Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, in moving this amendment, I shall make comments that reflect in part on EU relations and therefore on the other two amendments in this group.

As the explanatory statement says, this is a probing amendment in order to discuss equivalence determinations and processes and the role of reciprocity. The amendment states:

“The Treasury may not make an equivalence decision unless it has determined that a third country has equivalent legal and supervisory standards, and it may not make a determination based only on agreement to make reciprocal determinations.”


Broadly speaking, the first part of the amendment restates the usual equivalence requirement, and in the second part I am hoping that the Minister can explain how equivalence through trade agreements or reciprocal equivalence agreements will work. Will those mechanisms be allowed to dilute the standard set through the usual requirement?

We have heard a lot about trying to get equivalence with the EU. My position has always been that it was a remote possibility without rule taking, or dynamic alignment as it has become called. It also seems to me that the way in which the UK wants to operate, with the regulator making rules that can be flexible, makes it more difficult, or even impossible, for the EU, and maybe some other jurisdictions, to agree equivalence. That is because it ends up not being about rules—because in the UK they will be able to flex and vary—but about supervisory equivalence, or, as the noble Viscount, Lord Trenchard, called it, the outcomes. That is more subjective, a matter of opinion and confidence in supervisors rather than an objective analysis of rules.

This reasoning also lies behind what some noble Lords may see as my obsession with getting more information out of supervisors and for regular independent reviews. How else are we, let alone another jurisdiction, going to know what really goes on? Even less demanding jurisdictions than the EU, such as Australia, once they have set up independent scrutiny of their own regulators, may begin to wonder what they know about ours.

Our regulators will say that they have good and friendly relationships with other regulators and that they are respected and so on—all the presentations that they have repeatedly given to committees about why there would be equivalence with the EU in the end. They have been wrong so far, and I am not holding my breath. The statutory instruments currently underpinning legislation will be progressively taken away. I am sure that the EU will read these debates where the Minister has repeatedly stated how FSMA will enable rules to change quickly and be made bespoke and that is why Parliament cannot be let in too much. One hopes that means that rules will change to close gaps and adapt to new types of business, but there is nothing anywhere that says that. It can easily be interpreted as an intention to ease here and there, just like the tailor if we eat a little too much.

I am not trying to be awkward. I have sat in discussions with the European Commission at a time when my committee was concerned that the EU was being too rigid on equivalence. I have had to explain that equivalence was sometimes—in fact, quite often—of mutual benefit. That instinct to have things fixed and controlled between member states ran through every piece of legislation in one never-ending grind, as elaborated correctly by the noble Viscount, Lord Trenchard, on the previous amendment, although we may come from opposite positions. Such an instinct is stronger in financial services than in any other sector because of the philosophical commitment to the euro, whether or not that is relevant. Yet, somehow, it is still hoped that the EU can work out how to deal with this squidgy balloon that defines UK financial services rules. All I am saying is that we have to recognise that if we want the squidgy balloon way and the outcomes way, there are consequences when it comes to equivalence decisions.

That is looking at it from the outside. The other side of it is the inside. What are our rules and supervisory standards that other countries will have to be equivalent to? How is that judgment to be made? Will it be a rule book by rule book comparison or will it really be mutual recognition of supervisors, and if so, based on what? How will that assessment be done? Will HMT agree reciprocal equivalence with anyone when it sees an opportunity for export of financial services and assumes that not much will be incoming back to the UK, or will UK standards be lowered to match those of incoming equivalent businesses from the third country? Will UK firms be allowed to drop standards when operating overseas? To come back to my amendment, will the Government allow weaker standards, through trade agreements and reciprocal equivalence agreements, and how will consumers and financial stability be protected?

The example of software being allowed for capital is a convenient one, although there are probably bigger things. I kept that out of EU legislation but the UK could not hold the line on that this time round. The US has also allowed it. Where does that put banking equivalence for us in relation to the US and, should it ever be on offer, the EU? What top-up supervision or other requirements will go on?

It will be clear that I am less obsessed by getting reports on the EU situation as required by Amendments 100 and 105—although I will happily read them and wonder what is new. I am more obsessed with what standard is really being required by the UK of other jurisdictions to permit equivalence by any route and, in turn, how that will reflect back into our own supervisory standards. I beg to move.

