Draft Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018
John Glen Excerpts(5 years, 12 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018.
May I first say what a pleasure it is to serve under your chairmanship, Mr Bailey? Claims management companies offer advice and other services to consumers making claims for compensation. The Government have been consistently clear that a well-functioning CMC market provides vital support for consumers, who may otherwise be unwilling or unable to bring a claim for compensation themselves, and that CMCs benefit the public interest by acting as a check and balance on business conduct.
Robust regulation is important, as CMCs handle millions of pounds’-worth of consumer claims. However, there is significant evidence of misconduct in the CMC sector. Between 2015 and 2017, 443 warnings were issued to CMCs and 135 licences were cancelled by the regulator. As a result, consumers are distrustful of CMCs—76% reported to the legal ombudsman that they are not confident that CMCs tell their customers the truth.
The majority of stakeholders feel that the current regulator lacks sufficient powers and resources to supervise the market properly. That is why the Government are committed to strengthening claims management regulation. The draft order delivers on that objective by making provisions for the transfer of claims management regulation to the Financial Conduct Authority.
The provisions in the Financial Guidance and Claims Act 2018 lay the framework for strengthening the regulation of CMCs under the FCA. The draft order implements that framework by transferring the existing Compensation Act 2006 regulatory regime to the FCA and the Financial Ombudsman Service, with some changes, including extending claims management regulation across Great Britain for the first time. Consumers in England, Wales and now Scotland will have the same protections with regard to CMCs.
The draft order creates seven different permissions for claims management activity. That will make it possible for the FCA to take into account the different types of work and activities across each sector. Each CMC will require separate permissions, depending on the specific activities it wishes to undertake and sectors it wishes to operate in. Depending on which sectors they operate in, some CMCs may require just one permission while others may require several. That replaces the current regime, with a single permission covering all regulated conduct across any combination of activities and sectors.
We have kept the sectors that were regulated by the Claims Management Regulator—personal injury; financial products and services; employment issues; industrial and criminal injuries; and housing disrepair. We have focused on those sectors with the greatest potential for detriment associated with unregulated CMCs or a high number of spurious claims. The majority of claims management activity is in the financial services sector, which accounted for 74% of CMC turnover in 2017-18. We of course recognise that some sectors that CMCs operate in are not named in the draft order. We will monitor developments closely and consider how the Government can best meet that challenge.
The draft order sets out who is exempt from regulation by the FCA for the claims management activity they carry out. The issue of the exemption of solicitors came up during the passage of the Financial Guidance and Claims Act 2018, when some concern was expressed that unscrupulous CMCs would attempt to circumvent regulation by employing solicitors, who are exempt from regulation by the Claims Management Regulator, to carry out their claims management activity. I can reassure the Committee that solicitors are already strictly regulated by the Solicitors Regulation Authority for their work, which is often very similar to claims management work. The purpose of the exemption in respect of their claims management activity is to ensure that solicitors are not unduly burdened by dual regulation. That exemption applies only to the claims management activity that a legal professional carries out in their ordinary work as a solicitor.
The order includes vital provisions to ensure that the transition of regulation is a smooth and orderly process. A temporary permissions regime will be in place after the transfer on 1 April 2019. That will allow firms that have notified the FCA of their desire to transfer to the new regulatory regime to continue to benefit from authorisation until their full permission application has been determined. That should allow CMCs time to adjust to the new regulatory regime.
We are confident that the provisions of the 2018 Act, implemented by the order, will allow the FCA to introduce a regulatory regime that enhances both consumer protection and professionalism in the sector. The Government are confident that the FCA will be well placed and that it has the relevant resources to regulate the sector effectively. Bringing regulation under the remit of the FCA brings its expertise in conduct regulation. In addition, it will be able to leverage its strong existing relationships with other financial services organisations, such as the Financial Ombudsman Service, which will handle complaints about CMCs, and the Information Commissioner’s Office, which enforces the restrictions on cold calling by CMCs.
The Government believe that the new regime defined in the order will bring proportionate and professional regulation to the CMC sector. The Government hold firm to the belief that a well-regulated claims management sector can provide an important service to consumers by assisting them to claim the redress they are due. I hope that colleagues will join me in supporting the draft order, which I commend to the Committee.
John Glen
I thank the Committee for the serious questions and the range of issues raised. I will do my best to respond to all the questions. I will start with the hon. Member for Oxford East, who asked about progress on the cold calling plan. The Chancellor announced it in the Budget and laid a statutory instrument two days later banning cold calling in relation to pensions. It will be debated later in the year and hopefully will be in force early in the new year. I texted her counterparts on the Labour Front Bench to make them aware of that.
Anneliese Dodds
I am grateful to the Minister for enlightening us on that. However, we are talking about claims management rather than pensions.
John Glen
I will move on to that in a moment. I also want to touch on the point about the ICO as an enforcer, and why not the FCA. There are two debates here. The hon. Member for Garston and Halewood asked about the FCA’s suitability. One issue that has come up—my hon. Friend the Member for South Norfolk mentioned it as well—is the ICO’s experience and powers to enforce the restrictions on CMC cold calling. The ICO can levy fines of up to £500,000 for breaches of the Privacy and Electronic Communications (EC Directive) Regulations 2003. It has the international reach to enable enforcement action when companies are operating abroad, and perhaps calling my hon. Friend.
The ICO and the FCA work together to establish whether the claims management company has FCA authorisation to carry out marketing activity. The FCA will be able to consider whether the CMC is in breach of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and will sanction appropriately. It is really about the concentration of the FCA’s skills and experience in this domain.
Neil Gray
I thank the Minister for explaining where the Government are trying to move to in terms of CMC cold calling, which was a hot topic of debate during the passage of the Financial Guidance and Claims Act 2018. What he has described does not go as far as banning CMC cold calling, although he has banned it for pensions. Why is he not banning it? That is what we are getting plagued with. The hon. Member for South Norfolk and many others will be in the same position as me.
Mr Bacon
Good, because I would still like to hear an answer to whether, in making the phone call, the person, who plainly has my name and number and who refers in the opening sales pitch of the conversation to an accident that did not take place, is committing a crime now, or will be under the new regulations.
John Glen
I will move on sequentially through the points made.
On the question about why the Government are not banning all cold calls, which I think is behind all this, we are determined to tackle CMC cold calling and pensions cold calling, but a balance needs to be struck between ensuring that consumers are adequately protected and providing the right conditions for the legitimate direct marketing industry to operate. I recognise that there is a debate about the extent of the coverage and which sectors should be covered, but we took a view about what should be included at this time so that we could make progress and lay the order. We are actively prepared to consider further sectors that should come under the order.
The hon. Member for Oxford East raised the issue of the interim regime’s funding. The FCA is making a one-off levy from April 2019, and it will continue to collect fees from industry. Having recently closed a fees consultation, it will release a policy statement later this year about the funding mechanism for that transition period.
Anneliese Dodds
I asked specifically about the resources available to the FCA for creating that interim regime at a time when it is under enormous pressure in other ways. Is it to be expected to fund all that through its existing budget and receive that levy only after 1 April? Surely that could pose some problems.
John Glen
The FCA has made provision for the funding of the activity, and it will make a policy statement later this year about how it will work after April.
I was asked about the impact of new FCA regulation on the fees, so I will give more detail. To cover the costs of the transfer, the firms will be required to pay a one-off levy spread over two to three years, which will be collected by the FCA. Clarification will be given later about the regime following that.
On the point about solicitors’ exemption, which goes to the point about regulatory arbitrage raised by my hon. Friend the Member for South Norfolk, there are strict controls in professional regulation under the SRA. The intention has been to have a tougher regulatory regime for CMCs without burdening solicitors with unnecessary regulation, because we believe that they are robustly regulated. Whether the two are aligned is a legitimate issue that needs ongoing review. We are concerned about the risks. The order is designed to close the potential loophole through a provision that removes the exemption for legal professionals if their claims management activity is not part of their ordinary legal practice. That is what has been happening: they have not been subject to FCA oversight because, in effect, they have been doing something that they could say was under their regulator but that the FCA has nothing to do with.
The FCA and SRA have therefore committed to reviewing their memorandum of understanding where it sets out how they will work together, to ensure that the regulation is effective and avoids precisely the matter that my hon. Friend raised.
