Financial Services (Implementation of Legislation) Bill [HL]

Lord Hodgson of Astley Abbotts Excerpts

2nd reading (Hansard): House of Lords
Tuesday 4th December 2018 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, it would be hard to argue with the importance of having the necessary financial architecture in place to protect and sustain the UK’s position in the event of a no-deal scenario. The ability of the appropriate authorities to act decisively to maintain financial stability and public confidence is critical in any country, and nowhere more than in the United Kingdom, given the size and importance of our financial services sector. So the Bill certainly has my “in principle” support, and although it seems narrowly drawn, covering only regulations which are in process as the UK leaves the EU, there are a number of particular importance, as the noble Lord, Lord Sharkey, pointed out.

When the tide went out as a result of the 2008 financial crisis, it did, in Warren Buffett’s famous phrase, reveal a number of people who had been swimming naked. As a result of that, the UK Government faced a crisis and had to become a significant shareholder in a number of major UK financial institutions. That must surely be inappropriate unless and until the shareholders, bondholders and creditors have borne their share of the pain. So ensuring that the UK keeps up to date with Bank and central counterparty recovery legislation is very important. We cannot allow gaps to appear in the regulatory framework that may offer opportunities for what is known as regulatory arbitrage. At a more practical level, as my noble friend pointed out in his opening remarks, the move to a more focused regulatory approach to the prospectus requirements, particularly for SMEs and investment managers, must be a welcome development. The UK needs to adopt these regulations if it is to avoid being at a competitive disadvantage.

However, as has also been pointed out by the noble Lord, Lord Sharkey, the Bill, though narrowly focused, nevertheless gives the Government extraordinarily wide powers. I am sure that in Committee we shall need to prove the extent to which they are necessary and the ways in which the Government anticipate using them. At this stage I have a handful of points to raise with my noble friend. At paragraph 1.9 of the policy note that accompanies the Bill, there is an assurance that the Government will:

“undertake engagement and co-operation with key stakeholders throughout the process”.

That is potentially a very important restriction on inappropriate use of the powers in the Bill, but as it stands it is quite a bland statement. It would be helpful if my noble friend could give a little more detail about what the Government envisage in terms of their links with the sector during this very important two-year period.

Another constraint is the reporting requirement in Clause 1(8). The clause requires a report 12 months after a no-deal Brexit. After a no-deal Brexit, 12 months will be a very long time indeed. Have the Government given some thought to bringing forward a shorter regulatory period so that their use of these extraordinarily wide powers becomes more transparent more quickly? Moreover, the requirement, as I read it as presently drafted, requires only a statement of the actions that have been taken. It would surely be more helpful to the outside observer if the Treasury was also required to give a statement about why it had felt it necessary to take individual actions, not just that they had been taken.

My final point concerns the paragraph in the letter kindly sent to us by the Chancellor of the Exchequer. Here I am going to cover ground that my noble friend and the noble Lord, Lord Sharkey, have covered. The important paragraph reads:

“It is of course vital that any financial service legislation best serves the interests of UK businesses and customers once we have left the EU, rather than the UK simply accepting EU laws wholesale. The measures in the Bill will therefore allow for the government to choose to implement only those EU files, or parts of those files, which it deems beneficial for the UK, and to make adjustments and improvements to the legislation as it is brought into UK law to ensure that it works best for UK markets in a ‘no deal’ scenario”.


That is a broad power, as my noble friend said in his opening statement. That whole paragraph contains some pretty challenging implications. For example, who is going to deem what is necessary for the UK, and who is going to ride herd on them to make sure that their judgments are being exercised properly?

These early decisions, taken against the background, as they will be, of a no-deal Brexit scenario, may well have a fundamental impact on the shape and structure of future UK securities legislation and consequently on the competitive position of the City of London. Further enlightenment on the background to this paragraph would be helpful when my noble friend comes to wind up.

I have said that I support this Bill, and I do. When I wrote my notes for it, I said that at least it provides an essential stop-gap—again a phrase that came up in my noble friend’s opening remarks—but stop-gaps cannot be, and cannot substitute for, a carefully crafted strategic plan. In Committee we shall need to explore in more detail the extent of the powers the Bill gives to the Government and the way in which the Government anticipate using them.

