Financial Services (Implementation of Legislation) Bill [HL]

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

3rd reading (Hansard): House of Lords
Wednesday 6th February 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, perhaps I may say a word or two to put this discussion into perspective. This side hates the idea of a no-deal exit and so on, but the Bill is an outstanding example of co-operation by the Government. The Bill has changed massively from the one introduced at Second Reading. The Government facilitated discussions with the Minister and officials. It is now a much better Bill and, given its task, which we abhor, it is nevertheless a good Bill.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I remind the House of my interests as set out in the register. I also express my thanks to the Minister and his officials, along with other noble Lords who tabled amendments. We have a more than satisfactory outcome. We now have much greater transparency, some new procedures under which the Government will report on what is going to happen and tables to show us where things have gone. I hope this will perhaps lay the ground for how some other things, in what may be more fortunate circumstances than Brexit, could continue in the future. On behalf of these Benches, I thank the noble Lord and the officials.

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Wednesday 23rd January 2019 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have a lot of common thought with the questions that the noble Lord, Lord Kirkhope, has raised, so I do not need to go into detail. I have no problem with, if you like, the way the handle has been turned on the routine adaptation but, again, the question comes of whether it was right to follow the symmetrical approach, so that immediately the EEA is in the third-country pot, or whether there could perhaps have been a transition that made it a little easier. This is not to say that in the longer term that is not the right destination, but I am not sure about a “big-bang” switchover. I, too, wonder what will happen under the Part 3 heading, “Customer Due Diligence”. Will this be another excuse for banks to extract life histories from an awful lot of people, quite a few of whom reside in this House?

Those of us who are former Members of the European Parliament ought, I suppose, to declare an interest; we tend still to have residual bank accounts and such things there. I should talk about this because the same rules apply to those bank accounts as apply to UK bank accounts. Whereas from the UK banks I get 20 pages to fill in, including, as I said, a life history and everything since the year dot, I seem to get one page from a bank in Belgium, which is under the same ruling. I would quite like to know how many of these rules are consequences of the legislation and how many are consequences of gold-plating or uncertainty among our banks. It is, in a sense, an identity thief’s charter when you have to fill in all this information, along with copies of your passport and everything else, and upload it while unsure of where it is going; or you can take it into your branch. Anything that helps with regard to that would be useful to know.

In this case, there would have been an argument for being asymmetrical for at least a little while. I regret that that opportunity was not taken, but I do not believe anything has been done that offends, as such, against what one is supposed to do under the EU withdrawal Act.

[Lord Tunnicliffe (Lab)]

My Lords, perhaps I should say a couple of words about where we find ourselves with these SIs. As Her Majesty’s loyal Opposition, I do not want our participation in this process to be misinterpreted in any way as an endorsement of a no-deal exit from the EU; I cannot think of a worse outcome than no deal to the chaos that we find ourselves in. However, we have to accept that, given this chaos, which has to be laid at the Government’s door, there is a real possibility that we will stumble out of the EU without a deal. While the Government seek to make contingency plans for this, by bringing in front of us what one might call no-deal instruments, we will do our duty of scrutinising them as best we can.

So far, the Government seem to have played by the rules. In my view, the rules are set out first in the European Union (Withdrawal) Act 2018, but also in paragraphs 7.1 through to 7.9—which are identical in all Explanatory Memoranda that come from the Treasury. I believe they say that there will be no new policy introduced except where necessary to achieve the transition.

I diligently read through the Explanatory Memoranda. I fear that I did not read the instruments with as much care, because, frankly, I would not know how to start. A lot of them relate to other documents and getting up-to-date, amended copies of them is difficult, so I have to judge an instrument on the basis of the Explanatory Memorandum. All it basically does is say that EEA countries become third countries. It then goes on to make the consequential changes, which involve transferring various responsibilities. In relation to this instrument in particular, it also defines high-risk countries, which I can see is important.

I have only two questions. The problem with these memoranda is that the authors know what they are talking about, whereas the reader does not know what they are reading about. Having staggered through the document, when I got to paragraph 2.12, I became exhausted. I shall read what I think is the offending passage:

“The standards are to specify what additional measures are required to be taken by credit institutions and financial institutions with branches or subsidiaries abroad, when national law outside the UK does not permit group-wide policies and procedures to be implemented that are at least as strong as those that are required by the MLRs”.


