Equivalence Determinations for Financial Services (Amendment etc.) (EU Exit) Regulations 2020

Lord Agnew of Oulton Excerpts

Wednesday 2nd September 2020 Grand Committee

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[Lord Agnew of Oulton]

That the Grand Committee do consider the Equivalence Determinations for Financial Services (Amendment etc.) (EU Exit) Regulations 2020

Relevant document: 21st Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Treasury has been undertaking a programme of legislation to ensure that after the end of the transition period there continues to be a functioning legal and regulatory regime for financial services in the UK. The Treasury is laying SIs under the European Union (Withdrawal) Act 2018 to deliver this legislative programme and the majority of these SIs have already been approved in this place and in the House of Commons.

As part of this financial services legislative programme before exit day the Treasury laid the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, commonly known as the Equivalence Regulations 2019. Those regulations were designed to ensure that if the UK left the EU without a transition period, the UK would have a fully functioning equivalence framework from exit day. The additional time afforded by the transition period has provided us with the opportunity to put in place supplementary measures in the Equivalence Regulations 2019 to ensure that the UK continues to have a robust and functioning equivalence framework for financial services, both during and after the end of the transition period.

The measures in the instrument being debated today complement the Equivalence Regulations 2019 by creating additional stand-alone powers in this instrument for the UK-relevant financial services regulators—the Bank of England and the Financial Conduct Authority in this case—which are appropriate for those regulators in the transition period. They also make minor amendments to the earlier 2019 regulations, again as appropriate for the transition period. This SI will, finally, make minor amendments to add to the powers available to the regulators after the end of the transition period and to correct errors in earlier financial services EU exit legislation.

I am grateful that this SI was raised as an instrument of interest by the Lords Secondary Legislation Scrutiny Committee in its July report and for the question that the committee raised. I intend to address the question now and in the course of the debate.

The instrument being debated concerns the UK’s future regime for equivalence, a process to determine that another country’s regulatory and supervisory regime is equivalent to the UK’s corresponding regulatory framework. Recognising the regulatory equivalence of third countries is a key component of financial services regulation. Equivalence of determinations can help to reduce regulatory burdens on firms and can facilitate cross-border market access. This may lead to increased competition that can benefit both UK firms and consumers by engendering healthy market incentives to lower prices and offer innovative products.

At present, equivalence functions are performed by the European Commission and the European supervisory authorities. At the end of the transition period, these functions will be transferred to HM Treasury and the UK regulators as provisions in retained EU law. During the transition period, equivalence determinations can be made for EEA states via powers within the 2019 equivalence regulations. This instrument provides a UK equivalence framework that is appropriate for use during the transition period in relation to the EU’s existing framework. It allows the UK financial services regulators to complete the associated actions that mean that HM Treasury equivalence determinations taken during the transition period can take full effect at the end of that period.

This is a technical SI that provides for the UK’s transition to its new position outside the EU. I will turn now to the main categories of fixes that are being introduced here. The first three changes provide UK regulators with the appropriate powers to complete the associated actions to ensure that HM Treasury equivalence determinations can take effect fully at the end of the transition period. Currently, the 2019 equivalence regulations allow HM Treasury to make equivalence determinations by direction during the transition period for EEA states where these directions would not enter into force until the end of the transition period. As part of the equivalence process, almost all equivalence provisions in retained EU law will require UK financial services regulators to conclude co-operation agreements with the relevant regulatory authority or authorities for that EEA state before the determination can take effect.

There is currently no mechanism to allow regulators to undertake this during the transition period. Where the Treasury has made an equivalence determination by direction, this SI will make transitional provision for UK financial services regulators to have the power to enter into relevant co-operation agreements with the appropriate EEA regulatory authorities before the end of the transition period. These co-operation agreements would come into effect at the end of the transition period for the necessary provisions in retained EU law.

