Exiting the European Union (Financial Services)

Kirsty Blackman Excerpts

Monday 18th February 2019 Commons Chamber

[John Glen]

As the House will be aware, the Treasury has been undertaking a programme of legislation under the European Union (Withdrawal) Act 2018 to ensure that if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the United Kingdom. The two statutory instruments being debated today are part of this programme. The disclosure regulations, as corrected by the corrections slip published on 12 February, will address deficiencies related to the UK’s implementation of EU rules that govern the exchange of confidential information between European economic area and third country regulatory and supervisory authorities. Once the UK is outside the single market and the EU’s joint supervisory framework for financial services, amendments will be needed to these rules so that they continue to operate effectively in a scenario where the UK leaves the EU without an agreement. The money market funds regulations will fix deficiencies in UK law on money market funds and their operators to ensure they continue to operate effectively post exit. The approach taken in these pieces of draft legislation aligns with that of other statutory instruments being laid under the 2018 Act, providing continuity by maintaining existing legislation at the point of exit but amending it where necessary to ensure that it works effectively in a no-deal context.

Let me deal first with the Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019. As Members across the House will know, an important function performed by financial services regulators is the gathering of supervisory information from firms. Regulators use this information so that they can ensure that regulated firms are operating in a way consistent with regulatory requirements and so they are alerted to any development that may need supervisory intervention. As a great deal of financial services activity takes place across borders and across regulatory regimes, the ability of national regulators to co-operate with each other and to exchange information is vital if they are to discharge their supervisory functions effectively.

The information gathered by regulators is often confidential and often commercially or market sensitive, so it is right that there are strict rules and safeguards on how regulators share such information with other regulatory authorities. EU law currently plays an important role in setting these rules. In order to ensure the effective functioning of the single market in financial services, the EU has developed a joint supervisory framework for national regulators and supervisory bodies in the EEA. This makes co-operation and the sharing of certain supervisory information between EEA national regulators mandatory.

In addition, the EU has established the European supervisory authorities—ESAs— which are responsible for co-ordinating the approach of EEA national regulators. Co-operation and sharing of certain information with the ESAs is also mandatory for EEA national regulators. As well as setting out what information should be shared, EU rules also include restrictions and safeguards. In the UK, these rules are implemented in Part 23 of the Financial Services and Markets Act 2000 and the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001.

For third country authorities, there are additional restrictions when disclosing confidential information. The UK regulator may need to be satisfied that the third country authority has protections for confidential information in place that are equivalent to those of the EU. There may also be a requirement to enter into a co-operation agreement with the third country authority. In addition, if the UK regulator is disclosing confidential information to a third country authority which originated from an EEA authority, the UK regulator may need to seek the consent of the EEA regulator which originally disclosed the confidential information.

If the UK leaves the EU without an agreement, the EU has confirmed that it will treat the UK as a third country and the UK will also need to treat EEA states as third countries. The UK will be outside the single market and the EU’s joint supervisory framework, so references in UK legislation to this framework, and to EU legislation and EU bodies, will be deficient and will need to be corrected so that the UK’s disclosure rules for confidential information will work effectively. In particular, the rules will need to be amended to reflect the third country relationship that will exist between the UK and EEA states. After exit, it would not be appropriate to provide for different rules and protections on the disclosure of confidential information by UK authorities depending on whether confidential information is being shared with EEA authorities or the authorities of non-EEA states. If this is left unamended, the UK would afford additional protections and less onerous restrictions to EEA states compared with other third countries. In addition where there are currently requirements to seek the consent of an EEA authority before the onward disclosure of information, these requirements will be retained only if an equivalent requirement also exists in relation to seeking consent from non-EEA authorities.

This instrument also provides for a transitional arrangement that will ensure that any confidential information received by a UK regulator before exit day will continue to be treated in accordance with the relevant provisions that existed before exit day. While it is necessary to amend the UK implementation of rules around disclosure of confidential information to ensure that they continue to operate effectively once the UK is outside the EU, it must be stressed that these amendments are in no way intended to diminish the level of co-operation that exists between UK and EEA regulators.