I hope that the noble Lord can make some sense of that.

My only other comment is on the tone of the memorandum—this is true of other memoranda, but I shall centre on this one for the moment. The obligation to report to EU institutions is removed, and one can see why that is perfectly logical. However, money laundering is an international crime with an enormous impact on ordinary citizens, relating particularly to terrorism and to their wealth, because of the crimes committed and their impact on the economy. It is crucial that, even if we are daft enough to leave the EU without a deal, international co-operation continues. It is not just about taking the law where it is now; it is about the law needing to develop as criminals become cleverer and do different things, and we understand more about what they are doing and what action and international co-operation are necessary.

These regulations are brought before us as no-deal SIs and will be commenced on exit day. It is clear what role they will have if it is a no-deal exit, but if a deal is done and we enter a transition period and then come to the end of it, what will happen to this statutory instrument? Will it be repealed or will it be paused? The answer to that makes a big difference to its impact. If the instrument is merely paused, we are making law for the future. If it is repealed and we essentially start from scratch as part of the negotiation in the transition period, and if sanity then reigns and we complete a deal, this SI will not matter; we will be looking at longer-term ways of managing the problems to which it relates.

Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Tuesday 15th January 2019 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

Once again, I thank the noble Lord, Lord Bates, for his explanations. I declare my interest as a director of the London Stock Exchange PLC as some of these provisions could cover funds that might list on the exchange, although nothing I say is to do with the London Stock Exchange.

The AIFMD was a controversial piece of legislation. It was improved greatly during its long passage through the European Parliament and through trilaogues with the Council and the Commission—I think it took us more than 20 trilaogue meetings, which is a large number. I used up every ounce of my patience and innovation to keep it going until everything was in an acceptable place.

The directive started life as a way of regulating hedge funds, which were in the firing line after the financial crisis for their perceived role in the eurozone sovereign debt crisis and for selling unsuitable investments to retail investors—particularly in France which, unlike the UK, did not have any retail consumer protections in place. It was expanded to cover asset stripping. There are anecdotes around why that happened but I will not go into them here—and as I have not written my memoirs, noble Lords will not get to know them. Some hedge fund managers congratulated me on the fact that the legislation ended up in an acceptable place with nothing silly, but many resented moving from an unregulated space into a regulated space and, in the words of one manager, “having to spend time reporting things instead of just earning money”. I am afraid that, as a consequence, the legislation became a recruiting sergeant for the Brexit cause, with funds to boot. That is its sad legacy. That little bit of history augments what has already been said.

Further arrangements were introduced for the specific funds we are also talking about: social entrepreneurship funds and venture capital funds. I considered those introductions very useful, not just in their own right but because it represented the first breakthrough where some people recognised that AIFs could be good; they were usually considered to be at the bad end of the spectrum.

I have no comments on the way in which the onshoring has been done in so far as it follows the kind of path we have seen before, with temporary permissions in place until transfer to the domestic regime—in this case, the UK national private placement regime—takes place. I do, however, have a couple of questions, and I gave notice to the Treasury of the first one.

I believe that, in his introduction, the noble Lord, Lord Bates, covered the reasons why there has been a change to the private placement regime’s reporting requirements. The reasoning, which I understand fully, is that EEA UCITs become AIFs and therefore slot into a regime meant to cover the sort of funds used by only professional investors, whereas it has protections that correspond to the retail case from the EEA UCITs. That was given as a reason for changing the reporting requirements for those under the national private placement regime.

However, I do not understand what power the Government are using for that proportionality, and here I refer to what is said in paragraph 7.10 of the Explanatory Memorandum concerning Regulation 10(9)e. Is it a continuation of the withdrawal Act powers or are the Government using another form of empowerment? I did not perceive the withdrawal Act as giving powers to amend the national private placement regime, but I may have missed something in the logic. I hope that there is an answer there; it is quite likely that there is, which is why I gave notice of my question. Paragraph 7.10 also references the “reporting requirements for funds” recognised as retail funds under Section 272 of FSMA. It is true that they are less risky, so less reporting is needed, but where has the power to amend the private placement regime come from? Has it come from FSMA? That may be possible. If so, that should be said. I decided not to spend yet another weekend trying to work out where it came from, but to ask the question instead.

