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

Lord Deben Excerpts

Monday 18th February 2019 Lords Chamber

[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 Deben (Con)]

I wonder whether the noble Lord is being a little too kind to the Government. Is not the reason we have not had these figures—and we have not had them because we did not start to do the figuring early enough—that when you actually add up the figures you discover that the cost of Brexit is enormously greater than anybody has pretended, and therefore it is to the convenience of the Government and of those who want Brexit not to provide the figures? Does he know of any other occasion when the Government have proposed huge changes and not provided at least some estimate of the bill?

[Lord Sharkey]

I am grateful for that intervention. The short answer to the final question is: no, I do not. I shall try to be slightly less kind as I move on.

Paragraph 52 of the consolidated impact assessment notes that each of the SIs covered,

“contains provisions with indefinite effect and this is the majority of the content. For this reason, we have concluded that the standard 10 year appraisal period is appropriate”.

This seems to me an entirely perverse conclusion. Ten years is far too long for an appraisal of the effects of instruments containing such wide powers in a complex and critical field, which were produced in very great haste and which lack proper consultation or impact assessment. It would make more sense, and reduce any inadvertent harm, if we were to appraise after, say, two years. I am sure that if the industry were eventually consulted, it would agree with this timing. I would be grateful if the Minister would say why he is proposing 10 years for appraisal and what is wrong with two. Will he reassure the House that he will reconsider the timing of the appraisals? Perhaps he will write to us with his conclusions.

Finally, paragraph 73 of the consolidated impact assessment deals with the impact on the public sector:

“Where changes to the regulators’ rulebooks, or to EU technical standards, are required as a result of leaving the EU, the regulators intend to consult on these changes wherever possible”.


This “wherever possible” is alarming, especially in view of the Treasury’s failure to consult in the preparation of these SIs in the first place. Can the Minister give examples of situations in which it would not be possible to consult on the changes to the rulebooks or the technical standards?

[Lord Deben]

My Lords, I declare my interest as chairman of the organisation that represents financial advisers and those who manage other people’s money. I come back to the point that the noble Lord has raised. It is very difficult for the industry to understand why the Government have not found it possible to talk in a lot more detail about the costs that are going to be placed upon the industry. After all, the industry pays these costs.

I am a great believer in regulation: I think good regulation is very important. I do not like the way that people sometimes mix bad regulation with the need to have no regulation, but if we are to have good regulation, there are two very important elements. First, it must be clearly understood, and, secondly, the cost must be clearly adumbrated so that people can make proper provision. I agree with the noble Lord who spoke last that it is unacceptable that, first, we do not know in advance; secondly, we will not know until after we have passed these things; and, thirdly, we will have to wait 10 years until we know whether or not we got it right. I have enormous respect for my noble friend, as well as enormous concern, given the difficulties he faces.

[Lord Cormack (Con)]

Total sympathy.

[Lord Deben]

As much sympathy as one can possibly have. I can think of no other Minister I would be more sympathetic to, but I have to say to him that it is pretty difficult to think of another occasion on which a Minister has had to get up and tell the House that he does not know how much something is going to cost, he will not know how much it is going to cost, it is impossible to work out how much it is going to cost, we will not know until after it is all costed, and then we will not know for another decade. I do not think that the Minister will be a Minister in another decade.

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[Lord Adonis (Lab)]

Was the noble Lord in the House to hear the exchanges between the chair of Sub-Committee A and my noble friend Lord Rooker about a letter which apparently is going to be sent to the Treasury, but has not been made available to your Lordships, complaining about the way that consultation and impact assessments have been conducted? It came out only in the course of debate that this letter is in preparation: apparently, the chairs of the two Select Committees cannot agree on the terms of the letter, even though we are in the midst of debating literally dozens of these statutory instruments. Does he not think it would have been a good idea if we had had this letter before this debate? If the relevant authorities of the House are about to write to the Government fundamentally questioning the way that the Government have approached the process of consultation and assessing the impact of these regulations, surely it is not satisfactory for us to be considering these regulations in advance of the completion of that process.

