Financial Services (Implementation of Legislation) Bill [ Lords ] (First sitting)

Jonathan Reynolds Excerpts

Tuesday 26th February 2019 Public Bill Committees

[Alison Thewliss]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment 11, in clause 1, page 1, line 14, leave out from “(g)” to “does” in line 16.

This amendment would amend the definition of “adjustments” to restore its natural meaning, while retaining the prohibition on major changes.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 12, in clause 1, page 1, line 17, leave out “major” and insert “material”.

This amendment would prevent material changes to EU financial services legislation being made through adjustments under subsection (2).

Amendment 13, in clause 1, page 1, line 18, at end insert—

“(2A) But ‘adjustments’ may not include any changes that, in the Treasury’s view, lighten or remove the regulatory burden in comparison to the legislation as it would have operated had the United Kingdom not withdrawn from the EU.”

This amendment would prevent adjustments to EU legislation under this Bill from lightening or removing regulatory burdens on financial services.

[Jonathan Reynolds]

It is a pleasure to serve under your chairmanship, Sir Edward, and to open the debate for the Opposition. I would now like to speak to amendments 11, 12 and 13, which aim to address some of our wider concerns about the powers being given to the Treasury in this Bill. In the Opposition’s view, the Bill lacks the necessary checks and balances that would prevent it being subject to the potential exploitation of its stated objectives. I express my gratitude to my colleagues in the Lords who began this process and achieved some important initial restrictions on those powers. However, we believe that further controls can be added to ensure that the powers cannot be abused.

I will address this group in two parts. Amendments 11 and 12 would alter the language in the Bill to prevent material changes taking place and restrict the nature of the adjustments that can be made. Amendment 13 explicitly prevents any deregulation under the Bill. Those changes of language are significant and important, because they specify in the Bill clear limits on what alterations and adjustments fall within acceptable realms. We must exercise such caution because included within the Bill, as specified in the in-flight list, are fundamental pillars of the post-financial crisis regulatory regime. That list includes critical rules which are designed to strengthen our financial markets and infrastructure, to prevent a repeat of the disastrous events of 2008, of which we still feel the consequences today. Those include the capital requirements directive V, the bank recovery and resolution directive II, and the central counterparty recovery and resolution regulation. Those regulations have played a central role in promoting integrity in financial markets.

The capital requirements directive, for example, sets out the asset buffers that systemically important financial institutions must hold, and in what ratios. That is to prevent a repeat of the events of 2008, so that banks do not enter a downward spiral at times of market stress and put the public purse at unacceptable risk again. Given the costs involved for banks, the regulations often involve significant negotiation and lobbying to find an agreeable level of capitalisation with which banks feel they can reasonably comply. Last year, for example, the Basel Committee on Banking Supervision granted concessions to United States banks after a long process of lobbying by those banks, which resulted in flexibility in how the rules were ultimately applied.

I will not comment on whether that was the right or wrong decision, but that is a clear example of the interests that will need to be managed in such a process. It does not seem right to the Opposition that the Treasury could be lobbied on such a matter with fairly limited public transparency and that the subsequent changes could then be channelled directly into an SI for which the Treasury is responsible for drafting. In truth, although the current Treasury can reassure us in good faith that that will not be the case, we simply do not know how things might change or who the Government or Ministers might be in future.

Since the referendum result, we have heard noises about deregulation—faint, though they may be—and in our view, the Bill must be built to withstand the pressure that may come. That is why we have explicitly specified in amendment 13 that deregulation cannot be enabled as part of the Bill. That builds in vital protections for a regulatory framework to which we have already signed up at a European level. There will no doubt be reasonable disagreement about what constitutes a weakening or a lightening of the regulatory framework, but we are inserting an important direction to lawmakers and a clear signal to consumers that their interests will continue to be protected.

In truth, we simply do not know how things might change if we crash out of the EU without a deal. I and my Front-Bench colleagues have highlighted in Delegated Legislation Committees the complications that could be associated with capital requirements in such a situation. Capital requirements could be susceptible to problems with the removal of preferential treatment of Euro sovereign debt. At present, EU Government debt is treated with the same risk weighting as UK Government debt. If we crash out without a deal, the preferential treatment of EU sovereign debt will instantly change—it will no longer receive preferential treatment. The reverse would apply for UK sovereign debt.

Evidently, that could be highly disruptive and one would expect big institutions to recalculate their capital ratios and recapitalise when there has been no real change in the risk that they hold. Such a change would inevitably have an impact on how we ultimately implement the capital requirements directive V, as the status quo will have changed so dramatically from when it was first agreed. There must however be safeguards on the underlying process so that that dialogue can be publicly assessed.

I feel therefore that the amendments are reasonable, proportionate and would command public confidence. We might press them to a vote, subject to the Minister’s response.

[John Glen]

I start by thanking the hon. Gentleman for his explanation of the intent of the three amendments, which I shall address in turn.

I must confess that I was surprised to see amendment 11. The language that it seeks to remove was inserted as a concession to the Labour Front Bench on Report in the Lords. Indeed, the language was directly inspired by an amendment to the Bill tabled by Lord Tunnicliffe and Lord Davies of Oldham in Committee in the other place. Our original drafting reflected the Government’s position that the word “adjustment” is inherently limiting. Following concern in the other place, however, we agreed to insert this language—along with a further limitation, to which we will turn in amendment 13—to clarify what was meant by the term.

Under this wording, as agreed in the other place, the Government will be able to make only adjustments that reflect or facilitate the transition to the United Kingdom’s new position outside the EU, but that does not include changes that result in provisions whose effect is different in a major way to that of the legislation. The new wording clarifies limitations on the power to make adjustments, while, crucially, still allowing for some changes that may be needed, as the UK will have been neither at the negotiating table when the files were finalised nor advocating on behalf of the UK financial services industry during that process. Lord Davies’s position on Report was that he and Lord Tunnicliffe were content with the amended drafting. In light of that, I ask the hon. Gentleman to withdraw amendment 11.

On amendment 12, I am reminded of another debate that took place during the Bill’s passage through the Lords. That debate centred around the Opposition amendment that sought to replace “major” with “significant”, which was later withdrawn. Lord Sharkey, who spoke to that amendment, noted that subsequent to its tabling, he had realised that his dictionary defined “major” as “significant”. I note that the Oxford English Dictionary in turn defines “material” as “significant”. It is therefore clearly possible to interpret all three words as in essence meaning the same thing, in which case the amendment does not have the effect desired by those who tabled it.

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Secondly, in any event, any adjustments that the Treasury seeks to make to the legislation must—thanks to the wording agreed in the other place—not differ “in a major way” from the original legislation. That necessarily forbids substantial deregulatory changes that depart in a major way from the original EU legislation. In the light of that, I hope that the hon. Gentleman will not press amendment 13.

[Jonathan Reynolds]

I appreciate the Minister’s response to our three amendments. On amendment 11, my understanding in good faith of the position of my colleagues in the Lords is that it is not quite as he believes it to be. Their concession was on the prohibition on major changes, rather than on the language on adjustments.

On amendment 12, we could have a semantic discussion of the differences between “major” and “material” for some time. In statutory instruments, for example, on a substantial number of occasions legislation has simply changed European regulatory bodies to UK ones, and I would consider that a fairly minor change. However, I would consider something that resulted in a substantial change to the status quo to be material, and so I make a distinction between what is material and what is major.

On amendment 13, I genuinely believe and trust the Minister when he says that he has no interest in leading a race to the bottom on financial regulation. I know that, like me, he believes that the quality of UK regulation in financial services is a key part of our competitive advantage. However, none of us in this room can guarantee who the Ministers in this country will be in a relatively short space of time—they could be the same, or different, no one is entirely sure—[Interruption.] I am sure that the Whips Office will remain, as ever, a bastion of consistency. These are volatile times, and when legislation is assessed, discussions in Committee about the intent of parliamentarians are taken into consideration and are important. Both sides must be fairly united in believing that we should avoid the illusory race to the bottom as if that would somehow help UK competitiveness, and I simply feel that amendment 13 establishes that clearly. I intend to press all three of my amendments to a vote.

Question put, That the amendment be made.

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Division 6

Ayes: 9

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Labour: 7
Scottish National Party: 2

Noes: 10

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Conservative: 10

[Jonathan Reynolds]

I beg to move amendment 15, in clause 1, page 2, line 35, at end insert—

“(c) that draft was laid more than 1 month after the Treasury conducted a public consultation that was promoted to trade unions, regulatory institutions, service users, and any other stakeholders the Chancellor of the Exchequer considers appropriate.”