My second question concerns asset stripping. The asset stripping provisions have been contracted to apply only to UK companies. Does that mean that EU funds that are allowed to continue in the UK under the temporary regime can come here to asset-strip EU companies that they acquire? Are we going to get ourselves a bad reputation—“Come to London and we will strip your EU assets”—or are they covered by the built-in requirement of their home member state? Could they separately acquire something that is somehow ring-fenced in the UK? When they are converted to the UK national regime, will it still have all the asset stripping protections? It may not be the place to correct that here but, on a point of information, will our NPPR have UK asset-stripping protections? That was a novel aspect that was introduced into the AIFMD.

I will move on to venture capital and social entrepreneurship funds. When they were proposed, they were said not to be attracting much interest in the UK; people said that we did not need this kind of thing and we had all the funds we needed. I wonder therefore whether there are any figures for the volume of assets under management or sold in the UK using this heading.

We come now to the interesting point I have already mentioned: symmetry and continuity of assets under management. This is an instance of where we are treating the EEA preferentially and not as a third country, so that these funds can still have EEA assets within them, which I fully understand—you would not want to have to rapidly divest assets. But when they were constructed, preferential bias was built in to try to help the EU and EEA companies. Will there be a review of that in the fullness of time, for example to restore in some way the benefit of the UK footprint rather than an EEA footprint? What has been done is sensible in the immediate, but it would be interesting to know the longer-term view, partly because the logic of coming under the same jurisprudence no longer holds. The other side of that is: why not open up so that they can have all funds, including third countries, in them? How are we going to deal with that?

That is probably all that I need to say. My question is, what is the justification? The choice was between three options and the continuity option has been chosen. But where are we going to jump to next? Are we going to shrink back to the UK or are we going to open up to third countries?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting these instruments. I am sorry to sound like a broken record but I want to start with my concerns about the impact assessment. The Explanatory Memorandum says:

“A full Impact Assessment will be published alongside the Explanatory Memorandum on the legislation.gov.uk website, when an opinion from the Regulatory Policy Committee has been received”.


Is the Minister going to tell me that it is also de minimis or is this different from the last one? I had hoped that there would be an impact assessment, because I have absolutely no idea of the scale that we are talking about: I do not know whether we are talking about millions, billions or semi-trillions floating around. I would have found an impact assessment useful.

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

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

[Baroness Bowles of Berkhamsted]

My Lords, a couple of interesting points have been made in the context of this amendment. As it reads, it looks reasonably acceptable as we do not want gold-plating, which could potentially happen. I echo that the Commission has been particularly good at dealing with smaller companies and businesses. My experience is that that has not always been reflected in the UK when the dispensations have been a matter for the member state. On more than one occasion, I have written to regulators and others about that.

One of the points was about asymmetric effects and the fact that when we are no longer a member state the law will bear down on us when we replicate it, or nearly replicate it, in a different way from when we were a member state. It is not only in financial services legislation that this could potentially happen. It happens with contractual obligations. When we replicate Rome I and Rome II, if the other party is in, say, New York, the penalty for breach of contract will be different in the UK from what it would be in France because we no longer tick the member state box. It essentially means that the higher New York penalty will apply rather than it being limited.

I sit on one of the secondary legislation scrutiny committees, and there have been various occasions when asymmetries have come up. There have sometimes been attempts to balance them, but sometimes not. It depends. These judgments about asymmetries already appear to be going on under the withdrawal Act. From the ones that I have seen, by and large it has not looked as though we could have dealt with them differently, but the issue is worth investigating. To say that the Treasury should do what it can for small businesses is a good thing, whether or not we say that we should not be put in a worse competitive position. Our markets are bigger and, because we have bigger global markets, we may have to regulate in a way that looks stronger rather than weaker. There may be other ways that it does not suit the specificities. I would be a little worried about “no worse competitive position” taken to its extreme, but in the general sense it is possibly more acceptable.