In relation to FCA scrutiny, there is a statutory duty on the FCA to report to the Treasury, and that will cover CMC activity. The FCA will do that regularly—on an annual basis. Additionally, there are informal, three-weekly conversations between me and the FCA, and obviously I will be subject to scrutiny in the House. That mechanism is a real one: I am obviously pushing the FCA to get this right and it is keen to get it right.
The hon. Member for Airdrie and Shotts asked about the conversation with the Scottish Government. During the passage of the Bill that became the Financial Guidance and Claims Act, the Scottish Government confirmed that it would be proportionate and relevant to bring Scottish CMCs within regulation. This Government have had further, ongoing discussions with the Scottish Government and the Law Society of Scotland throughout the drafting of this legislation, and we are very happy that they are, obviously, included in it.
My hon. Friend the Member for South Norfolk asked about the current status of someone making a cold call. The 2018 Act prohibits anyone from making an unsolicited marketing call in respect of claims management activity. As I have said, that is enforced by the ICO, which has the power to levy large fines and has international reach. Under this statutory instrument, any advertising of claims management services must have prior authorisation by the FCA. Breaching the regulations and failure to have FCA authorisation will be an offence. There has been greater clarity about telephone numbers having to be published, but the ICO is the place where my hon. Friend could take the calls that he is facing.
Anneliese Dodds
I am grateful to the Minister for being so generous with his time. May I try to clarify something? Surely we are talking about two different forms of authorisation. This may have been in the Minister’s mind anyway when he was talking; I am not sure. There is authorisation by the regulator, but also by the person who is being rung by the claims management company. Surely they are two quite different things.
John Glen
Somebody should not be called unless they have given explicit permission to be called, so it is an illegal act if that permission has not been given.
My hon. Friend the Member for South Norfolk asked whether this regulation covers banks. No, they will be covered by their FCA authorisation and supervision, so they are covered but not under these provisions.
John Glen
It would be a criminal offence, but I will be happy to clarify the situation exactly in a letter to my hon. Friend subsequently. I think that I have covered the point about the SRA and regulatory arbitrage.
A point was raised about other sectors—this point came through a lot in the passage of the main legislation —by the hon. Member for Garston and Halewood. The Government are actively examining the extent of the coverage. According to my initial statistics, in 2017-18 financial products and services claims made up 79% of CMC turnover and personal injury made up all the remaining turnover. A point that has often come up is about coalminers. If they do not already come under personal injury, we will be able continually to observe, and possibly extend, coverage, based on whether a discrete additional category is needed.
In relation to the next steps on this regulation, if the Committee approves the order today, the regulation will transfer to the FCA on 1 April 2019. The FCA regularly updates its rulebook. It is a robust regulator, which I have frequent dialogue with, and is subject to scrutiny.
Sir Oliver Heald
Does my hon. Friend agree that since 2006 there has been a problem in finding the right regulator for CMCs? The advantage of the FCA is that it is a big regulator that already covers a lot of businesses and has a lot of capacity to tackle the area, unlike the original trading standards-type regulation that was introduced in 2006. It was always intended that what the MOJ did would be a temporary measure. Is it not to be welcomed that the area will now have a robust and substantial regulator?
John Glen
I entirely agree. That is the purpose of the draft order, which will enable claims management regulation to be transferred to the FCA and the Financial Ombudsman Service. Given the breadth of their existing regulatory oversight, that will satisfy the concerns of those who want a more robust regulatory regime in place. Consumers will benefit from a well-regulated and professional claims management industry. The industry can provide important services to some consumers, but there needs to be confidence in how difficulties are handled.
Neil Gray
I do not believe that the Minister has adequately addressed the point raised about the five-year wait for monitoring. He says that he is accountable to the House. Of course he is, but it would be far more useful if he could lay progress reports before the House and have more frequent voluntary reviews to allow proper scrutiny of progress.
John Glen
My view is that there are clear categories that the Government have been challenged on with respect to inclusion. There was a judgment to be made about what was to be included in the order at this point in time, but I would seek to make regular reports to review progress—far more frequently than every five years, which is the formal requirement. It would certainly be within the FCA’s remit to introduce changes far more regularly; if the hon. Gentleman reflects on the FCA’s work on high-cost credit, he will agree that its interventions have led to more rapid changes. My expectation is that the regulator will respond to market changes and consider the appropriateness of extending to additional categories.
I hope that the Committee has found this evening’s sitting informative and will support the order.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018.
Draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018
Draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018
John Glen Excerpts(6 years ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations 2018.
The Chair
With this it will be convenient to consider the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018.
John Glen
It is a pleasure to serve under your chairmanship, Mr Hanson.
An essential part of preparing for a potential no-deal scenario in which the UK leaves the EU without a deal or an implementation period is ensuring that there continues to be a functioning legislative and regulatory regime for financial services in the UK. To deliver that, the Treasury is laying statutory instruments before Parliament under the European Union (Withdrawal) Act 2018, several of which have already been debated in this place and in the House of Lords. Both sets of draft regulations before the Committee are part of that comprehensive programme. They will fix deficiencies in UK law relating to the regulation of e-money institutions, payment institutions and account information service providers, as well as making transitional provisions. They align with the approach taken in other SIs laid under the 2018 Act by maintaining existing legislation at the point of exit to provide continuity, but amending it where necessary to ensure that it works effectively in a no-deal context.
The regulatory regime that applies to payment institutions, electronic money institutions and account information service providers, and the rules for facilitating payments and issuing electronic money for those institutions, are created by various pieces of EU legislation: the EU directives on payments and electronic money, which were implemented in the UK through the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 respectively, and the EU’s directly applicable regulation on credit transfers and direct debits in euro.
In a no-deal scenario, the UK would be outside the European economic area and outside the EU’s legal, supervisory and financial regulatory framework. The existing legislation needs to be updated to reflect that and amended to ensure that its provisions will work properly in such a scenario. Furthermore, in a no-deal scenario, the UK will no longer automatically maintain participation in the single euro payments area, which enables efficient, low-cost euro payments to be made across EEA member states and non-EEA countries that meet the governing body’s participation criteria. SEPA is a key enabler of trade between the UK and other EEA member states and non-EEA participants.
To ensure that the legislation continues to operate effectively in the UK once the UK has left the EU, and to maximise the prospects of the UK maintaining participation in SEPA in a no-deal scenario, the draft regulations will make amendments to retained EU law relating to the 2017 and 2011 regulations and to the EU regulation on credit transfers and direct debits in euro. I will set out the approach taken in each set of draft regulations and the interaction between their provisions and the UK’s future participation in SEPA.
The Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations will make the following principal amendments to the 2017 and 2011 regulations. First, they will create a temporary permissions regime for payment firms. Should the UK leave the EU without a deal, there would be no agreed legal framework under which the passporting system implemented for EEA payment firms under the Payment Services Regulations could continue to function, so firms from the EEA would not legally be able to operate in the UK. The draft regulations will therefore create a temporary permissions regime for such firms that is similar to, but separate from, the regime set out in the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which applies to firms regulated under the Financial Services and Markets Act 2000 and has already been debated in the House.
Secondly, the draft regulations will make changes to ensure the continued effective safeguarding of consumer funds. To provide consumer protection in the event of an institution becoming insolvent, the Payment Services Regulations require payment institutions and electronic money institutions to safeguard consumer funds to ensure that they are paid out in priority to other creditors. The most common method of safeguarding funds is for the firm to hold them in a segregated account with a credit institution. A considerable number of UK firms hold safeguarding accounts in the rest of the EU. They will still be able to do so once the draft regulations come into force, but they will also have the option of using safeguarding accounts based anywhere else in the world, subject to adequate guarantees of consumer protection. This is in line with existing practice for protecting client assets and investments.
Thirdly, the draft regulations will remove the provisions that currently require supervisory co-operation with EU authorities. In a no-deal scenario, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or co-operate with EU authorities, so the provisions that require co-operation and information sharing with the EU have been removed. However, that will not preclude UK authorities from sharing information with EU authorities if appropriate, which the existing domestic framework for co-operation and information sharing with countries outside the UK allows for on a discretionary basis.