This amendment obliges HM Treasury to undertake wide-ranging consultation on their proposed implementation of EU legislation, to ensure appropriate public scrutiny on any regulatory divergence.

We have already discussed in Committee today the Opposition’s concerns about the transparency and suitability of the process that we are legislating for in the Bill; clearly, the concerns are quite widely shared across all Opposition parties. That is why we also propose amendment 15, which would mandate the Treasury to undertake full consultation before each regulation is transposed. That would provide an opportunity for better public scrutiny than the statutory instrument process normally affords. It would allow consumer groups, trade unions and academics, alongside a wide range of stakeholders, to give their input and identify where there might have been regulatory divergence that was not immediately apparent. The mandatory consultation would allow any adjustments to be openly debated and scrutinised. Such consultation is essential to maintaining a transparent process where the Treasury is being given powers in this manner.

Consultation and proper impact assessments have become major issues in the process so far of transposing existing EU legislation. I therefore urge hon. Members to support the amendment. It would empower the public and consumer institutions with an essential layer of scrutiny on a set of unprecedented powers being assumed by the Treasury.

[John Glen]

I thank the hon. Gentleman for his comments. The Government have committed to following Cabinet Office principles on consultation, and they have made clear their commitment to consult on each SI laid, as appropriate. As a matter of course, the Government publish impact assessments for statutory instruments, and that will be no different for those brought forward under powers in the Bill. Those assessments will include an analysis of economic impacts, and equalities considerations where relevant. In line with duties under the Equality Act 2010 and with Cabinet Office guidance, regulations will be made with that equality duty in mind, and any impacts identified will be included in the relevant impact assessments in the usual way.

The Government are already required by legislation to produce reports ahead of, and looking back at, the publication of SIs under the Bill, and those reports will include any inspected and realised impacts of the legislation. That commitment to rigorous reporting and transparency about the Bill’s powers, and the potential adjustments to files and proposed SIs, is evidence that the current Bill contains appropriate provisions for proper scrutiny. I hope that that provides reassurance about the Government’s commitment to transparency in the public and parliamentary spheres, and in that light I ask the hon. Gentleman to withdraw his amendment.

[Jonathan Reynolds]

I appreciate the Minister’s acceptance and reassurance that the levels of consultation and impact assessments are crucial to this process, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Alison Thewliss]

I beg to move amendment 6, in clause 1, page 2, line 37, leave out “4” and insert “8”.

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[The Chair]

With this it will be convenient to consider new clause 1—Draft consolidated financial services legislation.

[Jonathan Reynolds]

New clause 1 aims to address what the Opposition consider to be one of the central issues with the Bill. As we stated earlier, the Government’s chosen approach, which is to combine statutory instruments to transpose existing legislation with this Bill to transpose future legislation, risks creating a patchwork of legislation. Within that patchwork, it will be very difficult to identify areas of overlap, omission and inconsistency. That is an extremely precarious position in which to put a sector that is of such high value to the British economy—particularly one that is so reliant on regulatory certainty and clarity.

Equally, a variety of new powers is being bestowed on institutions such as the Financial Conduct Authority, the Bank of England and the Treasury, as the Opposition have previously highlighted in Delegated Legislation Committees. We believe that there is a clear need to have a central, transparent picture of which institutions will be carrying out which functions, so that we can assess the new balance of powers holistically. A huge shift in powers is being proposed. It is essential that those powers are debated openly and transparently, so that all Members are clear about what is being put forward. Our alternative approach, which is achieved by new clause 1, differs by putting the power to properly scrutinise financial legislation back into the hands of Parliament. To borrow a phrase, it would take back control.

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[John Glen]

Clause 1 comprises the core substantive content of the Bill. In a no-deal scenario, the Bill gives the Government the power to implement, in whole or in part, a specified list of EU legislative proposals or in-flight files. In many cases, the UK has strongly supported the proposals throughout their negotiations and has played a leading role in shaping them over a number of years.

The files fall into two categories. The first relates to the pieces of legislation that have been agreed while we have been a member of the European Union, but that will not have come into force prior to the UK’s exit from the EU on 29 March. Those files are listed in clause 1(3)(a), (b), (c), (d) and (f). In a no-deal scenario, there would be no way to implement them in a timely manner, as each would require primary legislation. Clause 1 gives the Government the power to domesticate those files, in whole or in part, via affirmative statutory instruments. Furthermore, as was clarified following concerns expressed in the House of Lords about the breadth of powers, the Government have the power to fix deficiencies.

The second category of files relates to those still in negotiation. The UK has played a leading role in shaping them so far and they could bring significant benefits to UK consumers and businesses when they are implemented. Those files are set out in subsections (3)(e) and (g), incorporating the schedule. Clause 1 also gives the Government the power to domesticate those files, in whole or in part, via affirmative statutory instruments. The UK will not be at the negotiating table when the files are finalised, however, so we will not be able to advocate for the interests of the specific nature of the UK’s financial services sector as negotiations are concluded. The Bill, therefore, provides the Government with the ability to fix deficiencies within the files and to make adjustments to them that go beyond the deficiency-fixing power.

Again, following concerns raised in the other place, the Government have clarified the nature of those adjustments and have stated that they cannot depart in a major way from the original EU legislation. However, the Government will have some flexibility to make adjustments to take account of the UK’s new position outside of the EU. It is only right that the UK retains the latitude to ensure that pieces of legislation finalised after we have left the EU reflect the interests of the UK’s financial services industry, and this Bill must tread the line between giving sufficient powers to enable the Government to effectively implement the legislation and imposing appropriate restraints to reassure Members that safeguards are sufficient.

I put on record my thanks for the collegiate way in which Opposition Front Benchers in the Lords worked with us to arrive at the present drafting and set of safeguards without division. Those safeguards are set out in subsections (7) to (10) of clause 1, and include a two-year sunset clause; a requirement for the affirmative procedure in every instance in which the power is used; strong reporting requirements on Government, including a requirement to publish a draft SI alongside a report detailing omissions and adjustments at least one month before laying it before the House; and a further requirement to publish a report twice a year setting out how the power has been exercised in the previous six months, and how the Treasury intends to exercise it in future.

I should note at this stage one issue to which we may return on Report. Members will note that subsection (3)(e) is not included among those files deemed settled. The Commission was required under the prospectus regulation to adopt delegated acts in January of this year; that has not yet happened, and as such, we do not yet know the content of that delegated legislation. Should the Commission adopt those acts prior to Report, we will seek to amend the Bill accordingly, limiting any adjustments that may be made to the fixing of deficiencies.

Clause 1 is the heart of this short Bill. It is the duty of responsible Government to prepare for all outcomes, and the Bill will provide us with the critical ability to implement legislation that maintains the functionality, reputation and international competitiveness of our financial sector. It is a key part of our no-deal preparations, and without this clause, I am afraid that there would be no Bill to take forward. I recommend that the clause stand part of the Bill.

I will now turn to new clause 1, which is suggested, essentially, as an alternative. The Government believe that the new version of clause 1 tabled by the Opposition is inappropriate as an alternative to the current version, as it does not as drafted provide the Government with any means of domesticating legislation through the Bill. As has been set out a number of times over the course of this and other debates on the Bill, there exists a body of in-flight EU legislation that the UK will want the ability to implement in a timely manner in the period following EU exit, in order to maintain the functionality, reputation and international competitiveness of our financial sector.

New clause 1 does not include any powers to domesticate EU legislation. It compels the Treasury to bring a motion before the House to debate a document stating what EU legislation it proposes to domesticate, but it does not include the necessary mechanism through which those measures can be implemented subsequent to the House’s approval. As such, the Bill would become a hindrance rather than a help—a means for debate without the necessary powers—and the Treasury would be left, having sought the approval of the House of Commons on those pieces of EU legislation it wishes to domesticate, needing to again seek approval by introducing primary legislation or, indeed, another version of this Bill. That would undermine the purpose of the Bill by not enabling the UK to implement important EU legislation in a timely manner when necessary. It would leave the UK lagging behind international counterparts on the issue of financial services regulation—something that I am sure Opposition Front Benchers would not wish to happen—and our financial services industry would then be at a competitive disadvantage at a crucial period in our country’s history.

