Financial Services (Implementation of Legislation) Bill [HL]

Lord Flight Excerpts

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Lord Bates]

For the points I will come to in a minute, which the noble Lord has slightly pre-empted. Obviously he has read the wind-up speech I gave at Second Reading—the arguments about volume of legislation and timeliness remain consistent—but I will come back to that.

[Lord Flight (Con)]

Would I be correct in describing the reason for that legislation as enabling us to meet equivalence requirements going forward if we have not otherwise dealt with things?

[Lord Bates]

Equivalence is one of a range of considerations that could be taken into account at that point.

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[Baroness Bowles of Berkhamsted]

My Lords, this amendment is a simple, overarching provision that says that no adjustment may be made,

“that jeopardises potential equivalence with the EU”.

This goes to the heart of what is allowable under a statutory instrument and what is not. It seems to me that it is one thing to seek short-cut arrangements—if I might call them that—to land in-flight legislation without needing primary legislation but quite a different matter to then land that legislation at a destination that is very different from the one that was expected. This is especially the case for legislation under subsection (2), which is no longer under negotiation but which has in fact landed, even if it is not yet operational.

It is worth pointing out that everything the Government have said about Brexit, under whatever type of Brexit, is to try to obtain or retain equivalence—that is the expectation. It may be that equivalence does not work out; it might be due to things that the EU does which become problems for UK markets—and, as I said, I know pretty well how that might happen—or it might just be that the EU Commission delays or decides not to make an equivalence finding because it does not see it as in its interest. After all, it is EU Commission policy to make equivalence decisions only when the EU needs them—although it tends to find out in the end that it does need them. I know full well what an infuriating process equivalence can be, as I have played my part both in making sure that it gets into the legislation in the first place and then pressing EU officials to get on with it.

However, despite all those difficulties around equivalence and whether we will have it or not, that will not be decided overnight—even, if I may say so, in the event of a no-deal Brexit. Thus to abandon notions of equivalence, even at any time within two years of Brexit, would be a big step and a decision that should come before Parliament in primary legislation. I do not say that it should not happen, but it is a big departure. I do not remember that anybody’s manifesto said that they would abandon equivalence willy-nilly. Everything that has been said on every occasion, on everything to do with the Brexit negotiations, has been to try to get something better than equivalence, so it would be a big departure to set it aside. This is where the dividing line comes, and this would be the gatekeeper of those things that you do: “It’s okay—you’re keeping equivalence. No; you can’t do it this way if you want to break away from equivalence”.

The truth is that we have already given regulators sufficient leeway that they could make rules that led to an abandonment of equivalence by them not matching EU delegated Acts legislation. The way we have set it up, that has been given to the regulators. However, I do not think that our regulators would tend to go down that track—and if they did, I suspect that it would feature prominently in their consultations. I regret that the noble Lord, Lord Adonis, is not in his place, because I commend his amendment that we will come to later on, in which he suggests that some reporting from the Bank of England should be included. Possibly, if we are to have these reports that tell us what is going on across the piece, it would be a good idea to include in that what the FCA is doing, whether that is done through the FCA having a section of the report or through the Treasury dealing on its behalf with that aspect of the report that it told us about.

As I have already indicated, we know that there are concerns about certain bits or pieces of legislation, but we have to bear in mind that abandonment or significant alteration of any policy element of what is essentially EU primary legislation may well remove the hope of equivalence for part of the market, or indeed for other parts or entities that are not necessarily the direct beneficiaries of those adjustments. I could construct an argument around the changing of the buy-in regime. If that was dropped, it could have ramifications for equivalences in many other places, and that matter is already weighing on the consciences of those who are having to think about which way they would want to push that debate.

As I said, the business about what we do with equivalence needs a great deal more thought. As my noble friend Lady Kramer said, we cannot let it go by default of not doing something or by rushing something through in a statutory instrument that we cannot amend, knowing that it might lead to a loss of equivalence. I beg to move.