The Government and UK regulators believe that effective co-operation and co-ordination is essential for the effective supervision of financial services. UK authorities will be doing everything possible to ensure that effective co-operation continues. UK regulators have always been key players and key voices of sanity in the global supervision of financial services, as is demonstrated by the close and co-operative arrangements we have with regulators in countries outside the EEA. After exit, it will be necessary for the UK regulators to enter into co-operation agreements with EEA national regulators and with the ESAs. These agreements will help ensure that a high level of co-operation and information sharing will continue.

[Kirsty Blackman (Aberdeen North) (SNP)]

I am seeking some clarity on the first of these SIs and which day the Minister expects the disclosure of information regulations to come into operation. Am I right in thinking that exit day means exit day unless there is an implementation period, in which case it means at the end of the implementation period?

[John Glen]

These SIs relate to a situation where we have no deal. So if there was not a deal or an implementation period after 29 March, these SIs would then take effect.

[Kirsty Blackman]

With respect, that is not what it says in the explanatory memorandum for the first SI, which suggests that it is needed in the event of any Brexit and not just in the event of a no-deal Brexit. The second one covers a no-deal Brexit, but I had understood that the first one was needed for any Brexit.

[John Glen]

I will examine that and, if I may, I will come back to it and seek to clarify it when I wind up this debate.

Both the Government and UK regulators attach very high priority to putting these agreements in place, and I am pleased to report that UK and EU regulators are making good progress in their discussions to finalise these agreements. The Treasury has been working very closely with the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority in the drafting of this instrument, and there has also been engagement with the financial services industry, including the publication of this instrument in draft, along with an explanatory policy note on 9 January. In summary, the Government believe that the proposed deficiency fixes are necessary to ensure that the UK has a clearly defined and operable set of rules for the disclosure of confidential information.

I turn now to the Money Market Funds (Amendment) (EU Exit) Regulations 2019, which relate to the establishment, management, and marketing of money market funds. Such funds invest in highly liquid instruments, and provide a short-term, stable cash-management function to financial institutions, corporations and local governments. They are commonly used by investors as an alternative to bank deposits. The regulations formed part of the response to the 2008 global financial crash to preserve the integrity and stability of the EU market, and to ensure that money market funds are a resilient financial instrument. They do so by ensuring uniform rules on prudential requirements, governance and transparency for managers of these funds.

Money market funds can either be structured as undertakings for collective investment in transferable securities—UCITS—or as an alternative investment fund. Therefore, they are regulated as UCITS or as an alternative investment fund, in addition to being regulated as a money market fund. The regimes for UCITS and alternative investment fund managers have been separately amended to reflect the UK leaving the EU by the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 and Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018, which were taken through Committee, where I believe I was joined by the hon. Member for Oxford East (Anneliese Dodds), and have now been approved in both Houses and will be made shortly. In a no-deal scenario, the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework. EEA money market funds, which currently provide the majority of money market services in the UK, would not be able to continue to service UK clients. The money market funds regulation therefore needs to be updated to reflect this and ensure that the provisions work properly in a no-deal scenario.

First, these draft regulations remove references to the Union which are no longer appropriate and to EU legislation which will not form part of retained EU law. These references will be replaced by references to the UK and to relevant domestic and retained EU legislation. Secondly, in line with the general approach taken to the onshoring of EU legislation, the SI will transfer functions currently within the remit of EU authorities; from the European Securities and Markets Authority to the FCA, and from the European Commission to Her Majesty’s Treasury.

As the UK’s regulator for investment funds and the current national competent authority for money market funds, the FCA has extensive experience in the asset management sector, and it is therefore the most appropriate domestic institution to take on these functions from the European Securities and Markets Authority. This statutory instrument transfers all powers exercised by ESMA to the FCA. The FCA will become responsible for technical standards on how funds should stress test their funds, and it will gain two operational powers to establish a register and reporting template for money market funds.

