Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019
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Lord Bates
That the draft Regulations laid before the House on 21 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, 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. As noble Lords will know, an important function performed by financial services regulators is the gathering of supervisory information from firms. Regulators use this information so they can ensure that regulated firms are operating in a way consistent with regulatory requirements so that they are alerted to any development that may need supervisory intervention.
The information gathered by regulators is often confidential and 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 to that, the EU has established the European supervisory authorities—ESAs—which are responsible for co-ordinating the approach of EEA national regulators. Co-operation and the 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 include restrictions and safeguards. In the UK, these rules are implemented by Part 23 of the Financial Services and Markets Act 2000—or FiSMA, as it is known—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.
Lord Tunnicliffe (Lab)
My Lords, looking through this statutory instrument to see whether there were any policy shifts, as far as I can understand it, the EEA countries have better protection for their confidential information than third countries do. This statutory instrument takes that special protection away and then requires agreements to be concluded. That would seem to be the wrong way around. I would have thought that the protection which the EEA states have—that before the information can be passed on, permission must be sought from the originating country—would be better extended to other third countries. This would be a better position for the management of confidential information than what is referred to in the Explanatory Memorandum as a series of agreements, followed by instructions to staff. It is a bit late to have a debate on such an obscure point but if the Minister were to read Hansard tomorrow and send me a letter on this point, I would value that.
Lord Bates
Again, I thank noble Lords for their scrutiny and questions. I give notice that I may need to write on one or two of them, if they would accept that, but I will say a little about how the negotiations are going. In my enthusiasm to communicate the details of this instrument to the House, I perhaps went a bit fast but I did indeed say that the negotiations were going well.
UK and EU authorities have made good progress in their discussions on a memorandum of understanding, which includes essential provisions for confidential information-sharing and co-operation. It is our hope that these will be in place by exit day. Both UK and EU regulators recognise the importance of effective co-operation and are working hard to finalise co-operation agreements. We fully expect these agreements to be in place by exit day, as part of preparations to deal with a no-deal scenario. More broadly, Members will be well aware of the top priority we have attached to putting in place a range of transitional arrangements, designed to mitigate the impact of no deal.
The noble Lord, Lord Sharkey—eagle-eyed as ever—spotted the gap between 5 pm and 11 pm. I am guessing that it is a standard cut-off point—a sort of close-of-business setting on the day in question—but perhaps that is not the case. I am told that exit day is defined in the EU withdrawal Act as 11 pm on 29 March, specifically; yes, I am aware of that. I think the point was made that it says 5 pm but there might be something else winging its way to me.
The noble Lord, Lord Sharkey, also mentioned confidential information and made a good point on that. Under Section 348 of FiSMA, “confidential information” means information which,
“relates to the business or other affairs of any person”,
that was received by the FCA, the PRA, the Bank of England, the Secretary of State or specified people instructed or employed by them for the purpose of discharging their functions; and it is not prevented from being confidential information because, for example, it has already been made available in public.
I will take advice from my noble friend Lord Young and perhaps just pause there with the assurance that I will write and follow up on this, and thank noble Lords for their contributions.
Lord Adonis
At this late and extreme hour, the noble Lord, Lord Sharkey, seems to have discovered a missing six hours in the regulatory regime that is going to govern the financial services industries of the United Kingdom and Europe, and what might happen for the exchange and disclosure of confidential information. Assuming that those six hours can be repaired overnight, I beg leave to withdraw.
Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019
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The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, the Treasury has been undertaking a programme of legislation 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 UK. The Treasury is laying SIs under the EU withdrawal Act to deliver this. A number of debates on these SIs have already taken place both in this House and in the House of Commons. This SI is part of that programme. It will fix deficiencies in retained EU legislation relating to packaged retail and insurance-based investment products, or PRIIPs, to ensure that it continues to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal 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.
I turn to the substance of the SI, which amends the PRIIPs regulation. PRIIPs are investment products offered to retail investors and considered as an alternative to, for example, depositing cash in a savings account. They include financial products such as investment funds, life insurance policies that have an investment element, derivatives and structured investment products. As such, PRIIPs are primarily sold by asset managers, insurers and banks.
The EU PRIIPs regulation introduced a standardised disclosure document called a key information document, or KID, to be provided when a PRIIP is advised on or sold to retail investors. It came into application on 1 January 2018. The PRIIPs regulation aims to make it easier for retail investors to compare similar financial products by requiring certain information about the product, such as the risks, performance scenarios and costs, to be disclosed in a standardised way on the KID. In a no-deal scenario, the UK would be outside the EU and outside the EU’s legal, supervisory and financial regulatory framework. The retained PRIIPs regulation therefore needs to be updated to reflect this and to ensure that the provisions work properly in a no-deal scenario.
First, the SI amends the territorial scope of the retained PRIIPs regulation to reflect the UK’s withdrawal from the EU. Currently, the EU regulation applies to any firms that manufacture, advise on or sell PRIIPs to investors in the EU. This SI ensures that, after exit day, the retained PRIIPs regulation will apply only to those firms that manufacture, advise on or sell PRIIPs to retail investors in the UK.
Secondly, the PRIIPs regulation contains an exemption from its requirements for certain securities issued or guaranteed by EEA public sector bodies. This SI expands the exemption, so that such securities issued by public sector bodies in the UK or any other third country are covered within the exemption. This is to ensure that no new securities are captured in the scope of the PRIIPs regulation in the UK on exit day, and that the UK treats EEA member states and third countries equally.
Moreover, the current regulation contains an exemption from its requirements for all Undertakings for Collective Investment in Transferable Securities funds until 31 December 2019. UCITS funds are a common type of retail investor fund and must be domiciled in an EEA state. Both UK and EEA-domiciled UCITS are sold widely in the UK and are subject to a specific disclosure framework set out in the UCITS directive, separate to the PRIIPs disclosure framework.
The instrument maintains this exemption for both UK and EEA UCITS until 31 December 2019. This is to ensure that both UK and EEA funds are able to continue to adhere to the existing disclosure framework for UCITS until the exemption ends. Furthermore, the SI transfers the functions carried out by EU bodies under this regulation to the relevant UK authorities. Following exit, EU bodies will have no mandate to carry out such functions in the UK. The instrument corrects this deficiency by transferring the functions of the European Commission to the Treasury, and the functions of the European supervisory authorities to the FCA. Powers to make and correct deficiencies in binding technical standards are also transferred from the ESAs to the FCA. This is in line with the approach taken across financial services legislation.
Finally, this SI deletes provisions in the retained PRIIPs regulation that will become redundant once the UK leaves the EU. It deletes certain powers for and references to EU regulators and EU member states, as well as administrative sanctions powers for national regulators which have already been brought into UK law and granted to the FCA through UK implementing legislation: the Packaged Retail and Insurance-based Investment Products Regulations 2017. The instrument also removes obligations in the PRIIPs regulation for the FCA to co-operate and share information with EU counterparts, as this obligation would not be appropriate after exit day. The FCA will instead be able to use existing domestic provisions for co-operation and information-sharing under the Financial Services and Markets Act 2000, to share information with EU authorities.
The Treasury has been working very closely with the FCA, and has engaged with industry bodies in the drafting of this instrument. On 22 November 2018, the Treasury published the instrument in draft, along with an explanatory policy note to maximise transparency to Parliament, industry and the public ahead of laying. The Government recognise the issues raised by industry regarding problems with the underlying PRIIPs regulation and KIDs. I fully recognise the significance of these issues. However, the EU withdrawal Act does not give the Government the power to make general policy changes to retained EU legislation. We can use the powers only to fix deficiencies arising from the UK’s exit from the EU.
However, the FCA has taken action in relation to issues with the PRIIPs regulation to date. The FCA launched a call for input in July 2018, to seek input from firms and consumers on their initial experiences of the requirements introduced by the PRIIPs regulation. This call for input closed for responses on 28 September 2018 and the FCA is in the process of reviewing all responses. It expects to publish its feedback statement in quarter 1 this year.
In summary, the Government believe that the proposed legislation is necessary to ensure that the disclosure framework for PRIIPS continues to function appropriately if the UK leaves the EU without a deal or an implementation. I hope noble Lords will join me in supporting these regulations, which I commend to the House.
Amendment to the Motion
Lord Tunnicliffe (Lab)
When I read the SI with care, it seemed straightforward and to do its work. I was seeking to see if there was any new policy, and the new policy that I discovered was the Venezuela point. I hope the Minister will be kind enough to write to me explaining whether “all countries” has that worldwide application and why the Treasury does not perceive that there is any danger in such an extension. Other than that, I am entirely content for this SI to go through.
Lord Bates
I am happy to give the noble Lord that assurance; I will write and be clear on that question. I thank the noble Lord, Lord Adonis, for not pressing his amendment.
Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019
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Lord Bates
That the draft Regulations laid before the House on 24 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, this instrument, laid under the EU withdrawal Act, will fix deficiencies in UK law relating to the regulation of financial benchmarks to ensure that it continues to operate effectively post exit if the UK leaves the EU with neither a deal nor an implementation period. This legislation is important for the regulation and integrity of financial markets in the UK.