Fourthly, the draft regulations will transfer to the appropriate UK bodies functions currently carried out by EU authorities. Under the payment services directive implemented by the Payment Services Regulations, responsibility for drafting regulatory technical standards currently sits with the European Banking Authority. In line with the Government’s cross-cutting approach to the transfer of functions, the draft regulations will ensure that those functions are transferred to the appropriate UK body, the Financial Conduct Authority.
The draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations will make the following principal amendments to the retained EU regulation on credit transfer and direct debits in euro. First, they will introduce the concept of a qualifying area, comprising the UK and the EEA, within which they will apply to UK payment service providers’ euro-denominated transactions. The qualifying area is broadly aligned to the geographical scope of SEPA, but it does not include SEPA’s existing non-EEA country participants; EU law does not include those countries, so it is not possible to include them in UK law under the European Union (Withdrawal) Act.
Secondly, the draft regulations will transfer to the appropriate UK body functions currently carried out by EU authorities. Under the regulation on credit transfer and direct debits in euro, the European Commission may adopt delegated acts to take account of technical progress and market developments. In line with the Government’s cross-cutting approach on the transfer of functions, the draft regulations will ensure that those functions are transferred to the appropriate UK body, Her Majesty’s Treasury.
Finally, let me turn to the interaction between the UK’s future participation in SEPA and the provisions made in both sets of draft regulations. The UK payments industry is required to make an application to maintain participation in SEPA as a non-EEA country in a no-deal scenario; I understand that UK Finance, which represents UK payment service providers, has made such an application on behalf of the industry. Applications from non-EEA countries are determined by the European Payments Council by reference to its published criteria for non-EEA country participation. Through the draft regulations, the Government intend to retain relevant EU law in a way that maximises the prospects of the UK maintaining participation in SEPA.
Should the UK not maintain participation in SEPA in a no-deal scenario, UK payment service providers would be unable to comply with some of the requirements in UK law that presuppose the existence of euro-denominated transactions within SEPA. To cater for that scenario, the draft Credit Transfers and Direct Debits in Euro (Amendment) (EU Exit) Regulations will give HM Treasury limited powers to revoke certain requirements to prevent detrimental effects on UK payment service providers.
In summary, the Government believe that the draft regulations are necessary to ensure that the regulatory regime that applies to payment institutions, electronic money institutions and account information service providers works effectively if the UK leaves the EU without a deal or an implementation period, and to maximise the prospects of the UK maintaining participation in SEPA to the benefit of UK consumers, businesses and the wider UK economy. I hope that colleagues from all parts of the House will join me in supporting the regulations. I commend them to the Committee.
John Glen
I will respond to the substantive points raised by the hon. Members for Stalybridge and Hyde and for Glasgow Central. First, I remind the Committee that these statutory instruments are needed to ensure that the regulatory regime that applies to payment institutions, electronic money institutions and account information service providers works effectively if the UK leaves the EU without a deal or an implementation period, and to maximise the prospects of the UK maintaining participation in SEPA.
The hon. Member for Stalybridge and Hyde spoke about the undesirability of this process. I acknowledge that going through 30 or so debates in this place is an interesting experience, but we are doing it to ensure that, in the unlikely scenario of no deal, we have a comprehensive regime in place.
On the overall situation with financial services, the negotiations are ongoing. I acknowledge the speculation over whether we have reached a deal. I am not able to confirm anything, but we are seeking to establish a strong bilateral relationship with EU regulators to fully mitigate the risks of being subject to equivalence decisions that are, at the moment, inadequate. I cannot comment further on that, nor on the progress on the deal as a whole. Members will appreciate that, as a relatively junior Minister at the Treasury, I am not privy to that information.
I can comment on some meaningful points. Concerns were raised about changes to consumer safeguarding as a result of the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations. The Payment Services Regulations 2017 require that payment and electronic money institutions safeguard consumer funds to protect consumers in the event of an institution becoming insolvent. The most prevalent method used to safeguard funds is for the firm to hold them in a segregated account with a credit institution. A significant number of UK firms hold safeguarding accounts in the rest of the EU, and they will still be able to do so once the statutory instrument comes into force. They will also have the option of using safeguarding accounts based elsewhere in the world, subject to adequate guarantees of consumer protection. That is in line with existing practices for protecting client assets in investments.
On the consultation undertaken, the hon. Member for Stalybridge and Hyde quite reasonably said that the usual process has been somewhat truncated. None the less, the draft regulations were published on 5 September and laid on 9 October. Consultation took place with key lobby groups in the industry, in particular UK Finance. We held a series of bilateral conversations with banks, FinTechs, payment providers such as PayPal and lawyers to verify the credibility of the statutory instruments. Although we have not undertaken a formal consultation on the statutory instruments, we have submitted them for approval in terms of the impact assessment and we expect that to come through imminently—next week, I hope.
I was asked about the impacts if the UK loses access to SEPA. SEPA enables efficient, low-cost euro payments to be made across participants. If, as expected, the UK secures a withdrawal agreement from the EU, EU law will be applicable in the UK during the implementation period and the UK will automatically remain within the geographical scope of SEPA. The Government’s approach to onshoring legislation is designed to maximise the prospects of the UK maintaining participation in SEPA in a no-deal scenario.
On the determination of the application to SEPA, which was raised by the hon. Member for Glasgow Central, UK Finance has made an application. Applications from non-EEA countries are determined by the European Payments Council, which is an international not-for-profit association; it is not part of the EU institutional framework. I cannot give the hon. Lady a categorical assurance over the timetable, because it is a matter for the EPC. UK Finance is in dialogue with it and has made the necessary provisions to do that in a timely way.
The hon. Lady also raised the impact of the UK losing access to SEPA. I think I have covered that.
John Glen
I am sorry: what are the impacts if the UK loses access to SEPA? In the unlikely scenario that the UK does not maintain participation in SEPA, UK consumers could face higher transaction costs and longer transaction times when making euro payments. That is precisely why we are making these provisions and I am happy to concede that. That is what underpins the whole of this legislative effort through statutory instruments.
The hon. Member for Stalybridge and Hyde asked why safeguarding goes beyond the EEA. In order to protect consumer interests, we wanted to make it possible for firms to use as wide a range of safeguarding accounts as possible. Restricting them only to UK accounts could place a burden on firms and restricting them only to EEA accounts would not be legally viable under World Trade Organisation rules on a most favoured nation status.
I hope that I have answered all the questions that were raised. There are two more, possibly. The hon. Member for Glasgow Central asked if the EU will engage with UK authorities on the same information sharing basis. Obviously, that is ultimately a matter for the EU and will be determined by EU law after we leave, but we hope that the UK authorities and the EU authorities maintain a constructive working relationship. Having visited two EU countries last week, I think there is a lot of good will towards the maintenance of that relationship, and that underpins our approach to the negotiations.
We should not assume that in a no-deal scenario there would be outright hostility to the UK; we hope we would be able to manage that. [Interruption.] I am seeking to be as constructive and reasonable as possible. I do not mean to be flippant about it. We are doing everything that we can to ensure that those relationships are as strong as possible. Throughout the last 40 years, we have played a leading role in influencing the regulation of financial services and many are uncomfortable with us leaving, but that means that the dialogue can still be very constructive in terms of our influencing future regulation.
Finally, the hon. Member for Stalybridge and Hyde asked about the prioritisation of the SEPA measure. It is a priority, as part of the Government’s approach to onshoring legislation. It is designed to maximise the prospects of the UK maintaining participation in SEPA. We are having a complex series of engagements in these Committees, but I am reassured that we have had a full discussion. I hope that the Committee is reassured and has found the sitting informative, and that we will now be able to support the regulations.
Question put and agreed to.
DRAFT ELECTRONIC MONEY, PAYMENT SERVICES AND PAYMENT SYSTEMS (AMENDMENT AND TRANSITIONAL PROVISIONS) (EU EXIT) REGULATIONS 2018
Resolved,
That the Committee has considered the draft Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018.—(John Glen.)
Treasury
John Glen Excerpts(6 years ago)
Ministerial CorrectionsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Ian Murray (Edinburgh South) (Lab)
The Minister has been asked five times to identify the figures for unemployment if we leave the customs union, so let us make it easier for him: will unemployment go up or will it go down?
John Glen
What I can say is that unemployment in this country is at a record low, demonstrating the coherence of this Government’s economic policy.