[Lord Deben]

I was indeed in the House to hear that exchange. It was an amazing, remarkable exchange and another example of the total removal of this whole discussion from reality. It was so unusual that I left the House to recover some sense of sanity. First, it is obviously true that we should have had that letter. We thought that the letter, according to a senior member of the committee, had gone. We were then told by the chairman of the Joint Committee that it was almost gone, or nearly gone, or on the way to going. We did not understand whether it would go or whether it still had to be recovered and discussed. The fact of the matter is, I can think of no more appropriate role for the House of Lords than to tell the Treasury that it needs to be very much more precise and correct in its treatment of this House and of the other place. The answer is that it must at least give the figures, and to do that, it has to have a useful impact assessment, not one which is merely a matter of form.

[Lord Adonis]

My Lords, the noble Lord is a distinguished parliamentarian of long experience. Does he not worry that the tone of self-congratulation which we always adopt in this House for the way we conduct scrutiny and the excellence of our processes is coming under serious strain as a result of this no-deal regulation process? The earlier exchanges raise fundamental questions as to whether we are fit for purpose in the way that we are conducting this process ourselves. If it has taken us six months into this no-deal regulation process even to seek to agree an approach to the Government on how they should conduct consultations and impact assessments, does that not fundamentally question the whole process which we are ourselves adopting in holding the Government to account? Earlier a noble Lord made reference to horses bolting and stable doors being closed. Already 100 or so of the statutory instruments have bolted before the Select Committees of this House have been able to agree on what the procedure should be for considering them, let alone whether they are adequate in their own terms.

[Lord Deben]

I feel philosophically and religiously opposed to self-congratulation, so of course I will not suggest that we should congratulate ourselves. As I said earlier, it is quite clear that our processes do not admit the proper consideration of the issues being put before us. However, the second thing which is quite clear—and after this, I really will sit down—is that the world outside thinks that we are absolutely barmy and wonders what on earth Parliament as a whole is doing. The world outside has become less and less willing to accept that our system is fit for purpose. We all know that all political parties—I mean all of them—are not seen by the vast majority of the population as in any way reflecting what they think, want and expect. We are engaged in a serious situation, and one of the sadnesses is that, if we are trying to do the job as well as we can, we have to be involved in them. However, we are involved in them in a way which may well mean that we are ourselves part of the very situation which is undermining the whole reputation of this, the oldest of Parliaments.

[Lord Adonis]

My Lords, I have amendments down in respect of the later statutory instruments, and on the substance of this statutory instrument I do not have much to add to what we have heard so far from the two noble Lords. However, the earlier exchanges raise significant questions. I put on record my hope that when we have the next string of these statutory instruments on Wednesday, the chairs of the two sifting committees might address us on what their procedure will be in respect of the handling and processes of consultation and impact assessments for regulations. I hope that the letter which is to be sent can be agreed—apparently there is a dispute between the chairs of the two sifting committees—and sent tomorrow. It sounds urgently necessary that it should be agreed and sent; indeed, that should probably have happened six months ago, not now. At least we are shutting the stable door after only half the horses have bolted, which I suppose is better than after all of them have left. I put on record that if the letter can be agreed, it is important that it is circulated to your Lordships before the debates on Wednesday, because it will have an important bearing on our proceedings. It may even be possible to slightly shorten our proceedings as a result. I feel obliged to make a speech on each of these statutory instruments about the inadequate processes of consultation and impact assessment, but if the relevant committees of your Lordships’ House are making these points about all the statutory instruments and requiring the Government to improve their regime in respect of all of them, we will not have to go through this gruesome process, statutory instrument by statutory instrument.

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[Lord Lilley (Con)]

My Lords, I hope that the noble Lord, Lord Adonis, will not be shocked to hear that as I have wandered through the corridors of this place, I have heard some noble Lords expressing the view that they are a little tired of his obsession with the statutory instruments. I hope that he will not be even more shocked to know that I am coming to his defence. I think that he is doing an important job and is highlighting one of the great benefits of Brexit. He is bringing to our attention the fact that, after 45 years when we have had to accept these accumulating piles of statutory instruments with scarcely a debate, with no possibility of rejection—that is why there has been no debate—with no hope of altering or amending, which is why we have not, up to now, considered any of the statutory instruments, now, because of Brexit, we are able to do so because, to coin a phrase, we are taking back control of our laws. We should be grateful to the noble Lord for being a convert to this. There is more joy in heaven over one sinner that repents than over 99 just men who have no need of repentance—and I rejoice with him.