Even if new clause 1 were amended to include a power to implement the legislation, I suggest that it is an unsuitable alternative to the current procedure. It requires the Treasury to collate into a single document the legislation it wishes to implement, alongside any adjustments it wishes to make and explanations of why those adjustments are necessary. That document would then be debated by the House through the aforementioned motion.

My objections to that extra layer of procedure are, in part, identical to those rehearsed earlier in my objections to amendment 4. Under the Bill as drafted, there will be extensive opportunity for scrutiny of the legislation before it is implemented. During the Bill’s passage through the Lords, we inserted the requirement to publish a draft SI alongside a report detailing any adjustments and the justification for those adjustments one month prior to laying it before the House. The publication of those draft SIs will allow Members to seek a debate on the proposed content, should they so wish. Indeed, the draft SI and the accompanying report seem essentially similar in function to the document that this new clause would require the Treasury to produce. I should also note that publication of those draft SIs will allow Parliament, including any interested Select Committees, to scrutinise the proposed content.

I sympathise with what I suspect is the intention behind the new clause. I imagine, and perhaps the hon. Member for Stalybridge and Hyde will confirm this, that the consolidated document is an attempt to make sense of all the pieces of financial legislation that form part of this essential Brexit planning for a no deal. This Bill addresses a specific issue; it is vital for the UK’s financial services industry that these 17 key pieces of legislation can be domesticated in a timely manner in a no-deal scenario. It will not be possible for the Treasury to set out in a single consolidated document its intentions for all these pieces of legislation prior to their final publication.

We simply do not know what the final version of each file will look like. It would mean the Treasury’s having to wait until all legislation in the Bill was finalised at EU level before producing this document. That would potentially lead to intolerable delays and to the UK financial services sector’s lagging behind its international competitors during this crucial period.

That is why, in the current draft of the Bill, the Treasury has committed to six-monthly reports that will set out how we have used the powers under this Bill in the preceding six months, as well as how we intend to use them in the subsequent six months. That should provide a clear and timely overview of how the Government are using the powers provided for in this Bill. In light of that, I ask that the hon. Members refrain from pressing the new clause as an alternative.

[Jonathan Reynolds]

I appreciate the Minister’s point that clause 1 is essentially the whole of the Bill that we are discussing, but we do intend to press new clause 1 to a vote as an alternative, for the reasons that I outlined. If I can explain to hon. Members who have not been on a Bill Committee before, under advice from the Chair I understand that if existing clause 1 were accepted then he could not then offer us a vote on new clause 1, because we would have accepted that entirely. Therefore, we will vote against clause 1 stand part in order to move new clause 1.

Question put, That the clause stand part of the Bill.

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[John Glen]

I beg to move amendment 1, in clause 2, page 3, line 42, leave out subsection (4).

This amendment removes the privilege amendment inserted by the Lords.

I shall speak only briefly on this amendment, as it is a standard form amendment removing the privilege amendment inserted by convention into all Bills that begin life in the House of Lords and have consequences for the public purse. The privilege amendment, as I am sure members of the Committee are aware, recognises that it is the constitutional right of the Commons to initiate legislation that relates to revenue raising or expenditure, and so forbids Acts that are introduced in the Lords from engaging in these activities.

As stated in the explanatory notes accompanying the Bill, regulations made under clause 1(1) could result in money flowing into, or out of, central Government funds. Further, regulations made by virtue of clause 1(4) could lead to provision for the charging of fees. Such financial matters are among those in respect of which the Commons claims the privilege to initiate legislation, and so the privilege amendment was inserted in the Lords. This amendment simply clears it away to enable regulations under, or by virtue of, the Bill to make provisions having consequences for public finances.

[Jonathan Reynolds]

We were interested, having never been on a Committee for a Bill that has been to the Lords already, in exactly how this worked. We were slightly worried at one point that the Minister was seeking to usurp the Bill of Rights 1689 by trying to make Treasury regulations without recourse to primary legislation; I am relieved to see that he is not seizing power in such an inappropriate way. I understand now that it is a pro forma amendment and I understand why such a process works in the Lords before it comes back to us. We therefore have no objection to this amendment.

Amendment 1 agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

[John Glen]

Clause 2 is simply a technical clause that extends the powers granted in clause 1 across England, Wales, Scotland and Northern Ireland. Financial services policy covered in the Bill relates entirely to reserved matters. It also enables the Act to come into force on the day on which it is passed, as we know of at least one file—the prospectus regulation—that will likely need to be implemented soon after EU exit. I therefore recommend that the clause, as amended, stand part of the Bill.

Question put and agreed to.

Clause 2, as amended, accordingly ordered to stand part of the Bill.

New Clause 2

Report on the provisions of regulations under this Act

“(1) Prior to making any regulations under this Act, the Treasury must publish a report on the impact of the provisions of those regulations.

(2) A report under this section must consider, in respect of the regulations proposed to be made—

(a) the impact of those provisions on households at different levels of income,

(b) the impact of those provisions on people with protected characteristics (within the meaning of the Equality Act 2010),

(c) the impact of those provisions on the Treasury’s compliance with the public sector equality duty under section 149 of the Equality Act 2010, and

(d) the impact of those provisions on equality in different parts of the United Kingdom and different regions of England.” .—(Jonathan Reynolds.)

This new clause would require a report to be made on the impact of any regulations under this Bill before any such regulations are made

Brought up, and read the First time.

Question put, That the clause be read a Second time.

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.

Leaving the EU: Economic Impact of Proposed Deal

Jonathan Reynolds Excerpts

Wednesday 20th February 2019 Commons Chamber

[Mel Stride]

My right hon. and learned Friend is entirely right that no deal would be a very unsatisfactory outcome. Of course, what the House will appreciate is that the only way to avoid a no deal is to secure a deal. That is why the Prime Minister will shortly return to Brussels to have further discussions with the EU Commissioner, Jean-Claude Juncker, in pursuit of one.

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

For more than two years, businesses and trade unions have called for clarity about the Government’s Brexit deal, and for two years there has been nothing but delay and a total lack of clarity. What has been clear from the wide range of independent analyses that we have received is that the Government’s Brexit deal is not good news for our economy. Even the Government’s own modelling said that the economy would be nearly 4% smaller if the Government’s deal was agreed, equivalent to £83 billion if it happened today. It is no surprise that the Prime Minister’s deal has struggled to command any widespread support, leading to the largest ever defeat in the House of Commons.

The climate of uncertainty created by the Government’s Brexit blundering, particularly their refusal to take no deal of the table, led first to businesses delaying investment decisions. Now, decisions are being taken, but as a result of the uncertainty and insecurity created by the Government, those decisions are to cut investment and jobs. The result, as the Governor of the Bank of England, Mark Carney, told us this month, is that business investment in 2018 fell by 3.7% in year-on-year terms.

Let us go through some of those decisions. Jaguar Land Rover has cut 4,500 jobs, Ford cut 1,000 jobs in Bridgend and Honda’s Swindon closure, supposedly not related to Brexit, will mean that 3,500 will lose their employment. In financial services, HSBC has announced that it will move seven offices from London to Paris in 2019. Deutsche Bank has said that it is considering moving 75% of its balance sheet from London to Frankfurt.

This is not just about Brexit. It is about how the Government have failed to produce an economic plan that tackles our productivity crisis and increases investment for the long term. They are a Government putting our economy at risk through failed economic management and failing to secure a Brexit deal that would protect jobs and the economy.

May I ask the Financial Secretary first, what happened to the promise of frictionless trade? Secondly, where is the detail businesses need about the promised customs arrangements? Thirdly, can the Government tell us what mysterious technology will facilitate their proposed customs arrangements? Fourthly, why have the Government failed even to mention the issue of intellectual property protections in the future partnership agreement? Finally, will the Government confirm that there has been a dilution of protections from road hauliers and passenger transport operators since the earlier Chequers commitments?

It is the role of the Government’s Treasury team, above all others, to stand up to protect our economy. It is as though the Chancellor has simply gone missing. The Government have run out of time. We cannot wait any longer for the answers we need and the country cannot wait any longer for the answers it deserves.

Draft Financial Regulators' Powers (Technical Standards Etc.) and Markets in Financial Instruments (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 Gary. Once again, the Minister and I are here to discuss a draft instrument that makes provision for the regulatory framework after Brexit in the event that we crash out of the EU without a deal. On each of those occasions, my Front-Bench colleagues and I have spelled out our objections to the Government’s approach to secondary legislation. The Minister knows and appreciates that. This is the first of two meetings we will have today, and I will not read my speech out twice, but I will simply say that the more I see of this process, the less convinced I am that it is a good way to make such a substantive body of law.

