurality, given the nature of my constituency, and almost 99% of the rural population live within 3 miles of a post office.

The Government believe that too few customers know about these excellent services so, at my predecessor’s request, UK Finance and the Post Office have been working together to launch a five-point action plan to raise awareness of post office banking services. Members may have seen posters in post offices or advertisements for the services in papers, or noticed the Post Office logo on their bank’s leaflets and websites. When I was new to office last year, there were concerns about the execution of that relationship, and I followed up and wrote to both parties to ask for assurances about the delivery of the programme.

The Government cannot reverse the changes in the market and in customer behaviour, nor can they determine firms’ commercial strategies in response to those changes. Today’s debate has focused on the loss of traditional banking channels, but it is important that we do not lose sight of a range of innovations in the retail banking market. They are bringing real benefits to consumers of all types, as I saw for myself on my visit to Scotland last summer.

No matter how the market changes, however, the Government will continue to take positive action to maintain access to vital banking services and ensure that banks support communities across the UK when their local branches close.

[Dr Whitford]

rose—

[John Glen]

I was about to conclude, but am happy to give way again to the hon. Lady.

[Dr Whitford]

I thank the Minister for giving way.

The banks that have already left my town did not leave any ATM behind. Because of the low fees earned through the LINK system, more and more ATMs in rural locations, particularly across Scotland, are also closing. Many people are not remotely ready to live in a totally cashless system, so is there anything that the Government can do at least to ensure that there are ATMs in every community?

[John Glen]

I am grateful for that intervention. The Government recognise that widespread free access to cash remains extremely important in the day-to-day lives of many people up and down the country, and LINK, the UK’s cash machine network, is committed to maintaining free access to cash through its extensive footprint of ATMs. The Government set up the payment systems regulator to ensure that the UK’s payment systems work in the interests of their users. The regulator is closely monitoring the situation and holding LINK to account for its commitments to maintain the broad geographic spread of ATMs across the UK.

I draw the attention of the House to the debate to which I envisage I will be replying next Thursday. I hope that it will give hon. Members an opportunity to make further points, which I will be happy to take on board.

Question put and agreed to.

Contingent Liability

John Glen Excerpts

Tuesday 5th February 2019 Written Statements

[The Economic Secretary to the Treasury (John Glen)]

I can today confirm that I have laid a Treasury minute informing the House of a contingent liability that HM Treasury has taken on in relation to the sale of certain NRAM loans acquired by HM Treasury during the financial crisis. Although the sale of those loans was completed in 2016, the Government are now amending the contractual protections that were provided to the purchaser, in order to facilitate the potential future sale of NRAM.

On this occasion, due to sensitivities surrounding the commercial negotiations, it was not possible to notify Parliament of the particulars of the liability in advance of the amendments to the contractual protections being agreed with the beneficiaries.

The contingent liability relates to certain market standard time and value capped warranties and indemnities confirming regulatory, legislative and contractual compliance. The maximum contingent liability arising from these warranties and indemnities is £1 billion.

I will update the House of any further changes in respect of NRAM as necessary.

[HCWS1299]

Treasury

John Glen Excerpts

Tuesday 5th February 2019 Ministerial Corrections

The following is an extract from the debate on the draft Market Abuse (Amendment) (EU Exit) Regulations 2018 and draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019.

[John Glen]

The SI also retains exemptions in MAR—and amends the scope of the exemptions to UK-only—that relate to certain trading activities that cannot be enforced against the regulation.

[Official Report, Thirteenth Delegated Legislation Committee, 23 January 2019, c. 4.]

Letter of correction from the Economic Secretary to the Treasury:

An error has been identified in my contribution to the debate on the draft Market Abuse (Amendment) (EU Exit) Regulations 2018 and draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019.

The correct statement should have been:

[John Glen]

The SI also retains exemptions in MAR for financial instruments on UK and EU markets. These relate to certain trading activities that cannot be enforced against the regulation.

Draft Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019

John Glen Excerpts

Tuesday 5th February 2019 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019.

It is a pleasure to serve under your chairmanship, Sir Christopher. As part of contingency preparations for a no-deal scenario, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments before the House under the European Union (Withdrawal) Act 2018 to deliver that, and a number of debates on statutory instruments have already been undertaken in this place and in the House of Lords. The SI being debated today is part of that programme and was debated in the House of Lords yesterday.