This statutory instrument transfers any power currently exercised by the Commission to the Treasury, in line with the other statutory instruments that we have taken through. Those powers all relate to creating rules concerning standards for money market funds, such as their liquidity and quantification of credit risk.

As I have mentioned, EU money market funds are structured and further regulated as UCITS or alternative investment funds. This statutory instrument makes provision to ensure that EU money market funds can use the temporary marketing permissions regime, as legislated for in the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 and the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018. Following an assessment by the FCA and the submission of a written statement to both Houses, the Treasury will be able to extend that by a maximum of 12 months at a time. It will also allow for EU money market funds that are currently marketing into the UK, and any subsequent UCITS sub-funds, to continue to market into the UK for up to three years after exit day.

This statutory instrument amends the scope of the regulation to apply to the UK only, with the effect of only allowing the marketing of UK-authorised MMFs or MMFs managed by UK fund managers. However, further amendments maintain the eligibility of EEA MMFs with temporary permissions to continue to market in the UK at the end of the temporary marketing permissions regime if they gain the required permissions to market as a third country fund under the UK domestic framework.

Money market funds that are UCITS will be required to gain authorisation under section 272 of FSMA, while the managers of money market funds that are alternative investment funds will need to notify under the national private placements regime. The UK currently has a very small domestic market that relies heavily on EEA money market funds, so these provisions address the cliff-edge risks that could arise as a consequence of defaulting to a UK-only market. That will ensure that local government, businesses and other UK investors can continue to access their investments and have a choice of money market funds to use for cash management.

As with the previous statutory instrument, the Treasury has been working very closely with the FCA in the drafting of this statutory instrument and engaging with the financial services industry. I would like to put on record my gratitude to TheCityUK for convening appropriate representative bodies throughout the process. In November the Treasury published the statutory instrument in draft, along with an explanatory policy note, to maximise transparency to Parliament and industry.

In summary, the Government believe that the proposed legislation is necessary to ensure that the framework for money market funds continues effectively, and that the legislation continues to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the regulations.

I would like to respond to the point raised by the hon. Member for Aberdeen North (Kirsty Blackman). Parliament will amend the regulations as necessary for a deal scenario. If we have a deal, an amendment process would apply to all the regulations that we have taken through. Most of them would need to be repealed, but we would do so according to the terms of the deal. I have nothing more to say at this point, and I commend these regulations to the House.

--- Later in debate ---

[Kirsty Blackman (Aberdeen North) (SNP)]

I am impressed by the hon. Member for Thirsk and Malton (Kevin Hollinrake) making a valiant attempt clearly not to stretch the time out, but to make an excellent speech. It was unfortunate that he did not listen a little more carefully to the speech by the Labour spokesperson, who raised the issue of powers that were being changed beyond the scope of simply rewriting the EU law into UK law. Powers are being changed in that regard.

In relation to the disclosure of information SI and to be fair to the people who wrote the explanatory memorandum, there are two whole pages on the deep and special partnerships that the UK desires to have with the EU, although not on the substance of the information in the SI. I commend them for including all that information, although it could have been written in any SI, to be honest.

The instrument redesigns the requirements on EU member states in various pieces of EU legislation that are to be read as applying to the UK after exit, according to a line in the explanatory memorandum, which did not make a huge amount of sense to me. The explanatory memorandum seems to suggest that this UK SI is amending EU legislation that applies to EU countries, which it clearly cannot do, because the UK Parliament does not have the power to amend EU legislation as it applies to other EU countries.

The SI contains some interesting stuff about the requirement to seek the consent of EU organisations and countries before disclosing information. There is currently a requirement for the UK to seek the consent of EU countries before passing on the financial data that it may need to pass on. The SI would remove that requirement. How does that accord with the UK being keen to have a deep and special partnership if it is removing the requirement to seek consent? Removing a requirement to seek consent seems like a bit of an odd thing to do, given that the requirement to seek consent presumably ensures that there are more safeguards in place. We seem to be reducing the number of safeguards in relation to EU countries but not in relation to third countries, because currently we do not need to seek that consent. It is a bizarre thing to do.