The regulations amend the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018, which, as the Minister described, simply list the EU regulations for which the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England are the appropriate regulator. In particular, they allocate the FCA a further set of EU regulations, taking its current figure by my count to a whopping 93. As we have raised in previous debates, it would be helpful to understand how it has been decided which powers will go to the FCA, the PRA, the Bank of England or the Treasury and how much resourcing will be given to those institutions. The Minister tends quite correctly to say that the functions of the Commission are going to the Treasury and those of ESMA are going to the FCA, but the picture is more complicated than that simple binary transfer of power. He knows that the Opposition are concerned about this unprecedented transfer of powers via secondary legislation, as any good Opposition would be, especially as there has been little consultation about the FCA specifically acquiring the powers.

Many bodies could take on powers of financial regulation alongside the FCA, the PRA, the Bank of England and the Treasury. Aspects of financial regulation could be seen as being within the purview of a democratic Parliament. There has been little explanation in statutory instruments about why other bodies, including Parliament, should not have principal oversight of former EU regulations. It is also not clear that the FCA has been given support or resourcing to discharge the major increase in powers it has been given. Without support or resourcing, the FCA will not be able to discharge new regulatory capacities effectively or responsibly. The explanatory memorandum confirms that the Treasury has not undertaken a consultation on the instrument, but it seems clear that some stakeholders have been consulted by necessity. Will the Minister clarify that point?

The explanatory memorandum also states:

“The financial services regulators plan to undertake public consultation on any changes they propose to make to BTS or rules made under the powers conferred upon them by the Financial Services and Markets Act 2000 using the powers delegated to them by the 2018 Regulations.”

It would be helpful to have further clarification on that, not least the statutory requirements for consultation. The words “plan to undertake…consultation” seem uncertain. According to the explanatory note, an

“impact assessment…on the costs of business, the voluntary sector and the public sector will be available from HM Treasury”.

However, the explanatory memorandum states:

“An Impact Assessment has not been prepared for this instrument because in line with Better Regulation guidance, HM Treasury considers that the net impact on businesses will be less than £5 million a year. Due to this limited impact, a de-minimis impact assessment has been carried out.”

The explanatory memorandum continues:

“There is no, or no significant, impact on business, charities or voluntary bodies, as this instrument relates to maintenance of existing regulatory standards...The impact on the public sector is that UK financial services regulators (the Bank of England/Prudential Regulation Authority, the Financial Conduct Authority and the Payment Systems Regulator) will be responsible for fixing deficiencies in BTS so that they operate effectively from exit day, and will have ongoing responsibility for making any technical standards required under retained EU law on financial services”.

It states:

“The allocation of responsibility is therefore a manageable impact.”

Will the Minister confirm whether there has been an impact assessment? Either way, can we see the evidence base for those assertions?

It is ten years since the fall of Lehman Brothers and the beginning of the global financial crisis, and the Government need to reflect on how the imperative of ensuring financial stability will be met, or otherwise, by these arrangements. I am becoming increasingly alarmed by the Government’s unfolding approach to regulating financial services, which seems to have no overall plan, no indication of how the different pieces of legislation fit together and, ultimately, no clarity. Rather than pushing through such a large volume of piecemeal secondary legislation, it is clear we need a consolidated piece of primary legislation.

Will the Minister explain why the Government need to update the Financial Regulators’ Powers (Technical Standards etc.) (Amendments etc.) (EU Exit) Regulations 2018 and the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, which were made in October 2018? It suggests they are making decisions as they go along, rather than having a coherent plan. I listened to the distinction that the Minister made, which was that new legislation has to be covered by the regulations, but surely that is the purpose of the in-flight Bill, which we dealt with on the Floor of the Chamber recently. In addition, part 3 makes minor technical amendments to correct the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018.

The Minister was frank about the errors that have been found, and right to say that for such a large volume of legislation the amount of those errors is relatively minor. As he may remember, however, Labour voted against the regulations and called for greater scrutiny, and there are still legitimate concerns about the strength of the process.

This statutory instrument must be understood in the context of the Government’s chaotic approach to no-deal preparations, which has been characterised by significant transfers of power to the Treasury, the FCA, the PRA, and the Bank of England through statutory instruments. When Britain voted to leave the EU, I believe that was to empower Parliament to debate and make these decisions, not to concentrate them in the hands of a few civil servants and Ministers. As legislators we have to get this right. This is not just about the principle of democracy and accountability; this is about robust law-making that is clear, comprehensive, coherent, and enforceable.

Santander Closures and Local Communities

Jonathan Reynolds Excerpts

Thursday 14th February 2019 Westminster Hall

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

I thank the hon. Member for Glasgow East (David Linden) and the Backbench Business Committee for enabling us to have this debate on a topic that is clearly vital to many communities.

We have heard some very good speeches today from the hon. Member for Angus (Kirstene Hair), my hon. Friend the Member for Heywood and Middleton (Liz McInnes), the hon. Members for Sutton and Cheam (Paul Scully), for Strangford (Jim Shannon) and for Tiverton and Honiton (Neil Parish), my hon. Friends the Members for Ynys Môn (Albert Owen) and for North Tyneside (Mary Glindon), the hon. Member for Barrow and Furness (John Woodcock), my hon. Friends the Members for Plymouth, Sutton and Devonport (Luke Pollard), for Hornsey and Wood Green (Catherine West) and for Glasgow North East (Mr Sweeney), the hon. Member for Central Ayrshire (Dr Whitford) and my hon. Friend the Member for Coatbridge, Chryston and Bellshill (Hugh Gaffney). That is quite a coalition, by any measure of parliamentary activity. Each of those speakers articulated very well the impact of bank branch closures—not just by Santander, but more widely—on their communities. Each speech raised several issues of public policy that I certainly agree need to be addressed.

The debate has shown that the challenge to maintain a banking sector that works for everyone at a time of rapid technological change is not being met and that the balance between digitisation and traditional banking models is not being got right. I want to say a few words to concur with the sentiment in the room today, but also a little about some possible solutions to these problems.

In advance of the debate, Santander provided some statistics on how people use its services and how that has changed. It said it has experienced a decline of about a quarter in branch transactions over the past three years, including for branch ATMs. It went on to say that that trend is expected to continue, with a projected 37% decline in branch visits across the industry in five years’ time. That is an empirical case for branch closures. We understand that—it is based on numbers and projected future demand. Those numbers alone, however, do not tell us the real story of how people depend on some of those services.

Today we are here specifically to debate the impact on local communities, and to do that, I want to share with colleagues and with industry, which will listen to the debate, the experience of my constituents and what bank branch closures have meant for them. Thankfully, the Santander branch in Hyde is not earmarked for closure in this round, but in recent years my constituency has lost branches of RBS, Lloyds, HSBC and Yorkshire Bank. Yesterday, on my Facebook page, I asked my constituents to share with me some of their direct stories of what that has meant for them. The first comment was:

“Losing the Lloyds in Stalybridge has been a blow. Yes there is one in Ashton”—

the town next door—

“and there is online banking. But there is no substitute for making an appointment you can walk to, talking to an actual human being.”

Another constituent, from Droylsden, which is just outside my constituency, said:

“Here…we now don’t have a single bank! We’ve gone from having Lloyds, NatWest, Royal Bank of Scotland and Halifax to having none!!! Our infrastructure dwindles by the day.”

The problem is even more acute for colleagues in more rural constituencies.

For businesses as well as individuals branch closures have posed particular challenges. One business owner—an existing Santander customer—said:

“You can do banking at the Post Office but, in order to pay things in, you have to get in touch with your bank first and get paying in slips sent out. Santander would only send me 5 and I have run out now. It means that I can’t accept cheques for my business easily, and I don’t have time to keep ringing up for more paying in slips.”

Someone else said:

“It’s a killer for small businesses, who have to close their shops to go and stand in a queue for a lengthy period of time just to get change.”

[Catherine West]

Given the history over the past decade of how small businesses have been let down by the big banks, does my hon. Friend agree that this is yet another slap in the face for small business?

[Jonathan Reynolds]

I agree with my hon. Friend. She is right to highlight—she did so in her speech—the many difficult issues with conduct in the UK banking industry, and specifically the abuses of lending to small businesses, which we have had many debates about in this Chamber and the main Chamber. Such abuses are particularly difficult to hear about—people have suffered some real abuses—and compounding them makes things especially difficult.