The SI makes amendments to retained EU law on financial benchmarks, known as the EU Benchmarks Regulation—BMR—to ensure that the UK continues to have an effective framework to regulate financial benchmarks. Benchmarks are publicly available indices used in a wide range of markets to help set prices, measure the performance of investment funds or work out amounts payable under financial contracts. They play a key role in the financial system’s core functions of allocating capital and risk, and impact on huge volumes of credit products and derivatives. The EU BMR sets requirements on benchmark methodology, transparency and governance.
Benchmarks must be approved to be used in the EU after the conclusion of the EU BMR’s transitional period at the end of 2019. To provide benchmarks for use in the EU after this, benchmark administrators located in the EU may apply for authorisation or registration. Third-country administrators or benchmarks may be approved through equivalence, recognition or endorsement. Approved administrators and benchmarks are placed on to the public register maintained by the European Securities and Markets Authority.
In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The UK legislation implementing the BMR and related legislation therefore needs to be updated to reflect this and to ensure that the UK’s benchmarks regulation operates properly in a no-deal scenario. These draft regulations therefore make the necessary amendments to the retained EU legislation to ensure that these regimes are operable in a wholly domestic context.
First, this instrument amends the scope of the BMR to apply in the UK only. From exit day, benchmarks and administrators outside the UK will be subject to the onshored third-country regime and must be approved via recognition, endorsement or equivalence for use in the UK. Secondly, this instrument establishes a requirement for the Financial Conduct Authority to create a UK benchmarks register, which it will maintain from exit day. Following the transitional window in the BMR, supervised entities may use benchmarks in the UK only if either the relevant administrator or benchmark is on the FCA register. This instrument ensures that benchmark administrators that the FCA has already authorised or registered ahead of exit day are automatically migrated from the ESMA register to the FCA register on exit day. It does the same for third-country benchmarks or administrators that the FCA has already recognised or which UK firms have endorsed.
Thirdly, this instrument includes a new transitional provision to take EU and third-country administrators and benchmarks that appear on the ESMA register at exit day—as the result of an approval under the BMR outside of the UK—and temporarily migrate them on to the FCA register for 24 months, beginning with exit day. This will enable continued use of these benchmarks in the UK for a 24-month period, unless and until an application for approval in the UK is refused or unless they are removed from the ESMA register during this time. This will provide continuity for administrators and users, and minimise market disruption. Administrators or benchmarks subject to the transitional provision must be approved by the FCA under the third-country regime to enable their continued use in new contracts in the UK after this period.
Fourthly, under the BMR certain regulatory functions are carried out by EU authorities, primarily the European Commission and the European supervisory authorities, including ESMA. Once the UK leaves the EU, EU bodies will no longer have a mandate to carry out these functions, and therefore this SI transfers the functions of the Commission to the Treasury, including the power to adopt delegated Acts based on the underlying legislation. The SI also transfers the functions of ESMA to the FCA. This includes the power to make binding technical standards. This SI also removes obligations within retained EU law for the FCA to co-operate and share information with EU regulators as this obligation, with no guarantee of reciprocity, would not be appropriate as of exit day. However, the FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act as they are currently able to do with other third countries. The SI makes further minor amendments to retained EU legislation to ensure that the UK’s benchmark regimes operate effectively once we leave the EU.
These measures, when taken together, will ensure that the UK retains an effective framework to regulate financial benchmarks. The Treasury has been working closely with the Financial Conduct Authority in the drafting of this instrument. It has also engaged with the financial services industry on this SI and will continue to do so. The Treasury published the instrument in draft form on 8 January to enhance transparency to Parliament, industry and the public ahead of laying. In summary, this SI is needed to ensure that UK benchmarks regulation can continue to operate effectively post exit and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting these regulations and I commend them to the House. I beg to move.
Amendment to the Motion
Lord Tunnicliffe (Lab)
My Lords, I am afraid that despite my efforts I can find nothing wrong with this statutory instrument. It seems to be perfectly straightforward and necessary to manage the situation. I thank the noble Baroness, Lady Kramer, for reminding us of the Libor scandal. It was a dreadful period in British financial services history, and we forget it too easily, I fear.
If my noble friend intends to divide the House on his amendment I make it absolutely clear that he will not be supported by the Opposition Front Bench. We would support a fatal amendment on a statutory instrument only in exceptional circumstances and only after very careful consideration of the reasons and widespread consultation. We will therefore be sitting on our hands if my noble friend divides the House.
Lord Bates
I again thank the noble Lord, Lord Tunnicliffe, for his responsible approach to these regulations. It is quite right that there should be scrutiny, but the amendment which we are now debating would effectively be fatal. It would prevent these regulations appearing on the statute book when their purpose is, as the noble Earl, Lord Kinnoull, and my noble and learned friend said, to avoid the type of abuse of market power and benchmarks that was sadly the case in the past. To avoid all the progress we have made in that in the event of no deal would be regretted.
However a number of points were made, including by the noble Lord, which should be responded to as part of the scrutiny, so I shall launch into them, if I may. The noble Earl, Lord Kinnoull, asked why it is important to have this SI in place. If it were not it would cause significant legal uncertainty and disruption for firms about how they were able to provide benchmarks for use in the UK and for other users about which benchmarks they could legally use. Many of them have already submitted applications or created business models on the basis of market compliance with the regime. That is why the noble Earl was right to cite paragraph 2.6 of the Explanatory Memorandum and my noble and learned friend was right to raise the importance of these regulations.
The noble Baroness, Lady Kramer, questioned the ability of the FCA to enforce these regulations given the previous situation with the Libor scandal. We do not accept that EU regulators are better regulators than ESMA. The EU regulation was created after the Libor scandal and introduced a comprehensive framework to ensure that the business integrity of benchmarks is maintained. We are confident that the FCA will enforce these regulations. She also asked about how EU and UK regulators will co-operate going forward. The FCA will use the information to ensure that on exit day any administrators or benchmarks which are on the ESMA register at 5 pm on the day exit occurs are copied over to the FCA register. FCA-approved benchmarks or administrators will be copied over permanently and those approved by other EU national competent authorities will be copied over for a temporary period of 24 months. This SI removes obligations in retained EU law for the FCA to co-operate and share information with regulators. The FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act.
The noble Lord, Lord Adonis, asked how we arrived at the number of firms affected by this SI. The number is the current number of approved benchmark administrators. The regulators that we are working with are seeking to understand the full range of administrators that will seek approval, but it is difficult to provide a final figure for the number located in the UK and the EU.
I think that that covers most of the points raised. Again, I thank noble Lords for their contributions on this SI. On behalf of the Government and the Opposition—and I am sure that on this occasion I speak for the Liberal Democrat Benches and perhaps the Cross Benches too—I express the hope that, despite the scrutiny that, rightly, is called for in the amendment, the noble Lord will not press it and will accept the regulations. It is necessary to put them in place in order to protect investors in this country.
Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019
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Lord Bates
That the draft Regulations laid before the House on 21 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I beg to move that the House considers the draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019—
Lord Tunnicliffe (Lab)
For once, it would be nice to get it right. The Minister is moving that they be approved.
Lord Bates
I am always very happy to take correction from the noble Lord. If he would like, I am happy to ask that the House approve these regulations.
Let me try again. The Treasury has been undertaking a programme of legislation 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 UK. The Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already taken place here and in the House of Commons. The SI being debated today is part of this programme.
The SI will fix deficiencies in UK law relating to the UK’s listing regime, prospectus regime and transparency framework to ensure they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
Turning to the substance of the SI, many noble Lords will be familiar with the prospectus directive, the transparency directive and the consolidated admissions and reporting directive, or CARD, and with related legislation that is implemented into UK law to set the listing regime, prospectus regime and transparency framework that regulate capital markets activity in the UK.
The transparency directive harmonises transparency requirements across the EU by requiring issuers with securities, such as shares and bonds, admitted to trading on a regulated market to disclose a minimum level of ongoing information to the public. It built on and amended CARD, which co-ordinates the conditions for the admission of securities to official Stock Exchange listing.
A prospectus contains information on an issuer that is seeking to offer securities to the public or is seeking admission to trading on a regulated market. The information they provide is used by investors to make investment decisions. The prospectus directive contains the harmonised rules governing the content, approval, format and distribution of the prospectuses that issuers must produce when securities are offered to the public or admitted to trading on a regulated market in a member state of the European Economic Area.
In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The UK legislation implementing the prospectus directive, the transparency directive, the CARD and related legislation therefore needs to be updated to reflect this to ensure that the UK’s listing regime, prospectus regime and transparency framework operate properly in a no-deal scenario. These draft regulations therefore make the necessary amendments to the retained EU legislation to ensure these regimes are operable in a wholly domestic context.
First, this SI will transfer responsibility for powers and functions currently within the remit of EU authorities to the appropriate UK institutions. Specifically, it will transfer powers from the European Commission to HM Treasury, such as the ability to make delegated acts pursuant to the relevant legislation. It also transfers powers to the Financial Conduct Authority from the European Securities and Markets Authority to create and amend certain binding technical standards. This transfer of functions mirrors the current split between the legislative power of the Commission and the regulatory role of ESMA.
