Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 3) Regulations 2019

Lord Bethell Excerpts

Tuesday 1st October 2019 Lords Chamber

Moved by

[Lord Bethell]

That the draft Regulations laid before the House on 15 July be approved.

Relevant document: 58th Report from the Secondary Legislation Scrutiny Committee

[Lord Bethell (Con)]

In the previous debate, I explained how the extension of the Article 50 process had made some additional onshoring legislation necessary. This instrument fixes deficiencies in new EU legislation that will become part of UK law at exit and amends some EU exit provisions already made to account for the extension. It also corrects several minor errors or omissions in earlier EU exit instruments.

I note that, in its report published on 25 July, the Secondary Legislation Scrutiny Committee highlighted this instrument as of interest for what it called,

“the range and magnitude of the changes”,

made by it. It also expressed concern about the scale of the challenge facing financial services firms in adjusting to the changes being made to financial services legislation generally.

While the instrument makes amendments to 15 pieces of legislation, the number of amendments is modest and their nature minor. They follow the same approach to fixing deficiencies in EU legislation as approved by Parliament in previous financial services EU exit instruments. They do not change policy or alter requirements on firms. The SLSC is of course right to highlight the challenges financial services firms will face in adjusting to changes introduced by exit legislation.

I reassure the House that minimising this challenge for industry has been central to the onshoring project from the beginning. The Treasury, under other secondary legislation approved by Parliament, has introduced a variety of measures to smooth the transition for businesses adjusting to the changes in EU exit legislation and changed circumstances generally. These measures include a range of temporary permissions and transitional regimes for EEA firms and funds. Parliament has also granted UK financial services regulators powers to phase in requirements that change as a result of EU exit legislation, giving firms the time they need to adjust in an orderly way. The regulators have consulted on their approach to phasing in these requirements, which involves broad use of their transitional powers. They have received a very positive response from industry.

We have also engaged with the industry on the development of all our EU exit instruments to give it as much time as possible to become familiar with the legislation. Given the minor and technical nature of the amendments in this SI, I will not cover every provision in my opening remarks, but I am happy to take questions on any of the individual provisions.

The provisions in this instrument cover three broad areas. First, they make changes to a number of pieces of EU legislation that have become applicable since the Article 50 extension and will therefore form part of UK law on exit day, but they are not substantive enough to warrant separate additional instruments. For example, the European Commission recently introduced measures to further promote the use of small and medium-sized enterprise growth markets. Those trading platforms are subject to more proportionate regulation, making it easier for SMEs to raise finance. The instrument makes minor amendments to fix deficiencies in the new EU legislation, ensuring that it continues to function in UK law after exit. Following the approach approved by Parliament in previous financial services exit legislation, this instrument gives UK regulators the job of fixing deficiencies in the new technical standards that have been adopted by the EU since 29 March.

Secondly, the instrument makes amendments to existing EU exit legislation that are required to take account of the Article 50 extension process. For example, it makes a change to the Solvency II exit legislation by amending the date from which the PRA will be obliged to publish certain technical information that insurance and reinsurance firms must use to value their liabilities. Previously, the PRA had been required to begin publishing this information from 10 April 2019. The instrument amends that date so that the obligation on the PRA does not commence until an appropriate date after the UK has left the EU.

--- Later in debate ---

[Lord Davies of Oldham (Lab)]

My Lords, there is not much else to say. It is the case, as the noble Lord, Lord Deben, indicated, that we have spent a considerable period of time dealing with the financial services industry on the question of a no-deal exit from the EU. He was absolutely right when he said we were in danger of diminishing the reputation of the industry, and of London, throughout the world. The most specific and important fact is that we are diminishing the position of London in relation to Europe just as we were absolutely clear that on the whole question of the development of financial services the British voice was heard with a great deal of sympathy in Europe. Just at the point when we were, if not taking control then showing the necessary leadership for the benefit of the whole of the European community and confirming and consolidating the position of the City of London, we take this step to end it all.

The Minister has probably not come totally armed with the facts of where we are with regard to the whole debate on Brexit, but now and again, prior to his accession to his position, he will have heard a few comments on where we are all at with regard to Brexit. It is the case that most noble Lords in this House who have taken a keen interest in the issue are absolutely shattered and exhausted by the amount of work that has been necessary, and of course the great danger is that so much of it is going to be utterly wasted and detrimental to the nation’s interests.

The Minister will want us to concentrate rather more on the immediate issue of this instrument. The regulations were flagged as an instrument of interest by the Secondary Legislation Scrutiny Committee in its 58th report. The committee expressed its concern that while this incident is presented as an innocuous tidying up exercise on past efforts, the exercise is actually fairly complex. This single statutory instrument makes changes to 15 items of legislation. The Minister already knows this, but he will not mind my reading it into the record. It includes a sub-delegation of powers and extends a ministerial power of direction. A saving grace is that the measure is subject to the affirmative procedure. That provides some safeguard, as the noble Baroness, Lady Bowles, indicated.