Financial Services (Implementation of Legislation) Bill [HL]

Lord Hodgson of Astley Abbotts Excerpts

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

If I may anticipate the Minister’s response, I suspect that he might say something about needing to respond quickly and something about the legislative burden. On responding quickly, this issue arises all the time in respect of legislation, and it is not satisfactory for the Government to make major changes to the law of the land by decree simply because they do not believe that there is enough time for Parliament to debate them. That argument could apply to all legislation at any time, and it does not seem to justify the powers in the Bill. On there not being enough parliamentary time, I am sorry to keep returning to this, but parliamentary time is a commodity at the disposal of the Government and this House. When it comes to major changes to the law of the land, such as significant reforms to financial services regulation—things like the prospectus directive that the Minister refers to will apply to potentially every company in the country, affecting vitally their business and their ability to compete in the global marketplace—it is perfectly reasonable that this House and the Government should make enough time for us to debate propositions in a way that they can be amended and go through the normal legislative procedures. No case is made for the provisions set out in the Bill.

[Lord Hodgson of Astley Abbotts (Con)]

The noble Lord has already referred to the two-year sunset clause. Does he accept that in the short run, the imposition of the Brexit deadline will require things to be done quickly, and in those circumstances, if the sunset clause were shorter, would he be happier?

[Lord Adonis]

My Lords, the sunset clause is for two years, which is nearly half a Parliament. The fact that there is a sunset clause does not somehow legitimise everything that takes place in that period. There is no case for these provisions at all. Let us be clear that we are talking about further changes to the existing law; these are the provisions that are causing such difficulty for many of us in the House. We are prepared to grant the Minister powers to simply transpose existing provisions into UK law—indeed, I am not even sure that under the European Union (Withdrawal) Act he needs legal powers for that. The key issue here is that it all concerns further changes to the law. The statute book constantly needs to be capable of being updated; the whole purpose of Parliament is to debate further changes to the law, and we have established procedures which go back to time immemorial for doing that. They involve Second Reading, Committee, Report and Third Reading stages in both Houses of Parliament.

There is no reason whatever for subverting those principles simply because the Government are overloaded, which is essentially the argument at the moment. The answer is either not to make those changes in law, if effectively they can be made only by exercising powers by decree, or to create the necessary time to do so, which means the Government having the right priorities in what they put before Parliament. We always have to set priorities. As a former Minister, I know that what you do and do not put in the Queen’s Speech and the legislative programme is a matter of priorities. If necessary, the House must sit for longer.

Finally, if it comes down to whether this House should sit somewhat longer to debate major changes to the law of the land on financial services, I for one feel that it is our duty to sit here, debate these changes and not give the Government the power to legislate by decree. I hope that the noble Lord, Lord Hodgson of Astley Abbotts, feels the same because he has been responsible for financial services regulation in the past. That is effectively the power being granted here, potentially in significant areas that are not to do with simply transposing existing or in-flight European law into UK law. I am sorry to say this to the Minister, but the objections to the Bill are fundamental, not incremental. He may well find that, unless he can meet those objections, substantial parts of the Bill will be removed by the House on Report.

--- Later in debate ---

Further, the fact that small listed companies’ representations have been invited to propose proportionate amendments to EU legislation, and that the Commission has made such amendments following these direct approaches, demonstrate that the Commission is open to amendments to the rules to ensure that they are more proportionate in order to support SME listings. Allowing the Treasury the objective and power to ensure that financial services regulations do not impose a disproportionate burden on small companies would merely be a continuation of current Commission policy and practice. It should not be objectionable and, therefore, should not in any way be seen as a threat to equivalence. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, I have put my name to this amendment. My noble friend has raised an important point about Brexit itself and its implications for the regulatory regime. I do not propose to follow up on his technical discussion, but there is a wider point to be made. Here, I will draw on the remarks of the noble Baroness, Lady Kramer, who said that, in the two-year period during which the Bill provides powers, things will happen. We can set out our regulatory stall, but our strategy for regulation needs to become clearer during the two years in which the Act will be in effect.