[Official Report, 22 October 2018, Vol. 648, c. 32.]
Letter of correction from the Economic Secretary to the Treasury:
An error has been identified in my response to the hon. Member for Edinburgh South (Ian Murray).
The correct response should have been:
Oral Answers to Questions
John Glen Excerpts(6 years ago)
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Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)
The Economic Secretary to the Treasury (John Glen)
The Office for Budget Responsibility has set out its forecasting assumptions regarding EU exit and will update them when the details of a deal justify a forecast change. Parliament will be presented with the appropriate analysis to make an informed decision ahead of the vote on the final deal. It is in the interests of the EU and the UK to strike a deal, and we remain confident that we are on track to achieve a mutually advantageous deal in the near future.
Mr Bailey
The Chancellor’s Budget measures were based on OBR assumptions of an orderly withdrawal from the EU and a 21-month continuation in the customs union. In the event of a no deal, will the Minister share with the House the assessment he has made of the potential decline in tax revenues and consequential changes to his tax and spending plans in the Budget?
Nicky Morgan (Loughborough) (Con)
Mr Speaker, through you, may I assure all Members of this House that the Treasury Committee will take very seriously the job of scrutinising the analysis produced by the Treasury on the final deal on behalf of all Members, and will let Members know the conclusions that we draw from that before the meaningful vote?
My hon. Friend the Minister may well be aware of the OBR discussion paper published last month on Brexit and the OBR’s forecasts. Paragraph 1.27, which talks about the risk of a disorderly Brexit, says that
“while not a direct parallel, it is worth noting that the ‘Three-Day Week’ introduced in early 1974…was associated with a fall in output of…under 3 per cent that quarter.”
The shadow Chancellor might think that the 1970s was a good way to manage the economy, but can my hon. Friend assure us that he does not think that that is the way forward for this country?
John Glen
That is certainly not the way forward. I can assure my right hon. Friend that we are doing everything we can to plan for all eventualities. That is why I am taking through a large number of statutory instruments to take account of all possibilities next year, but we are working on, and focused on, achieving a good deal.
Helen Goodman (Bishop Auckland) (Lab)
There is no estimate in the Red Book for the benefits to tax revenues of the measures that we took in the Sanctions and Anti-Money Laundering Act 2018. Is that because Ministers are holding that money in their back pocket in case of a no deal?
Leo Docherty (Aldershot) (Con)
Surely the greatest threat to this country is not no deal, but a Labour Government and the tax bombshell that would come with them.
Lee Rowley (North East Derbyshire) (Con)
Gareth Thomas (Harrow West) (Lab/Co-op)
The Economic Secretary to the Treasury (John Glen)
As the hon. Gentleman knows, the co-operative movement is very important to our economy; we have met to discuss various aspects of its future. I am happy to meet him again to discuss the matters that he wishes to bring forward.
Luke Hall (Thornbury and Yate) (Con)
Chris Bryant (Rhondda) (Lab)
If we took every single person who has suffered a major traumatic brain injury—for instance, from a car crash—from needing four people in order to be able to wash, clothe and look after themselves to needing just one, and thereby leading a more independent life, we could save the taxpayers £5 billion a year. May I meet with the Chancellor to explain all this?
Mr Speaker
Before we come to the first of the two urgent questions, I remind the House that the sitting will be suspended at 1.45 pm and will resume at 3.15 pm. That is to accommodate the fact that significant numbers of colleagues are going to the commemorative Remembrance service in St Margaret’s church. It might be useful for colleagues to know that both urgent questions will therefore finish by 1.45 pm.
Draft Building Societies Legislation (Amendment) (EU Exit) Regulations 2018
John Glen Excerpts(6 years ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Building Societies Legislation (Amendment) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Hosie. The draft regulations are another statutory instrument to form part of the Treasury’s work to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario in which the UK leaves the European Union without a deal or an implementation period. These regulations fix deficiencies in UK law relating to building societies. They have been drafted using the same approach taken across all the financial services SIs that I have had the pleasure of introducing, laid under the European Union (Withdrawal) Act 2018.
The Building Societies Act 1986 and related legislation contain various provisions governing how building societies must act. Those include requirements relating to the UK’s membership of the European economic area. For example, one provision ensures that loans secured on UK land and loans secured on EEA land are treated equally. That has important consequences for building societies, as loans secured on land are used when defining who counts as a building society member in the original legislation. Loans secured on land are also used when calculating a building society’s lending limit—a legal requirement that ensures that building societies focus on their core business of mortgage lending. Other parts of the 1986 Act ensure that EEA bodies and UK companies are treated in the same way regarding transfers of business from a building society to a commercial company.
In a no-deal scenario, however, the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework. UK legislation relating to building societies therefore needs to be updated to reflect that, and to ensure that the provisions would work properly in such a scenario. The original legislation treats members of the EEA differently from other third countries in certain respects. Given that that will no longer be appropriate after exit day, the draft regulations will amend the 1986 Act and related legislation to equalise the treatment of EEA countries and other third countries after exit day.
To take the example that I have already set out, this draft SI amends the original legislation to ensure that new mortgages on properties in non-EEA states and in EEA states are treated the same after exit day. Members should note, however, that the instrument maintains pre-exit legal treatment of mortgages on properties in EEA states, providing contractual continuity for those building society members who have an existing mortgage on a property in an EEA state. Building societies will have to take that treatment into account when calculating lending limits and defining building society members. Members of the Committee should also note that no existing building society members will have their mortgages, savings or membership rights affected by the changes in this statutory instrument, and that no building society currently lends on property outside the UK—only a handful have done so in the past.
The original legislation also allows building societies to transfer business to and from companies and mutuals in EEA states, but not in countries outside the EEA. The draft SI will amend the legislation so that such transfers are no longer allowed, equalising treatment of EEA firms with other third countries. Members should note that no building society has yet used the provisions that are being removed; to date, all transfers of engagement have taken place between UK companies and mutuals.
The draft regulations replace several references to EU directives with equivalent references to the Prudential Regulation Authority’s rulebook, and ensure that the existing relationship between the UK and the Channel Islands, the Isle of Man and Gibraltar are maintained.
There are some potential costs for business linked to the restriction of the ability of building societies to lend on properties in the EEA. That is because the provisions in the draft SI will prevent building societies from diversifying too far into EEA lending, should they wish to. Members should note, however, that there will be no direct impact on building society balance sheets resulting from this instrument—no building societies are offering mortgages outside the UK, and only a handful have done so in the past. Any potential costs are therefore expected to be minimal.
As I emphasised this afternoon, in an earlier Delegated Legislation Committee sitting, if we enter an implementation period when we leave in March 2019, access to each other’s markets will remain the same, and the legislation will continue to apply as at present for the duration of the implementation period. However, the draft regulations contain practical measures necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves without a deal or an implementation period. I hope that Members will join me in supporting the draft regulations, which I commend to the Committee.
John Glen
I am keen to try to address the points raised by the hon. Gentleman. First, I reiterate that the Government believe that the draft regulations are necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves the EU without a deal or an implementation period. There is no intention whatsoever to make any policy change with respect to the governance and law surrounding building societies.
I note the hon. Gentleman’s reference to the issue raised by Lord Tunnicliffe in the other place and the comment on restricting the ability of building societies to lend on properties in the EEA post-exit. I think that issue was also raised in the impact assessment, which led to the question being asked in the Lords.
The change to the definition of loans secured on land means that building societies will be restricted from diversifying too far into EEA lending. This is a function of the lending limit that will apply, which requires building societies to secure at least 75% of their assets on residential property. Clearly, if they were continuing to lend in the EEA, that would not contribute to that 75%, which would really practically impact them, and therefore they would probably find it an undesirable lending decision to make. Also, as I said in my opening remarks, no building societies are currently proactively offering products for properties in the EEA.
As for the consultation, in line with the general approach to onshoring, the building society sector was not consulted on this SI. However, officials consulted extensively with the PRA, which has in-depth knowledge of each individual building society within the sector, when drafting the SI. Furthermore, the SI was shared with the Building Societies Association on its publication over the summer, and the BSA had no comments on it.