I have heard some particularly moving stories from those who care for others, who have borne the brunt of some closures. This comment choked me up:

“My mum with Alzheimer’s relied on her Lloyds branch in Droylsden before it was shut. The staff knew her well and helped her. They knew her condition and if she was in a bad way they would phone me and give her a cup of tea while they waited for me to arrive. The staff said there were lots of other people like my mum. The closure really affected her.”

Such stories show that we are talking about real people and the impact on their lives. Those are real experiences. The data do not always reveal that. The banks, of course, have the right to present that data to us, but our job is to tell the human side of the story.

We cannot hold back the tide of technological change—like some of my colleagues, I am not a luddite, and I love technology—but we can stop to think about how to make it work for us, not the other way around. Without protection the move to online as a default option will risk leaving the most vulnerable and marginalised in our society without services that work for them.

As we have seen in the debate around ATMs—which were raised several times in this debate—the risk is that we will sleepwalk into a society without access to cash at all, with the industry realising that we need those safety nets only when it is too late. Access to cash is becoming an increasing challenge for people, following bank closures and the decline in our high streets. The chair of the Payment Systems Regulator, Charles Randell, was right to ask in a Treasury Committee evidence session earlier this week whether access to ATMs should be seen as a universal service. I am sympathetic to that.

No one wants to prevent innovation. Indeed, some technological advances, such as remote video appointments or audible speaking ATMs, could for the first time help to include people who have historically had trouble interacting with traditional banking. Our objective, however, must be to use technology to benefit all customers, rather than creating a pared-down, automated banking sector that leaves people without the support they need.

The bank branch network has been shrinking at an accelerating rate. In December 2016, Which? reported that more than 1,000 branches of major banks had closed between January 2015 and January 2017. Banks stopped publishing data on closures in 2015, and there is now no central source for it, so the exact number of closures becomes more and more difficult to find out. Since those figures were published, however, we have seen multiple further closure announcements from banks, including Yorkshire Bank, RBS, Lloyds and now Santander.

The scale of the closures seems disproportionate and does not necessarily match how people want to use their bank branches. Also—this has come out in the debate—some of the modelling around the closures does not reflect the fact that branches are all closing at the same time. That was particularly the case in Scotland with RBS. Research conducted by the Social Market Foundation in 2016 found that strong consumer appetite remains for a physical presence. Nearly two thirds of consumers would prefer to talk to someone face to face when making a big financial decision.

A report by Move Your Money, published in July 2016, made the damning assessment that, far from responding to market pressures, the major UK banks are simply closing branches in poorer areas and opening or retaining them in more affluent ones. That is simply not acceptable. The same report mapped bank branch closures against the postcode lending data from the British Bankers Association, which is now UK Finance, to show that bank branch closures dampen SME lending growth significantly in the postcodes affected. The figure grows even higher for postcodes that lose the last bank in town. At a time when we all want to stimulate more lending to SMEs and to encourage growth, a sustained programme of bank branch closures risks taking us in precisely the wrong direction.

Labour’s answer to that is a proposal to change the law regulating banks so that no closure can take place without a real local consultation or the Financial Conduct Authority approving the tranche of closures. A future Labour Government would obligate banks to undertake a real consultation with all customers of the branch proposed for closure, including local democratic representatives on the relevant local council. The bank would be mandated to publish details of the reasons for closure, including the financial calculations showing the revenues and costs of the relevant branch. The share of central costs such as accounting systems, IT, cyber-security and personnel would have to be identified separately, because many of those costs are relatively fixed and not proportionate to the number of branches. The FCA’s approval would be needed for any bank branch closure. We think that is the right balance. It accepts that, as technology changes, there might be some closures, but it would ensure that customers are not forgotten about or taken for granted.

That is our policy on closures, but as my hon. Friend the Member for Ynys Môn said, we wish to go further. The Post Office is often referred to as the solution to bank branch closures, through its relationship with the Bank of Ireland. That is better than nothing—something like £14 billion in deposits is held in accounts linked to the Post Office—but there are clearly shortfalls. The hon. Member for Central Ayrshire highlighted some of those in her speech.

The potential exists, however, to build on that model and to create a genuine Post Office bank, which would ensure universal access to banking services for every part of the UK. It would be a standalone institution; it would pay the post office network for use of those branches, and it would therefore replace the network subsidy payment. It would offer a future for the Post Office, as well as for financial services in every part of the country. It would be held in a public trust model, with 100% of the shares held in trust for the public benefit, ensuring that no future Government could seek to privatise it. I plan to develop those plans and to present them in more detail in the near future, alongside our plans for the future of the public stake in RBS and other measures designed to increase plurality in the banking sector, including the return of new post offices to the UK.

[Albert Owen]

Is not one of the problems—perhaps a future Labour Government could address this—that so many different Departments are involved? We have heard about the Department for Work and Pensions and about the Department for Business, Energy and Industrial Strategy, with its responsibility for the Post Office, and the Treasury Minister is responding to the debate. Would my hon. Friend include in his plans a responsible Minister so that there is accountability to Parliament?

[Jonathan Reynolds]

That is an interesting submission. Ultimately, if we wish to see the kind of developments that my hon. Friend and I would like to see, we have to have the Treasury behind them, in whatever way Whitehall responds to that. Clearly, there are lots of different aspects; some are about the legislative environment, some about the regulatory environment and some about the spending decisions that need to be made if we are serious about ensuring universal access to financial services.

In every debate such as this, we all recognise that the financial crisis has had a severe and long-lasting impact on communities in Britain. That fallout has damaged the banking sector in the public’s eyes—we cannot get away from that—but banks must not compound that damage with an overly aggressive and sustained programme of closures, which risks being another step in leaving the high street as an empty shell. Regulators, banks and policy makers need to work together to build a viable banking infrastructure that works for all customers and all communities in a way that will ultimately restore trust and confidence in the UK banking sector.

--- Later in debate ---

[John Woodcock]

Perhaps the Minister should do that first, then.

[Jonathan Reynolds]

Will the Minister give way?

[John Glen]

In deference to my esteem for my shadow Front-Bench colleague, I will.

[Jonathan Reynolds]

I am very grateful. The idea of banks collaborating and having hubs that would be the joint front end of their back-office functions comes up time and again, but it has not happened. There is no work being done to deliver that. Surely, there are issues to do with competition law, regulatory compliance and liability for mis-selling that simply make it quite unlikely. That is why a serious alternative is required.

[John Glen]

I respect the concern that the hon. Gentleman has raised and I will respond to it.

Before I get into the detail into what I am trying to do as the Minister with responsibility in this area, I want to reflect on some of the facts of changing banking practices. More of us choose to bank online or on an app, but the point made by the hon. Member for Central Ayrshire (Dr Whitford) about a mixed appetite for banking services is important, as is the intergenerational point. Between 2011 and 2016, branch usage declined by 42% whereas mobile banking usage increased 354% between 2012 and 2017. Cash was used in 61% of payments in 2007, but it is projected that by 2027—in just eight years—it will go down to 16%. There is a significant and rapid change.

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

Jonathan Reynolds Excerpts

Tuesday 12th February 2019 General Committees

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

It is a pleasure to serve under your chairmanship, Sir Edward. Once again, the Minister and I are here to discuss a statutory instrument that makes provision for a regulatory framework after Brexit in the event that we crash out without a deal. I will spare the Minister the full list of our concerns; I think we are somewhere around 15 through the list, but these events are almost daily now, so he is aware of our concerns. It is enough to say that the Opposition would like to put on record our worries that the process of transposing this legislation has not been as accessible or as transparent as it should be.

Last night in the main Chamber we debated the Financial Services (Implementation of Legislation) Bill—the “in-flight” financial services Bill—which the Opposition voted against. One of the reasons for opposing that Bill is that the combination of work happening in Delegated Legislation Committees, along with the “in-flight” Bill, is creating a patchwork of new rules. We believe that is inherently vulnerable to clashes, gaps and inconsistencies.

That is also our view of today’s instrument. Clearly, the objectives are the right ones, but the Minister and I have already voted on a great number of items of regulation where in some instances the Government have transferred powers to the Financial Conduct Authority, the Prudential Regulation Authority, the Treasury or the Bank of England, so it is not entirely clear why we now need this separate instrument, to pass distinct powers to grant equivalence arrangements separate to the decisions that we have already taken in each of those specific instruments. Once again, while there is a sunset clause in this legislation, it is worrying that the Treasury is trying to give itself powers to keep in its back pocket to deploy should it decide that they need to be exercised.

