Central Securities Depositories (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

I thank the noble Lord, Lord Bates, for his introduction. As usual, I declare my registered interest as a director of the London Stock Exchange. By now we are familiar with the pattern of how powers transfer to the UK regulators and temporary regimes. I will not revisit that. I have just two points regarding these SIs that the Minister might be able to clarify.

I do not need a response to anything on the trade repositories regulations. I just note as new—new in the sense that I have not commented on it before—the way an ESMA-recognised UK trade repository or entity can simply move into the UK regime. That seems a sensible provision.

On the CSDs, the policy note and guidance on the Treasury’s website say that applications before exit will be “subject to existing law” while the application is considered. I wondered whether there could be some elaboration on the difference between that UK law and the onshored CSDR once firms switch to it. What happens at the point of switching, or is this just, as I suspect, splitting hairs and no big deal? That provoked my curiosity and, with other things going on, I did not quite have the energy to work through absolutely every last word and work it out for myself.

Two issues are general to all these SIs, particularly in the context of the no-Brexit—sorry, that is a Freudian slip—of the no-deal preparations, so I take this opportunity to raise them. Last week I showed a letter to the noble Lord, Lord Bates, when we expected to discuss the SIs that are to come later. It was sent to the chair of the Secondary Legislation Scrutiny Committee, explaining that the SIs laid under the EU withdrawal Act will be deferred, amended or revoked by the withdrawal agreement Bill, ready for the end of an implementation period, rather than exit day. My first point is that it is dangerous to think of any of these SIs as just-in-case provisions. Obviously, much of this allocation of powers is a provision for any Brexit scenario, but it would be helpful to know which provisions are likely to be revoked or substantially modified if we go into an implementation phrase. I am not sure we can necessarily do that for these at this point, but it would be useful if it was in the Explanatory Memorandums.

The other point that we have not previously discussed is that since Monday last week we have had the impact assessment. It did not reveal a great deal—there was no new or useful information—but I do not have a clue where the figures of the costs for firms to familiarise themselves with regulations come from. The amounts seem very small indeed. I wonder whether they include the thousands of pages of consultation that the FCA is doing, which is up to about 1,800 pages just on Brexit preparation. For MiFID, one of the largest regulations and which we will deal with later, the familiarisation cost is a mere £1,900. That is a very low charging rate. I cannot see anybody getting much legal advice for that; at London rates that is about two hours. Just for comparison, how long does it take the Treasury to make a complete transcription? It obligingly sent us the MiFID schedules, along with caveats about accuracy. The problem is that the firms that have to familiarise themselves with these new regulations cannot put in caveats about accuracy. Their compliance executives work under the rigours of a senior managers’ regime. There are no short cuts. I do not mean to cast any aspersions on the hard work being done by anybody in the Treasury—I know that a lot of diligent work is going on—but I do not see how these rather minimal costs can be justified.

[Lord Tunnicliffe (Lab)]

My Lords, I will take the statutory instruments in order, starting with the central securities depositories regulations. A characteristic of these SIs is that they tend to have two parts. I wish I had the same interests to declare as the noble Baroness because then I would come to this knowing something about it. Starting from scratch is quite a battle. My analysis of these SIs is broadly that there is a bit about the transfer of functions and a bit about the transitional provisions. They are more or less in those two groups. The transfer of functions is unexceptionable, except that I am not at all convinced that the Treasury should be solely responsible for the equivalence decision. That is a view that I shall take all the way through. The noble Lord does not have to answer me on this SI because I will bring it up on the last one, by which time a note might have arrived from the Box.

The transitional provision is more complex in all the SIs, but in particular with this one. When you dig into it you discover that apparently there is only one UK CSD and its transition will be little more than a formality, which is good to hear, since these organisations are so important in our lives. Non-UK CSDs have a more complex transition process, but, as far as I understood it, that was okay.

Similarly, the transfer of functions for the trade repositories is straightforward, except for my caveat on the Treasury’s role. I understand that there are five UK trade repositories, covered by paragraph 7.18 of the Explanatory Memorandum. Once again, it looks as though that is pretty well a formality. I found the non-UK TRs transfer regime more complicated, but the one feature I saw is that some new TRs—if they ever emerge—seem not to be fully registered for up to three years. Can the Minister explain why such a long period is necessary?