In addition, as part of the direction-making process, almost all equivalence provisions require regulators to issue recognition or registration decisions for non-UK firms. Where the Treasury has made an equivalence determination by direction during the transition period, this instrument puts in place a regime for firms to make an application to the appropriate regulator, and for that application to be processed. It will therefore ensure that regulators have the power to process applications and issue recognition and registration decisions during the transition period to come into effect at the end of that period for the necessary provisions in retained EU law.

This SI will also give regulators the power to request fees from applicants for such regulatory decisions. I appreciate that the House of Lords Secondary Legislation Scrutiny Committee questioned whether there is enough time for UK regulators to establish co-operation agreements with EEA regulators once an equivalence determination is made and then process applications made by EEA firms. I am pleased to say that regulators have a period of one year to process applications from EEA firms once the required co-operation agreements have been established. Both the Treasury and the regulators consider this to be ample time for the regulators to decide any applications.

Secondly, this SI will amend the Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, which in turn make provision for the onshoring of the EU credit rating agencies regulation. The amendments will onshore powers to enter into co-operation arrangements currently held by the European Securities and Markets Authority, such that in the future they will be held by the FCA. The amendments also make provision for existing EU equivalence determinations that will form part of retained EU law by operation of Section 3 of the European Union (Withdrawal) Act 2018.

Finally, two minor but necessary amendments are made to the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018. The first relates to a provision which stipulates that equivalence may be granted only to states that have a regime for the recognition of central securities depositories authorised in other states. The amendment ensures that the UK is one of these states. The second amendment ensures that the Bank of England has the appropriate timescales to make recognition decisions for central securities depositories.

In summary, the Government believe that the proposed instrument is necessary to ensure that there is an appropriate equivalence framework for financial services during the transition period and to complement that already put in place by the 2019 equivalence regulations. I hope that colleagues will join me in supporting these regulations, and I commend them to the Committee.

[Lord Ashton of Hyde (Con)]

My Lords, we have no room for manoeuvre on time for this debate, so I would be grateful if Peers could keep to time and ideally go slightly short.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, I thank noble Lords for their questions and for the important points raised in this debate. I will try to answer as many as I can in the time available, and, where I am not able to, I will ensure that we write to noble Lords.

The noble Baroness, Lady Bowles, asked about progress on co-operation agreements. That is an ongoing process, and we will of course keep this House updated on that process of engagement over the next few months. My noble friend Lord Trenchard asked whether we should continue with a policy of holding to equivalence with the EU regime. That is certainly our policy at the moment, because that is how the City has worked over the past 40 or so years. However, by being in control of our own regulatory policy, we will have the opportunity in the coming years to keep reviewing that. The noble Baroness, Lady Kramer, made the important point that the growth is now in Asia. By having our own regulatory regime, we will have the flexibility to consider those opportunities.

My noble friend Lady Wheatcroft raised a number of questions. Possibly the most important one was whether the EU will grant equivalence. We are of course at the tail end of these negotiations, a time at which things will be most fraught. It would certainly be absolutely in the interests of the EU to grant equivalence, but I cannot prejudge the outcome of the discussions over the next few weeks.

On the capacity of our regulators to take on these decisions, we have engaged in depth on this issue and we are assured that they have this resource. Fees will be a matter for individual regulators in order to recover their costs in processing any applications.

My noble friend Lady Altmann asked what provision should be made beyond the 12-month period to process these applications. Certainly, that was the period of time that was considered reasonable. My noble friend made a perfectly reasonable point that the transition period has seemed tight, but we have had the worst pandemic in nearly at 100 years in the middle of it, so I am confident that we can deliver on that. She raised one or two other technical questions on defined benefits, and I will write to her in an attempt to answer them.

The noble Lord, Lord Bruce, made one or two points on paragraph 7.2 which states,

“The UK has now left the EU with a deal.”


While decisions on equivalence are autonomous and unilateral in many areas of financial services, it is essential to understand the approach of the other party when deciding how to approach an area of cross-border activity. While the UK has undertaken an assessment of the EU, we will not be making equivalence decisions at this stage; we will make decisions where and when we determine that it is in the UK’s interest. Our ambition is to achieve a reciprocal equivalence, supported by the effective regulatory co-operation of an ambitious FTA, and we continue to work towards that goal. We continue to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both countries. However, as I said in relation to earlier questions, it will be a very rough few months. We must be perfectly realistic about that.