Will the Minister clarify why we need stand-alone powers of this kind and which regulations he feels they would be used in reference to? What is the relationship between this general set of regulations on equivalence and the specific statutory instruments that we have already debated and which already relate to the transfer of powers? Why has the Treasury been given powers to make labour-intensive evaluations of regulatory standards in other countries, as opposed to that going to the Financial Conduct Authority, the Bank of England or the Prudential Regulation Authority? Is the Treasury properly resourced for this work? If not, will it receive extra resources for what it is being asked to do? Will there be a publicly available central register of all equivalence decisions, so that domestic and external market participants can have ready access to up-to-date information, along with the accompanying rationale for the decisions that have been made?

I note that these powers can be used before exit day, with a view to taking effect on 29 March. The Minister directly referred to this near the end of his speech. That is an uncomfortable proposition and distinct from some of the legislation we have already passed. With just 33 working days to go until we leave the European Union, can the Minister indicate in what context they would be used during this period and why that would be felt to be necessary? I believe the words that he used were that the Government need to be “nimble” in that scenario, but as parliamentarians we need more reassurance about that and about the general scope and intention of this legislation. I hope the Minister can provide that for us.

Financial Services (Implementation of Legislation) Bill [Lords]

Jonathan Reynolds Excerpts

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

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

I am someone who believes in Parliament—I believe in it not just as a way to pass the laws under which we are governed and to hold Ministers to account but, crucially, as a way of reconciling the different and competing interests that a complex and sophisticated country such as ours inevitably encompasses. Like many colleagues, I find our politics at the moment increasingly bitter and angry and lacking in respect and empathy for opposing points of view. For me, the House of Commons and, to an extent, the House of Lords have historically given this country the means to have the conversation that it needs to have with itself to begin to resolve differences of this kind.

I say that in opening to explain that it is a genuine source of sadness to me that, so far, Brexit has represented not the return of greater powers to Parliament, but the greatest accumulation of power to the Executive that we have ever seen in peacetime. That reality is before us again today. The Minister has clearly laid out the basis of today’s legislation. We are now so close to our EU exit day without a deal—just 34 working days, to be precise—that ensuring that we have a functioning regulatory system after Brexit is an urgent priority.

Leaving without a deal would be so problematic for this country that it is hard to believe that it has ever been much more than a thinly veiled threat to try to force Parliament into supporting the Government’s rejected Brexit withdrawal agreement. However, we have had to take appropriate steps to ensure that we have a functioning system in the event that that does happen. The Bill transfers significant powers to Government to deal with EU financial legislation that is in flight at our time of departure, meaning that we have been involved to some extent in shaping it but that it does not yet form part of the law applicable to the UK.

It is a welcome change to have the opportunity to substantively debate a major piece of legislation such as this. Until now, the Government have chosen to transpose the existing EU financial regulatory framework through secondary legislation. Ministers, my colleagues and I have now debated dozens of statutory instruments with just a handful of colleagues in the corridors of this place, passing legislation on huge items of EU regulation, containing many thousands of pages. I will spare our colleagues the excitement of referring to each of them in detail, but they provide all sorts of vital consumer protections and market safeguards.

Financial regulations are like the intricate parts of an engine: we do not need to understand them all or even to know about some of them, but we benefit from them being there and we will soon know when they go wrong. The regulations that we have dealt with include those that mandate the provision of clear, succinct information to people before they invest in particular products. They include the protections that ensure that people are not charged exorbitant fees for paying by credit card when they book a flight for a holiday, and those that allow insurers to operate across the UK and the continent, providing products that people depend on to give themselves security and protection. At a macro level, we have dealt with regulations that form part of the package that was designed to fix the enormous flaws in our global financial system that caused the 2008 crisis, including those that specify the bank capital requirements and which put in place the new market infrastructure designed to make derivatives trading more robust and more stable and lower the risk of contagion in a market downturn.

So far, all these have been debated by up to 17 Members each time in Committee Rooms in the House. The Opposition have requested debates on the Floor of the House on a number of them, all of which have been refused until very recently. Tens of thousands of pages of regulation have simply been ported across in a way that I do not think any Member, on either side of the House, has found fully satisfactory.

The Government have assured Parliament that no policy decisions are being taken as part of this process. However, it is vital that all colleagues are aware that porting across EU regulations into British law does not mean that we have been legislating for the status quo. Sometimes, the very act of taking out a reference to “the European economic area” and replacing it with a British one results in a material change. For instance, a no-deal Brexit would immediately mean that we assess the capital reserves of financial institutions differently, because we would no longer be giving preferential treatment to the sovereign debt of EU member states. Similarly, there would be no limit on the fees applied if a UK citizen used their credit card to buy something from an EU member state after a no-deal Brexit, because the reciprocity that we have now cannot be provided for. This point—that the withdrawal process cannot guarantee the continuity of the status quo—is one that I feel very few people understand, and I cannot stress it enough.

In addition, this process inevitably involves matters of judgment and raises questions about capacity and resourcing. For example, simply substituting “the European Securities and Markets Authority” for “the Financial Conduct Authority” and “the European Commission” for “the Treasury” creates a new relationship between those institutions that has not existed previously. It creates questions about the checks and balances between them, especially when new powers are being bestowed, and about which decisions will instead go to other bodies such as the Bank of England and the Prudential Regulation Authority. These decisions should not be taken unilaterally and simply presented for rubber-stamping in a Delegated Legislation Committee. That is relevant because the Bill effectively sets up the same process, but for the next two years of new financial services legislation.

We are extremely grateful to the Minister and the civil service for taking the time to fully brief us about their approach, but the Opposition plan to vote against the Bill today, and I want to explain the three reasons why. First, as I have touched on, we believe that the Government’s approach is fundamentally undemocratic. Simply diverting the process for the scrutiny of future EU legislation to secondary legislation Committees risks a major democratic deficit.

As we have seen with the no-deal statutory instruments, it is entirely within the Government’s gift whether time is granted on the Floor of the House to debate these instruments further. We will effectively be bestowing power on the Treasury to decide our future compliance with EU financial regulation. Given the concerns that the financial sector has about being a rule taker, that is an enormous step to take. When Britain voted to leave the EU, I believe that it was to empower Parliament to debate and make those decisions, not to concentrate them in the hands of a few civil servants and Ministers. Of course, the big change from a sovereign point of view is that, for some of these, we would no longer have had any input at the EU level.

Secondly, the approach of splitting in-flight files and existing regulations into a patchwork of statutory instruments lacks coherence. We are debating the Bill today. Numerous other, related statutory instruments will proceed in Committee this week, one of which we are sitting on tomorrow. We have already discussed some of the legislation referred to in this Bill in Committee, yet the updates on it and the next stages of these directives and regulations are now included in the Bill as being in flight. We need a single overview to identify what the post-Brexit framework will look like. Approaching it piecemeal risks having items fall through the gaps as well as creating clashes and inconsistencies. Significant powers are being transferred to the Bank of England and our regulators, yet there is no single item of legislation that demonstrates the extent and scope of the powers.

To be frank, given that the legislation is itself only a stop-gap, none of us really knows what the Government have planned for financial regulation after Brexit. This opaque and confusing process is inaccessible not just to legislators, but to those outside Parliament. I have received correspondence from two different asset managers in the past fortnight, for example, seeking insight into what is happening in this place regarding the collective investment regime because they have found the SI process so confusing to follow and are worried about the future.

Thirdly, we must acknowledge the systemic importance of what is included in the Bill. Nobody wishes to see a repeat of the events of the global financial crisis in 2008. That is why an extensive package of regulation emerged in the aftermath of the crisis, designed to protect against a repeat of those mistakes. Many of those pieces of regulation had their origins in the 2008 and 2009 G20 summits. There was a co-ordinated global effort, of which we were part, intended to make our financial markets safer and better able to withstand stress, hopefully protecting the public purse in future.

I genuinely hear no appetite for a bonfire of EU regulation when I speak to people in the UK finance sector but, in truth, we simply do not know what the future holds or where pressure may come from to relax or tighten regulations. However, the Bill risks enabling the Treasury to make wholesale changes to our regulatory regime with little recourse available to Parliament to have a say on that, other than through the secondary legislation process, which, as we have all seen, can severely limit the chances for scrutiny. I believe that the current Treasury would approach that process in good faith, but Ministers and Prime Ministers change and we do not know who ultimately will be entrusted with these powers.