The SI will fix deficiencies in UK law for financial markets and insolvency regulations to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the withdrawal Act—providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context. The instrument being debated today concerns insolvency-related protections that are provided to systems and central banks under the EU settlement finality directive. “Systems” for these purposes are entities such as central counterparties, central securities depositories, and payment systems. These systems provide essential services and functions relied on by the financial services sector. For example, central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. They guarantee the terms of a trade even if one party defaults on the agreement, reducing counterparty risk.

Under the SFD, a European economic area-based system can be designated by its member state’s designating authority. Once a system is designated, funds or securities placed in that system by a system user cannot be clawed back in the event of the system user going into insolvency. This framework is intended to benefit both systems and their users. In particular, a system may provide services on more favourable terms to a user if it has SFD protections in place. In certain cases, membership of a system is contingent on those protections being provided, as that is an essential tool for the system to manage risks. Designation is therefore important, as it facilitates the smooth functioning of, and confidence in, financial markets.

The Bank of England and the Financial Conduct Authority are the designating authorities in the UK. When the Bank or FCA designates a system, it currently informs the European Securities and Markets Authority—ESMA—which places it on the EU register of designated systems. The SFD provides similar protections to central bank functions across the EEA. Collateral received by an EEA central bank in accordance with its functions, such as emergency lending, cannot be clawed back if the relevant counterparty to the central bank is subject to insolvency proceedings. The relevant EU laws—the SFD and the financial collateral arrangements directive—are implemented in the UK via the Financial Markets and Insolvency (Settlement Finality) Regulations 1999, the Companies Act 1989, the Financial Collateral Arrangements (No. 2) Regulations 2003 and the Banking Act 2009.

Should the UK leave the EU without a deal or implementation period, there will be no framework for the UK to recognise systems designated in EEA jurisdictions, which in turn may risk the continuity of services from those designated systems for UK firms. This SI introduces changes to mitigate risks to UK firms, to ensure that settlement finality protections continue to operate effectively following the UK’s withdrawal. First, the SI introduces a UK framework for designating any non-UK system. To do that, the Bank of England’s existing powers to designate and charge fees will be expanded to non-EEA systems, so that they can be designated under UK law. Moreover, the Bank of England will be able to grant protections to non-UK central banks, including EEA central banks, that already receive protections under the SFD. That will help to maintain the effect of the current framework, providing continuity to UK firms accessing systems and central banks, while assisting UK firms in accessing the global market. In making those changes, the SI also maintains existing designations for UK systems that were made by the Bank of England before exit day.

Secondly, the SI establishes a temporary designation regime. That provides temporary designation for a period of three years to existing designated EEA systems that intend to be designated under the new UK framework. The purpose of temporary designation is to allow time for designation applications to be processed by the Bank of England, while ensuring continuity of access for UK firms to relevant EEA systems immediately after exit day. The SI also grants the Treasury the power to extend that period, should the Bank of England need more time.

The Treasury has been working very closely with the Bank of England and the Financial Conduct Authority in drafting this instrument. The Treasury published the instrument in draft, alongside explanatory notes to maximise transparency to Parliament, industry and the public, on 31 October 2018. The Treasury has engaged with the financial services industry, in particular systems, on the SIs and will continue to do so going forward. Last Wednesday the Treasury also published the impact assessment that accompanies the SI. The impact assessment confirmed that there is no impact to UK firms as a result of bringing forward this legislation. However, there will be costs to EEA firms, which will need to familiarise themselves with the UK regime and pay fees to the Bank of England in order to be designated.

In conclusion, the Government believe that this legislation is necessary to ensure the smooth functioning of financial markets in the UK, if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the draft regulations, which I commend to the Committee.

--- Later in debate ---

[John Glen]

I thank the hon. Members for Stalybridge and Hyde and for Aberdeen North for raising those issues. I will start with the Opposition Front-Bench spokesman’s opening comments. He questioned the appropriateness of our journey through these many SIs. It is profoundly concerning to me that we have such a high volume to deal with every week. All I can do is ensure that the work has been done on the impact assessments, and that the engagement with industry has been thorough and its concerns responded to. I reassure him that, clearly, we are within the scope of the powers under the legislation.