[Lord Hodgson of Astley Abbotts (Con) [V]]

My Lords, I have Amendment 105 in this group, which is also a probing amendment, and seeks to insert a new clause in the Bill about regulatory co-operation with the EU. In her Amendment 90 the noble Baroness, Lady Bowles, called for actions. Amendment 105, as the explanatory statement makes clear, is a reporting mechanism to report on progress towards or completion of an MoU with the EU on regular co-operation measures, which were envisaged under the trade and co-operation agreement between the UK and EU as regards financial services. The amendment flows from my chairmanship of the Secondary Legislation Scrutiny Committee of your Lordships’ House.

Last autumn, the committee considered a number of statutory instruments, which have granted equivalence to oversight and regulatory arrangements in the EU in the area of financial services. Mostly they were laid by the Treasury but some were laid by another departments. It was not clear to our committee whether the SIs were all part of a potential agreement with the EU or whether they were unilateral individual decisions. We wrote to John Glen, the Economic Secretary to the Treasury, as follows:

“Equivalence in relation to the regulation of financial services is an important aspect of our future relationship with the EU. In several of the instruments that we have considered, the UK appears to have granted equivalence indefinitely, while the EU has not yet completed its assessment of the UK’s equivalence (for example in relation to the regulatory regime for auditors) or has granted only time-limited equivalence (for example limited to 18 months in the case of the supervisory arrangements for central counterparties).”


Against this background, we asked for further and better particulars on three points:

“A list of the equivalence decisions made by the UK Government in the different areas of financial services regulation. Whether the EU has reciprocated and granted equivalence to the UK and its regulatory arrangements in these areas. Whether equivalence by the UK and EU has been granted indefinitely or is time limited.”


The reply on 7 January, which I referred to in my speech at Second Reading, was not a model of clarity and precision. Phrases like

“a package of equivalence decisions”

and “the majority of decisions” do not help critical analysis. The correspondence between the noble Lord, Lord Butler, and my noble friend Lord Agnew at Second Reading, which followed this and circulated among all who participated in that debate, seemed to follow the same generalist approach.

However, John Glen’s letter did make one thing clear, that

“there are no decisions made by the EU that have not been reciprocated by the UK.”

As such, to date, it has been a one-way street. That is not necessarily a bad thing, but Parliament and the country are entitled to, and should, know about the development of our relationship with this most significant and geographically proximate market in a sector of particular importance to the United Kingdom—hence my tabling this amendment.

[Baroness McIntosh of Pickering (Con) [V]]

My Lords, I am delighted to follow my noble friend, and I thank him and the other authors of the amendments in this group.

This is a particularly appropriate moment to state that “taking back control” has possibly worked less successfully in the financial services sector than in any other since we left the European Union, with Amsterdam having overtaken us as the largest share-trading centre. There are generally understood to be four options for trade in financial services with the EU. First, there is passporting, which we enjoyed and was very beneficial not just to the London Stock Exchange but, I venture to add, other centres, such as Edinburgh, Leeds and other financial centres in the United Kingdom; it was the most seamless form of trade in financial services. Secondly, there is trade on World Trade Organization terms and, thirdly, free trade agreements, such as that agreed between the EU and Canada, although I am not convinced that it covers financial services or services as a whole. Finally, there is equivalence. If we are not able to revert to passporting, and I understand that we are not, that would be a good way forward. My understanding is that equivalence is where a decision is made by one state to recognise another state’s legal requirements for regulating a service, even though they may not be the same—so, clearly, it is not as good as passporting.

I very much enjoyed the introductory remarks of the noble Baroness, Lady Bowles, and I support each of the amendments in this group for differing reasons. Obviously we will not have the chance to hear from the noble Lord, Lord Tunnicliffe, until he speaks to his amendment, but all three of the amendments in this group would, I believe, further the case for equivalence with the European Union.

Time marches on, and we obviously realise that the trade and co-operation agreement with the European Union left out this major sector of financial services. So I take this opportunity to ask my noble friend the Minister to say, in summing up this debate, precisely where we are with the negotiations and whether we have any chance of reaching an agreement on equivalence under the circumstances and the further particulars as set out by my noble friend Lord Hodgson of Astley Abbotts. I find it deeply regrettable when our own Minister cannot answer three very simple questions in a letter so that our understanding is better. However, with those few remarks, I am minded to support Amendments 90, 100 and 105 for the reasons given.