My other question is whether the EU has announced plans to change its legislation so that it does not need to seek consent from the UK to pass on financial information. I have raised this issue before and the Minister will know what I am about to say. In some cases, the UK seems to be agreeing on reciprocity—my understanding is that it is on a case-by-case basis by whoever happens to be heading the Department’s SIs and there is no overall policy from the Government on whether they will agree EU reciprocity on such matters, but will the EU change its law? Has it signalled its intention to change its law and is that why we are seeking to change our law?

The explanatory memorandum states:

“The UK and the EU have agreed the terms of an implementation period”.

I am little confused about the definition of “UK” in this regard. The House certainly has not agreed to the terms of an implementation period. The Prime Minister’s deal lost by 230 votes, so we cannot say that it has been agreed. It may have been negotiated, but I would not go so far as to say that it has been agreed. The Prime Minister certainly seems keen to reopen negotiations on the withdrawal agreement, so surely it cannot possibly have been agreed at this point.

The explanatory memorandum states:

“The powers in the EUWA”—

the European Union (Withdrawal) Act 2018—

“are not intended to be used to make policy changes”,

yet the powers in both SIs are being used to do just that, by changing how the law operates, and not just replacing EU regulators with UK regulators. They contain more wide-ranging changes.

The explanatory memorandum states that it would be “inappropriate” to continue sharing information. I am not sure how that would be inappropriate. If we are switching from “shall share information” to “may share information”, surely there will be cases in which it would be appropriate to continue sharing information.

I have a question about the co-operation agreements that will potentially be signed for the disclosure of financial information. I am interested to know how much work will be involved in negotiating those co-operation agreements. Clearly we do not have to do any such negotiating with the EU currently because we are part of the single market and of that framework. Brexit will be overwhelmingly bad, whatever happens. Even if we have a deal, we will end up at a huge disadvantage, compared with our current position. On this specific point, how much additional work will be generated as a result of having to negotiate and sign those co-operation agreements, and at how much of a disadvantage will we be put as a result?

I am still dealing with the first SI, on the disclosure of information. The regulations were published in draft on 9 January this year, but the corrections were made less than a week ago, on 12 February. The copy that I got from the Vote Office did not include the corrections, so I had to find them online. I am interested to know why corrections were needed.

[John Glen]

There were typos.

[Kirsty Blackman]

If they simply correct typos, that is absolutely fine. I was worried that they might have been the result of concerns raised about the legislation. I welcome that clarification.

The explanatory memorandum states that no consultation was undertaken. Once again, I think that consultation should have been undertaken on the SIs, and particularly the one that makes changes to the legislation. The explanatory memorandum states that no impact assessment was done, but it does say that

“a de minimis impact assessment has been carried out.”

This is the first time that I have seen that phrase used in an explanatory memorandum on a financial SI, and I do seem to be spending quite a lot of my life dealing with them—I am sure that the Minister is spending even longer. I do not know what a de minimis impact assessment is, and I do not know where I could find it, because it is certainly not provided on the website. I can find no further information on this thing that has apparently been done to assess the impact.

We have criticised the Government before for not carrying out impact assessments. I think that it would have been useful to have an impact assessment on this. In fact, I fully intend to challenge the Government on this. They carry out an impact assessment only when there is likely to be an impact of £5 million or more on businesses. They do not carry out impact assessments when there is likely to be an impact of millions, or indeed hundreds of millions, on consumers or individuals living anywhere in these islands. It strikes me that, according to the Government’s own better regulation guidance, this process is entirely unfit for purpose, given that it involves literally hundreds of SIs coming through, many of which could do with an impact assessment.

I will move on to the Money Market Funds (Amendment) (EU Exit) Regulations 2019, which is a no-deal SI. The Labour spokesperson made a comment about taking no deal off the table. [Interruption.] Mr Deputy Speaker, it would be easier to speak if it was a little quieter in the Chamber. We are not asking the Government to take no deal off the table now—the hon. Member for Thirsk and Malton said that we were doing so at a critical point in the negotiations; we have been asking them to take no deal off the table pretty much since the Brexit process started, because it should never have been an option in the first place. We are not asking for it to be done now; we were asking for it to be done almost three years ago.