Hon. Members asked a number of specific questions, which I shall try to address. The hon. Gentleman expressed concern about the provision being applicable only in a no-deal situation. I can confirm the SI is just for a no-deal scenario. The temporary designation regime allows EEA systems that currently benefit from UK protections under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 by virtue of the UK’s membership of the EU to continue to do so after exit. As the hon. Member for Aberdeen North pointed out, the Bank of England clarified on 24 January which have already expressed a desire to join.

[Kirsty Blackman]

Can the Minister explain whether, in the event of the Prime Minister’s deal getting through and there being some sort of implementation period, he envisages a transitional regime or whether everything will just go ahead as it is currently?

[John Glen]

I am very happy to respond. In the situation that we have a deal, which is what the Government wish to happen, we would enter the implementation period. That means we would have continuity of current arrangements until we secured the enhanced equivalence solution, which we would be working towards, by the middle of next year, before the end of the implementation period.

The hon. Member for Stalybridge and Hyde expressed concern about the cost. We estimate that 126 EEA firms benefit from UK protections via the SFD and would therefore be in scope for this regime. Each firm is expected to have a one-off familiarisation cost of £210, so the total cost would be £27,000.

The hon. Member for Aberdeen North asked about the extension of the Bank’s power to designate non-EEA systems, which she posited was a significant policy change to the EU SFD and therefore incompatible with the general onshoring approach. The key point is that if, in the undesirable circumstances that we leave the EU with no deal, the UK becomes a third country and therefore is treated the same as any other non-EU jurisdiction, the new regime would need to reflect that. The SFD is a directive rather than a regulation and so allows for a degree of member state discretion on transposition into national law. I suspect that is why there is the impression of some arbitrary decision being taken.

A number of member states, including the UK, have in place or are working towards a framework for designating non-EEA entities. I would therefore submit that the Bank’s power to designate non-EEA systems is not a significant policy change from how the SFD framework currently operates in the EU at member state level. I note the hon. Lady’s observations about how her approach would differ, in that, if changes were made to the EU directive, we would submit another SI. I cannot give her the explicit rationale for why we did not adopt that approach, but I am happy to write to her on that point.

The hon. Lady also raised concerns about who had looked at the SI and asked about hits on the website. I do not have that data. I do not know whether it has been collected; I do not think it has. We engaged with stakeholders, including the financial services industry, while drafting these SIs, and they were published in advance. We shared the draft legislation with industry to allow stakeholders the opportunity to familiarise themselves with our approach and to test our understanding of the impact, and it was welcomed and supported. I cannot give the hon. Lady a precise answer about the iterations leading to the final SI being laid before the House, but I can say that there are no concerns about where it has ended up.

The hon. Lady asked about my view on the likelihood of no deal and whether it has changed. Obviously, we cannot completely rule out the possibility that the UK will leave the EU without a deal, but from my perspective as a junior Treasury Minister, it is important that I deliver a fully functioning legislative and regulatory regime come what may, and that is what I am determined to do. We have engaged with stakeholders to ensure that happens. The Commons continues to debate and, I hope, approve SIs relating to no deal, but I think the process the Government are going through is well known.

The hon. Member for Stalybridge and Hyde asked what the procedure would be for extending the temporary designation regime. Under this instrument, the Treasury will be able to extend the temporary designation regime by an additional 12 months beyond the initial three-year period. We would do that by laying a negative SI, given that we would not be substantively changing anything; it would be an administrative change. We would lay a written ministerial statement before both Houses in advance of laying that SI, in order to inform them of the situation.

[Jonathan Reynolds]

I suspect that the Minister may need some inspiration to answer this question, but could that be a cumulative process? Could it be used only once, or could a series of annual negative SIs be laid to prolong the process in perpetuity?

[John Glen]

I am grateful for the advice I have received, mystically, from behind me. It could be a multiple approach, but, again, that would be justified in the written ministerial statement. It is quite difficult to see how that would go on in perpetuity, but if there was a justification from the Bank of England, that would be made clear and that would happen.