Along with the noble Baroness, I have the privilege of sitting on the Secondary Legislation Scrutiny Committee of your Lordships’ House, which goes through these regulations and changes to ensure that they accord with what they are supposed to accord with, to highlight any aspect of them which we think needs to be brought to the attention of the House and, if need be, to upgrade them. I have to say that it has been a revelation to me to see the scope, scale, detail and complexity of legislation which, in the past, has been implemented simply because it is EU legislation. Even if the whole House had rejected it, it would still have become the law of the land.

The noble Lord, Lord Adonis, is right to be concerned about several things. He is right to be concerned about consultation, because now consultation will matter. There will be some point in listening to what people think about statutory instruments because we will, in extremis, be able to reject them, and certainly to suggest to the Government that they might choose to do things differently, and it will be possible for them to do so.

The noble Lord is also right to point to the need for impact assessments and measures of cost. My noble friend Lord Deben—another great convert to Brexit—pointed out that these were important and suggested that the failure to cost these things was because the Treasury was anxious to hide them. I can tell him that today our committee considered one measure which concerned the European budget. We suggested that there should be a costing of that, because there would be a saving of between £10 billion and £12 billion net from no longer being part of the European Community if we leave without a withdrawal agreement on 29 March.

[Lord Deben]

I do not quite understand how we can know the net saving if we have not estimated the actual cost of any of these statutory instruments. That, surely, is the issue. Although we all understand my noble friend’s very amusing and charming way of putting it, many of us realise that the reason why we have these things in this form is that it gives us real equivalence. The problem we are now faced with is that we have fake equivalence. We decide what we want, but if others are not prepared to go along with it, our financial industry will be very much disadvantaged.

[Lord Lilley]

I am trying to get the full gist of my noble friend’s intervention, which was, first, that he seemed to think that the cost of all the statutory instruments which have not been costed—although many of them have—might somehow accumulate to anything approaching the £10 billion to £12 billion a year net contribution that we will save as a result of this one statutory instrument that we have been discussing in the Secondary Legislation Scrutiny Committee today, which will remove us from the EU budget. If he thinks that they are on that scale, I invite him to name one that might be worth £1 billion, for example. I suspect that he will not be able to do so.

My noble friend went on to talk about equivalence, which is important and can be valuable; that is the substance of this SI. It is worth the House remembering that equivalent regulation is not as important as superior regulation. It is far more important for this country to have good regulation—that is, the best in the world, which is not to say the most detailed or intrusive regulation but effective, appropriate, not-too-onerous regulation that ensures good quality of business. That has been the City’s great strength over the years. Better regulation than other countries has often been more important than identical regulation. The Eurodollar market is in London, not New York, because of bad regulation in America: Regulation Q, or whatever it was, drove all the business out of America. Our success in the trade in German state bonds was because the majority of it took place in London, due to our regulatory system being superior to the Germans’ before we introduced the single market and they had to improve theirs somewhat. Likewise, we carried out a high proportion of the trade in French equities because our regulatory system was superior, rather than identical, to that of France.

We should remember that the four great financial centres in the world—New York, Singapore, Hong Kong and London—all have something equivalent to each other and are great financial centres because they have in common common law and all the infrastructure built on that, such as legal and accounting processes, which make them flexible and desirable places to do business. In effect, they outpaced countries with different legal systems. We should welcome equivalence where appropriate but be very glad that we will not have to have regulation identical to that of our friends and partners on the continent. It is almost certainly beneficial to London to be a rule-maker, not a rule-taker.

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[Baroness Kramer]

Well, we also had MEPs, for whom I have great respect, and engaged broadly in the process.

One of my problems is that the equivalence SI we are dealing with today essentially puts, for the next 12 months, all relevant decisions on whether we remain equivalent or, as the EU makes changes, become equivalent in any new area into the hands of the Treasury alone. Not only does that not engage this House—I suppose you could consider the Chancellor to be involved—but it represents the most disengagement we have ever had at an absolutely critical time. If we leave the EU, how we behave on equivalence in the coming months will shape the context of any negotiation on the economic future of the UK, this being its most important economic sector and a major contributor to taxes and jobs. It is pivotal to the economy, yet the Treasury alone will make many of these key decisions. All we have for context are the comments in the political declaration. I will not repeat discussions we had earlier today, but those comments are exceedingly limited and give very little sense of direction.

To make matters almost worse, it is quite clear in the SI that, beyond that period, future decisions will be made through negative SIs—not through some policy framework in this House, engagement with your Lordships in broad debate or extensive consultation, but through the negative procedure. That will make it even harder for us to be engaged in the process. I can tell the noble Lord, Lord Lilley, that all the Brexit issues we are dealing with lead to the massive democratic deficit of great concern to many of us.