Secondly, it alters the scope of the legislation by ensuring that, post exit, EEA issuers wishing to access the UK’s capital markets will be required to have their prospectuses approved directly by the FCA, as any other third country would have to do. Currently, EEA issuers can passport prospectuses approved by other EEA regulators for use in the UK. This aligns with the approach taken across other financial services SIs laid under the EU withdrawal Act.
The SI also introduces grandfathering arrangements that will allow any prospectus approved by an EEA regulator and passported into the UK before exit day to continue to be used up to the end of their normal validity, as well as supplemented with additional information. The end of validity is usually up to 12 months after the prospectus is approved.
Thirdly, this SI extends the exemption under the prospectus directive for certain public bodies from the obligation to produce prospectuses to the same set of public bodies of all third countries post exit. If a UK-only approach were taken, EEA state public bodies that are currently accessing the UK market would be obliged to produce a prospectus to issue securities in the UK that they would not be required to do to issue securities in EEA states. Additionally, extending the exemption to public sector bodies of third countries is consistent with the UK treating EEA member states and third countries equally.
Fourthly, as the explanatory information for this SI states, in a no-deal scenario, the Treasury intends to issue an equivalence decision, in time for exit day, determining that EU-adopted international financial reporting standards can continue to be used to prepare financial statements for UK transparency and prospectus requirements. This will allow issuers registered in EEA states with securities admitted to trading on a regulated market or making an offer of securities in the UK to continue to use EU-adopted IFRS when preparing their consolidated accounts. This decision is consistent with the Government’s approach to provide continuity following the UK’s exit from the EU. This has been welcomed by the industry and is supported by the Financial Conduct Authority.
Additionally, this SI removes obligations within retained EU law for the FCA to co-operate and share information with EU regulators, as this obligation, with no guarantee of reciprocity, would not be appropriate as of exit day. However, the FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act as it is currently able to do with all other third countries.
This SI makes further amendments to retained EU and UK legislation to ensure that the UK’s listing regime, prospectus regime and transparency framework operate effectively once we leave the EU. It is important to note that, while this instrument covers the UK legislation implementing the prospectus directive, there is no power to domesticate the provisions of the prospectus regulation that apply from July 2019 in the Financial Services (Implementation of Legislation) Bill. These additional provisions make significant changes to the prospectus directive.
Certain provisions of the prospectus regulation have applied since July 2017 and July 2018, with the remainder of the legislation due to apply from July 2019, after the UK leaves the EU. It is the Government’s intention to domesticate the remaining provisions as they will constitute the prospectus regulatory regime from July 2019. However, the EU withdrawal Act will only convert EU legislation into UK law that is already in force and applies immediately before exit day. Therefore, remaining provisions of the prospectus regulation will be domesticated via a statutory instrument laid under the Financial Services (Implementation of Legislation) Bill. The Bill, as currently drafted, requires the affirmative resolution procedure for every statutory instrument made under it, providing Parliament with an opportunity to debate and discuss each file that the Government are implementing. This change, I acknowledge, was as a result of the scrutiny the legislation received in your Lordships’ House, and we are grateful for it.
The UK has played a leading role in shaping the prospectus regulation for the benefit of consumers and industry. It is welcomed by industry and acts to cut the cost to business of producing a prospectus in the UK.
The Treasury has been working closely with the Financial Conduct Authority in the drafting of this instrument. It has also engaged the financial services industry on this SI, and will continue to do so going forward. On 12 December 2018, the Treasury published an instrument in draft, alongside an explanatory policy note on 21 November 2018, to maximise transparency to Parliament and industry.
The Government believe that the proposed legislation is necessary to ensure that the UK’s listing regime, prospectus regime and transparency framework can continue to operate effectively post exit, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations, and I commend them to the House.
The Deputy Speaker (Lord Geddes) (Con)
My Lords, for the avoidance of doubt, I say that the Motion before the House is that these draft regulations, laid before the House on 21 January, be approved. The Question is that this Motion be agreed to.
Amendment to the Motion
Lord Bates
Again, I thank noble Lords for their contributions to this debate, which has been very useful and has focused on two themes, as will I. The first is about process, the second about the level of consultation or engagement. I will try to put some points on the record and address the specific technical points raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe.
What we are doing here is onshoring the regulations that already exist, which have gone through a scrutiny process involving the European Commission and regulators in the EU, the European Parliament and our own House. We are onshoring those to the UK. These are exceptional circumstances; they are not normal circumstances in which we are doing it.
The criticism seems to be: why have we waited so long? It is worth putting on the record here that the powers by which we are undertaking this process were set out in some detail by the EU withdrawal Act. I think I said, wrongly, that there were only 10 hours of consideration about the Section 8 process. In fact there were 12 hours of consideration of this process, which was then adopted by both Houses of Parliament.
However, the EU withdrawal Act did not get its Royal Assent until 26 June. I tried to find out—given that the enabling power we had was available on 26 June last year—when the first of our SIs was laid under this process, given that the charge that has been made is that the Treasury has been somewhat dilatory in its approach. The first SI was laid on 16 July. That is not exactly a long gap between Royal Assent, having the power and actually beginning the process. We started debating these for the first time—the noble Lord, Lord Tunnicliffe, the noble Baroness, Lady Kramer, and many familiar faces will remember our first hour in the Moses Room talking about the broad principles—on 17 October, and we have been going more or less every week since then with new SIs coming through.
I want noble Lords, particularly my noble friend Lady Altmann, who I know has a great deal of expertise in this area, to feel reassured that what we are dealing with here are rules and regulations which the industry was already operating by, but under a different regulatory system, that we are now bringing onshore and applying fixes using powers and scrutiny that were set out by the EU withdrawal Act. In a timely process, we have brought that forward. I cannot claim that that will satisfy everybody, but it is worth putting that position on the record.
On whether it was consultation or engagement, in many ways we are discussing the words and phrases of it. What we are talking about here is not a normal consultation. I readily accept the point made by the noble Lord, Lord Adonis, that the rules on consultation are laid down by the Cabinet Office. As set out, they involve a particular process. That is why we are always very careful when we say “consultation” at the Dispatch Box; it has a particular formula attached to it. We might instead say “engagement”. We have consistently used the term “industry engagement” through this process. As came out in the contributions from the noble Earl, Lord Kinnoull, and my noble friend Lord Leigh, industry has been almost the wind in our sails, urging us to get on with this, because of the consequences of not having these safeguards in place, leading to a cliff edge. There has been a push. My noble friend Lord Bridges highlighted the report by Stephen Jones in his UK Finance newsletter. I see my noble friend Lady Wheatcroft in her place, so I hesitate to summarise it in this way, but in terms of the City there are effectively only two main bodies: there is UK Finance, which represents a substantial body of financial services, and TheCityUK. My noble friend Lord Bridges referred to UK Finance.
Lord Adonis
Everything that the Minister has said is based on the premise that we are dealing with a no-deal situation. All the bodies to which he has referred, given the choice between no deal, a deal and not having Brexit at all, would infinitely prefer having no Brexit or having a deal. The circumstances in which the Minister seeks to justify the use of what are essentially exceptional decree-making powers on the part of the Government are circumstances entirely of the Government’s own making.
Lord Bates
This is a separate debate. The noble Lord is moving his amendment, expressing regret from your Lordships’ House that there has been no consultation with industry on this measure. That is what his amendment says, as my noble friend Lord Bridges pointed out. I am not trying to raise the temperature to the same level as perhaps existed earlier in the Chamber; I am trying to maintain it at a level where we are focusing on the legitimate scrutiny which the noble Lord and the noble Lord, Lord Davies, are applying to this process. My noble friend Lord Bridges talked about UK Finance; I was about to quote TheCityUK.
Baroness Kramer
I thank the Minister but he is rapidly losing me. Had the noble Lord, Lord Tunnicliffe, not raised it just now, I would not have known that we are about to give approval for the issuance in the UK of Venezuelan sovereign bonds. That may not have been of particular interest to TheCityUK or UK Finance because of the way in which they look at the world, but I suggest that, had we had a 12-week public consultation, somebody would have come in with that information, which might have been of great interest to this House and created some pressure on government to re-examine that provision and clause. While industry bodies are crucial, there are many other stakeholders with an interest which by necessity have apparently been excluded from this process so far. Underscoring their importance is the issue in front of us today.
Lord Bates
If that is the case, it is happening under the existing rules. All we are doing is replicating those rules to avoid a cliff edge.
Lord Davies of Stamford
The Minister’s description of the position is not at all what I understood. As I understood it from my noble friend Lord Tunnicliffe—who spotted this, to his great credit—at present the prospectus directive provides that certain state bodies within the EEA do not have to produce a prospectus. So the Government of France do not have to produce a prospectus if they go to the markets and seek more money. That is a reasonable situation. Far from not changing the substance when they switch from an EU directive to an SI affecting only this country, it appears that the Government have made a significant change in the wording. It no longer says “any EEA sovereign body”—or words to that effect—but “any sovereign body anywhere in the world”. So, as the noble Baroness, Lady Kramer, pointed out, you would have a situation where the Government of Venezuela—if there is one—or of Eritrea, or wherever, could issue a prospectus in London. I cannot believe that that would really happen, but if it did it would be an invitation for the most appalling financial crisis. People would lose all faith in the whole system and the credibility of the prospectus arrangements that we have here.