[Kirsty Blackman]

As the Minister managed to get divine inspiration for that question, he might manage to get some for this one. He has talked about the cost to companies of having to make these changes and go through the registration process. I failed to ask about, and the Minister did not mention, the additional cost that the Bank of England might incur from administering the transitional designation regime.

[John Glen]

I am very happy to write to the hon. Lady about that. I think the cost would be minimal, and it would be in the context of the Bank’s overall work. I do not know whether the cost relevant to this directive can be isolated, but I will write to her in general about the resourcing of the work of the Bank of England.

The hon. Lady also asked whether the Government have decided not to recognise systems that are recognised by EU authorities. The mutual recognition process works by virtue of the UK being a member state and hence subject to the settlement finality directive. I may have raised this point earlier. When we leave the EU, we will no longer be subject to the SFD, so this is not a policy decision; it is a necessity to provide continuity in respect of EEA systems. That is why the temporary designation regime is being created.

There is also the question of our overall aspiration. Clearly, we hope to secure a deal, and therefore we have ambitious plans subsequent to that, during the implementation period, to have an ambitious arrangement with the EU where we have strong relationships, regulator to regulator. This SI is essential for ensuring that we continue to have an effective framework for financial markets insolvency in the UK in a no-deal scenario. I hope this sitting has been informative and that the Committee will join me in supporting this SI.

Question put and agreed to.

Draft Solvency 2 and Insurance (Amendment, Etc.) (EU Exit) Regulations 2019 Draft INSURANCE DISTRIBUTION (Amendment) (EU EXIT) Regulations 2019 DRAFT FINANCIAL CONGLOMERATES and Other Financial Groups (Amendment Etc.) (EU Exit) Regulations 2019

John Glen Excerpts

Monday 4th February 2019 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019.

[The Chair]

With this it will be convenient to consider the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019 and the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019.

[John Glen]

It is a pleasure to serve under your chairmanship, Sir Henry.

As the Committee will be only too aware, the Treasury has been undertaking a programme of legislation to ensure that if the United Kingdom leaves the European Union without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018 to deliver that. Debates on such SIs have already taken place in this place and in the House of Lords, and the SIs we are debating are part of that programme. We have at least 13 more to come.

The draft SIs before us will fix deficiencies in UK law on the prudential regulation of insurance firms, insurance distribution and financial conglomerates to ensure that they continue to operate effectively post exit. The approach taken in the legislation aligns with that of other SIs being laid under the EU (Withdrawal) Act, providing continuity by maintaining existing legislation at the point of exit but amending it, where necessary, to ensure that it works effectively in a no-deal context.

Three SIs are being debated today: draft amendments to the Solvency 2 regulations, the financial conglomerates and other financial groups regulations, and the insurance distribution regulations. The Solvency 2 regulations set out the prudential framework for insurance and reinsurance firms in the EU. Prudential regulation is aimed at ensuring that financial services firms are well managed and able to withstand financial shocks, so that the services that they provide to businesses and consumers are safe and reliable. Solvency 2 is designed to provide a high level of policyholder protection by requiring insurance and reinsurance firms to provide a market-consistent valuation of their assets and liabilities, to understand the risks that they are exposed to, and to hold capital that is sufficient to absorb shocks. Solvency 2 is a risk-sensitive regime in that the capital that a firm must hold is dependent on the nature and level of risk that a firm is exposed to.

The insurance distribution regulations set standards for insurance distributors as regards insurance product oversight and governance, and set information and conduct of business rules for the distribution of insurance-based investment products. The financial conglomerates and other financial groups regulations set prudential requirements for financial conglomerates, or groups, with activities in more than one financial sector.

The three draft SIs that we are debating amend those regulations so that they function properly in a no-deal scenario. The amendments to be made by the draft Solvency 2 regulations, first, remove references to the European Union and EU legislation, and replace them with references to the UK and UK legislation. It is important to stress that the high prudential standards of Solvency 2 are not being altered. Changes are being made to ensure that the Solvency 2 regime continues to operate as originally intended once the UK is outside the EU.