My noble friend Lady McIntosh asked about the handling of a breach. The normal rules of public law will apply, and, after the transition period, equivalence will be covered by provisions in retained EU law, as amended under the European Union (Withdrawal) Act 2018.

The noble Baroness, Lady Kramer, asked about the status of the negotiations. We have completed round 7. We have been clear in discussions throughout that this intensified process continues to be constructive, but there are still significant differences. Our preference is to leave with an FTA as long as it guarantees our political and economic independence, and these are tricky issues.

On plans for divergence, as I mentioned on an earlier question, we are committed to regulatory autonomy but at this stage to providing as much equivalence as we can. We are committed to the highest standards of regulation and the appropriate levels of supervisory oversight. In many areas we already go beyond what the EU rules require. Where we make changes, they will be for good reasons, but our starting point will be what is right for the UK, our economy and to ensure financial stability.

The noble Lord, Lord Tunnicliffe, raised a number of questions. He was worried about the quality of the guidance documents and felt that they were not in a spirit of providing clarity. That is a fair criticism, and I will certainly encourage officials to try to provide a more accessible guidance for future SIs, which I expect we will have over the next few weeks and months.

The noble Lord asked whether the instrument, which provides for subsequent co-operation agreements and regulatory decisions, introduces any significant new policy. I can confirm that that is correct; the provisions in this SI complement existing provisions and make minor amendments to earlier EU exit instruments and retained EU law but do not alter the policy of the earlier instruments or introduce any new policy.

The noble Lords, Lord Tunnicliffe and Lord Bruce, asked about the progress on the questionnaires, which have a deadline of the end of June of this year, and about the implications of not having met that deadline. We returned all 17 questionnaires received from the EU as part of its assessment process. The returns totalled some 2,500 pages. We received the first questionnaire only in late March, and the last 250 pages of questions reached us only at the end of May. The equivalence assessments are a technical process which each side is carrying out separately and are not linked to the UK-EU trade negotiations. Many, if not most, of the questions relate to explaining the details of the rules and regulations in the UK and the rules and regulations that we share with the EU. We have made sure that the EU has the information it requires to make a positive decision for the UK for all regimes, and we have always been clear that as the UK and EU start from a position of having very similar financial services regulations, that should be a straightforward process. We continue firmly to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both parties.

The noble Lord, Lord Tunnicliffe, asked about statements from my colleague the Economic Secretary, which he believes are optimistic. Equivalence is a unilateral autonomous process that is distinct from the FTA negotiations, and the politicisation of the financial services sector is not in anyone’s interest. The financial stability that underpins our economy and the EU’s economy depends on trust and predictability in relation to regulatory matters. A thriving financial services sector is clearly important to our economy but also to the EU’s economy. The UK is a global financial hub. Among other things, it channels investment into Europe cost effectively and manages the assets of millions of EU firms and consumers. Fragmentation of that market would be costly and disruptive and, given the shock of the pandemic over the past few months, it would be an odd decision for the EU to make that more difficult for its member states.

The noble Lord asked what is my assessment of the impact on cross-border financial services trade between the EU and the UK if the equivalent ruling is not given, or at least not in a timely manner. We continue firmly to believe that comprehensive mutual filings of equivalence between the UK and the EU are in the interests of both parties. We remain open and committed to continuing the dialogue with the EU about its intentions on this. The financial stability that underpins our economy and that of the EU depends on trust and predictability in relation to regulatory matters.

This SI is needed to ensure that the UK continues to have a robust and functioning equivalence framework for financial services in the UK during and after the end of the transition period. The SI will also make minor amendments to modify the errors in onshore legislation. I hope that the Committee has found this afternoon’s sitting informative. I will write on technical questions that I have not been able to answer. I hope that noble Lords will join me in supporting these regulations.

Motion agreed.