Lord Bates
In those circumstances, we would be dealing with a third country. We would not be part of the EEA, so we could not give them the terms that apply within the EEA at the moment. We had quite a bit of debate on this last time. They would be a third country like any other. We want to develop a very close relationship, but that is a matter for negotiation and discussion.
Lord Tunnicliffe
The suggestion that the EEA does not exist, because we are out of the EU, is surely not valid. Many regulations specify how they apply to different countries. It would be entirely available to the Government to say that the exemption for public moneys should apply to EEA countries and not to other third countries. It is an entirely possible outcome; I am not saying whether it is good or bad. I want to know why the Government have moved from the EEA to everybody, including Venezuela.
Lord Bates
To allow the House to make progress on this, I will seek some advice on that point.
Baroness Kramer
Is there any hope that there might be some in-flight information on this? I had understood, from listening to this debate, that this is not a rollover of the current rules; it is a way to make the rules more palatable—presumably to many of the Brexit community—by saying, “We will recognise that EEA state organisations do not have to use prospectuses, but don’t worry, we’re not treating them as special, we’re now going to allow it for every other country, even if they don’t have equivalence”. That is a policy shift. All I am saying is that a consultation would surely have surfaced that issue and the Government would have dealt with it in a different way.
Lord Bates
The official position here is that, under international trade law, we cannot favour some countries’ public bodies and not others. It is all or nothing. I take it that I may have other opportunities this evening—perhaps into early morning—to put on record the words of Miles Celic, chief executive of TheCityUK, and of the Investment Association, responding to the engagement which they have had with us. A lot of the issues which have been raised will come up again and I will respond to them then.
Lord Adonis
My Lords, the longer this debate has gone on, like so many of our debates on these no-deal regulations, the clearer the case has become for having this consultation. In the last 15 minutes, prompted by my noble friend Lord Tunnicliffe, a very important issue has arisen about the distinction between EEA and non-EEA states when it comes to the new listings and publications regime. The noble Baroness, Lady Kramer, brought up the exceedingly important policy point underlying it. This is not my area—my role is simply to facilitate the proper scrutiny by Parliament of these important changes to the law—but it has become ever clearer as this debate has gone on, let alone all the others we have had, why there should have been proper consultation.
Some noble Lords have said that these are exceptional circumstances. I repeat the point that, first, these are exceptional circumstances of the Government’s own making. We are not talking about acts of God here; these are acts of the Government and the Government could correct these acts. The second point was made by the noble Baroness, Lady Altmann, and is incredibly important. The precedents we are setting in the examination of the statutory instruments and the processes we require to put in place, given that we are going to have a cascade more—particularly if we do indeed Brexit at the end of this process, because we are going to have literally hundreds of these, year by year—will all be cited.
The noble Lord, Lord Bridges, says that it is all very well, we have engagement not consultation, and the noble Earl is relieved that his industry is not actually going to be trashed by this regulation, although there are many others that will do so in due course if we Brexit. He says that we should get on with it and that the people he knows are very grateful that they have at least had the opportunity to engage. I tell the House that, once these precedents start to be cited, we can wave goodbye to the normal Cabinet Office processes and procedures for conducting consultations. That is what will happen. That is what always happens once you start sliding down this kind of slippery slope.
The Minister quoted TheCityUK in respect of this instrument. It is important to understand TheCityUK. I have been reading its representations and what it thinks about how the Government have handled the Brexit process in relation to financial services. Shortly after the Brexit referendum, in September 2016, the same guy the Minister quoted said:
“While at this stage it is too early to talk about conclusions from the Brexit negotiations, access to the single market on terms that resemble, as closely as possible, the access the UK currently enjoys is the top of our list”.
That is what this organisation said.
Then, when the Government published the political declaration with the withdrawal agreement at the end of last year, which marked a significant retreat from the objectives that were set out before in terms of mutual recognition, TheCityUK said:
“Mutual recognition would have been the best way forward. It is regrettable and frustrating that this approach has been dropped before even making it to the negotiating table”.
That is what these vital sectors of our economy think about what is happening at the moment. The fact that they are clutching at the straws of having no-deal regulations in place that prevent catastrophe if we leave in five weeks’ time with no arrangement whatever with the EU is no excuse at all for the way this whole business is being handled and for the discarding of our normal processes and procedures.
I make no excuse for detaining the House at this hour. I would be very happy to carry on these debates with the Minister into the early hours if it would bring about change in government policy. He is normally very open to these matters, so maybe it is an invitation to keep going for a long period, because we might then get proper processes of consultation and engagement in place. As a poor substitute for that, I beg leave to test the opinion of the House.
Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019
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Lord Bates
That the draft Regulations laid before the House on 17 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, this SI is an important part of the Treasury’s programme of legislation under the European Union (Withdrawal) Act 2018. It will address deficiencies related to the EU’s equivalence framework for financial services, and will make provisions for elements of the UK’s stand-alone equivalence framework for financial services, in a scenario where the UK leaves the EU without an agreement.
Many noble Lords will be familiar with the EU’s framework for equivalence. EU legislation allows the European Commission to determine that a country outside the EU—often termed a third country—has a regulatory and supervisory regime in a particular area of financial services that is equivalent to the corresponding EU regime. Granting equivalence is a key component of financial services regulation and supports cross-border activity. Equivalence decisions can reduce or eliminate overlaps in regulatory and supervisory requirements, thus decreasing regulatory burdens on firms. Some equivalence decisions provide improved prudential treatment, or facilitate the exchange of services. This can lead to increased competition, which benefits firms and consumers, while protecting financial stability.
Before making equivalence decisions, the Commission will undertake an assessment and may ask the European supervisory authorities for technical advice to support it. As an EU member state, any equivalence decisions made by the Commission currently have effect in the UK. In a no-deal scenario, the UK would be outside the EU’s equivalence framework. The Government place significant importance on having a functioning, stand-alone equivalence regime which will support our future relationship with the EU and other financial centres with which we want to build stronger partnerships.
Noble Lords will be aware that other Treasury statutory instruments which have completed their passage in Parliament have already transferred some equivalence responsibilities from the Commission to the Treasury, and functions from the ESAs to the UK financial regulators. Through these SIs, the Treasury has maintained the same substantive criteria that the EU uses to judge equivalence.
The SI does three main things to support a stand-alone UK equivalence framework in the event of a no-deal exit. First, it replaces the functions given to the ESAs with functions for the UK financial services regulators and creates an obligation for the Treasury and the UK regulators to enter into a memorandum of understanding that sets out how they will support equivalence assessments.
Secondly, the SI corrects deficiencies in existing equivalence decisions made by the Commission—for example, replacing references to the “Union” with references to the “United Kingdom”. Fixing these decisions is important to minimise disruption for some UK firms with businesses in equivalent third countries, and for some overseas firms which currently rely on these decisions.
Thirdly, the SI creates a temporary power for Ministers to make equivalence and exemption decisions for EU and EEA member states by direction for specified equivalence regimes listed in the SI. This is separate from the permanent arrangements for making equivalence decisions, which will become available only after exit and will require regulations subject to the negative resolution procedure. This temporary power is needed to prepare for the particular circumstances we would face if we left the EU without a deal.
As an EU member state, the UK has not previously needed powers to determine whether the EU is equivalent. However, in a no-deal scenario it will be important for the Treasury to have powers to make such decisions in time for exit day, to respond quickly and effectively to any risks to the financial system and to avoid disruption for firms and markets. To illustrate why these powers are required, I point the House to the European Commission, which has published several draft legal Acts granting certain technical exemptions to UK public bodies in a no-deal scenario. The Government would grant similar exemptions for relevant EU bodies in such a scenario, and this SI contains the powers to allow such exemptions to be put in place by exit day.
To ensure transparent use of the temporary power, this SI will oblige Ministers to lay directions before Parliament and to publish them. Noble Lords may have seen that the Treasury Select Committee wrote to the Economic Secretary to the Treasury on 7 February asking if 12 months was long enough for this power, given that other transitional regimes in financial services have been passed with longer periods. The Treasury’s response to the committee, published last week, emphasised that this power was needed only to mitigate the risks around exit. The Treasury expects that the permanent mechanism for taking equivalence decisions by regulations, subject to the negative resolution procedure, will be ready soon after exit day. As a result, the Treasury judges that 12 months is sufficient for this power.
The Treasury has worked closely with the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority in drafting this instrument. The Treasury and the regulators have also ensured that the resources are in place to take on these functions. The Treasury has engaged the financial services industry and will continue to do so. The regulators and key industry stakeholders have expressed support for the provisions in this SI as necessary to mitigate disruption and to provide legal certainty about the UK’s equivalence system.
This Government believe that the proposed legislation is needed to ensure that the UK has an operable equivalence framework in a no-deal scenario. The powers it contains are needed to ensure that the Treasury and UK regulators are properly equipped to respond if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations and I commend them to the House.