In conclusion, this SI does nothing to affect existing building society contracts. On exit day, all contracts between a building society and its customers, such as mortgage contracts, will remain unchanged. I hope that gives the hon. Gentleman the reassurance he seeks and answers the points he has raised. I commend the regulations to the Committee.
Question put and agreed to.
Draft Central Counterparties (amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018
John Glen Excerpts(6 years ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Bailey.
As part of contingency preparations for a no-deal scenario, the Treasury is laying between 60 and 70 statutory instruments under the European Union (Withdrawal) Act 2018, to ensure that, in the unlikely scenario of the UK leaving the EU without a deal or an implementation period, a functioning legislative and regulatory regime will continue to be in place for the UK financial services sector. The SIs will do that by fixing deficiencies in applicable EU law that would be transferred directly on to the UK statute book at the point of exit, and in existing UK law to ensure that it continues to operate effectively after exit day. The SIs do not change policy; instead, they are intended to provide continuity as far as possible at the point of exit by maintaining current legislation.
Where existing EU legislation would not operate properly in a UK context in a no-deal scenario, we need to amend it, to ensure that it works effectively after we leave. The regulations deliver on a commitment made last December, when the Treasury announced that it would give the Bank of England functions and powers in relation to non-UK central counterparties and establish a temporary regime to enable those firms to continue to operate in the UK for a limited period after exit. That is similar to the approach we have taken to the European economic area firms that currently operate in the UK under the financial services passport, creating a temporary permissions regime that will allow them to continue operating in the UK for a limited period after exit, while they apply for authorisation. The debate on the instrument implementing that regime took place on 24 October.
Central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer, and they guarantee the terms of trade even if one party defaults on the agreement, reducing counterparty risk. As such, they are central to the UK and global financial system, reducing risk and making the system as a whole more resilient.
UK firms currently receive services from non-UK central counterparties under the framework set out within the European market infrastructure regulation. Under EMIR, non-UK central counterparties are permitted to provide services to UK firms if they are either located in the EU and authorised by their home regulatory authority, or located in a third country that has been deemed equivalent by the European Commission and the central counterparty is recognised by the European Securities and Markets Authority.
Should the UK leave the EU without a deal or an implementation period, it would be outside the single market for financial services, meaning that non-UK central counterparties would be unable to provide services to UK firms until they were recognised under the UK’s domestic regime. Given that many UK firms rely on non-UK central counterparties to provide clearing services and for mitigating transaction risks, such a sudden dislocation in the provision of services would introduce risks to those UK firms and financial stability risks to the broader financial system. The draft regulations therefore introduce measures to mitigate the risks and ensure a smooth continuation of services from non-UK central counterparties to UK firms.
First, the draft SI establishes a UK framework for recognising non-UK central counterparties while maintaining the same regulatory criteria for non-UK central counterparties to provide services in the UK. To do that, the European Commission’s responsibility for determining the equivalence of a third country jurisdiction’s regulatory and supervisory framework in respect of EMIR is transferred to the Treasury, and the Bank of England may provide technical advice from the Treasury on such decisions, in the same way as the European Securities and Markets Authority may, and does, provide such advice to the Commission currently.
In addition, functions of the European Securities and Markets Authority that relate to recognising individual central counterparties located in third countries will be transferred to the Bank of England, including the mandate to make technical standards specifying the information to be provided by CCP applicants. The Bank is the appropriate authority to take on that role, as it is already responsible for the authorisation of UK central counterparties.
Secondly, the statutory instrument will provide powers to the Bank to consider recognition applications ahead of exit day, so that the necessary steps to recognise non-UK central counterparties can be taken as soon as possible after exit day. In response to a point raised by Baroness Bowles when the SI was debated in the other place last week, I note that central counterparties are not required to apply for recognition ahead of exit day. Although they are able to do so and are encouraged to engage with the Bank on such matters as soon as possible, they will also be able to apply for full recognition after exit day.
Finally, the draft regulations will establish a temporary recognition regime for central counterparties. The regime will provide temporary recognition for a period of three years to non-UK central counterparties that intend to continue providing clearing services in the UK. The purpose of temporary recognition is to allow additional time for applications to be processed and for equivalence decisions to be made by the Treasury. Although non-UK CCPs are encouraged to engage with the Bank as early as possible, the TRR will ensure continuity of services in the event that a recognition decision cannot be made ahead of exit day. The statutory instrument also gives the Treasury a power to extend the regime for 12 months at a time if it is
“satisfied that it is necessary and proportionate to avoid disruption to…financial stability”.
The SI is essential to ensure that we have a functioning financial services regime in a no-deal scenario. It provides reassurance for non-UK central counterparties and the UK businesses and customers they serve that they will continue to be able to operate here, no matter the outcome of negotiations. The importance of the SI’s provisions is reflected in our announcement last December, which made it clear to industry well in advance of exit day that the Treasury would introduce legislation to deliver such a regime. The Bank of England is in the process of engaging with industry to ensure that the regime functions properly when the UK leaves the EU.
It should be noted that if, as expected, we enter an implementation period when we leave in March 2019, non-UK central counterparties that meet the current requirements will continue to be able to provide services to UK firms, because access to each other’s markets will remain the same during the implementation period. However, it remains prudent to continue to prepare for a no-deal scenario to provide certainty to the financial services sector that we are ready for all outcomes. In that context, the measures in the SI are a pragmatic approach to ensuring that UK firms can continue to access non-UK central counterparties if the UK leaves the EU without a deal.
I hope that colleagues from all parties will join me in supporting the draft regulations. I commend them to the Committee.
John Glen
I shall do my best to answer the questions that have been raised. I think it would also be helpful if I were to set the context with respect to powers under the European Union (Withdrawal) Act 2018. What is being done through the statutory instruments may be disputed by the Opposition, but it is ultimately a matter of the legislation that was passed. I am using the provisions to do everything I can to ensure that we have the right arrangements should there be a no-deal scenario. I recognise the points about the unusual nature of the process—the large number of statutory instruments. That is why I am committed to doing everything I can to facilitate meaningful scrutiny, dialogue and exchange of information in advance of Committee sittings.
The regulations are tightly constrained to fix deficiencies, not to make wider changes; this is not a power grab. The temporary recognition regime and other transitional arrangements are in line with the expectations of the industry, which needs certainty. It needs the contingency arrangements. I propose to go through the six questions and the additional points raised by the hon. Member for Glasgow Central and, I hope, answer them meaningfully.
First, as to the consultation, it is right to say that there has been long-standing engagement. It is done case by case, on the basis of the most appropriate mechanism. We announced it in December 2017 and published three letters over the course of this year. Engagement with relevant stakeholders in the industry has to vary according to different statutory instruments. In the case we are considering, I think it is fair to say that the arrangements we have undertaken have been well received by the industry, which welcomes the certainty we have given. Obviously there are a small number of players, and we have done what is necessary.
Secondly, the hon. Member for Oxford East is correct about the alignment of the Commission to the Treasury and the transmission of the ESMA powers to the Bank of England. The Treasury will make the equivalence decision, but the authorisation process will be carried out at a technical level with the appropriate skills in the Bank of England. That is purposefully aligned to the same distribution of roles from the Commission to ESMA.
Thirdly, on the question whether, if there were a need for an extension, it would be appropriate for the Treasury to make that provision using the negative procedure, that is an administrative, managerial decision. It is not based on any extension of the existing powers. It would be on the basis of a clear need to do so. The principle of what we are doing and the criteria for doing it are being discussed now; it is a translation of what already existed. The three years plus one arrangement is designed with industry convenience in mind.
Fourthly, as to the scope of EMIR and any changes, we are retaining most of EMIR as it currently applies in the EU and are unable to make significant policy changes, as I said, under the 2018 Act, so the legislation provides a good basis for discussions on equivalence with the EU. The hon. Lady raised the issue of regulation 14(1)(a) and the equivalence, as compared to EMIR,
“as it has effect in EU law as amended from time to time”.
Regulation 14 applies only before exit day. After exit day our approach to equivalence will be to compare third-country regimes to EMIR as onshored and part of domestic law. We will not necessarily as a matter of policy be following changes to EMIR in EU law; but equally it would not be our aspiration to deviate wilfully. There is obviously a lot of alignment. We start from a common starting point, and obviously we anticipate securing a deal on the basis of the alignment that currently exists.