Secondly, the draft statutory instrument alters the arrangements for the regulation of cross-border European economic area groups of insurance and reinsurance firms that provide services in the UK. As in other areas of EU regulation, insurers and reinsurers are subject to the EU’s joint supervisory framework. That enables the requirements of Solvency 2 for a cross-border EEA insurance or reinsurance group to be applied to the group, with one EEA supervisor allocated lead responsibility for supervision of the group, in addition to supervision of solo firms by their respective EEA supervisors. Supervisory co-operation takes place through a college of supervisors in which all the interested EEA supervisors take part.

After exit, however, in a no-deal scenario, the EU has confirmed that it will treat the UK as a third country and that the UK will be outside the joint supervisory mechanisms that are the basis for the current treatment of groups in the EEA. Cross-border EEA groups may therefore become subject to group supervision by both UK and EEA supervisory authorities in the absence of equivalence decisions.

The statutory instrument will transfer responsibility for making equivalence decisions in relation to third-country regimes. Currently, a third country’s regulatory or supervisory regime may be deemed by the European Commission to be equivalent to the approach set out in Solvency 2. After the UK leaves the EU, Her Majesty’s Treasury will make equivalence decisions for third-country regimes.

The statutory instrument will transfer responsibility for a number of important technical functions from the EU authorities to the UK. Most significantly, the risk-free rate—the rate that insurance and reinsurance firms must use to value their liabilities—will be transferred from the European Insurance and Occupational Pensions Authority to the Prudential Regulation Authority. The PRA is the most suitable UK body to undertake the technical function of compiling the risk-free rate. It will also take on the responsibility of publishing the risk-free rate. In addition, responsibility for making binding technical standards, which are currently developed and drafted by the EU supervisory agencies, will be transferred to the PRA, in a manner consistent with the approach taken in the other statutory instruments that we are laying under the withdrawal Act.

The statutory instrument removes obligations for EU competent authorities to share information with each other. If the UK leaves the EU without a deal, it will no longer be appropriate to require UK regulators to share information with EU regulators. UK regulators will continue, however, to be able to use their discretionary powers to share information when doing so might be necessary to ensure that supervisory responsibilities are carried out effectively.

Preferential risk charges for certain assets and exposures that originate from within the EEA, and which are held by UK insurance and reinsurance firms, will be removed. A UK firm’s exposures from the EEA will now be treated in the same way as exposures from any other third country. The EU has confirmed that it will treat UK exposures as third-country exposures if we leave the EU without an agreement.

I will now turn to the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019. This instrument fixes deficiencies in the regulations and relates mostly to removing inappropriate cross-references to EU bodies and legislation. The instrument transfers to the Financial Conduct Authority the power to make technical standards for a template presenting information about general insurance policies—a standardised document to help customers compare policies and make informed decisions. That power is important as it enables the Financial Conduct Authority to update the document in the future, to ensure it continues to deliver useful information for consumers.

The instrument also transfers relevant legislative functions to the Treasury. Those functions give the Treasury the powers to make regulations about conflicts of interest, inducements, assessments of suitability, appropriateness and reporting to customers, and specifying principles for product oversight and governance.

Finally, I will address the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019. This statutory instrument makes changes to the definition of “financial conglomerate”. Under the EU financial conglomerates directive, a financial conglomerate is defined as a group with at least one entity in

“the insurance sector and at least one…within the banking or investment services sector”.

One of those must be located within the EEA. The others can be located anywhere in the world. This statutory instrument will amend the geographical scope of the definition, so that one entity must be located within the UK, rather than the EEA, to be subject to the UK regime.

This statutory instrument amends the definition of “competent authority” so that it no longer includes regulators based in the EEA. It transfers a number of functions from the EU authorities to the UK regulators. The European financial conglomerates directive requires EU authorities to publish and maintain a list of financial conglomerates, for example. That function will now be carried out by the FCA and the PRA. In addition, as with other financial services files, the responsibility for developing binding technical standards will pass from the European supervisory authorities to the appropriate UK regulator.

Finally, as is the case for the statutory instrument that amends the Solvency 2 regulations, this statutory instrument removes obligations for EU competent authorities to share information. If the UK leaves the EU without a deal, it will no longer be appropriate to require UK regulators to share information with the EU. However, the UK regulators will continue to be able to use their discretionary powers to share information where this might be necessary to ensure that supervisory responsibilities are carried out effectively.