Lord Sharkey (LD)
My Lords, the equivalence SI shares the same consolidated impact assessment with the next three SIs. I am grateful that this was published in advance of today’s debate and was available in good time in the Printed Paper Office. That is a significant and welcome improvement on last week’s lamentable performance. I would have preferred individual impact assessments, rather than this consolidated one. However, consolidation has the merit of making absolutely clear the unsatisfactory vagueness about the costs and benefits of these SIs and that this arises chiefly from the lack of consultation.
The summary sheet in the IA for this package of SIs notes that the likely cost for all of them is “Unknown: likely significant” in all three defined categories. The benefits are also unquantified, but are said to be “significant”. This rather dramatically illustrates the point made by the noble Lord, Lord Adonis, in his later amendments. There has been no real consultation on any of these instruments. This is unsatisfactory and is entirely the Government’s fault. Had the Treasury started preparing these entirely predictable SIs earlier, consultation would have been possible. Why has the Treasury left things until the last moment? Although I sympathise strongly with the spirit of the amendments in the name of the noble Lord, Lord Adonis, I hope he will not press the fatal ones to a vote as we would not support him in a Division. It is critical to the functioning of our financial services that we make the changes—no matter how unhappily—set out in these SIs.
I turn to the detail of the consolidated impact assessment. The first 40 paragraphs are clear, but some questions arise in subsequent paragraphs and apply generally to all the SIs. Paragraph 44 explains that,
“it has not been possible to discuss the impact of the full package of changes with firms as this impact assessment was being produced, and has therefore not been possible to produce a monetised estimate of their full impact at this stage”.
This is more than a pity: it is tantamount to a dereliction of duty. It would not be the case if the Treasury had started the process earlier. It has had plenty of time to do this: the deadline can hardly have come as a surprise.
Paragraph 50 acknowledges explicitly that the impact assessment,
“is not able to fully quantify the potential impact of these SIs on industry”.
It undertakes, as a result of this self-generated inability, that if these no-deal SIs come into effect in March,
“it will at the appropriate time complete further analysis considering all of the relevant SIs as a package”.
The word “appropriate” is very vague; what does it really mean? Does it mean, for example, in less than three months after a no-deal Brexit?
I do realise that the promised analysis is shutting the stable door long after the horse has bolted, and even longer after the horse gave notice that it would bolt. Nevertheless, Parliament should still have a chance to review the real impact of these SIs on industry. Could the Minister help the House with an explanation of the limits implied by “appropriate” and confirm that Parliament will be given an opportunity to debate the subsequent analysis?
Lord Bates
We could probably start with agreement across the House in saying that that is certainly something the Government do not want to happen. There is a very easy way for the noble Lord to ensure that that does not happen: to ensure that his colleagues support the deal before the House. This would then be unnecessary. This is not in any shape or form an objective this Government relish. It is a possibility that any prudent Government must prepare for. That is its status—nothing more, nothing less.
Given that we are going to be in for five substantial debates tonight, I will set one thing in context at the beginning. I will not cover some of the points, because I know they will come up in later debates, so I will try to not test the patience of the House by repeating answers five times to five different SIs. I will try to keep them as concise as possible so we can move through them at some pace.
I thank the noble Lord, Lord Sharkey, as the official spokesman for the Liberal Democrats and the noble Lord, Lord Tunnicliffe, as the official spokesman for the Opposition, for stating their intent to let this legislation go through, because they recognise that—whatever their concerns—there is a greater concern to ensure that there is a functional statute book in the unlikely event of no deal. I recognise that responsible approach, and I am sure it will be welcomed by the industry. The noble Earl, Lord Kinnoull, and the noble Lord, Lord Leigh, spoke from that perspective.
I want to put this on record, because I think it is really important. In their presentations the noble Baroness, Lady Kramer, set out brilliantly and the noble Baroness, Lady Bowles, set out extremely well—and indeed the noble Lord, Lord Sharkey—the outstanding work that the Parliament and the Commission did in regulation. The UK has been a leader, an influencer and a shaper of regulation. It really has been a good process. Every single one of the SIs we are dealing with through this entire process has gone through that scrutiny. We are not dealing with something that has never been thought of before; this already exists and has been subject to scrutiny—not only in the Parliament but, let us not forget, in another important group that does incredible work in this House: the European Union Committee and its six sub-committees. They scrutinise all the regulations and directives that come out. Then we had the European Union (Withdrawal) Act, in which we said—because it included a revocation of the European Communities Act 1972—that we needed to bring a lot on to the statute book. That is what we are doing: bringing on SIs, directives and regulations from the EU that have been subject to scrutiny by a UK Minister, the European Parliament and your Lordships’ House in the sub-committees, at the instruction of Section 8 of the European Union (Withdrawal) Act. Many of us recall the long and painful process of that working its way through the House. I looked it up: we spent 10 hours on Section 8, which gives us the powers and sets up the process we are now following.
The idea is sometimes presented that somehow what we are doing here is bringing onshore a whole load of stuff that we have never prepared for and that industry has not had any clue about dealing with. Industry is working with it, and we are now bringing it onshore. The process by which we deal with new regulations in future—the point made by the noble Lords, Lord Lilley and Lord Leigh—is something we need to look at. What we are doing at the moment is bringing across what is already in existence and has already been considered through a rigorous process, and putting it on the UK statute book.
Baroness Kramer
Perhaps this is my misunderstanding, but as I read the SI I did not have the understanding that the Treasury, following exit day with no deal, would be able to act only in exact accordance with the pre-existing rules established under European directives but that it could make fresh and new decisions to revoke, effectively amend or make new decisions for a 12-month period; a process would appear at some point in that time that was not Treasury-only, but it would be structured around a negative SI. I thought that was part of this whole package.
Lord Bates
The powers the Treasury will have are the powers the Commission currently has. The Commission cannot have them because we will have left the EU without a deal. Somebody therefore has to have them, and it goes to the Treasury because that is the equivalent body. Where the European markets authority was the regulator, that is transferred to the regulator here. We are simply doing all the things the noble Lord, Lord Tunnicliffe, has said at least two dozen times when we have discussed these points. He looks to see if we are actually following the rules as set down in Section 8 of the European Union (Withdrawal) Act. That is what we are doing. We are not making substantial policy changes, just correcting deficiencies and making fixes. The noble Baroness is absolutely right; that is the process.
Baroness Kramer
I accept what the Minister says. The Treasury in effect becomes the Commission, but without the checks and balances that normally exist on the Commission because we do not have the democratic process. That is the only point I am trying to make.
Lord Bates
I know the noble Baroness is seeking to make a point, but the Treasury does have a representative in your Lordships’ House. I know the noble Lord, Lord Deben, thinks, with the Chief Whip present, that I will be here today, gone tomorrow. That may well be the case.
Lord Deben
The only suggestion I made was that the noble Lord might not be here in 10 years’ time. That is a very different comment.
Lord Bates
Perhaps the noble Lord was not aware that he and I served in the same Government 25 years ago. He was a personal hero of mine because he abolished the hated Cleveland County Council and returned it to the North Riding of Yorkshire, which was greeted with absolute acclamation. However, it was still not enough to get me past the 1997 general election, so I find myself here in your Lordships’ House. Indeed, the noble Lord, Lord Young, was there 40 years ago—so there is form.
My point is that the Treasury is accountable to Parliament. It is possible to question a Treasury Minister here in the House of Lords in the way that noble Lords could not question a Commissioner in the House of Lords, so I do not want us to run down that particular track. Nor do I want to overegg the situation and say that it is perfect. We are having to prudently prepare for a set of circumstances that nobody in this House wants but for which we need to prepare because the industry requires that assurance.
Let me try to deal with some of the specific points in this debate. The noble Baroness, Lady Kramer, asked what third countries will do to declare the UK equivalent. The Treasury and the regulators have been in close contact with third-country authorities, including the United States regulators. We expect to replicate all arrangements with third countries which are based on equivalence. The UK will have grandfathered all existing Commission decisions through the EU withdrawal Act, and there will be retained EU law—the point I referred to.
The noble Lord, Lord Tunnicliffe, asked about a no-deal scenario, and I have dealt with that.
The noble Baroness, Lady Kramer, asked why the negative resolution procedure is considered appropriate for equivalence. We went through this whole area. I will not repeat it, but, if the House will bear with me, it is good that the usual channels are here. As part of the EU withdrawal Act, there was intense discussion and debate about the correct process for considering the large body of regulation that would be coming onshore. A comprehensive system of scrutiny—involving sifting committees, the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee—was set out for your Lordships, and it has been working. I am sure that the noble Lord, Lord Adonis, will come back at a later stage to some of the debate we had, which was probably as interesting to me as it was to him as we listened to Sub-Committees A and B. But the reality is that that scrutiny work is going on through your Lordships’ House and is following exactly the process set out in the Act and agreed through the usual channels.
The noble Baroness, Lady Bowles, said that the legislation is hard to follow. The Government are committed to ensuring that the law is transparent and accessible. That is why the National Archives will publish online a collection of documents capturing the full body of EU law as it stands on exit day. It will also gradually incorporate retained direct EU legislation into the Government’s official legislation website, legislation.gov.uk. She also asked whether decisions will be reviewed every three years because of the forthcoming SI. The future Treasury SI deals with making sure that equivalence directions fit into part of the existing FSMA framework. It does not mean decisions will be reviewed every three years.