Some of the fundamental pillars of the post-crisis financial regime, such as the capital requirements directive V and the bank recovery and resolution directive II, as well as other items of regulation designed to strengthen the financial market infrastructure, are included in the Bill. The capital requirements directive, for example, sets out the asset buffers that systemically important financial institutions must hold and in what ratios. Given the costs involved to banks, these regulations often involve significant negotiation and lobbying. We saw in the US last year that a concerted lobbying effort secured major concessions from the Basel committee on capital requirements. It is simply a fact that such legislation involves the management of large and competing interests, and it does not seem right to the Opposition that the Treasury could be lobbied on such a matter and subsequently implement a statutory instrument that is subject to limited scrutiny compared with primary legislation.

It is for these reasons that our reservations outweigh our understanding of the need to pass the Bill. We very much want a strong and successful financial sector after Brexit, but we reiterate that the best way of ensuring that we have that is to negotiate a deal that the House is willing to vote for. We acknowledge that in the event of no deal a whole raft of emergency legislation would need to be passed, but at present we cannot sign up to handing over these powers to the Government without any guarantee about how they will be used. It is our intention, therefore, to oppose Second Reading and divide the House.

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.

--- Later in debate ---

[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.

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

Jonathan Reynolds Excerpts

Monday 4th February 2019 General Committees

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

It is a pleasure to serve under your chairmanship, Sir Henry. Once again the Minister and I are here to discuss a statutory instrument that makes provision for a regulatory framework after Brexit in the event that we crash out without a deal. On each of those occasions, I and my Front-Bench colleagues have spelt 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. Secondary legislation ought to be used for technical, non-partisan, non-controversial changes, because of the limited accountability it allows. Instead, the Government continue to push through far-reaching financial legislation via this vehicle. These regulations could represent real and substantive changes to the statute book. As such, they need proper in-depth scrutiny. In light of that, the Opposition want to put on record our deepest concerns that the process regarding the regulations is not as accessible and transparent as it should be.

Our request for a debate on the Floor of the House regarding the markets in financial instruments directive in December 2018 was rejected, but I note that in the Treasury Committee’s oral evidence session last Tuesday, the Chair said that she was writing to the Leader of the House to ask for a debate on the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. Given that we now have more parliamentary time due to the cancellation of the February recess to focus on this very issue, I hope the Government will heed the calls now coming from across the House for more in-depth and open debates on these matters.

Today we turn our attention to three items that make provision for the UK insurance industry in the event that we leave without a deal. The UK insurance market, centred on Lloyd’s of London, is the world’s oldest insurance industry of its kind. It attracts business from all over the globe as it is often the only place where the combination of specialists can be found to provide products to cater for all of today’s highly complex risks, especially those of terrorism, cyber-attack and natural catastrophes. From its humble beginnings as a coffee house in the 17th century, Lloyd’s of London has become central to world insurance markets, paying out more than £18 billion in gross claims in 2017. Yet the insurance sector, which is so fundamental to the way in which businesses and individuals manage daily risks, is still in complete limbo over its post-Brexit future.

As I have said in this Committee before, relying on equivalence arrangements will fall short of what our financial sector as a whole needs if we are to use it when we leave the European Union. For the insurance sector, it is obviously even worse, as there is simply no equivalence framework for brokers under the insurance distribution directive. We would therefore be going into uncharted territory. The London Market Group, which represents brokers and underwriters, has said:

“It would be unacceptable to see EU clients left in a detrimental position, not knowing whether their claim would be paid or not.”

Inevitably, we have seen the consequences of that as the insurance community has been forced to move forward with its own contingency plans in the absence of any clarity from the Government. Lloyd’s became authorised to write EEA business from the beginning of the year, and is now working on transferring all EEA business to Lloyd’s Brussels before the end of 2020. Brokers here in London intermediate business all over the world, but the third-country regime was not designed for market participants already operating globally; it was intended to bring external countries into the regime.

The Minister has presented three instruments that the Government argue will allow for a basic framework to function in the event that we crash out without a deal. The first is the draft Solvency 2 and Insurance (Amendments) (EU Exit) Regulations. Given the systemic importance of the insurance industry, there has been a co-ordinated effort over the past decade to ensure that capital requirements are sufficient to protect insurers and policy holders against insolvency. Those regulations have been vital to building a more robust insurance sector post-financial crisis. It is critical, in the view of the Opposition, that there is no move to water them down in the wake of our exit from the EU.

Typically, the industry representatives I meet have no desire to bring about a bonfire of regulation, but there is no guarantee that there are not forces who wish to see that outcome in the UK and plan to lobby for it. The Opposition are strongly against any adaptation of Solvency 2 in such a way that would weaken capital requirements. Although I see no evidence of that in this instrument, the area that is cause for concern relates to the end of preferential treatment for EU sovereign debt.

As we discussed during the Committee on the draft Capital Requirements (Amendment) (EU Exit) Regulations 2018, if we crash out without a deal, the zero risk weighting for EU sovereign debt will instantly change. It will no longer receive preferential treatment, but instead be treated as third-country debt. The reverse would apply with regards to UK sovereign debt. That has the potential to be highly disruptive, as big institutions would be expected to recalculate capital ratios and recapitalise when there has not been any real change in risk.

Sam Woods of the Prudential Regulation Authority insisted during a Treasury Committee evidence session, which the Minister participated in, that this is a decision for Parliament, which is why it has been included in an SI. However, he also emphasised the need for making the change very carefully, through proper risk processes and governance, as it will affect reported capital ratios. In a no-deal scenario, where market conditions are likely to be volatile, the last thing needed is for banks and insurance companies to be uncertain about their published capital ratio.

I therefore ask the Minister: what provisions are the Treasury making for that scenario? It is not mentioned in the impact assessments that have been circulated, which is of deep concern to the Opposition. We urgently want to know what provision is being made. As the Association of British Insurers has directly highlighted:

“The Government has already publicly stated its commitment to applying transitional relief in this area, but it is vital that the PRA applies this effectively so that firms can consider their asset portfolios and make any necessary changes in an orderly fashion.”

Moreover, the ABI has underlined further outstanding concerns shared by the Opposition. The PRA is assuming hugely important decision-making powers, and therefore the ABI views the structure as an emergency process to address immediate challenges. As the ABI has publicly stated, there must be genuine checks and balances on how the PRA exercises those functions, replicating the European Parliament’s existing role in scrutinising how those functions are currently exercised at EU level.

I have made this point in Committees related to other items of financial services legislation: the Government cannot simply port over the same regulatory framework as the European Commission and its regulators, when our Treasury and supervisory authorities do not interact in the same way. In the Opposition’s view, that then becomes an implicit policy decision.

On the draft Insurance Distribution (Amendment) (EU exit) Regulations, the insurance distribution directive was a relatively new piece of legislation that helped to level the playing field for consumers buying insurance and to improve conduct standards. As such, there could be a significant consumer detriment in removing those protections, which try to ensure that policy holders are treated fairly and consistently.

However, our real concern is that we continue to lack any kind of equivalence provision for the IDD in a post-Brexit world. As the London & International Insurance Brokers’ Association wrote in its letter to the Prime Minister in 2018, an enhanced equivalence regime will see intermediaries losing access. Our primary concern must be that markets can continue to function and that there is no consumer detriment, or any legal risks, created for insurers or brokers. Can I therefore ask the Minister to provide some clarity on whether any progress has been made in that field?

I would also like to know why the term “insurance-based investment product” is being redefined here. It is not clear how that flows from the European Union (Withdrawal) Act. Regulation 12 transfers insurance-related regulation-making functions to the Treasury. Why the Treasury, and not the PRA? Why have the Government not publicly rationalised their transfer of some functions to different bodies? As I have said, simply porting functions over to institutions in the UK ignores the fact that EU institutions and regulators interact entirely differently. There should be a wider debate about those decisions, so we can ensure the right checks and balances are in place.

Moving on to the third statutory instrument, the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019, the Opposition has the same concerns with regard to capital buffers and how they are calculated if preferential treatment for EU sovereign debt is removed. Regulation 3 suggests an amendment referring to the “relevant competent authority”. Can the Minister clarify who that might be, and why it is not possible to specify that yet? That is all I wish to ask. Subject to the Minister’s reasonable reassurances, I do not intend to divide the Committee on these draft regulations.

Draft Interchange Fee (Amendment) (EU Exit) Regulations 2018

Jonathan Reynolds Excerpts

Tuesday 22nd January 2019 General Committees

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

Good morning, Mr Hanson; it is a pleasure to see you in the Chair.