The Treasury has been working closely with the PRA and FCA in the drafting of these instruments. It has also engaged the financial services industry on these statutory instruments and will continue to do so going forward. The Committee will have heard from the Association of British Insurers, in a letter of 1 February, how meaningful that engagement has been. In late 2018, the Treasury published these instruments in draft, along with explanatory policy notes, to maximise transparency to Parliament and industry.

[Sir John Hayes (South Holland and The Deepings) (Con)]

On the issue of familiarisation costs, which are dealt with in the SI and are specified more precisely in the explanatory memorandum, it is clear that business is impacted and will endure what are said to be one-off costs in the notes. Will the Minister say a word about that to assuage any doubts?

[John Glen]

My right hon. Friend is right to draw attention to the impact assessment, which covers two of the three statutory instruments. One of them, of course, did not require one because of the de minimis impact. We have done our very best to be as transparent as possible and to quantify those. In the vast majority of cases, it has been about one-off familiarisation costs rather than an enduring burden. I thank my right hon. Friend for giving me the opportunity to clarify that.

In summary, the Government believe that the proposed legislation is necessary to ensure that insurance and reinsurance firms, insurance distributors and financial conglomerates continue to operate effectively in the UK, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the regulations. I commend them to the Committee.

--- Later in debate ---

[John Glen]

I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their thorough examination of these three statutory instruments, and I note their consistent objection to the use of that mechanism to deliver such changes. All I can say is that the Government have pursued the changes consistent with the powers in the Act, and that great care and diligence have been taken to liaise with regulators and the industry, and to engage with industry participants, as I think the ABI has confirmed.

Of course, the process is designed as insurance in the circumstances of no deal; it is not the Government’s policy that the regulations will need to come into effect. I fully accept the point made by the hon. Member for Stalybridge and Hyde about the broader need to look at the future in a fair way, and the concerns of the London Market Group representative, whom I will meet tomorrow to look at global financial partnerships. The Treasury is not just focused on no-deal planning.

Both hon. Members raised a number of specific points, which I will seek to address as succinctly as I can. They expressed concern about relying on secondary legislation to push through controversial legislation. I re-emphasise that the powers granted in the European Union (Withdrawal) Act 2018, under which the majority of exit SIs are being made, have restrictions to ensure the appropriateness of their use. The central objective of the SIs is to provide legislative continuity, which is what market representatives have sought. Such SIs are, of course, subject to the usual scrutiny provided by the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee. In addition, the Treasury has taken the step of publishing drafts of financial services SIs in advance of laying them before the House, to maximise transparency.

The hon. Member for Stalybridge and Hyde asked about equivalence and whether it was sufficient to protect UK industry. I agree that equivalence is not a sufficiently good outcome, and that is why the Government are working for a deal that aims for enhanced equivalence, which we would embed in the new relationship with the EU by June next year. Obviously, however, if there is no deal, we have to cover ourselves.

The hon. Gentleman also asked whether Solvency 2 can still operate effectively if preferential treatment for EU assets is retained, and whether removing preferential treatment is a political decision that the Government have made. The Commission has made clear that it intends to treat the UK as a third country after exit in the absence of a withdrawal agreement, and therefore we expect EEA regulators to remove current preferential treatment. It is only appropriate for the UK, in the absence of a reciprocal agreement, to treat EEA assets and exposures in the same way. We recognise that that may have a day one capital impact on insurers with EEA assets and exposures; that is why we intend to provide regulators with a transitional tool, as I discussed at the Treasury Committee last Tuesday morning, to ensure that firms have sufficient time to comply with changes overall with respect to legislation and rules.

The hon. Gentleman reflected on the concerns that the ABI expressed in its letter about too much power being transferred to the PRA for Solvency 2. The PRA has the expertise and resources to take on the technical functions being transferred from EU institutions and to ensure that they are met on an ongoing basis. There are existing safeguards within the Financial Services and Markets Act 2000 that place conditions on the PRA’s ability to exercise its powers. The Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 also require the Treasury to approve changes to technical standards by regulators to correct any deficiencies before exit day.

The hon. Gentleman asked which functions would come to the Treasury. Wherever the Commission exercises a legislative function, that is transferred to the Treasury, which can make changes to these regulations only through SIs in Parliament, where parliamentary approval will be required. On the lack of democratic accountability for the PRA, the changes are not intended to be long term; regulators, the Treasury and industry will work together to address the framework in the long term.