[Lord Tunnicliffe]

My Lords, listening to this debate, one cannot but feel that this is about a policy decision. The last thing I want in this Bill is policy decisions which will introduce different levels of regulation and proportionality. That may not have been the intention. I did not find the words very attractive because they led me to all sorts of different scenarios. I think I heard it advocated as quite a narrow concept to provide against unintended consequences as a result of slavishly transcribing a piece of legislation. If that is the intention, it may have some attraction, but as drafted, the narrowness of that is in no way clear and the breadth of it would involve serious policy changes. It is not the purpose of this Bill to introduce serious policy changes.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, I agreed with the amendments of Lord Adonis; I do not agree that they are not needed, even with Amendment 7. There is still the issue of sequencing in terms of what is and is not being done; Amendment 7 does not solve the cherry-picking point or various other things. I attach quite a lot of importance to the reports provided by subsections (8) and (9). In that context, I read the amendments that added in the Bank of England. The noble Lord has explained that in the sense of taking advice from the Bank of England. But when doing these transpositions, there are inevitably delegated acts and other associated things that will be done at the level of the regulators and will not even be contained in a statutory instrument. Therefore I thought it was right that the regulators reported how things are dealt with as well as the Treasury. I support the amendment but would add the PRA and the FCA. In that way, we get the full Treasury report through to the regulators, so that we see that we are all on the same page and where the tweaks, even within the available limits, are made. So I agree with the noble Lord.

As to whether Amendment 11A is needed, there is no harm in putting it there. The Secondary Legislation Scrutiny Committee and other committees will still be doing their part when the things come to them, so I see no reason not to give some work to the Treasury Select Committee.

[Lord Tunnicliffe]

My Lords, we have an open mind on the amendments. The noble Lord, Lord Deben, hit the nail on the head in saying that the gap between primary legislation and the SI process is too wide. Since we are shovelling a lot of stuff into the statutory instrument process, this is a good time to consider some intermediate action. I do not move from my commitment to tighten up what is available for secondary legislation under this Act, and we will be pursuing that, but I shall listen to the Minister’s response with care to see whether this would be the occasion to make some progress in this important area and give two views of a piece of secondary legislation, instead of the usual process. No matter how hard the Minister and I, and colleagues on the Liberal Democrat Benches, try to give some life to the affirmative SI process, we know in our hearts that we are not going to vote against it because we are not going to provoke a constitutional crisis. Some process in between the two—this may be the right one—deserves careful consideration.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

My Lords, I have Amendment 16 in this group. As the noble Lord, Lord Hodgson, said, I added my name to his amendments and I thank him for trying to bring some better order to the reports and to increase the frequency with which they are produced. Amendment 16 says that the reports must include a table setting out which provisions of the financial services legislation have been transposed into domestic legislation, and under which statutory instruments. I ask for that because it is awfully difficult to know where things have been put. The Minister will recall that on several occasions when we have been discussing statutory instruments under the withdrawal Bill, I have had to go hunting for the articles of the legislation that has been transposed, and they have popped up in a different instrument and sometimes been dealt with at rather different times.

If that kind of thing is going to happen again, we need the safeguard of knowing where things have been put. In European parlance, this was called a “coronation table”, which showed where the European legislation ended up. One does not necessarily need to do that going forward, once we are amending under our own rules, but something like it would be a first step to obtaining equivalence, because we will also have to demonstrate to the EU where everything has been put. Therefore, this seems a useful addition to these reports, thereby keeping Parliament informed about how things are progressing.

[Lord Tunnicliffe]

My Lords, we have constantly been debating the same issue, which this amendment addresses from another direction. I am afraid that my experience of government producing annual reports is that, on average, they tend to appear every 18 months, rather than 12 months. I am not quite sure what the last report of the two does anyway, and the idea of one meaningful report every six months has a lot to commend it. Being prescriptive about its contents would also be quite useful, and I look forward to the Minister’s response.

Payment Accounts (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Wednesday 12th December 2018 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

I thank the noble Lord, Lord Bates, for his introduction and the noble Baroness, Lady Drake, for drawing attention to the report of the Secondary Legislation Scrutiny Committee’s Sub-Committee A, on which I sit, so I do not have to do it. With the state of my voice, that is welcome.