Further, the noble Baroness asked why the SIs are being undertaken in such a piecemeal way and wondered why changes cannot be assessed holistically. A number of legislative changes will be necessary to ensure that there is a functioning statute book on exit day. HM Treasury has been as open as possible about this legislation and the potential impact, particularly by publishing draft legislation in advance of laying, alongside explanatory policy decisions.
The noble Lord, Lord Sharkey, asked whether we could provide examples of consultation on proposed rule changes. The regulators have undertaken extensive consultations on the proposed changes to their rules and technical standards. However, the powers in the EU withdrawal Act allow them to proceed without consultation, where necessary, to ensure that the necessary regulations are in place for exit day.
Does relying heavily on secondary legislation leave room for departments to push through unpopular or controversial legislation? These are powers granted under scrutiny by the EU withdrawal Act, as I have already explained.
Let me turn to another point raised by the noble Lord, Lord Sharkey, and my noble friend Lord Deben. They asked why we have chosen a 10-year appraisal period. This is not about when we review the legislation; this is a technical issue about the period over which the costs are allocated. We have committed to further analysis and, if the SIs come into effect, we will need to consider what an appropriate time is, but it will be much less than 10 years.
The noble Lord, Lord Sharkey, asked about consulting and whether we would allow more than is quantified in the impact assessment. The limitations set out in the impact assessment would not be overcome by consultation at this stage. Firms need to consider all the changes made by these SIs, alongside the broader changes that occur at the point of exit, which cannot be known in advance.
The noble Baroness, Lady Bowles, asked why we have not mentioned the public in the commentary. Consumers benefit from both competition and financial stability. This instrument will allow the Government to have due regard to both.
The noble Lord, Lord Sharkey, asked why no one has come forward to provide transparency around the costs of Brexit. The impact assessments for these SIs focus solely on their direct impacts; the wider costs of Brexit were covered in the cross-government analysis.
When we talk about the costs of these SIs, which just bring onshore regulations that already exist, has anybody thought for a moment to consider what the costs would be if we did not have them ready by exit day? What would that mean for the financial services industry? It would be cataclysmic. It is absolutely the reason that the noble Lords, Lord Sharkey and Lord Tunnicliffe, were right to say that, while they recognise the need for scrutiny, they also recognise how important it is for the industry that we get these measures through.
I will come back to some of the other issues in later debates on this evening’s SIs.
Lord Tunnicliffe
Will the noble Lord consider my point on paragraph 2.1 of the Explanatory Memorandum? It assures us that these powers will be used in a narrow way to manage the transition and not to introduce new policy. That is quite a strong statement, but it is nowhere on the record and there is nothing in the instrument to limit the use of the powers mentioned in paragraph 2.1.
Lord Bates
The noble Lord did ask me to assure that that will apply, and I am happy to do so. With those assurances, and conscious that we will touch on many of these matters again later in the evening, I beg to move.
Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2019
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Lord Bates
To move that the draft Regulations laid before the House on 16 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I shall speak also to the Tax Credits and Guardian’s Allowance Up-rating Regulations 2019, and I will explain the changes that the two sets of draft regulations would bring.
These social security regulations make changes to the rates, limits and thresholds for national insurance contributions and make provision for a Treasury grant to be paid into the National Insurance Fund if required. These changes will take effect from 6 April 2019.
First, I will outline the changes to employee and employer national insurance contributions, referred to commonly as class 1 NICs. On class 1 primary NICs for employees, the lower earnings limit will rise in line with inflation from £116 to £118 a week, and the primary threshold will rise with inflation from £162 to £166 a week. The upper earnings limit is aligned with the UK’s income tax higher rate threshold, which will rise from £892 to £962 a week in 2019-20. On class 1 secondary NICs for employers, the secondary threshold will rise with inflation from £162 to £166 a week. The level at which employers of people under 21 and of apprentices under 25 start to pay employer NICs will rise from £892 to £962 a week.
I now move on to the self-employed, who pay class 2 and class 4 NICs. The rate of class 2 NICs will rise in line with inflation from £2.95 to £3 a week. The small profits threshold will rise from £6,205 to £6,365 a year. On class 4 NICs, the lower profits limits will rise with inflation from £8,424 to £8,632 a year. The upper profits limit, which is also aligned with the higher rate threshold, will rise from £46,350 to £50,000 a year.
Finally, class 3 contributions allow people to voluntarily top up their national insurance record. The rate for class 3 will increase in line with inflation from £14.65 to £15 a week.
The regulations also make provision for a Treasury grant of up to 5% of forecasted annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2019-20. A similar provision will be made in respect of the Northern Ireland National Insurance Fund. I trust that this is a useful overview of the changes we are making to bring rates of support and contributions to the Exchequer in line with inflation.
I now turn to the Tax Credits and Guardian’s Allowance Up-rating Regulations. As noble Lords may know, the Government are committed to a welfare system that is fair to the taxpayer while maintaining our protection for the most vulnerable in society. To put the regulations in context, the Welfare Reform and Work Act legislated to freeze the majority of working-age benefits, including child tax credit and working tax credit, for four years—that is, up to 2020. This helped to put our welfare system on a sustainable long-term path. Specifically exempt from the freeze were the disability elements of the child tax credit and working tax credit. The guardian’s allowance was also not affected.
As per previous years, we are now legislating to ensure that the guardian’s allowance and the disability elements of child tax credit and working tax credit increase in line with the consumer prices index, which had inflation at 2.4% in the year to September 2018. Therefore, alongside our commitment to fiscal discipline through such measures in the Act, the Government are equally committed to protecting those who are most in need of it.
In practice, the regulations mean that we maintain the level of support for families with disabled children in receipt of child tax credit and disabled workers in receipt of working tax credit. They also sustain the level of support for children whose parents are absent or deceased. Increases to these rates are part of the Government’s wider commitment to supporting the most vulnerable people in our society.
This proposed legislation makes changes to the rates, limits and thresholds for national insurance contributions, makes provision for a Treasury grant, and ensures that guardian’s allowance and the disability elements of working tax credit and child tax credit keep their value in relation to prices. I hope noble Lords will join me in supporting these regulations, which I commend to the House.
Baroness Janke (LD)
I thank the Minister for his introduction to the orders. The freezing of working age benefits means that tax credits increase benefits only for workers and children who are disabled. This excludes a whole range of benefits which are crucial to many of the poorest people and families. The Resolution Foundation states that the four-year freeze on working age benefits has been,
“one of the most vivid examples of austerity in recent years as it represents a … real-terms cash loss for millions of low-income families”.
Among the poorest families, the average single parent will be £710 worse off, which amounts to between 3% and 7% of their income. The freeze looks set to cost working-age families £4.4 billion in 2019-20.
I noticed from the Explanatory Memorandum that no consultation was thought to be needed. Last year when these orders went through, the Minister was asked about an impact assessment on child poverty but he said that there was no need as this was done when the freeze was announced. However, we are now entering the fourth year of the benefits freeze. Is it not time an impact assessment was made in relation to the most vulnerable and poorest groups? This is particularly important, first, because the circumstances of these groups need to be taken into account when the migration to universal credit takes place and, secondly, in the light of the evidence of so many reports—for example, by the Resolution Foundation, the Joseph Rowntree Charitable Trust, the Trussell Trust and many others—which draw attention to the poverty and suffering being caused to people and working families at the lower end of incomes.
Does the Minister consider that disabled workers who benefit under the second statutory instrument will be at risk when the Government migrate them to universal credit? Will the Government look at the risk of that process to this vulnerable group? Will they use the forthcoming test-and-learn pilot of managed migration to trial a system where benefit claimants are moved automatically to universal credit so that their income is protected?
Lord Bates
My Lords, I thank the noble Baronesses, Lady Janke and Lady Sherlock, for their questions on these important orders. I do not dissent at all from the assessment by the noble Baroness, Lady Janke, that we are talking here about some of the most vulnerable people in society, and therefore that our approach should be extremely focused.
Nor, though, would I want the accusation to stand that we have been somewhat impassive to the needs of people in the circumstances in which they find themselves, because one of the greatest routes out of poverty, as we all know, is that of employment. This may not be very helpful, but the noble Baroness referred to my noble friend Lord Young taking these orders through last year. At the time he mentioned the increase in employment, which is now at record levels—I am sure that she, being fair-minded, would recognise that as being something that is helping the poorest in our society immensely; the reform of benefits to ensure that work always pays; and some of the important measures that have been taken, not least the national living wage, the increase in which by 4.9% to £8.21, significantly above CPI, will mean an increase in full- time wage workers’ annual earnings of over £690. Unemployment has fallen by over 1.1 million since 2010.
At the time when my noble friend took the orders through, we made a serious point and there was a rationale for the arguments being made for welfare reform. From 1997-98, welfare spending rose by £84 billion in real terms—
Baroness Lister of Burtersett (Lab)
I am sorry to interrupt, and I am sorry that I missed the beginning of the Minister’s statement. Before we move on to the more general question about spending, I do not think he has addressed my noble friend’s point. Given that paid work is supposed to be the best route out of poverty, why are the Government freezing the tax credits paid to people in paid work?