That will be a significant change, and one that I hope we do not pursue; I think there is a lack of understanding about how significant that change would be. However, we would do everything we could to ensure that we set that framework in the right way. Accountability to Parliament will be a priority whatever happens, and only functions carried out by EU regulators are being transferred. The hon. Member for Stalybridge and Hyde also asked why there cannot be more specificity regarding the relevant competent authority with reference to the conglomerates. The legislation specifies that it is either the PRA or the FCA, depending what type of regulated firm is covered, which fits with the UK’s existing framework.

The hon. Member for Glasgow Central again reflected on the ABI’s concerns, this time about the inefficiencies being created by making cross-border insurers subject to dual group supervision. We recognise that dual regulation may create additional costs for UK insurers that operate across the UK-EU border. However, that is a consequence of the UK’s decision to leave the EU rather than of this instrument, and in applying Solvency 2 in a UK-only context, the PRA needs to apply group supervision at the UK level, as it can no longer participate in the formal college of EU supervisors. Basically, the PRA will need to take account of the systemic risks that exist, and ensure they are covered for.

The hon. Member for Stalybridge and Hyde asked why insurance-based investment product definitions are being changed. The definition is not being changed; it will operate as before, but references to EU institutions and EU law need to be fixed. If there are outstanding issues on that point, I am very happy to correspond with him.

The hon. Member for Glasgow Central challenged the need for the Government to take additional powers in the draft insurance distribution SI. The instrument transfers relevant legislative functions of the European Commission, contained within the insurance distribution directive, to the Treasury. As the hon. Lady clearly understands, the Treasury has the powers to make those regulations about conflicts of interest, inducements, assessments and so on. They are important, because the IDD came into force only last year, and as such the Commission held those powers to ensure that the regulatory regime for the sale and distribution of insurance could be updated. Transferring them to the Treasury is in line with the Government’s standard approach to such powers as part of this process.

The hon. Lady asked about the resourcing of the PRA. As we have also discussed before, regulators are independently funded by levies on industry. The regulators have prioritised Brexit; I seem to recall that the FCA now has 158 full-time equivalents, up from 28 in March last year. I meet with Andrew Bailey regularly. I met him this morning and he confirms that those resources are in place, but if more is required he would be at liberty to raise a levy to secure those.

The hon. Lady referred to consumer welfare concerns about the IDD. I can reassure her that consumers will not lose out. There is no substantive change in the policy requirements on firms under this SI. Firms will still be required to prepare the standardised statement, with the same content as is currently the case and, indeed, as industry wishes.

I hope that I have dealt with the substantive points that were raised. I have a lot more material that I could go through, but I think I have faithfully addressed what was said. I hope that the Committee has found the sitting informative, and will be able to join me in supporting the three statutory instruments.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019.

Draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019

Resolved,

That the Committee has considered the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019.—(John Glen.)

Draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019

Resolved,

That the Committee has considered the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019.—(John Glen.)

Equitable Life

John Glen Excerpts

Thursday 31st January 2019 Commons Chamber

[The Economic Secretary to the Treasury (John Glen)]

It is a privilege to respond to the debate. First, I congratulate my hon. Friend the Member for Harrow East (Bob Blackman) and the hon. Member for Leeds North East (Fabian Hamilton) on their tireless work on this issue, which has helped the Government to achieve so much. I attended a meeting of the all-party parliamentary group for justice for Equitable Life policyholders last September, and the respect of colleagues on both sides of the House for those Members’ work was clear.

This well-documented topic has been explored once again in detail today, with 10 eloquent and measured speeches by Members on both sides of the House. I need to declare an interest. My father worked in a glasshouse nursery all his life and paid in modest sums each month to Equitable Life. He received the compensation of 22.4% to a bond that he was paying into. Sadly, he died of mesothelioma aged 69, just two years ago. I know that it was a matter of grave concern for him, and he took the money and invested it somewhere else. I am very familiar with the long history of this case.