It is important that the Government do some serious thinking about how this country will present itself to the world via its financial services as part and parcel of the new regime. Noble Lords will know that, for a number of years, I was a director of one of the self-regulatory organisations which governed the City before the passage of the Financial Services and Markets Act. A wise old bird once told us that we should think about it like a high jump. If you set the bar too low, everybody can clear it and you will attract to your market all sorts of undesirable characters and firms, and there will inevitably be failures and problems, which will damage your overall reputation and therefore you will lose your world standing. By contrast, if you set the bar so high that nobody can get over it without enormous cost, bureaucracy, time and difficulty, you may have a market relatively free of failure but it will have very many fewer participants. I encourage the Government to think about how we set that high-jump bar for regulations, given the comments my noble friend made in his opening remarks.

The only other point I want to make is this: regulation tends to be on an upward lockstep. For the most part, regulators do not have a reverse gear. Few regulators come along and say that, given that the world has changed, they no longer need the powers they have because they can do a perfectly satisfactory job without them. Rather, they are left with those powers, which then have to be enforced and have a cost. The commercial vessel then gets more and more barnacles and slows through the water, and it is never able to go in for a hull clean.

My remarks are not an argument against regulation per se. They urge the Government to have regular reviews of regulation to ensure that it is properly focused and achieves a worthwhile result.

[Lord Adonis]

My Lords, the longer the noble Lords, Lord Leigh and Lord Hodgson, spoke, the more concerned I became about their intentions in relation to the powers proposed in the Bill.

I fully accept the noble Lords’ perfectly reasonable intentions. We can have a debate on the right hygiene bar for the regulation of financial institutions—if Britain leaves the European Union, it will be a debate. The Foreign Secretary, Jeremy Hunt, opened it last week in his speech in Singapore, when he set out a vision of Britain being Singapore-on-sea, with a light-touch regulatory regime, offshore from Europe, ready to start competing—as I took it—on a lower bar. It perhaps will not be as low as the hygiene level mentioned by the noble Lord, Lord Hodgson, that starts to discredit us as a reputable financial centre, but he clearly wants it to be lower—he is a Tory, and generally speaking this is what Tories want. There is no great secret around what it is that the noble Lords, Lord Leigh and Lord Hodgson, want.

The crucial issue, however, is how the noble Lords’ intentions relate to the capacity of the Government, under this Bill, to effectively legislate by decree. If the Government want to make big changes in our regulatory regime, they should be debated openly and fully in this House and in the House of Commons. Indeed, if they are substantial departures from existing practice, the more difficult it will be to deliver paragraph (b) in the amendment, which states that,

“financial services regulations do not impose a disproportionate burden on small listed companies”.

That is all the more reason why they should go through the full and proper legislative procedures of this House: Second Reading, Committee, Report and Third Reading. That way, we can debate whether the hygiene level of the noble Lord, Lord Hodgson, is satisfactory. They make no argument whatever for giving the Government the power to rule by decree.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts]

For the Hansard writer, I did not say “hygiene”, I said “high jump”.

[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.

--- Later in debate ---

Moved by

[Lord Hodgson of Astley Abbotts]

12: Clause 1, page 2, line 16, leave out “April 2020” and insert “October 2019, and at six monthly intervals thereafter until the end of the period specified in subsection (5),”

[Lord Hodgson of Astley Abbotts]

My Lords, in moving Amendment 12 I will speak to Amendments 13, 14 and 15, all of which are consequential. In this we will touch on some of the points raised in Amendment 6 by the noble Baroness, Lady Bowles. I am extremely grateful to her for having put her name to these amendments, as I am to my noble friend, Lord Leigh of Hurley.

The debate at Second Reading on 4 December and the debates on the amendments we have had this afternoon showed the very wide executive powers the Government are taking under the Bill’s provisions, notwithstanding the existence of a two-year sunset clause. The Government argue, in my view with some justification, that in the event of a no-deal Brexit these wide powers will be needed to cover the wide range of eventualities that might result from such an outcome. Further, given the great importance to the UK of the financial services sector, these powers are doubly needed. But if the Government accept, as I believe they do, that these powers are unusually wide, they surely cannot object to the legislature having a higher degree of transparency regarding when and why these powers will be used, so that it might undertake its proper constitutional role—referred to by the noble Lord, Lord Adonis, and others—while scrutinising the activities of the Executive and holding them to account.