Financial services regulation is a complicated matter at the best of times. Amending legislation in this manner is of little help to anyone who is seeking to understand the rules of the game. Primary legislation, including the Financial Services and Markets Act, has been continually amended throughout its lifetime. This process has been repeated at the European level. Every time these changes are made, regulatory authorities such as the FCA and the Bank of England update their own guidance, adding another element of complexity. That is not to say that regulation is not important; we on these Benches would scarcely advance that argument. But we are dealing with a very complex field, and our job is not made any easier by the Treasury’s approach to this exercise.

My noble friend Lord Tunnicliffe, who has played such a significant part with regard to the SIs relating to a no-deal exit, and of course those colleagues on the Liberal Democrat Benches who have also pursued these issues with great diligence, had a meeting with the Economic Secretary to the Treasury in late February to discuss the kind of concerns that have been expressed today. At that meeting, Mr Glen, the Economic Secretary, committed to producing a summary of the EU exit SIs passed up to that point, with what we hoped was a genuine commitment to a plain English explanation of the effect on key pieces of legislation and guidance. We do not know whether that document has ever been provided. Given the number of changes that have been made, I assume—or at least hope—that somebody in the Treasury has maintained an overview of the situation. Would the Minister, who of course comes new to all this, commit himself to chasing this up with the department? A great deal of work was invested in this and it reflected the sheer complexity of the issue and its significance for the industry that we are dealing with. The Minister will reap a reward for his time in taking advantage of the offer I have made to him, to which I am sure his civil servants will be only too glad to respond.

I know that the Treasury has worked with bodies such as the FCA and the Bank of England when drawing up these instruments, but I wonder whether the Minister could shed any light on what else the department is doing to assist regulators during these particularly challenging times, when so much is in a state of flux, yet people need clear, accurate and legal decisions. Complex the industry may be, but there is a great deal at stake in its welfare, and at the present time we are not sure that the Government are bent on the correct course at all.

[Lord Bethell]

My Lords, I would like to thank everyone for participating in a really meaty discussion about an SI that is incredibly detailed in nature. The discussion got under the skin of some very serious issues.

I shall start by tackling head-on the comments made by the noble Baroness, Lady Bowles, about the late notice or delivery. I completely sympathise and understand her point. With a mopping-up SI such as this, one wants to capture the latest changes that have been processed, and therefore there is a pressure to have the SI as up-to-date as possible and that mitigates against early delivery. However, I agree with her sentiment that it is preferable for these things to be delivered early, and I will try to ensure that the department achieves that.

I do not want to raise the curiosity of the noble Baroness, Lady Bowles, too much about the CJA—that could be dangerous for the department—but I reassure her that the concerns she had were just about an omission. We need to reflect that Gibraltar and the EEA will be separate jurisdictions but that market abuses will still be caught in the same way as now. The changes that refer to the CJA simply capture that.

I will try to provide some reassurance on systematic internalisers. As the House knows, this instrument amends MiFID legislation so that the ability to meet the shared trading obligation using a systematic internaliser requires such trades to be made through a UK systematic internaliser after exit. This change in scope is consistent with the overall onshoring approach; it does not try to create something different. Once we are outside of the EU single market and joint supervisory framework, UK regulation will need to reflect that.

The noble Baroness, Lady Bowles, also asked about Solvency II and the risk-free rate. I reassure her that the risk-free rate will be calculated on the same basis as now. The change is that it will be published by the PRA instead of the EIOPA. That will be the principal change from this SI.

The noble Baroness, Lady Kramer, asked about equivalence with Singapore. We will carry over all the EU’s existing equivalence decisions, including that for Singapore. I can explain that we are speaking to Singapore about that jurisdiction recognising the UK in the same way. I understand that talks are progressing well, and I hope to be able to provide good news to the House at a future date.

The noble Lord, Lord Davies, asked about a plain English explanation. I reassure him that we provided an overview to noble Lords earlier this year, but I am happy to provide any further information that he may require and to chat about that at a later date.

The noble Lord, Lord Davies, also asked whether adjusting to all these changes is a substantial challenge for industry. That is linked to the heartfelt and moving appeal about this entire process from my noble friend Lord Deben. I take my noble friend’s comments on board, but I have a different perspective. In life, you often have to spend a significant amount of your time providing for and protecting yourself against things that you hope will not happen. That is a basic fundamental in life. That view is shared by not just me but the financial services industry, which urges this House, Parliament and the Government to pursue these measures with great energy and in great detail, to ensure that there is full protection against a possible no-deal Brexit.

At times, it feels like a waste of energy and a distraction, but that does not detract from the value of the work that has been put in. I have not been sitting here for the 50 SIs and I do not have the scars on my back like many in this room, but I still value enormously the expertise, time and passion that have gone into making such a good job of this whole exercise. I endorse the work of Parliament, industry and the officials working on all of this and reassure the House that it is taken extremely seriously by the Government. In that vein, I commend these regulations to the House.

Motion agreed.