Financial Services (Implementation of Legislation) Bill [Lords]

Debate between John Glen and John Baron

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.

Draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018 Draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 Draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018

Debate between John Glen and John Baron

Wednesday 9th January 2019 General Committees

[John Glen]

I thank my hon. Friend the Member for Basildon and Billericay and the hon. Members for Oxford East and for Glasgow Central for their exhaustive scrutiny of what I said and some of the issues. I put on the record my great respect for the assiduous way in which Opposition Front Benchers have conducted themselves during this process; I concede that it has not been optimal, in terms of the level of engagement and impact assessments. I will now try to faithfully respond to all the points; when I cannot, I shall write to the relevant Members.

Before I come to the issue of the level of engagement and impact assessments, I will address the point that the hon. Member for Oxford East raised. There were long discussions during the passage of the EU withdrawal Act, but that legislation does not give the Treasury the ability to make major changes to policy or legal frameworks beyond those appropriate to ensure basic continuity. We are acting within the spirit of that and doing so as professionally as we can, with as much work to consult and engage with the industry as possible.

We have not conducted a formal consultation on these SIs, but we have engaged closely with industry to ensure that there is a functioning legal framework in a no-deal scenario. That hints at the points raised, which I will come on to more substantively in a moment, about the fact that there are contested spaces in this area and that, in a no-deal scenario, there would be a significant imperative for a bigger corpus of legislation to set the industry fair in this country. Obviously, though, we anticipate and hope—well, not hope, but believe—that we will secure that deal.

The engagement has involved talking to asset management trade associations, representative bodies such as the Investment Association and wider financial services bodies such as TheCityUK, to get technical input to inform our work. That is across the United Kingdom as a whole. I chair the asset management taskforce and I had three or four meetings through 2018 where many of those concerns were also taken forward. I draw attention to the words of Chris Cummings, the chief executive of the Investment Association, who said on 7 December last year:

“In a possible no deal Brexit, HM Treasury’s commitment to remain open to international funds ensures that the UK will remain a world leading asset management centre and that UK savers will continue to have access to a full range of investment opportunities.”

We have worked to satisfy him, and other stakeholders like him, through this process.

I turn specifically to the issue of the impact assessment. The challenge in some areas has been that multiple statutory instruments will apply. We have grouped them together and taken them to the Regulatory Policy Committee to be looked at in the round, so it can then provide a more meaningful assessment of the impact.

I recognise that, as the hon. Member for Glasgow Central said, it is sub-optimal not to have it at this point, but the impact assessment that covers the SIs being debated today has been prepared and is going through the normal clearance and scrutiny procedures. We hope to have it published shortly. It will then cover the balance of those statutory instruments that we will be debating subsequently in these Committees over the next eight weeks, so I hope I will not need to make this apology again.

I emphasise that the point of this legislation is to minimise disruption to firms and their customers and maintain continuity of service provision as a whole. As such, these SIs will significantly reduce costs to business in a no-deal scenario, as without them the legislation would be defective. That is the principle on which we are doing this: we are doing it because the industry wants us to deliver it.

On the point made by the hon. Member for Oxford East about the temporary marketing permissions and the volume of notifications to the market, earlier in the year the FCA launched an online survey for EEA inbound passporting firms and funds, to help inform its preparations and identify firms for which a temporary permission may be relevant. In 2018 there were around 2,060 EEA alternative investment funds that had been notified via a passport to market into the UK. It is not expected that those firms will enter into the temporary marketing permissions regime.

The hon. Lady asked about the specific requirements on depositories. Authorised UK AIFs will be required to have a UK depository as a result of amendments to be made in a related collective investment schemes SI. Transitional arrangements are included in that SI to ensure that firms have sufficient time to make preparations, and unauthorised AIFs will be allowed to have an EEA depository.

The hon. Lady went on to ask about something that has often been raised: the cost to the sector. Again, we will need to see the overall cost, based on that impact assessment. UK investors will maintain their rights to funds in which they are already investing, and will continue to have access to funds currently marketed under a passport and enter the temporary marketing permissions regime. The main cost to firms that we have identified are familiarisation costs of the new legislation and transition costs, because of changes in legal definitions and reporting requirements for firms using the temporary marketing permissions regime. In due course, I think that will be seen to be a very modest sum.