The regulations also change the powers of the Financial Conduct Authority. I have raised concerns before about the powers of the FCA, and the fact that the Government are making piecemeal changes without any kind of overall strategy on what they expect it to look like at the end of the process. I know that the FCA can request more money from Parliament, and I assume that it will have to do so in order to carry out the additional functions that are being delegated to it as a result of all the SIs coming through.

The explanatory memorandum for the money market funds regulations states that HM Treasury will have

“the power to make delegated acts specifying quantitative and qualitative liquidity requirements on MMFs.”

I would appreciate it if the Minister could seek some divine intervention on this and let us know how those delegated acts will be introduced. Will SIs be introduced under the affirmative or negative resolution procedure, or will the Treasury simply be allowed to make its own regulations without any recourse to Parliament? It would be useful if Parliament were across this, given that it is an area that Parliament is not in the habit of dealing with, because it has been an EU area. I think that, in the event of no deal, Parliament would benefit from having some input into those requirements on MMFs.

The commencement provisions for both SIs state that they will take effect on “exit day.” Now, I understand that exit day is defined in the European Union (Withdrawal) Act, which sets out a definite date and time. I am told that the SIs that refer to “exit day” mean that date and time. However, the withdrawal Act also gives the Government the power to vary exit day. If the Government vary exit day, presumably the SIs would come into effect only on the day that they have decided is to be exit day.

I want to know what will happen if we approve these SIs. The process is as follows. If an SI is approved, it does not get Royal Assent—that is not something that happens to SIs. Instead, it basically sits in a pile of SIs that are waiting to be “made”, and they are “made” at a date and time of the Government’s choosing. I was unable to get any further information on that, other than that it is the Government who decide—is it the Cabinet Office or the Prime Minister?

When we were asked to approve these SIs, I genuinely thought that the first one was not to do with a no-deal Brexit, because nowhere in the explanatory memorandum could I find the words “no deal”. The second SI, however, is very clearly to do with no deal. We are being asked to approve the money market funds regulations, which the explanatory notes state will come into effect only if there is no deal, but there is nothing to stop the Government from making this SI, or indeed any other, at a time of their own choosing; it would then apply after exit day. The House of Commons is basically being asked to agree to all these SIs coming into force on exit day, and then the Government have carte blanche to make any of them whenever they desire.

The Minister and I were both a little confused about the provisions of the disclosure of information regulations, given that I thought they applied in any circumstance. I am not sure what will happen if there is a deal now, because I do not know how the disclosure of financial information will work, because we have not been provided with an SI that works in the event of a deal scenario—surely we should have been, because there would be deficiencies in EU law.

What happens in that event? How do the Government decide when to make these SIs? If there is a deal, will they suddenly rush through provisions? The House of Commons has so many SIs in front of it, and we are now only dealing with no-deal SIs. In the event of a deal, will we have a mad situation where the Government have to make edits to each of these SIs and bring them through the House again so that we can approve them, followed by some sort of procedure to put them in place?

There have been screw-ups of monumental proportions in relation to everything to do with Brexit. Specifically in terms of the SI process, we have not seen all the SIs for a no-deal scenario. Apparently we will not even see some of the SIs for a deal scenario until the Prime Minister manages to get something through the House, and who knows when that may be? Are we going to continue with this shambles? For people who are interested in House of Commons procedure, it is wonderful to see it not working. It is great to see the millions of places where House of Commons procedure is completely deficient, and it is particularly great to be able to discuss these SIs and raise those issues on the Floor of the House.

I understood that the disclosure regulations were for the event of any deal or no deal. If they are only for the event of no deal, what information will the Minister provide about that? What information will he provide about the powers of the FCA and what it will look like in future? How will he ensure that the FCA is adequately funded to fulfil its obligations? Lastly, these two SIs and all the other financial services SIs we have seen have not been adequately consulted on, and I would appreciate it if the Minister commented on the consultation process.