Fifthly, the hon. Lady rightly pointed out the need for clarity the other way, in how the Commission deals with trades carried out through UK CCPs. It is welcome that, according to Tuesday’s Financial Times, Vice-President Dombrovskis has indicated a willingness to act to mitigate. That outcome is a function of the technical group dialogue that has been going on since April, and it has been welcomed in the City. More details are needed, but we have acted proactively to give as much assurance as we can, and that significant step forward is very welcome.
Sixthly, the hon. Lady asked about the mechanism to switch off the regulations. The SI itself does not include provision for switching itself off in the event of a deal, but the White Paper on the withdrawal agreement Bill confirmed that it would contain provisions to allow SIs like this one to be repealed, delayed or amended should a deal be secured. In the circumstances of a deal, we will do whatever is appropriate, and clearly this SI would not be necessary. The hon. Lady is looking at me quizzically.
Anneliese Dodds
I am grateful to the Minister for that explanation. Are we to understand that the decision whether to switch off any SI produced in the context of the withdrawal Act is ultimately in the gift of Ministers?
John Glen
To be honest, I will have to write to the hon. Lady to clarify that detail. The essential point is that the statutory instrument is for a no-deal scenario; if we get a deal, we will not need the SI because we will be in a close working partnership and we will have the implementation period. I will need to write to her about the precise mechanism that we would use to get rid of the SI or withdraw its provisions, but that is my attempt to answer her six questions.
The hon. Member for Glasgow Central asked about fees and, quite reasonably, echoed a number of other points. There has been dialogue with the industry on the fees, which will be proportionate to the process that the Bank of England will need to go through. In practice, these firms do not exist in massive numbers. I cannot give her the cost in pounds and pence, but it will be aligned to industry expectations and will not impede the choice to register.
Alison Thewliss
Can the Minister give any indication whether the fees will start straight away, or be phased in over a longer period?
John Glen
On the fees that will be necessary to go through the process of authorisation with the Bank of England, it would be best if I wrote to the hon. Lady to give clarity on how they will be applied.
I have had conversations with the relevant people in the Bank of England and am confident that it is making adequate preparations and effectively allocating resources ahead of March 2019. As demonstrated by the letters published in December 2017 and in March and October this year, the Bank will continue to work closely with CCPs to provide guidance on applications with a view to making the process run as smoothly as possible.
The hon. Lady made a wider point about resourcing and skills. I have checked the position, after previous debates in which the right hon. Member for North Durham made similar reasonable points, and there is provision for regulators to extend their resources if required.
I hope that I have adequately responded to points raised, that the Committee has found this afternoon’s sitting informative, and that it will join me in supporting the draft regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
Leaving the EU: Central Counterparty Clearing
John Glen Excerpts(6 years ago)
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The Economic Secretary to the Treasury (John Glen)
I congratulate the hon. Member for Nottingham East (Mr Leslie) on securing this debate and thank him for what he said. He set out very clearly the risks and the need for clarification. I am very happy to give him the answers to the questions that he has posed in his thoughtful and helpful speech.
I, first, wish to acknowledge the issue of no deal and to clarify from the outset that the Government firmly believe that it is in the interests of the EU and the UK to strike a deal. That remains the clear goal on both sides and we are confident that that will be achieved. I reassure the hon. Gentleman and the whole House that an enormous amount of work and dialogue is going on at all levels in order to understand the issues that exist on both sides.
Our proposal for the future UK-EU relationship in financial services seeks to be both negotiable and ambitious. It is founded on preserving the economic benefits of the most important financial services traded between us and on ensuring stable institutional processes for governing the relationship into the future. That is the best way to protect financial stability and open markets, and it is in the interests of businesses and consumers on both sides. Just for clarification, under our plan, we would build on the EU’s existing equivalence regimes but expand their scope to recognise business activities that are in the interests of both the EU and the UK but not covered by the existing regime.
Mr Leslie
Just stepping back from the specifics, on the policy stance of the UK Government, are we intending to remain in lock-step with our European neighbours in terms of the regulatory approach that we take—as a matter of philosophy? The Americans would perhaps like us to depart from that, but it feels to me important, for our existing market access, that a commitment is given to preserve some of the harmonies that we already have.
John Glen
I am very happy to respond to that point. We are seeking to recognise that we start from a common starting point. What we acknowledged in the White Paper in July is that there is an appetite on both sides—on the part of the UK and the EU—to retain the autonomy around their supervisory bodies. But we need to develop a strong bilateral relationship in the future should either side wish to innovate and deviate from the existing alignment, so that we can then have a strong bilateral dialogue on how to resolve any disputed areas.
However, I reassure the hon. Gentleman that we are not seeking to differentiate ourselves and to become a bargain-basement regulatory environment. We secure such significant investment in the City of London because of the world-class nature of our regulatory environment. In fact, we have led the way in many of the dialogues over the years within the EU. So our aspiration is an ambitious one and it is based on a strong trading dynamic with the EU into the future.
I want to move into the specifics, because the hon. Gentleman has raised some significant and sensible points. We are prepared for all outcomes, including for no deal. The Government recognise that, in the event of a no deal, this is a critical issue. We are not complacent and he has set out the stakes clearly, which are so high for jobs and livelihoods up and down this country.
As the Financial Policy Committee has said, £69 trillion- worth of centrally cleared derivative contracts could be affected. Central counterparties, as the hon. Gentleman set out, are financial institutions that firms use to reduce counterparty risk. CCPs do that by standing between the parties of a trade, becoming the buyer to every seller and the seller to every buyer. That guarantees that transactions will be honoured if the other party defaults.
CCPs are central to the UK and global financial system. They reduce risk and ultimately improve the efficiency and resilience of the system as a whole. Any disruption to this system would affect large banks and institutional investors, which use these clearing services when hedging their risks.
There are key issues for CCPs and their members. First, when the UK leaves the European Union, EU CCPs will not be recognised to provide their clearing services to UK firms, and vice versa. Secondly, there is legal uncertainty about whether EU clearing members can continue to meet their contractual obligations to UK CCPs. This disruption is particularly acute for EU firms using UK CCPs. The European Central Bank estimates that UK CCPs clear approximately 90% of euro-denominated interest rate swaps used by euro area banks. The only industry mitigant available would be to close out or transfer the contracts that EU clearing members have with UK CCPs before March 2019. But as the FPC has said, the movement of such a large volume of contracts in a short timeframe would be costly and would strain capacity in the derivatives market.
The importance of the financial services sector to the UK and the EU has already been noted in this debate, and it is critical that we acknowledge that and respond to these challenges wholeheartedly. I spend my time as a Minister promoting, preserving and standing up for the benefits of the sector for the whole United Kingdom—not just the City of London, but areas such as Bristol, Nottingham and Edinburgh. The sector is a British asset as much as a European one. This Government remain committed to agreeing a close future relationship on financial services with the EU that preserves the mutual benefits of our uniquely integrated markets while protecting financial stability, consumers, businesses and taxpayers across the UK and the EU, and this relationship must take into account that the UK is a global hub for these clearing services.
As I said, it remains unlikely that the UK will leave the EU without an agreement, but we are prepared for all outcomes, so I will now go into some detail on the no-deal situation. As the hon. Gentleman mentioned, we have committed to unilateral action to resolve the risk of disruption as far as possible on the UK side. Colleagues will be aware that the Government have already laid draft secondary legislation that will establish a temporary recognition regime for CCPs. That regime will allow non-UK CCPs to continue to provide clearing services to UK firms for up to three years while those CCPs apply for recognition in the UK.
My noble Friend Lord Bates debated the statutory instrument through the Lords on Tuesday, and a debate is arranged for a Delegated Legislation Committee in the Commons next Monday—the pack is ready for me to go home to Salisbury with so I can prepare—and, as has been highlighted, any successful mitigant to the clearing services problem requires action by both UK and EU authorities.
I welcome the announcement by European Commission Vice-President Valdis Dombrovskis, I think, on Tuesday this week, that the EU will, if necessary to address the financial stability risks arising from the UK leaving the EU, act to ensure continued access to UK CCPs on a temporary basis. It is right that EU authorities will have to set out further details on their plans, and we would welcome that, but this announcement is a positive step in ensuring the stability of the financial system for the UK and the EU.