Once again, the Minister and I are here to discuss one of the many Treasury statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. As he well knows, on each such occasion my Front-Bench colleagues and I have spelled out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation that passes through Delegated Legislation Committees.

The last instrument that we debated before Christmas related to a sprawling piece of EU financial legislation known as the markets in financial instruments directive. Our repeated requests to debate the instrument on the Floor of the House for 90 minutes were denied, even though there was ample parliamentary time. Such decisions diminish the good will between the Government and the Opposition; given the simple fact that every scenario before us requires some degree of legislative co-operation between us, that is of concern.

The prospect of no deal looms large after the chaotic events of the past week and the Government’s refusal to rule it out, so we must recognise that on 29 March, instruments considered by Delegated Legislation Committees may well become what we rely on—especially given the very real risk that the Government are simply running down the clock. Such instruments could represent real and substantive changes to the statute book, so they need proper scrutiny and in-depth analysis.

As the Minister said, interchange fee regulations on credit and debit cards form an important part of consumer protection. I was therefore very concerned to read in paragraph 2.8 of the explanatory memorandum that

“cross border card payments between the UK and the EEA, where the acquirer or card issuer are based in different jurisdictions, would no longer be subject to the caps established under EU or UK law, and the card issuer could receive higher interchange fees. This means, for example, that if a consumer used a UK-issued card to make a purchase from an EEA-based merchant acquirer, then neither the UK IFR or the EU IFR would apply, because the UK would be a third country vis-à-vis the EU.”

Will the Minister confirm my understanding of that paragraph, which is that no provision has been made to prevent cardholders from having to pay higher interchange fees from acquirers if we crash out without a deal? That seems to carry a very high risk of consumer detriment, given the prevalence of using cards to buy goods from across the EEA. As we are all aware, it is not uncommon for large retailers that operate in the UK and across Europe to channel payments across locations in the EEA—that is certainly the case for many large online retailers. Will the Minister therefore state the Government’s intention for the transposition of payment services directive II, which contains vital provisions to prevent surcharging for card usage?

Secondly, the legislation notes that the technical standards for interchange fee regulations will be transferred to the Payment Systems Regulator in the UK, which published a consultation on the matter in December 2018. The PSR is still a relatively new regulator. Can the Minister explain how the PSR will be sufficiently resourced to cope with that new workload?

The interchange fee regulations have been a large and contentious issue at an EU level for a number of years. They have required extensive engagement with stakeholders and the triangulation of competing interests. It is therefore no small matter to move those functions over to the domestic regulator. I shall be grateful if the Minister provides further detail on those points.

--- Later in debate ---

[John Glen]

I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central, for their points. I will do my very best to respond to them all.

First, I will address the overall context of where we are. It would be wholly undesirable for us to have a no-deal outcome, but my job is to deliver 63 statutory instruments to ensure that we have a functioning regime in place. Never has so much effort gone in to achieving something that hopefully we will not need.

I acknowledge the rigour and seriousness with which the Opposition Front Benchers have taken to this task, and I take on the points that are repeated each time. All I can say is that I will seek to maintain good will by giving as full an explanation as possible. Where I can, I will follow up with letters if I do not know all the responses that are sought.

Now I will seek to address the points that have been made, in sequence. The hon. Member for Stalybridge and Hyde mentioned the issue that was raised in the Lords concerning, first of all, the scope of this measure and why we are taking action under this mechanism. This SI reduces the scope of the UK legislation relating to interchange fee regulation from the EEA to the UK, and it maintains caps on transactions that involve only UK entities. It is laid under the EU (Withdrawal) Act, which transfers directly applicable EU law to the UK statute book, and it gives the Government the power to amend legislation to fix any provisions. However, it does not allow us to innovate.

Baroness Bowles of Berkhamsted legitimately wanted us to move forward and insert a cap so that we would not be vulnerable in a third-country situation to whatever might come from the EEA, but that is not something that the Government are permitted to do under this legislation. So, the measure is limited just to making those fixes, to restrain the Government from that sort of proactive innovation.

Linked to the point about the payment services directive, I will say that all legislation that is ongoing through the EU will be subject to the in-flight files Bill, which is now going through the House of Lords and will come to the Commons, I believe in February. That will determine the mechanism by which we onshore files that are ongoing.

So, there is a deliberate restraint on innovation during this SI process, which therefore prompts questions. However, what we cannot do in this situation is to assert proactively what sort of third country we want to be to the EU, when the EU has not offered a reciprocal arrangement that would make sense.

[Jonathan Reynolds]

I understand very clearly what the Minister is saying. However, we have sold this process to the public and to our colleagues in the rest of Parliament as a process that continues the status quo. I understand that logically what the Minister is saying is absolutely right; effectively, he is saying that we cannot innovate to provide for the status quo. By transposing this measure, however, we are actually diminishing the position of British consumers, which is of concern.

[John Glen]

I fully recognise that that is a legitimate point to raise, but in addition to this process we have the in-flight files Bill, which determines how we would go about onshoring—or not—provisions of ongoing directives, and we are also working on financial services legislation for the 2019-20 session, which would seek to respond holistically to the challenges that would be presented in a no-deal scenario. We are not passively waiting to be vulnerable, but this is the first stage of a process that we would have to undertake. It would be complex and time-consuming, and there would be a lot of work to be done, but that is where we are.

With respect to the challenge posed by the hon. Member for Glasgow Central about no deal, I really do not want to see a no-deal. There are a lot of observations that a managed no-deal would be okay, but what is not clear to me is how one determines that degree of management. It seems to me to be quite a random set of actions and the consumer detriment in the short term would be considerable.

I have covered the point about why I am using secondary legislation rather than primary legislation, and the constraints under which I have to act. I was asked about the capacity and expertise of the payment systems regulator to deal with these new responsibilities. The payments systems regulator was set up four years ago. It has issued public statements on the actions that it is taking. In the Treasury, we are confident that it will be making adequate preparations and effectively allocating resources ahead of March 2019. It has responsibility for monitoring and enforcing compliance with the new interchange fee regulation and for some regulation of the UK payments systems. We remain confident in its ability to continue to discharge its responsibilities.

The hon. Member for Glasgow Central raised the issue of the de minimis impact assessment. It has been prepared in line with the better regulation guidance, and we consider that the net impact on businesses would be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the payments systems regulator, and that is where that cost comes from. Firms will benefit from the reduction in uncertainty under a no-deal scenario, and without this instrument legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.

The hon. Lady made a number of points related to the Bird & Bird legal paper. I have not seen that. To be fair, I would prefer to reflect on that fully and write to her in detail, so I can address some of the concerns raised around different drafting elements of it. She asked whether the SI capped debit card fees. We are maintaining a domestic cap for debit and credit card transactions. Those are referred to in amendments made to articles 3 and 4 by regulations 6(1) and 7(1). However, their derivation applies only to debit card transactions in the existing law.

I was asked about the broader question of monitoring the interchange fee in future, as a third country in a no-deal situation. Clearly, the Government keep all policy under review, but we would need to look proactively as soon as possible at what would be the appropriate arrangement to come to. As has been made clear in the discussion this morning, if we were a third country the 0.2% and 0.3% cap would not automatically be applied, and that would have serious implications.

[Jonathan Reynolds]

I understand what the Minister is saying about the unworkability of the legislation if this does not go through, but from what he is saying it seems that if this SI were not passed, the British consumer would be in a stronger position than if it were passed. When we think about the circumstances of no deal—immediate tariffs, almost certainly some further depreciation of sterling, higher inflationary pressures—I am not sure that we are in a position to say that passing this legislation is in the best interests of the British consumer.

[John Glen]

We have to remember that this is in a no-deal situation; we would be outside and without the scope of the EU regulations of which we are currently a part. We would have no regulations for maintaining the caps within the UK. All we are doing is domesticising that existing provision as far as we can, within a UK environment. In our engagement with industry and with the PSR, it has been recognised that this is necessary but it is not the final solution. That is why there would need to be further innovation and policy work subsequently, as I have set out.

In conclusion, the SI is needed to ensure that the UK continues to have a functioning legislative and regulatory regime for payment card interchange fees in the event of a no-deal scenario. I have reiterated my belief that that should not be the outcome we secure in the end, but I hope I have dealt with the points raised. I will return to the hon. Member for Glasgow Central on her specific concern about the Bird & Bird note, and I shall make that available to the Committee.