The issue of note here is that an obligation to service non-UK residents is removed. Many of these will probably be UK nationals and will probably come to the UK sometimes, even though they are resident elsewhere. I am sure that this will be an inconvenience and that is greatly regretted. In the interests of saying that this is not being reciprocated, there has been a lack of generosity of spirit in this statutory instrument. Can the Minister confirm whether there would be any supervisory pressure, under “know your client” provisions, for these accounts to be closed? Will supervisors make it more awkward and put pressure on the banks so that closure is de facto the most likely event?

I also remind the Committee that one of the purposes of this legislation was to ensure that basic bank accounts could be opened in advance for people who were moving around for the purposes of work. Otherwise, you get into a Catch-22 situation where you cannot get a permanent place of residence until you have a bank account and you cannot get a bank account until you have a permanent place of residence. While I was an MEP, I got this in my postbag. Indeed, one of my own children had this problem. We were constantly having to intervene to get these things sorted. If we want to encourage talent and still allow it to come to the UK, why make it awkward? I am sure that those who come for big and well-paid jobs may find that they can open accounts, but what about the more ordinary person? I think that, actually, this is a very bad measure.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this instrument. When I first read the Explanatory Memorandum, I thought it was good and it convinced me that, broadly speaking, the instrument was doing its job. Then my noble friend Lady Drake decided to share her speech with me and I realised that perhaps I had not fully understood it, but by this point in the proceedings, the Minister had enough questions to answer anyway without me inventing any more.

The point that has come out of the last two speeches is important. The Government often conclude that an impact is minimal because it affects quite a small number of people. The problem with that attitude is that for the people it affects, it affects them 100%. If you cannot get a basic bank account, that is pretty close to catastrophic in the modern world, so I hope that the Minister will have good answers to my noble friend’s points.

My question is one that runs through many of these SIs—the lack of formal consultation. The consultation paragraph states that there has been discussion with “relevant stakeholders”. One has an uncomfortable feeling that the relevant stakeholders are in fact the financial institutions themselves and not the key relevant stakeholders—the consumers. I would be grateful if the Minister could tell us who the relevant stakeholders were and whether they included consumer representatives, and, if not, why not?

Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Wednesday 12th December 2018 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, probably few if any other people would stand up and say that CRD IV is their favourite piece of legislation, but for a variety of reasons it is my favourite. I do not mean to alarm the Minister or his officials by that, because we seem to have stuck within the rules of onshoring and the transfer of powers in the way with which we are now familiar. However, inevitably that process opens the door to future changes without it having to return to Parliament, as is the case in the EU, because a lot can be done via the interpretation of binding technical standards—if not immediately then at the next stage. It is not entirely clear from the explanation and from what is set out in the Explanatory Memorandum whether the binding technical standards will essentially just replicate what we have at the moment or whether they will make additional policy changes; that is, is it going to stay entirely within the “no policy change” of the withdrawal Act, or will changes be made simultaneously or subsequently?

For now, I want to concentrate on two points of personal interest. The first is the change to what counts as zero-risk weighted sovereign debt. This has long been a pet subject of mine and now it has become mainstream—in particular, that zero-risk weighting is actually inappropriate for eurozone sovereign debt because the European Central Bank cannot print money, although it has done a pretty good approximation of that in recent years. It would be interesting to explore a little more the effect of moving the zero-risk weighting from non-UK sovereign debt, given that sovereign debt is the main tier 1 liquid asset for banks. Will that mean that there is an incentive to reduce diversification in liquid assets?

More generally, how are banks currently dealing with sovereign debt in their risk calculations? The international banks most likely to have other EU sovereign debt can, and probably should, be using internal models to calculate risk rather than rely on the standard model and therefore the zero-risk weight. However, when I looked at this a while ago, the risk allocated in that way seemed to be pretty minimal, and I wonder whether that is still the case. Will minimal risk in the internal models be affected once the near-zero justification has gone? Also in the past some large banks have availed themselves of permanent partial use as a standard model under Articles 149 and 150 of the CRR, the reasoning being that it would otherwise be rather complicated due to holding a lot of different sovereign assets. Of course, Articles 149 and 150 will now apply only to UK sovereign debt, so what will happen there? Can the Minister also advise whether any UK banks are still using Article 150?