I respectfully suggest that the Bill as drafted fails in this purpose. Under Clause 1(8) the only evidence or check of the Government’s use of the power is the report by the Treasury, which it must provide at the end of 12 months—that is, April 2020. Noble Lords will be aware that this is already half way through the two-year period. The phrase about shutting stable doors and bolting horses comes to mind. No less importantly, while Clause 1(8) requires the Treasury to report when it has used the powers, it does not require any explanation as to why they have been used. The Treasury report in April 2020 under this subsection could be just a series of one-line entries.

My amendments have two very simple purposes: to shorten the reporting period and to require the report to include some qualitative explanation as to why it was felt necessary to use the powers in the first place. Amendment 12 would shorten the reporting period so that instead of there being just one report during the Bill’s life, there would be three: in October 2019, and in April and October 2020. Amendment 14 would require each of these reports to give a forward look on any expected use of the powers in the next six-month reporting period. Finally, Amendment 15 would require an explanation of the reasons why the powers are being used in the period under review and why their use is planned in the following six-month period.

Under the Bill, the Government are taking exceptional powers that, as has been pointed out repeatedly this afternoon, could in certain circumstances be used quite arbitrarily. I do not have the purity of approach of the noble Lord, Lord Adonis—perish the thought. I am not sure that his purity of thought is entirely aimed at preserving the UK constitution; I think that he might have a wider objective, but never mind. However, I accept the broad argument of the unique challenge of a no-deal Brexit justifying the Government’s approach and the powers they propose to take. But I cannot and do not accept that the Bill as drafted gives sufficient opportunity for the legislature to scrutinise, let alone obtain justification of, their use. These modest amendments would redress this imbalance, achieve the degree of transparency commensurate with the seriousness of the intended powers and so help to maintain public trust and confidence. I beg to move.

--- Later in debate ---

[Lord Bates]

I thank my noble friend Lord Hodgson for ably introducing this amendment. A substantial part of my speaking notes is remarkably similar to those for Amendment 2, when I responded to the comments made by the noble Baroness, Lady Bowles, on early reporting. Again, we have made some progress, so let us perhaps just leave that on the record.

I will make a couple of specific points about my noble friend’s amendments, and those which the noble Baroness, Lady Bowles, has put her name to as well. These amendments would require the Government to lay reports on the use of the power every six months, rather than every year; to set out why the power would need to be used; and to include a table setting out the provisions of the EU legislation that have or have not been transposed into domestic legislation, as the noble and learned Lord, Lord Judge, mentioned in an earlier debate. Again, I can assure noble Lords that the Government’s intention has always been to set out such reasoning and detail as part of the reports referenced in subsections (8) and (9).

As to the frequency of the reports, the current drafting has been designed so that the reports will provide an overview of how the powers have been used in the first year, and how the Government propose to use them in the second year. The intention behind this is to allow enough time to pass for a meaningful report to be drawn together. I hope this helps to clarify the Government’s intention to be as transparent as possible in the exercise of these powers.

As with the amendments tabled earlier by the noble Baroness, Lady Bowles, I have listened carefully to the arguments being presented on all sides, and particularly in this instance by my noble friend Lord Hodgson. It may be that we need to consider further exactly how such a process can run, so that we can provide the House and Parliament with the necessary assurances that it seeks. In that regard, I ask my noble friend to withdraw his amendment, given my commitment that we will look again at this issue and seek to make some constructive suggestions on a new way forward at Report.

[Lord Hodgson of Astley Abbotts]

I thank all those who have taken part. I thank the noble Lord, Lord Tunnicliffe, for his two-thirds of a loaf, and the noble Baroness, Lady Bowles, whose amendment I should have referred to in my opening remarks; it was rude of me not to have done so. A table of derivations and destinations is what I think such a table would be called in UK law; it would be a very helpful addition to the schedule to the reports that we have in mind. My noble friend was smooth—to the point that I thought he was going to turn me down on, but at the end the horse swerved in and jumped the fence. I am glad that he has agreed to put this into the mix. I am grateful to him and happy to withdraw the amendment for the time being.