[Lord Flight]

My Lords, the hope is that if everything were sensible, the amendment would be appropriate and powerful. As the noble Baroness, Lady Bowles, pointed out, it is possible that the EU may go down paths of regulation that are not very sensible. In that situation, given that the market for the UK’s financial services industry is not just Europe, it may not be practical for the UK to use and follow equivalence. Indeed, there may need to be changes to the benefit of the industry other than vis-à-vis a Europe that has gone off the rails with its regulations.

[Baroness Kramer]

My Lords, I added my name to the amendment because I consider it one of the most important in the range we are addressing today. Two fundamental issues seem to underlie our concerns about the legislation. One issue comes from a constitutional perspective, concerning Henry VIII powers. It matters; we discussed it in other contexts but it is important in this context too. It has an impact on the relationship between Parliament and the Executive, including applying the ability to exercise policy power and Parliament’s role in scrutinising policy.

One aspect of that is particularly substantial in the Bill. In the two-year period when the regime discussed in the Bill holds sway, we will be in a critical time, determining our future relationship with the European Union and whether our financial services industry continues to have access to European markets for financial services. That is a huge discussion and decision; it should not be handed over to the Treasury to enact simply through statutory instruments. I am exceedingly concerned that using this legislation, we will find ourselves in a position where because of Treasury decisions, our negotiators will find that no matter what they wish at the end of their negotiating period, we will have diverged significantly in financial services, making it almost impossible to reconnect parts of the market. If the industry sees that we will go through a period in which that may happen, it will make decisions about where it puts operations, activities and jobs that would not be in the long-term interest of the UK. That two-year period—exactly the period when this legislation applies—is critical. We will basically delegate decisions on whether equivalence continues to be UK policy that come into effect in this House only through the weak medium of statutory instruments.

I see this measure as a safeguard. I recognise what was said by the noble Lord, Lord Flight: that some things about future European regulation in the financial services industry may be unsatisfactory and that we may decide to diverge from them. But it really should not be the Treasury’s decision to do that and it should not be the Treasury’s decision to shut off the possibility of creating a long-term equivalence regime. That is why I support this amendment. If we accept that within this Bill and the Government decide that there are indeed instances where they want to diverge, they can bring forward primary legislation. It is simply that they could not do that through secondary legislation in the way that this Bill would currently allow them to do so. That is too major and fundamental a decision.

I remind the Committee that the financial services industry is probably the most important sector in our economy. It delivers something like £76 billion a year in taxes which support our public services. To make a decision that will fundamentally impact on key aspects of the industry and with all the consequences that that entails must surely need to be done only through primary legislation and with the full and total engagement of this House. That is why I am particularly concerned about this clause.

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[Lord Adonis]

I did not hear the noble Lord across the Chamber, but it does not affect the point. He wants to vary the level of the bar—that is the issue. I do not object in principle: he has a right as a parliamentarian to put forward proposals for changing the level of the bar. However, I object strongly that the Government should be allowed to make those changes by decree, the power that is given to them by this Bill, but we will return to that on Report.

At the moment, the intentions of the European withdrawal Act are elaborately debated in this House, precisely to meet the objective rightly set out by my noble friend Lord Tunnicliffe: that there should be a transposing of European legislation to British law and any further changes to the law should be sufficient only to prevent, remedy or mitigate deficiencies in retained EU law. That is a limited objective which justifies the power of the Government to do this by Orders in Council. As soon as we get to much wider political objectives—the kind that the noble Lord has just set out and as set out by this amendment—it completely undercuts the justification for this Bill. The justification for this Bill should surely not be for major departures of this kind in the law and the regulatory regime to be made by Orders in Council rather than by the full, open and proper debate which is necessitated by introducing primary legislation.

[Lord Flight]

My Lords, first, I declare my interest in the register. I want to make a small point, to which no one has referred so far. There is quite an importance in the various trade and regulatory bodies to discuss with the Treasury, and potentially with the regulator in the EU, what makes sense and what does not. That is a check on the Government having too much power where they will potentially have to do things in a way that is not approved by the noble Lord, Lord Adonis.