Both Front-Bench spokesmen referred to the FCA resourcing. I will seek to provide more clarity on that. I managed to get the number of full-time equivalents, but I knew that if I gave some information, more would be requested, so I will seek that out. In its business plan it is funded by a levy and it would be able to move quickly, should it need additional resources.

With regard to UK fund managers passporting into the EEA, the Government are only able to take legislative action in relation to EEA fund managers who passport into the UK; we cannot determine the outcome the other way around. However, again, for the comfort of the Committee, I draw attention to the statement made by the chair of the European Securities and Markets Authority on 3 October 2018, in which he said:

“In the case of a no deal Brexit, NCAs and ESMA should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators…ESMA has co-ordinated the preparations for such MOUs together with the EU27 NCAs.”

That is also supplemented by the remarks of Andrew Bailey of the FCA to the Treasury Committee last December, when he estimated that the cost of EU withdrawal for the FCA has been less than initially expected, thanks in part to the temporary permission regimes that the Government have enacted, and which the alternative investment fund managers SI and a number of others have set up.

[Mr Baron]

I take on board that the Minister has just quoted ESMA and all the rest of it. The trouble is that investment trusts are not well understood within the EU. It is all right for them to say, “We are happy with things,” but if they are inherently deficient, we have to step up to the plate.

[John Glen]

Let me just finish with the points made by the hon. Member for Oxford East and then I will come to my hon. Friend’s points.

On the point about regulations on UCITS, I think the hon. Member for Oxford East was asking whether removing the AIF-related reporting requirements for the EEA UCITS, despite their being defined as alternative investment funds, will reduce transparency, in essence. It will not. This instrument carves out reporting requirements on alternative investment funds for funds that obtain recognised status from the FCA, to be sold as UK retail investments. As a result of that recognition process, the FCA will already receive all the information necessary for the effective supervision of the funds.

I want to come to the points made by my hon. Friend the Member for Basildon and Billericay. He kindly offered me the device of writing to him by letter, but in essence he set out a series of concerns, which he raised previously in a similar Committee in October, about the distinctions between the investment trust and the unit trust, and the application of key information documents and how they can be misleading. He drew my attention again to the concerns of the different industry bodies. For the edification of the Committee, I wrote to him, as he pointed out on 26 October. In Q1 2019, the FCA will publish its feedback.

My hon. Friend’s point about the obligation of the Government versus the regulator is very fair. I will reflect on his comments and have a regular dialogue. I met the chairman of the FCA this week. I have regular conversations and meetings with the chief executive, and I will make those points to him. That has to be set within the context that I am not licensed by this process to innovate, although I recognise that we must also accept that over the last 10 years we have reached a level of authority and reputation, when it comes to regulatory breadth and depth of oversight, that is commonly welcomed.

My hon. Friend has quite reasonably drawn attention to the lack of familiarity in the EU framework with some of the instruments in some jurisdictions outside the UK, which means that the appropriateness of those conclusions has sometimes been contested. I very much understand the issue.

[John Glen]

I respect the deep—deeper than my own—personal experience of both hon. Members who have spoken about that matter. In terms of the previous engagement of the British Government through their representations as the documents were constructed, I cannot account for that now, but I am happy to write to the hon. Lady about it.

The point that my hon. Friend the Member for Basildon and Billericay is making is that, in the future, when we leave the EU, we will have to take account of the combination of responsibilities to broadly align with common expectations in like-minded investment communities and to attend to real challenges that lead to perverse investment decisions and outcomes for investors, which my hon. Friend is very familiar with.

I hope that has covered the points raised. If there are other points that I have not answered, I will be happy to write to hon. Members.

[Mr Baron]

May I remind the Minister of the sense of urgency that is required? It is not just that the date of the 29th is looming, but that the FCA, if one were being charitable, has been slow out of the traps—that is not just my opinion, but that of a number of trade bodies—and appears somewhat slow in coming to review the whole situation. Pressure from the Government would help.