The Government are committed to working with our EU partners to identify and address risks relating to the UK’s exit from the EU. We are supportive of continued engagement and co-operation between our regulators. This is continuing, including through the technical working group convened by the ECB since April with the Bank of England, and is evidence of our shared interests in these issues. I acknowledge what the hon. Gentleman has said about the lack of detail coming out. I think that is a condition of the Commission’s negotiating stance. We respect that, but will continue to engage and to observe what is going on.
There are suggestions from some in the EU that UK CCPs pose a risk to the EU’s financial stability. That is the impetus behind the proposal to revise the framework for supervising third-country CCPs, including the so-called location policy. UK CCPs are truly global institutions, and we recognise that there are legitimate questions about the future supervision of UK CCPs with EU members once we leave the EU. We should take a stable and co-operative approach to the supervision and regulation of globally active firms. This should include the ability for regulators in different jurisdictions to defer to each other based on comparable rules—a principle that the EU and the UK have committed to at the international level. Some of the measures currently under consideration by the EU undermine this principle and cannot be seen as an enhancement of the existing equivalence process. In particular, a location policy would be a poor solution that would unnecessarily harm investment in Europe, increase costs for European firms and ultimately undermine financial stability. We are making that case, and I am sure that those who use CCPs will be making the same case.
I thank the hon. Member for Nottingham East for raising, in a very thorough way, some very legitimate issues at the core of these negotiations. I want to reassure him, and the hon. Member for Bristol East (Kerry McCarthy), who contributed to the debate, that the Government are not complacent on these matters. I am acutely conscious of the large number of statutory instruments that I will be taking through over the coming weeks. Dialogue is continuing at all levels as we seek to reassure the City of London, and the financial services industry across the United Kingdom, that the Government are prepared for all outcomes, though working determinedly and passionately for the best outcome and a good deal that recognises the centrality of financial services to the UK economy.
Question put and agreed to.
Banking Act 2009 Reporting
John Glen Excerpts(6 years ago)
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The Economic Secretary to the Treasury (John Glen)
The Treasury has laid before the House of Commons a report required under section 231 of the Banking Act 2009 covering the period from 1 October 2017 to 31 March 2018. Copies of the document are available in the Vote Office and the Printed Paper Office.
[HCWS1049]
Draft EEA Passport Rights (amendment, Etc., and Transitional Provisions) (EU Exit) Regulations 2018
John Glen Excerpts(6 years ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Austin. The Treasury is in the process of laying around 70 statutory instruments under the European Union (Withdrawal) Act 2018. That is being done to ensure that a functioning legislative and regulatory regime for financial services is in place should the UK leave the EU without a deal or an implementation period. This is the second debate in the House as part of that programme, and I look forward to several more in the weeks ahead.
The overriding objective of that work is, as far as possible, to maintain continuity at the point of exit by maintaining legislation as it currently exists. Where existing EU legislation would not operate properly in the UK context, we need to amend it to ensure it works effectively after we leave. We are therefore using powers delegated to Ministers under the withdrawal Act to fix deficiencies in applicable EU law that will be transferred directly to the UK statute book at the point of exit, and to fix existing UK law to ensure that it is not deficient on and after exit day.
Ian Murray (Edinburgh South) (Lab)
I am grateful to the Minister for giving way so early in his contribution. I hope he will tell us before he finishes what projections the Treasury has made of the number of potential job losses in the financial services sector if the UK leaves the EU without a deal.
John Glen
I will be very happy to address that point in due course, either in my introduction or when summing up.
That work will provide the UK’s financial services sector with much-needed certainty about regulatory requirements in the event of no deal, and ensure that firms can continue to do business in the UK. That is consistent with the Government’s position that, although the best outcome is for the UK to leave with a deal, in the meantime we must—and we will—continue preparing for no deal. I want to underscore the point that the tabling of this statutory instrument was a planned activity that was widely anticipated by the regulator and industry.
Thelma Walker (Colne Valley) (Lab)
Has the Minister ever seen a Treasury matter of comparable scope and importance debated in a Delegated Legislation Committee?
John Glen
No—I acknowledge that this is a significant event. What we are doing today is wholly necessary, and I cannot at the moment envisage anything of comparable significance.
Many of my esteemed colleagues will be familiar with the passporting system, which allows a firm in a European economic area state, such as a bank or an insurer, to offer services in any other EEA state on the basis of the authorisation granted by its home state regulator. That system relies on a set of reciprocal agreements between EEA member states, which are implemented in domestic legislation, in this case under schedules 3 and 4 to the Financial Services and Markets Act 2000. My Department had to make a key decision about how to deal with those existing EEA passport rights in UK law in the event of no deal.
In such a scenario, the UK would be a third country, outside the EU financial services framework and therefore outside the passporting system. The provisions agreed between EEA states would cease to apply in the UK, meaning any references to EEA passport rights in UK legislation would become deficient at the point of exit. As a result, the Government will need to repeal provisions in the 2000 Act implementing the EEA financial services passport, meaning that any EEA firms currently operating in the UK via a passport would lose their permissions to do so on exit day, just as UK firms would lose their permissions to passport into other EEA states. Instead, firms would need to obtain authorisation from the UK’s regulatory authorities—the Prudential Regulation Authority and the Financial Conduct Authority—by exit day if they wished to continue doing business in the UK.
Mark Garnier (Wyre Forest) (Con)
Has the Minister done an analysis of what that would mean in terms of income for regulators and the extra requirement for them to be the direct regulators as opposed to just having oversight?
John Glen
I cannot give my hon. Friend a precise figure, but it would be a considerable change in the way that the regulators operate and would need a considerable reconfiguration of resources in an ideal scenario. Having had conversations with Sam Woods and Andrew Bailey at the PRA this morning, it is a scenario for which they have made contingency provisions.
The volume of applications received by the UK regulators is expected to increase significantly, as many hundreds—perhaps thousands—of EEA firms submit applications for UK authorisation. That will include applications from large and complex businesses with a substantial UK presence. To minimise the disruption faced by EEA firms and UK businesses and consumers due to the loss of EEA passporting rights in a no-deal scenario, the draft regulations fulfil the Government’s commitment, made on 20 December last year, to introduce legislation to establish a temporary permissions regime.
Ian Murray
The Minister said a few moments ago that the regulations would allow UK financial firms to continue doing business as regulated businesses in the UK. Can he say whether they would be allowed to continue doing business in the EU?
John Glen
I am sorry if I made a mistake in what I said; the regulations actually allow EEA firms to continue operating in the UK. The reciprocal right of UK firms to operate in the EEA does not exist at the moment. That is a reciprocal decision that we hope will be in the interest of EEA states to make with respect to the comfort of their citizens, who receive financial services from UK firms, but that is not something that has happened yet.
This regime would enable EEA firms operating in the UK, via a passport, to continue their activities in the UK for up to three years after exit day, allowing them to obtain UK authorisation or transfer business to a UK entity as necessary. The regulations would also give the Treasury the power to extend the regime, which is crucial to alleviate the potential scenario in which some EEA firms cannot be authorised within the three-year period. The Treasury would not be able to extend the regime as a matter of course, but only if it considered it necessary to do so. The use of the power would also need to be based on a robust assessment from the FCA and PRA regarding the effects of extending or not extending the period. The length of the regime could only be extended by 12 months at a time. The instrument that would extend the regime would be subject to the negative procedure, and that has been drawn to the special attention of the House of Lords by the Secondary Legislation Scrutiny Committee Sub-Committee B, in a report published last week, on 18 October.
My officials and I judged that choice of procedure to be appropriate, given that the power to extend the regime is conferred by the draft regulations under discussion today, which are subject to the affirmative procedure. I reassure hon. Members that we take parliamentary scrutiny seriously, and although this affirmative instrument introduces the power to pass regulations via the negative procedure, the Treasury believes that if similar provision were to be made by an Act of Parliament, it would also be via the negative procedure, not least because the power is so tightly drawn.
The temporary permissions regime would ensure both that firms can continue servicing UK businesses and consumers for a temporary period after exit day, and that they have appropriate time to prepare for and submit applications for UK authorisation and can complete any necessary restructuring. The PRA and the FCA can manage the expected applications for UK authorisations from EEA firms that were previously operating in the UK via the passport in a smooth and orderly manner.