[Lord Bates]

I thank the noble Lord and the noble Baroness for their scrutiny of the statutory instruments. I will respond first to the noble Baroness, Lady Bowles, who asked about the difference between the current system and the onshoring SI. Before the CSDR, the recognised clearing house regime under the FSMA applies. After exit and the end of the transition regime, the onshored CSDR regime, which is more extensive, applies for any CSD.

The noble Baroness asked for more detail on how that process will work. The Bank of England sent a letter to non-UK CSDs, setting out the process through which CSDs may notify the Bank of England to enter a transitional regime following the UK’s withdrawal from the EU. The process is proportionate and straightforward, with questions we do not expect to be onerous for CSDs to answer. Non-UK CSDs are encouraged to indicate to the Bank of England their intention to notify from the point at which they receive the letter—so the letters have been sent. The Bank of England will treat these indications as notifications at the point that the legislation is made. We are therefore confident that non-UK CSDs will be able to make these notifications in good time. One specific element is that a non-UK CSD will continue to be subject to the existing requirements under the FSMA until the Treasury has made a decision on jurisdiction. Once that happens, these CSDs will be required to provide an application to the Bank of England six months after the Treasury decision. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit.

The noble Baroness asked about the familiarisation costs included in the regulations. I was looking at the algorithm in Annexe 5 and she made some points about that. I am happy to confirm that the familiarisation costs in the impact assessment cover only these instruments. They do not include FCA consultations or the broader impact of leaving the EU—just the specific provisions in this SI.

--- Later in debate ---

[Lord Bates]

I certainly would not suggest that the noble Baroness has misunderstood anything. I will work my way through the pile: I have a feeling that I will have an answer for her very shortly.

She asked what would be amended if there were an implementation period. The legislation would not come into effect in March 2019 in the event of an implementation period. It would be amended to reflect the eventual deal on the future relationship, or to deal with a no-deal scenario at the end of the implementation period. Amendment would depend on agreement being reached with the EU.

The noble Lord, Lord Tunnicliffe, asked if was appropriate that the Treasury is the only body responsible for equivalence decisions. The Treasury takes the role of the Commission in equivalence decisions, but will be informed by advice from the FCA as necessary. As to why the regime will last for three years, the TRRs provide sufficient time for the FCA to be satisfied that the new TR fully meets the requirements set out in the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories SI, of which he and I have fond memories and which was published on 22 October. Three years was judged the most suitable duration period, based on consultation with the FCA. The timescale aligns with other temporary regimes such as the CCP temporary recognition regime.

The noble Lord, Lord Tunnicliffe, asked specifically about the transitional regime for central securities, and the noble Baroness, Lady Bowles, also referred to it. The transitional period is intended to allow non-UK CSDs to continue to provide services in the UK after exit. UK CSDs that have applied for authorisation prior to exit day will be automatically entered into the transitional regime. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit. Any non-UK CSD that fails to notify the Bank may be subject to public censure. A non-UK CSD that has notified the Bank and entered the transitional regime can continue to provide CSD services in the UK on the current basis for a certain period. For a CSD that has made an application for recognition to the Bank of England, that period ends when the application is decided. For a CSD in a jurisdiction that the Treasury has determined to be equivalent and that has not made an application to the Bank of England, that period extends to six months after the Treasury’s equivalence determination. I think that is a partial answer to the question raised by the noble Baroness, Lady Bowles.

The noble Lord, Lord Tunnicliffe, also asked why the Government are not bringing into UK law the settlement discipline regime. Certain CSDR provisions on settlement discipline do not come into force until after exit day. As a result, they cannot be considered retained EU law and are beyond the scope of the European Union (Withdrawal) Act 2018. Returning to the question asked by the noble Baroness, Lady Bowles, she said that it seems strange that once a country has been found equivalent, more is required of that CSD. Equivalence is a decision on the alignment of another country’s regulatory regime. This is a decision of the Treasury. The recognition of a specific CSD is a more technical decision at the level of that CSD, and that is made by the Bank of England.

[Lord Tunnicliffe]

Before the noble Lord sits down, I am fascinated to know what “public censure” looks like.

[Lord Bates]

Of course, that would be what the regulators engage in in the rigorous upholding of the rules that govern activities in their respective areas, whether it is the Bank of England, the Financial Conduct Authority or the Prudential Regulatory Authority. Any reprimand of any shortcoming they observe would be regarded as a matter of public censure.

I am grateful to noble Lords for their comments. I commend both these SIs to the House.