[John Glen]

I accept that. In the context of Q1 of this year, with respect to no-deal preparations, the Financial Services (Implementation of Legislation) Bill on in-flight files is going through the other place at the moment to put in place a mechanism to have discretion to onshore, or not, files that are live. They have to be the priority at the moment, but the point is well made and I have heard it. I will make representations.

I hope I have demonstrated that the regulations are needed to ensure that alternative investment funds continue to operate effectively in the UK if the UK leaves the EU without a deal or an implementation period. I hope that the Committee has found the debate informative and will now be able to support the regulations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018.

draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018

Resolved,

That the Committee has considered the draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018.—(John Glen.)

draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018

Resolved,

That the Committee has considered the draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018.—(John Glen.)

Draft Financial Regulators' Powers (Technical Standards Etc.) (Amendment Etc.) (EU Exit) Regulations 2018

Debate between John Glen and John Baron

Wednesday 10th October 2018 General Committees

[Mr Baron]

If I may just move away from the hypotheticals, I have tried to outline a serious deficiency in EU regulation here. Can I have an assurance from the Minister that our regulatory bodies will have the power to put that right, if we leave without a deal?

[John Glen]

The purpose of this process and this statutory instrument is to provide the framework to onshore the binding technical standards that are needed. Turning to my hon. Friend’s point, I will ensure that the FCA is aware of the issues that have been raised—I am sure it already is. I am told that this summer, it launched a call for input to seek feedback for consumers and firms, which closed on 20 September. Next time I see Andrew Bailey—I see him regularly; I saw him just last week—I will ask him to consider that.

I will come on to the other points and the broader principles. Some of the considerations about where we will be in the future are subject to the deal that we end up with. Again, I do not want to be drawn into hypotheticals at this point. I will come back to my hon. Friend’s point in a minute.

The hon. Member for Oxford East raised a number of other issues about resourcing. The right hon. Member for North Durham also raised this, in terms of the regulators having enough resource. In my travels to Indonesia, Malaysia and Japan over the summer, I have seen that UK regulators are highly regarded and among the most important and most respected in the world. They have the resource and expertise, and the Government are confident that they are ready and able to do what has been asked of them. The hon. Member for Glasgow Central was also concerned about this point. I have had no indications from my conversations with the PSR, the PRA or the FCA that there is a resourcing issue. If that changes, I am sure they will be very keen to come and talk to me about it.

--- Later in debate ---

[John Glen]

I note the right hon. Gentleman’s point and I will now move on to the issue of supervisory co-operation and the continuance of that, as raised by the hon. Member for Oxford East. While it is true that we will be outside the EU’s framework, we want supervisory competition to continue. I am sure that the hon. Lady knows that there exists a high level of co-operation across many countries outside the EU framework, and our regulators stand ready to do this. A point was made about optimism for the future. The Chancellor set out some great opportunities in the Mansion House speech that we will have with global financial partnerships. The regulators will be deeply involved in that.

I turn now to the points made by my hon. Friend the Member for Basildon and Billericay and acknowledge the quality of his articles in the Investors Chronicle. I look forward to reading his book. The powers in the European Union (Withdrawal) Act 2018 deal only with fixing deficiencies at the point of exit, as he will know. Wider changes need to be considered at a later date, but I think he has put on the record some meaningful analysis of the implications of the regulations for the characterisation of risk around unit trusts versus investment trusts. I have heard that, as have my officials, and we will come back on that.

[Mr Baron]

I thank the Minister. All I have asked him to do is look at this and be conscious of it; I do not expect immediate answers now. Most of us, whether Brexiteer or remainer, would prefer a good trade deal that favoured both sides; trade deals tend to be good. Is the Minister able to confirm now—although I would be happy for somebody to do so afterwards—whether this bit of regulation, which is causing so much angst over here, will remain in force within the Chequers agreement? In which case, we have further battles to wage.

[John Glen]

Candidly, at the level we are at at the moment, in seeking a strong bilateral arrangement to determine the future dynamics of dialogue between the EU and the UK supervisory bodies, I cannot answer with that degree of specificity. I take the point and will seek to come back to him as soon as I can.