The draft regulations are a pragmatic response to a complex problem, and are needed to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. I note that the Secondary Legislation Scrutiny Committee report has acknowledged the importance of the regulations in achieving that objective, and I emphasise to the Committee how widely desirable they are both to the industry and to the regulators.
It is also important that industry understands what we are doing, how it will work and why it is necessary. To aid that, the regulations were published in July in draft form along with an explanatory policy note to maximise transparency and understanding before their introduction. The regulators responsible for the authorisation and supervision of financial services firms are now in the process of consulting industry to ensure that the rules that would apply to firms in this regime function properly when the UK leaves the EU.
To conclude, the regulations are essential to ensuring that we have a functioning financial services regime in a no-deal scenario. They provide reassurance for EEA financial services firms, UK businesses and the customers they serve that they will continue to be able to operate here, no matter what the outcome of the negotiations. The City’s success is based on being the most open and dynamic financial centre in the world. Ensuring that EEA financial services firms can continue to operate here after exit day will help to maintain that status, protect jobs and preserve tax revenues to fund our vital public services. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.
John Glen
First, I congratulate the hon. Member for Stalybridge and Hyde on his 13th statutory instrument. I assure him that we will have to celebrate at least his 30th together, in this room or one down the corridor.
As he always does, the hon. Gentleman has raised some very important matters and I will do my very best to respond. The first substantive point is whether these matters should be dealt with through primary or secondary legislation. This instrument and many others are affirmative instruments and we rightly have the opportunity to discuss this one today. That process was a matter of considerable debate during the passage of the Bill and was agreed by Parliament as the only practical way of proceeding. That sets the context for why we are doing that here.
The hon. Gentleman made a number of points about the regime and how it will work, including landing slots. The regulators will have the ability to set landing slots if they so choose. We have been working closely with the regulators on that and expect them to organise and schedule the landing slots in an orderly manner. They are limited because they have to be in a two-year period from exit day. I will come on to the specific points made by the hon. Member for Edinburgh South, but I would stress that these are arrangements for a no-deal scenario. The Government are fully committed to securing a deal—and a deal on financial services that is in the best interests, as I fully acknowledge, of the financial services sector, which has a considerable footprint across the United Kingdom.
The amendments to domestic legislation, both primary and secondary, are consequential amendments to provisions of domestic legislation that reference the EEA passporting system, which will no longer be in effect after exit day. This is essentially a clean-up exercise to remove redundant references to passporting arrangements on the UK statute book. It does not result in any policy change. Provisions in any onshored EU legislation that reference the EEA passporting system will be similarly amended in the relevant individual exit statutory instruments that will be laid as part of the ongoing onshoring programme.
The hon. Member for Stalybridge and Hyde raised the issue of the extension period of around six to 12 months to three years. The extension is necessary to ensure a smooth transition for firms moving from the current system of passporting rights to full UK authorisation. It will bring the statutory deadline set out under the Financial Services and Markets Act 2000 in line with the overall three-year duration of the regime and will help to ensure the overall application process can be managed in an orderly manner. It will not disadvantage firms, as every firm in the regime will be able to undertake the same activities they were entitled to undertake before exit day.
Ultimately, the Government are committed to ensuring a smooth transition for EEA passporting firms to UK authorisation. The determination of the three-year window was made in close consultation with the PRA and FCA, based on estimates that they made of the number of applications they would be likely to receive for authorisation. We believe this is good news for firms. It will not give them uncertainty; it will give them assurance. UK businesses and customers will welcome that.
The hon. Gentleman asked about applications for authorisation that are rejected. I can tell him that we will have further statutory instruments laid later on to enable such firms to wind down their UK-regulated activities in an orderly manner. On the Government’s negotiating objectives for passporting, the Prime Minister has made it clear that Brexit will mean an end to passporting. The temporary permissions regime is about managing that transition. We have set out a proposal for an ambitious future relationship in our negotiations. I will set that out in a moment.
The hon. Member for Edinburgh South raised the issue of an impact assessment of a no-deal scenario. As he readily acknowledges, the Treasury is undertaking a wide range of analyses in support of the negotiations and preparation. He cited various scenarios, all of which have different assumptions according to the people citing them as being desirable. In a no-deal scenario, there are a range of outcomes. We could make assumptions about a degree of hostility or a degree of co-operation from our friends and neighbours in the EU. EEA members would not serve their consumers very well if they did not offer a reciprocal regime. It is impossible to make a meaningful financial or jobs calculation because it is conditional on a range of assumptions and is not possible to set out.
Ian Murray
I just do not accept that excuse. The Treasury does projections on every single aspect of its work every single day. Indeed, the financial services sector itself has said that up to 10,000 jobs could go on day one if there is no access to the single market, so let me make it easy for the Minister, as I tried to in the Chamber earlier this week. Will unemployment, as a result of any of the scenarios, go up or down?
John Glen
I have stated my and the Government’s position. We are working towards a deal that is in the best interests of the United Kingdom as a whole. There was an awareness of this measure on 20 December last year. It was laid on 11 July. The head of the PRA came to the Select Committee on 11 July and set out how desirable it was. With respect to the wider question of the economic consequences of different outcomes, it would be beyond the scope of this Committee if I set that out here and now. However, I can say that we must have a deal that is right for financial services and allows us flexibility going forward, but this measure is about making sure that we have adequate certainty for consumers who benefit from the financial services of EEA firms, and that is what this is about.
As to what will happen to UK firms that passport into the EEA , the Government, as I said, can take legislative action only in relation to EEA firms that passport into the UK. We cannot, through unilateral action, influence the status of UK firms operating in the EEA. However, as I said, it is hugely desirable for their consumers for them to do it. That is why we really want to avoid that situation and agree a deep and special partnership with the EU, as well as an implementation period, which is important for both.
Jonathan Reynolds
I think the Minister is saying that the Government’s objective is still for mutual regulatory recognition for—essentially without the existence of the passporting regime—similar arrangements to those we have now after we leave. I think most people would acknowledge that that is quite a difficult thing to propose without negotiating a new relationship with Europe that would include such things as being part of a new customs union, as the Labour party has proposed.
Is it not possible that, if the Government agree what we might call the Chequers package—a common rule book on goods—even though a deal might be agreed we should still be using the measures we shall agree today? Even though a deal of some sort was agreed, because it did not cover the financial services sector, we would still be using the regulations that are before the Committee.
John Glen
Of course, the outcome of the negotiations will determine what we do. If we get a deal, clearly the implementation period will take effect. We would then have to look at what new legislation was optimal, from a financial services point of view, to keep us competitive; but such decisions have to be deferred until we get to that point.
I do not want to detain the Committee unduly, but there were other points I wanted to address. On the point about the FCA and the PRA powers to enforce home regulator powers or breaches, it is not an extra-territorial measure, but it has effect in the UK only. It merely preserves requirements imposed by an EU regulator so that the EU regulator does not have to impose such requirements itself. Once in the regime, the UK regulators will be able to disapply the requirements if they choose.
I think I have probably addressed all the points that were made. I am grateful for the number of points that have been fed to me from my left. I do not think that I have addressed all the scenarios to the satisfaction of the hon. Member for Edinburgh South, and I acknowledge his dissatisfaction. All I can say is that the Government are fully committed to delivering the best possible deal on financial services. I visited Edinburgh over the summer recess and I acknowledge the importance of financial services to the hon. Gentleman’s constituency, and to jobs throughout the country. We hope that we shall not need provision for a no-deal scenario, but it is appropriate that we make provision for it today.
Question put and agreed to.
Resolved,
That the Committee has considered the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.
Mutual Deferred Shares
John Glen Excerpts(6 years ago)
Written StatementsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
The Government have decided not to lay the secondary legislation required to give effect to the provisions in the Mutuals’ Deferred Shares Act 2015, which enable mutual insurers to raise equity by issuing mutual deferred shares (MDS). The Government have consulted widely with industry representatives in reaching their decision. During that consultation, industry representatives informed the Government that mutual insurers would only issue MDS if they qualified as tier 1 regulatory capital and would not alter the tax status of any mutual that issued MDS. It has not been possible to design MDS which meet both these criteria. The Government have, therefore, decided not to lay the regulations. The Government would reconsider their position if any material factors changed in the future.
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