I want to take this opportunity to remind Members that, on this issue, this Government have taken more action than any previous one. Using the ombudsman’s findings, we determined the reduced returns that policyholders received to be £4.1 billion. That is significantly more than the £340 million arrived at by the previous Labour Government in the Chadwick review, which was then dismissed. That increase is because we generously assumed that every new investor consulted the incorrect regulatory returns and, on the sole basis of those returns, made an investment.

In 2010, we announced that up to £1.5 billion would be made available for payments. Those payments were tax-free, which increased their value even more. Out of that £1.5 billion, following representations from groups such as the Equitable Members Action Group, we decided to pay the group of with-profits annuitants in full. The total cost of those annual payments was estimated to be around £625 million. As several Members have mentioned, there is an additional £100 million contingency fund in place to provide for annuitants should they live longer than their actuarial forecast, and we expect the contingency to be drawn on from the middle of the next decade. The remaining funding was distributed pro rata to remaining eligible policyholders. The scheme operated successfully for around five years, and in 2016 the operation was wound down.

There has, reasonably, been a degree of repetition in the asks made today, and three key points were raised. I have listened closely to those representations, and I would like to deal with some of them in turn. First, I have received suggestions that all policyholder records should be retained indefinitely, in case further payments are made. There has been correspondence between the Treasury and the APPG on that matter, and I can assure Members that relevant records are currently retained and will continue to be as long as it is legal. I can reassure the House that there are no plans to destroy any records.

Secondly, I am aware that some are dissatisfied with the £1.5 billion and suggest that it is incompatible with the ombudsman’s report. However, Members will be aware that the ombudsman wrote to the APPG on that issue and said that the Government’s decisions could not be said to be incompatible with her report. That spending decision was taken in the wider context of other spending priorities. I recognise that there is a whole range of opinions about spending priorities. That is what we do—we make relative decisions. This decision needed to be fair to the taxpayer, who funded these payments, and £1.5 billion was, on balance, judged to be the most appropriate figure.

I want to be clear: when this settlement was made, it was not subject to future review by the Government. I note the inference by the APPG and Members from the statement at the time, but no specific commitment was made to return to that calculation. No obligation linked it to the future state of public finances. There have been representations that this issue should be reopened and that a further £2.6 billion should be paid to policyholders. The Government’s position on this is clear, and I have set it out in my letters to the APPG and my meeting with it last year. Being in government is about making difficult decisions. Our decision was to spend £1.5 billion, reversing and multiplying by four the previous Government’s dismissal of a commitment to £340 million. These difficult decisions are about how to be fair to both hard-working taxpayers and those in receipt of public spending and services, and where the need to spend public money is greatest.

I acknowledge the point made by my right hon. Friend the Member for New Forest West (Sir Desmond Swayne) concerning the imperative to provide for the next generation and, as several Members said, to restore trust in pensions and pension savings. There is cross-party consensus on that, and both parties have worked hard to achieve a lot in terms of auto-enrolment. There is more work to be done in that space. None the less, the House will recognise that the opportunity cost to the Exchequer of paying a further £2.6 billion is funding the salaries of 67,000 teachers, or 112,000 new nurses.

[Gordon Marsden]

I am listening with some concern, as I am sure other Members are, to what appears to be an edging further and further away from the commitments that we have all asked for this afternoon. The Minister talks about priorities. We could spend three hours in this Chamber talking about the priorities that this Government have given to tax cuts and other things. He needs to choose his words carefully in responding to what has been said.

[John Glen]

I will choose my words carefully, but it is undeniable that after 13 years in government, the previous Labour Government—

[Gordon Marsden]

Stop playing party politics.

[John Glen]

It is not about party politics; it is about saying that when we came into government, in the absence of a resolution to this matter, we increased the figure from £340 million, which the last Labour Government were proposing, to more than £1.5 billion. In the light of those facts, it is a bit unreasonable to criticise what I am saying. While I appreciate and empathise with the fact that some policyholders who have invested their funds have not received the funds that they hoped for, like my late father, and that this impacted on their plans and futures, we have taken the best action that we could have to resolve the Government’s part in these reduced returns. We have done more than any previous Government.

I draw colleagues’ attention to Equitable Life’s own research from 2011, which suggested that their policyholders wanted the Government compensation to draw a line under this issue. I agree with them. The Government’s view is that this issue is now closed, and as a Minister I have never been in the business of offering false hope.