Amendment 12 withdrawn.

Financial Services (Implementation of Legislation) Bill [HL]

Lord Hodgson of Astley Abbotts Excerpts

Report stage (Hansard): House of Lords
Tuesday 29th January 2019 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

I shall speak briefly in support of the Government and the clause as drafted, primarily because of the points just made by the noble Lord, Lord Sharkey. When I went to the Oxford English Dictionary to check, I got the results he has just described, but it seems to me that the Government’s choice of word is better than the one now being advanced by the noble Lords, Lord Sharkey and Lord Davies. I urge my noble friend to be of good courage and stick with it.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the Minister for a good set of amendments that respond across the piece to concerns that were raised in Committee. I shall probe a little further on what can and cannot be done for the purpose of clarification.

Clause 1(1) states that this is about converting,

“the provisions, or any of the provisions, of any specified EU financial services legislation”.

So the option is still there not to convert it or to convert only parts of it. At an earlier stage, I suggested that that could be adapted. I noticed that when the Minister spoke, he used the word “files” as if the files were all transposed at once, but we must recognise that some things may not be transposed. I believe that is the intention. Here, I should give my usual reminder to the House of my interests as set out in the register, in particular as a director of the London Stock Exchange. In the first set of EU legislation—that which is completed but not yet active—you could still omit some or all of it and do an EU-type adaptation, but you could not adapt it if you chose to convert it. It has got to be relatively straightforward.

For the not yet completed, there is greater flexibility. I have a few little tests of my own to see whether this would be allowed. First, what if you wanted to keep a current provision instead of having a new one? That is quite simple: you probably just leave it out and do not convert it, which falls within what is allowed. If you want to reflect more closely an international standard—let us say that the EU has embellished it in some way—could you do that? I think you probably could because you are still going back to the originating international standard, but it would be interesting to hear what the Minister has to say about that. What if you want to reflect more closely UK market data because it has been calibrated on EU data, by then absent us? I expect most of that happens in technical standards, but it would be interesting to have the Minister’s view on whether the Government could make such a change. I think it would be allowable.

What about aligning with alternative provisions made in other major international markets? That would be departing from alignment with the EU into alignment with somewhere else. Let us say that you wanted to align tick sizes with Hong Kong or the US, rather than staying with the EU regime. Would that be allowed? I think that is quite a marginal issue. The Minister does not have to use that particular example, but it would be interesting to know where that would lie in the tests. If you want to avoid disrupting the functioning of UK markets—the sort of comment you often hear—you are probably left with the option of not converting that element.

My final test is, what happens about proportionality for SMEs and SME markets? I am not sure how that would work out: if the legislation has not included proportionality, is it reasonable and within scope to put some proportionality in? That measure is probably relatively popular from a UK perspective, so it would be nice to know whether that could be covered.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, I thank the Minister for listening to everything said in Committee. There really is little else to say other than that he has taken on board three of my amendments. I am very pleased to see them there. I accept that he has cut down the timescale in the pre-legislative report, if I can call it that, to one month from three months because it might be necessary to do things more rapidly.

If I can pick out a theme from the several speeches I made before, it is that Parliament should not be surprised by what the Government intend to do and do. This suite of amendments, including the more frequent reporting suggested by the noble Lord, Lord Hodgson, makes it very clear: we are told before and afterwards. In fact, we might be told before twice by the two reports—the generic one, if I might put it that way, and the precise one. We will also know where things are so that the diligent individual, possibly when dealing with things in the Moses Room in Grand Committee, will not have to search around wondering where things have or have not gone.

I thank the Minister. He has served me and us very well in this.

[Lord Hodgson of Astley Abbotts]

My Lords, I add my thanks to my noble friend and his officials for Amendment 5, which in large measure answers the points I tried to raise in Committee. I am extremely grateful to him and to the Government.

An epochal event such as Brexit will obviously require a certain degree of statutory flexibility. That is why I support the principle of the Bill, but that does not mean that the powers under it should be exercised below the radar. I am therefore extremely grateful to my noble friend for having set the reporting periods, when he made it clear that it is not just a question of reporting: it is a question of why it is being used, as well as that it has been used. That is important to maintain confidence.