[Lord Deben]

Did the noble Baroness notice that my noble friend said, “I think we may have had influence”? Is it not true that we have been at the centre of these discussions and that the European Union is much more transparent and open when it comes to them than the British Government have ever been—certainly more so than the Government now propose to be under these statutory instruments?

[Baroness Kramer]

I can only agree. We have major transparency problems. I am working on the Trade Bill; it is unconscionable that we do not have available to us information that the EU would not only put automatically on a website but constantly report back on, with discussion between the Commission, the Council and the Parliament.

Let us set that aside so I can move on with this particular instrument. I reinforce the concerns about the impact assessment. I must say that the consolidated impact assessment discussed by my noble friend Lord Sharkey contains three pages dedicated exclusively to this SI—I am sure that the Minister will point that out—but anyone who cares to read it will discover that, although it is usefully descriptive, telling us a bit more about the instrument, what used to happen in the EU and what will happen under this instrument, it cannot be called three pages of impact assessment. It does not even attempt to monetise the impact and give us a sense of the costs and the value of the benefits—that is beyond it—and it never deals with the risks in any way. Never in my commercial life have I seen impact assessments that did not assess risk—but these do not even begin to do so.

That is very disappointing, particularly for the businesses which will be picking this up. They want to make sure that this SI goes through, because anything that reduces uncertainty in any area where there is not a cliff edge will be of great value to the relevant businesses—but, my goodness, they would have welcomed something much richer in terms of the discussion to give them some forward vision rather than one that just deals with the very short period of time that will immediately follow departure under a no-deal scenario. I find that very frustrating and a real weakness in the way in which impact assessments are being dealt with here.

That takes me to perhaps the last issue that I will address, which was touched on to some degree by my noble friend Lady Bowles. There is very little discussion in any of this about what I call reciprocity. In order for equivalence for the industry to be able to function without any kind of cliff edge in no deal, not only does the UK need to provide equivalence but the EU needs to grant equivalence as well. In many instances it has not done so, but it may do so in the future. My interpretation is that at the moment it is doing so only in areas where it thinks that not granting equivalence would cause financial instability, rather than looking at broader market access issues.

I take this as a real shot across the bows that we need to take on board, framing the EU intent as to where it will take future negotiations in this area. That is important and I am rather concerned that the Government do not deal with those kinds of issues in this impact assessment, because an honest discussion of that is crucial for businesses as they use the product and everything that we are printing to try to understand what the context is going forward. It has made me feel very gloomy that we will see a much more fragmented set of financial services. I am sure that London will remain a crucial global centre, but I can see the way in which the pattern is developing. It will have some very significant rivals that will take away very significant pieces of business. Over the long term that has real consequences for the UK.

In all that we have here there is one last issue which perhaps the Minister would address, because it could be my deficiency in reading all of this. At the moment we know that third countries operate, as it were, within the EU because the EU has granted them equivalence. As I understand it, the UK will be granting identical equivalence under this SI for the day that we leave if it is a no-deal scenario. But I am unclear about how many of those third countries are granting us reciprocal equivalence. Not only do we have questions about in which areas the EU is granting us third-country equivalence, I am not clear where we stand, for example, in terms of the US. Will we be granting the US equivalence using exactly the same pattern as that of the EU currently? It is not clear whether the US is granting us equivalence and on what terms—and that is just one of the many different countries with which we have built up a kind of network through mutual equivalence that has been established over the years.

Equivalence is extraordinarily complex. It is not a matter of a simple one-hour discussion about four or five easy to understand factors. It is exceedingly complex, it often comes with conditions and it may be limited in a whole variety of ways such as by time and by content. It may have many issues attached to it, and therefore negotiating new equivalence arrangements from scratch would concern me a great deal. I say that in particular because of what we have seen with some of the trade deals, where Liam Fox was absolutely confident that we could take existing trade deals between the EU and the 71 other countries with whom we had free trade agreements and roll them over. He has now been woken to the fact that most of those countries see this as an ideal opportunity to improve their position and to renegotiate. It has become a much slower, much more difficult and much more complex process. I want to try to understand where we are with our equivalence agreements, because potentially the situation is exactly the same. It is very different having an equivalence agreement to have access to the market in the UK from having access to a market of 500 million people. I do not know how many of these equivalence agreements are in play.

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[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.