Lord Bates
That decision was taken through the 2016 Act that I mentioned in my introduction. It was taken then as part of the need to get our public finances into the right order. That was the rationale for it. I say to the noble Baroness, who is someone else who cares immensely and focuses on these areas, that that was the rationale that we used at the time.
On the specific questions, I turn to the point about CPI that was raised by the noble Baroness, Lady Sherlock. She said the previous Government had announced in the Summer Budget of 2010 that CPI would be used for the indexation of benefits and that they would review the use of CPI for the indexation of taxation and duties. Consistent with that, the default indexation assumption is CPI. RPI is no longer recognised as a national statistic.
The noble Baroness, Lady Janke, asked about the impact of the benefit freeze. The Government are committed to taking action to help the most disadvantaged, with the focus on tackling the root causes of poverty. Our welfare reforms are incentivising work and supporting working families. Since April 2016, the universal credit childcare element has covered up to 85% of eligible childcare costs. We will be investing over £6 billion a year in childcare by 2020. Since 2010, 300,000 fewer children are living in absolute poverty and 630,000 fewer children are living in workless households—a record low. We are committed to helping lone parents to find work that fits around their caring responsibilities. We have extended free childcare for three to four year-olds for working families to 30 hours a week, with over 340,000 children benefiting in the first year.
The noble Baroness, Lady Sherlock, asked some specific questions, which she very kindly said that she would give me the opportunity to answer in writing. If that is acceptable, I will write to her and copy in the noble Baronesses, Lady Janke and Lady Lister, who have also spoken in the debate.
Insurance Distribution (Amendment) (EU Exit) Regulations 2019
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Lord Bates
To move that the draft Regulations laid before the House on 19 December 2018 and 17 January 2019 be approved.
Tax Credits and Guardian’s Allowance Up-rating Regulations 2019
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Lord Bates
To move that the draft Regulations laid before the House on 16 January be approved.
Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019
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Lord Bates
To move that the draft Regulations laid before the House on 15 January be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, as with other instruments we have debated today, these have been laid under the EU withdrawal Act. This instrument is part of the Treasury’s legislative programme to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning UK legislative and regulatory regime for financial services.
In December 2017, the Treasury announced that legislation would be brought forward to establish a temporary permissions regime enabling EEA firms operating in the UK to continue their activities here for a limited period after withdrawal. At the same time, it was also announced that legislation would be brought forward to ensure that contractual obligations not covered by that regime could continue to be met, helping protect the interests of UK customers of EEA financial services firms. The legislation setting out the temporary permissions regime for firms that passport under the Financial Services and Markets Act 2000 was debated and passed by this House last autumn, in the form of the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.
Separately, legislation for temporary regimes for non-UK central counterparties, EEA payments and e-money institutions, and trade repositories has also been debated and passed by your Lordships’ House. This instrument therefore delivers on the second commitment: to ensure that those financial services contracts not captured by the temporary permissions regime can continue to be serviced. It similarly ensures continuity for customers of financial services providers that do not enter other temporary permissions regimes, or that exit these temporary regimes without full UK authorisation or recognition. Specifically, this instrument makes provision for passporting EEA firms, non-UK central counterparties, EEA payments and e-money institutions and trade repositories to wind down their operations in an orderly manner. It will apply to those firms that no longer wish to operate in the UK, and to those that exit the temporary regimes without permission from UK authorities to carry on new business here. The approach taken in this instrument aligns with that of other statutory instruments being laid under the EU withdrawal Act. It delivers on the Treasury’s commitments and is vital to the financial services sector and its UK customers.
Turning to the substance of the instrument, many noble Lords will be familiar with the EU law that allows EEA firms, non-UK central counterparties and trade repositories to provide regulated services in the UK on the basis of being authorised in their home member state, or recognised or registered by the relevant EU authority. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. Once the EEA frameworks providing for passporting rights, recognition of central counterparties and registration of trade repositories fall away, we will need to avoid widespread disruption to the provision of financial services, which would ultimately affect UK businesses and consumers. This instrument inserts provisions into the existing temporary regimes to allow for orderly winding down of existing contractual obligations or services, providing continuity and certainty for UK customers of those firms that do not enter the temporary regimes, or that exit them without full UK authorisation, recognition or registration.
Specifically, these draft regulations establish four distinct run-off regimes related to four different temporary regimes, covering EEA firms passporting under the Financial Services and Markets Act 2000, non-UK central counterparties, EEA payments and e-money institutions, and trade repositories. This instrument is necessary to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. The temporary regimes which have been established go a long way towards mitigating the risks of disruption and uncertainty. Without the additional wind-down provisions, however, some UK businesses and consumers could nevertheless see disruption to their existing contracts or services.
Lord Bates
I thank noble Lords for their questions. It might be for the ease of the House to know that I have the advantage—I think—of having a flow diagram in front of me. It must be one that I can release; I am sure it is. It has something printed on the top which probably tells me that it should not be released, but I am happy to make this diagram available. I do not want to reopen the debate about whether the Official Report should be able to capture diagrams and schemes; that would be a heresy that would cause a debate way above my head and pay grade, so I shall stay way out of it. I will circulate that diagram to noble Lords and place a copy in the Library. I will also, if I may, write in detail on the points raised by the noble Baronesses, Lady Bowles and Lady Kramer. Perhaps the same letter could be used to do that.
On the points raised by the noble Lord, Lord Tunnicliffe, about the impact assessment, I can confirm that one was published on 8 February. On the point made by the noble Baroness, Lady Bowles, about the maximum time for extension of terms, the regime can be extended by no more than five years at a time.
Lord Bates
But the noble Lord was just telling us how he was working over the weekend. He does Fridays, Saturdays and Sundays. The Opposition Chief Whip is here, so he should not undersell himself. He is one of the most diligent Members of this House. We will certainly look at that point.
On why the CCP regime is non-extendable, the Bank will remain in close contact with CCPs to inform them of expectations during the run-off period. This task is expected to be manageable, given the relatively small number of CCPs that can be expected to be in a run-off.
The noble Baroness, Lady Bowles, also asked under what circumstances a firm may be moved from a supervised to a contractual run-off. The FCSR makes provisions allowing a firm to be moved from the contractual run-off to the supervised run-off and vice versa. For this to happen, a regulator would have to consider the matter specified by the FSCR, including whether the move is necessary for the protection of consumers. Only the regulators can move a firm between the SRO and the CRO; firms cannot choose whether to move.
I appreciate that there will be other points relating to this but, as I have given a commitment to write to noble Lords, I will conclude my remarks there for the time being, and commend the regulations to the House.
Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019
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Lord Bates
To move that the draft Regulations laid before the House on 8 January 2019 be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, as this instrument has been grouped, with the leave of the House I will speak also to the draft Financial Conglomerates and Other Financial Groups (Amendment) (EU Exit) Regulations 2019 and the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019.
The Treasury has been undertaking a programme of legislation 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 UK. The Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already been undertaken in this place and in the House of Commons. The SIs being debated today are part of that programme and have been debated and approved by the Commons.
These SIs will fix deficiencies in UK law on the prudential regulation of insurance firms, the distribution of insurance products, and financial conglomerates, in order to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
Three SIs are being debated today: the financial conglomerates and other financial groups regulations, the insurance distribution regulations and the draft amendments to the Solvency II regulations. The financial conglomerates and other financial groups regulations set prudential requirements for financial conglomerates or for groups with activities in more than one other financial sector. The insurance distribution regulations set standards for insurance distributors regarding insurance product oversight and governance, and set information and conduct-of-business rules for the distribution of insurance-based investment products.
Solvency II sets out the prudential framework for insurance and reinsurance firms in the EU. Prudential regulation is aimed at ensuring that financial services firms are well managed and able to withstand financial shocks so that the services they provide to businesses and consumers are safe and reliable. Solvency II is designed to provide a high level of policyholder protection by requiring insurance and reinsurance firms to provide a market-consistent valuation of their assets and liabilities, understand the risks that they are exposed to and hold capital that is sufficient to absorb shocks. Solvency II is a risk-sensitive regime, in that the capital that a firm must hold is dependent on the nature and level of risk that a firm is exposed to. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The Solvency II and insurance regulations, the financial conglomerates and other financial groups regulations and the insurance distribution regulations therefore need to be updated to reflect that, and ensure that the provisions work properly in a no-deal scenario.
I shall start by addressing the changes to the financial conglomerates and other financial groups regulations. Under the EU financial conglomerates directive, a financial conglomerate is defined as a group with at least one entity in the insurance sector and at least one in the banking or investment services sector. One of these must be located within the EEA, while the others can be located anywhere in the world. This statutory instrument will amend the geographical scope of the definition so that one entity must be located within the UK rather than the EEA in order to be subject to the UK regime. This statutory instrument also amends the definition of a competent authority, so that it no longer includes regulators based in the EEA.
In line with the approach taken for other statutory instruments, this instrument transfers several functions from the EU authorities to the UK regulators. For example, the EU financial conglomerates directive requires EU authorities to publish and maintain a list of financial conglomerates. This function will now be carried out by the Financial Conduct Authority and the Prudential Regulation Authority. In addition, the responsibility for developing binding technical standards will pass from the European supervisory authorities to the appropriate UK regulator.
