Draft Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019

Jonathan Reynolds Excerpts

Wednesday 20th February 2019 General Committees

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

It is a pleasure to serve under your chairmanship, Sir Henry. For the second time today, the Minister and I are discussing a draft instrument that makes provision for a regulatory framework after Brexit in the event that we crash out of the EU without a deal. On each occasion this happens, my Front-Bench colleagues and I have spelled out our objections to the Government’s approach to this process. It is fair to say that those concerns have not changed since this morning.

As the Minister said, the draft instrument relates to the packaged retail and insurance-based investment products regulations, known as PRIIPs. The discussion on regulating such products began a decade ago, and we believe that the legislation introduced subsequently has played an important role in consumer protection. The biggest part of that is the key investor information document, known as the KID, which was an important step forward as it obliged providers to provide retail investors with a succinct, easily understandable summary of no more than three pages telling investors of the main risks involved. The Opposition are therefore supportive of transposing this regulation and ensuring that there is no relaxation of applicable standards should we leave the EU without a deal.

However, we believe that an ongoing review of this area of regulation is needed, to ensure that the regulation is sufficiently robust. As the original EU regulatory background note stated, these areas are often complicated and lacking in transparency and the information provided can be overly complex and difficult to use for comparisons between different investment products. It also said that institutions selling these products advise investors, and therefore that conflicts of interest may arise. However, I note the Minister’s saying that a wider review is not possible under this process, which is a fair point. I look forward to the Government’s future proposals in that regard.

I particularly note the exemption applied to UCITS funds that the Minister just described, which I attribute to the fact that a KID is now an integrated obligation of the latest version of UCITS. I would be grateful if the Minister could confirm—perhaps in writing if it is not possible to do so now—whether that is the case, or whether it is simply a technical deficiency in the draft instrument? How will that affect the onshoring plans and the statutory instruments relating to UCITS that we have already passed?

I put on the record the Opposition’s objection to the decision to transfer functions to the FCA from the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority, and from the European Commission to the Treasury, with little consultation or transparent explanation. We would appreciate greater consultation. As I have said in such Committees before, the Opposition believe that an implicit policy judgment is being made by allocating powers to both institutions without parliamentary consultation on future resourcing and the balance of powers.

I also highlight that regulation 2(4) amends the Financial Services and Markets Act 2000, essentially to require that policy statements by the FCA and others are more detailed. This is a rather general amendment that should be in primary legislation and for which we would like to ensure that the FCA is adequately resourced into the future.

I conclude by reiterating my comments from last week’s financial services Bill debate, when I questioned how much consultation there had been with the asset management sector on these issues. It seems from a couple of stakeholders that have contacted me that there is some confusion about process, given their lack of familiarity with the secondary legislation process, and subsequent concerns about how their businesses will be able to function in the long term. I would like the Minister to provide some clarity on these points.

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[John Glen]

Yes I am. The green impact assessment, which was issued on 8 February, also identifies that the familiarisation costs will be £150 per firm and that there will be a range of costs between £510,000 and £680,000.

I concede that this is an unique exercise in preparation for an outcome that the Government do not wish to have, and I hope that it will not need to be used. We had to take a view, however, about how to do it efficiently in a relatively compressed time period and I am convinced that we have done the best that we could have done in the circumstances.

We have shared working drafts of the legislation as it has progressed to identify any unintended consequences and to help industry to understand how the sector would need to respond. We have published almost all our statutory instruments before they have been laid on a dedicated section of our website with contact details for stakeholders to contact us. I am not saying that it is perfect, but I draw the Committee’s attention to the remarks of Miles Celic from TheCityUK, who noted that there is an industry-wide recognition that all parties—industry, Government and regulators—are operating in an uncertain and time-constrained environment where doing nothing is simply not a feasible option, and that these are exceptional circumstances that require a unique response.

On some of the other points, there was sensitivity about the transfer of functions to the FCA. As the national competent authority, the FCA has been instrumental in making strong representations on PRIIPs. It formally rejected the early iterations and delayed the implementation of the first draft that came out in 2016, so it was implemented on 1 January 2018. I set that out in detail to the Front-Bench colleague of the hon. Member for Stalybridge and Hyde. Frankly, the FCA is capable, as it is now doing, of responding to last year’s call for evidence, looking into the key concern of the industry around the methodology for calculating the information displayed in a KID—particularly relating to performance information and risk estimation, as well as transaction costs—and coming forward with suggested changes.

On the hon. Gentleman’s point on equivalence and the appropriateness of the changes to the Financial Services and Markets Act, in a situation in which we leave the EU without a deal, we cannot favour EEA countries of the basis of our close proximity. We will have to treat all third countries the same way. The hon. Lady’s point on the need to resist duplicate but different regulatory requirements is wise. Whatever happens, it is my determination to try to avoid that, because the common framework that exists in this area holds a lot of value for the industry.

I also point out that EU national competent authorities collaborated fully in the construction of these regulations, and the FCA was one of the leaders in that. Any amendments to fix the exit deficiencies would have to be made known to the Treasury, and any new binding technical standards derived from this ongoing review will also have to come from the Treasury and will have to be laid under the affirmative procedure.[Official Report, 18 March 2019, vol. 656, c. 4MC.]

I think I have covered most of the other points made. The FCA’s resources have been covered in previous Committees, but for the record the FCA set out in its 2018-19 business plan the proportion of its resources to be used for forthcoming exit work. As of December 2018, it has 158 full-time employees working on Brexit. I cannot break that down, because I do not think that the FCA has, but that is a significant increase from 28 nine months earlier. It will bring forward a new plan in 2019-20.

[Jonathan Reynolds]

We have addressed this in lots of similar Committees. Part of our contribution to the EU budget covers, among many things, a contribution towards the EU regulatory bodies that affect our economy. On those people working on the Brexit withdrawal process, it is surely reasonable, as we re-domicile that remit, to put some of the money currently spent through our contribution to the EU budget into our own regulators, which will have so much more to do.