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

Jonathan Reynolds Excerpts

Tuesday 5th February 2019 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Sir Christopher. Once again the Minister and I are discussing a statutory instrument that would make provision for a regulatory framework after Brexit in the event that we crash out without a deal. On each of these occasions, as the Minister knows well, I and my Opposition Front-Bench colleagues have spelled out our objections to the Government’s approach to secondary legislation.

The volume of EU exit secondary legislation is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken. However, establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Intrinsic decisions are being made on a daily basis now about supervisory arrangements, and we do not believe that is the correct process for ensuring the scrutiny required for measures of this kind.

Today we turn our attention to the draft financial markets and insolvency provisions. The regulations serve an important purpose in ensuring the stability of our overall financial market infrastructure in the event of insolvency, so there must be due care and attention paid to carrying those safeguards into domestic legislation. Replacing EEA references with UK ones sounds relatively straightforward. However, I would like to ask the Minister some questions about the bestowal of powers on the Treasury and about the establishment of the temporary designation regime, which I will refer to as the TDR, both of which are brought about by the SI.

According to a “Dear CEO” letter sent to relevant companies by the Bank of England in July 2018, those companies were advised to prepare for a TDR and begin a pre-application process. However, it is not clear whether the TDR we are debating today applies to one that will exist solely in the event of no deal, or whether this is an interim plan for a transition period. Whichever is the case, this seems extremely late to be establishing such a framework.

The Minister and I debated the establishment of a temporary permissions regime back in October, to give firms sufficient time to apply for it, but our exit from the European Union is now next month. How does the Minister propose that companies will have enough time to apply, or that the Bank of England will have sufficient capacity to deal with the likely volume of incoming applications, along with those for the temporary permissions regime?

I note in the draft regulations that notification must have been made prior to exit day of the intention to apply for temporary permission. Does the Treasury or the Bank of England have an estimate of how many participants are likely to apply under the TDR? How will the TDR operate and where is that outlined? From the Minister’s speech, it sounded as though it would perhaps be applicable only to firms that are already recognised, but I am unsure of that point and would be grateful for clarity on it.

The instrument also confers on the Treasury the power to extend the TDR as it sees fit. The Opposition’s concern is that that is granting an indefinite authority. Will the Minister explain why that is necessary? It would seem much more appropriate and democratic to include a sunset clause on such powers, to ensure appropriate checks and balances.

For that reason, this feels like one of the more blunt statutory instruments that we have discussed in relation to providing for a no-deal framework. I am quite concerned about that, but I would like to give the Minister the opportunity to respond to some of those concerns and give us some insight into those matters, before probing slightly further.

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[John Glen]

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

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

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

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

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

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

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

[Jonathan Reynolds]

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

[John Glen]

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