Lord Tunnicliffe
I thank the noble Earl for that explanation and apologise for misunderstanding him.
The task we have is under Section 8 of the European Union (Withdrawal) Act, which is a very narrow task. My concerns are perhaps quite small and detailed, but I think that there is a fundamental concern about the process. There is a generality in political activity whereby what politicians do should be understood by a reasonably intelligent amateur—I am at least an amateur—and there is disquiet about the complexity of these three SIs. They are remarkably difficult to understand if one is not part of the industry. It is impossible to read the raw instruments. Much of them relates to FSMA 2000, which has been amended so many times that the original document is indistinguishable. Trying to understand the measure from the Explanatory Memorandum, in which I must trust because I have no other way of examining it, was difficult.
The Opposition will not oppose these instruments. As I read through them, they seem in general to do similar things, so I have no points to raise. However, paragraph 7.12 of the Explanatory Memorandum states:
“The European Commission’s responsibility for developing legislation will be transferred to HM Treasury which will be given power to make regulations for certain matters previously dealt with under Solvency II, e.g. the system of governance and risk management, methods and assumptions used in valuations and risk modules”.
That seems to be a pretty sweeping power which has been transferred. Does the Minister believe that is compatible with the withdrawal Act, particularly Section 8? What scrutiny, if any, will Parliament have of the exercise of these powers by HM Treasury? As set out here, they seem to be unrestricted.
Paragraph 7.13 says:
“EU assets and exposures held by UK insurers will no longer be subject to preferential risk charges when setting capital requirements for insurers that use the Standard Formula”.
At first sight, that sounds as though we are taking something away from the EU, that we are being beastly to them. It was only when I did further research that I realised that it has the opposite effect. As I understand it—I hope the Minister will be able to confirm this—the effect will be to increase the capital requirements for UK insurers, which will certainly reduce their profitability. As we know from previous debates, the objective of the withdrawal Act was to not introduce new policy. In his introduction, the Minister said that these instruments aligned with previous SIs. I do not think they do because, in order to stop cliff-edge changes in value, previous SIs have always had some sort of transition regime. If the effect is higher capital requirements, does that mean that UK insurers have been operating unsafely, with insufficient capital? If not, we will be introducing an increased burden on them. If my interpretation is right, why is there not a transition regime in order to make sure there is no cliff-edge change to that requirement?
Further on, in the section on impact, paragraph 12.3 states:
“UK insurers which use the Standard Formula for calculating capital requirements will be impacted by the removal of preferential treatment for EEA risk-weighted assets and exposures. Such insurers could face higher capital requirements unless they divest themselves of such assets and exposures. However, the government intends to legislate to provide regulators with powers to introduce transitional measures to phase in on-shoring changes to reduce the immediate impact on exit.
That hints that the Government are going to introduce a transitional regime through the regulators. Is that a proper interpretation of the paragraph? If so, when will the legislation alluded to, giving these powers to the regulators, come before the House? Why has this not been part of the SI?
Paragraph 7.15 of the insurance distribution instrument says:
“Regulations 6 and 12 of this instrument also transfer relevant legislative functions of the European Commission contained within Articles 25(2), 28(4), 29(4) and 30(6) of the IDD to HM Treasury. This includes the powers to make regulations about conflicts of interest, regulations about inducements, and regulations on assessments of suitability, appropriateness and reporting to customers, and specifying principles for product oversight”.
That seems to be a big bunch of powers. Will they be subject to any parliamentary scrutiny?
Finally, I was somewhat exhausted by the time I came to look at the conglomerates SI—we amateurs do have to work hard—but reassured by paragraph 7.12 of the Explanatory Memorandum which says:
“In practice this change will not have a material effect on financial conglomerates already operating in the UK”.
With that assurance, I have no questions on that SI.
Lord Bates
I thank noble Lords for their questions and of their scrutiny of these important SIs. I am sorry to have ruined the noble Lord’s weekend. I hope he got a chance to see the rugby.
Lord Bates
I hope that cheered him up a bit.
These are very detailed SIs but in your Lordships’ House there was a wealth of ability to understand them and raise some pertinent questions. The noble Earl, Lord Kinnoull, began by paying tribute to the parliamentary draftsmen and officials at the Treasury and the way they have worked with the ABI. I have witnessed that close working relationship and am grateful to the noble Earl for recognising it in his remarks. I do not have a note relating to his question about the insurance industry on the number of insurance brokers relative to the growth in the economy, and whether there is something about the competitiveness of the UK insurance market that we need to learn from. Those are interesting points and I will take his suggestion back to John Glen, the Economic Secretary to the Treasury and brilliant Cities Minister, who is looking at issues of competitiveness. I will then write to the noble Earl.
Most of the questions related to Solvency II, so I will group those and deal with the other ones as I go through. The noble Lord, Lord Tunnicliffe, asked about insurance distribution and why the Government need the additional powers in the SI. The instrument also transfers relative legislative functions of the European Commission contained within the insurance distribution directive to the Treasury. Any changes made to regulations by the Treasury would have to be approved by Parliament. I hope that that offers some reassurance.
The noble Baroness, Lady Bowles, asked whether the financial conglomerates regulations had resolved the problem of double gearing in the insurance model. FICOD has created new supervisory powers which increase standards of governance and oversight for the largest financial groups. This has helped address gaps that arise from the sectoral supervision of individual firms in a group, in particular the risk of double gearing, which can arise in the absence of robust, group-level policies on capital governance. As I was reading that, I wondered if it answered the question of whether the problem has been resolved. I think the answer may be yes, but I will say that we are working on it and I will write to the noble Baroness. I thank her for raising that point.
The noble Lord, Lord Tunnicliffe, asked about the transitional power referred to in the Explanatory Memorandum to the Solvency II regulations. This power can only be used to phase in the EU exposures changes that the noble Lord is concerned about; it cannot be used to avoid a cliff-edge impact. The power will complement transitional arrangements already approved by Parliament, including the temporary permissions regime. The noble Earl, Lord Kinnoull, asked whether we should have a review of Solvency II. The UK is putting in place all necessary legislation to ensure that, in the event of a no-deal exit in March 2019, there is a functioning legal regime. The Act does not give the Government the power to make policy changes beyond those needed to address deficiencies. That means, as far as possible, that the same rules apply. Let me extemporise a bit: the noble Baroness, Lady Bowles, made the point that the record of UK regulators in leading on Solvency II was widely acknowledged. I think that that is to be encouraged. In all likelihood, if our world-class regulators spot deficiencies in the new regime, they will keep that under review.
The noble Baroness, Lady Drake, asked whether we will be weakening standards. In many ways, as I have alluded to already, our intent—the Chancellor and many others have put this on the record—is to recognise that the UK’s reputation in financial services is earned because we have high standards, not because we have low standards. In a sense, there is a tension between the claim that we are going to be lowering standards and my noble friend Lord Deben asking whether we are going to be gold-plating standards, a question I will come to in a second. My noble friend asked about the definition of equivalence. The definitions that operate for each EU equivalence regime will not change and we will use the same criteria for making equivalence decisions in the future as the EU uses now.
My noble friend asked whether the regulators will have adequate resourcing for a no-deal scenario, a question picked up by the noble Lord, Lord Tunnicliffe. Figures on resources and any new costs are for the regulators to publish in their annual reports, which are laid before Parliament. I remain confident that the regulators are making adequate preparations and effectively allocating resources ahead of March 2019. They have actively participated in a wide range of groups in developing technical policy and regulatory rules and have chaired a number of committees and task forces, bringing their considerable experience in implementing EU legislation to bear.
The noble Baroness, Lady Bowles, asked whether there is a figure for EU holding of gilts compared to the rest of the world. To the best of our knowledge, there is no reliable data on EU firms’ holding of gilts; however, analysis by the regulators suggests that the capital impact of this change should not be significant.
My noble friend Lord Deben asked about gold-plating by the UK. Solvency II is a maximum harmonisation directive—I do not know whether that is another phrase my noble friend will pick me up on. There must be a level playing field across the EU and we are preserving these rules as much as possible. He also asked whether the instruments reduce the need for the PRA to co-operate and share information. The UK fully expects a high level of co-operation to continue after exit, as is currently the case with countries such as the United States.
The noble Lord, Lord Tunnicliffe, asked whether too much power has been transferred to the PRA. In the longer term we will need to review the regulatory framework in the UK, including the role of regulators and how far they should be accountable. He asked why we are increasing capital requirements under Solvency II —whether the current requirements are not adequate—and worried about what the past situation was. The prudential standards in Solvency II are not being altered. The capital standards that apply now are entirely appropriate and will be largely unaffected by exit. There are only two situations in which a firm may be required to hold more capital once outside the EU’s joint supervisory framework for group supervision. Some EU groups operating in the UK may be subject to an additional layer of supervision by UK regulators. He asked why we are giving new legislative powers on Solvency II to the Treasury. The EU withdrawal Act explicitly provides for EU functions to be transferred to UK bodies, which is what we are doing.
I will, as with previous secondary legislation, review the record of the debate with officials. Should I find that any points have not been covered adequately, I will write to noble Lords and copy in other Members. In the meantime, I commend the regulations to the House.