The second point I want to raise out of interest is the country-by-country reporting which comes from Article 89 of the directive and has the distinction of being enshrined in the EU withdrawal agreement as part of the BEPS commitments. The particular matter I want to highlight is that the onshoring has replaced the reference to the EU directive 2006/43/EC on statutory audits and annual accounts with the words:

“International Standards on Auditing (United Kingdom and Ireland) issued by the Financial Reporting Council Limited or a predecessor body”.


Frankly, I wish that it had not done that. At present, we have both the Kingman inquiry into the future of the FRC and the Competition and Markets Authority inquiry into audit, which encompasses the FRC and standards matters. I would expect a certain amount of criticism of the way in which the standards as applied in the UK under the FRC have not measured up to the company law of either the UK or the EU. So is that a future-proof amendment, given that the inquiry reports possibly as soon as next week?

On bank recovery and resolution, I am very happy to see the FSB key attributes referenced as a default. I spent quite a lot of time in Brussels having to wave those around during negotiations when things were going in slightly the wrong direction from time to time. As a practical matter, does the Minister consider that there is a substantial difference caused by being in only the international crisis management groups of a bank rather than in the full EU resolution procedures? I repeat my references to what the BTS are going to be doing, given the reference in paragraphs 7.19 and 7.20 in the Explanatory Memorandum. Does that suggest two lots of consultation, or is it just the same lot?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting these two instruments. I cannot but agree with the early paragraphs of the Explanatory Memorandum—which is the same in all these Explanatory Memorandums—that, essentially, if these instruments end up being used, it will be in a no-deal scenario, which would be disastrous for the United Kingdom.

Having had an original career in aviation, I intellectually accept that it is right and proper to prepare for all credible scenarios. That is what we are doing today, and we will do it in the usual polite way about another 40 times between now and the end of March. But, today of all days, one has a feeling that the no-deal scenario has crept a little closer, and I have almost a sense of being asked to dig my own grave against the possibility that extreme Brexiteers will win the day and we will end up in a no-deal situation.

The European Union (Withdrawal) Act highly limits what we are doing here, and I hope that the constraints of that Act are being fully respected. We are not here, frankly, to debate the merits of the instrument; we are here to debate whether it stops within the agreed constraints, which are rehearsed in many places. Perhaps the strongest sentence is in paragraph 7.4 of the Explanatory Memorandum, which states:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation”.


The process called for by the Act, in a sense, divides into two. The first part of the process, which is true of all the things we discuss today, is to reassign responsibilities—in other words to recognise that appropriate authorities are necessary for the business of the various Acts to work and they have to be moved from EU institutions into UK institutions. The second is to make policy changes within the strict limitations of the sentence that I just read out.

Discharging our narrow duty to ensure that the Government have stuck to the rules is very difficult to achieve. In theory, we could go through each SI, line by line, regulation by regulation and Act by Act to see if that is possible. I recognise that the wisdom of the noble Baroness allows her at least in part to do that, but I am afraid that with our available resources that is not possible. A poor second to that is to skim the document and look at its structure and the language that it uses.

Let me take the bank recovery and resolution SI first. It looks as though the reassignment of responsibility has been discharged because, in page after page, one finds that it takes a responsibility from an EU institution and moves it to a UK institution. However, the area that I am particularly concerned about is where the instrument uses entirely new language, because it seems to me that, where there is entirely new language, I have no way of knowing whether policy variations have accidentally arisen. Therefore, I am very surprised to see areas of entirely new language, because I would have assumed that the object of the exercise is to take rules presently in place and translate them into English law.

The most dramatic example of that is on pages 41 and 42 of the bank recovery and resolution SI, where there are two pages of fresh language that talk about the recovery plan that institutions must put in place. Now, I assume that the requirements for that plan are already effectively enacted at this time. Why, then, is it not written over—or whatever the right term is—or why is it not referenced back into the law as it exists today, so that we can see that there is no change in policy? I ask that question to see whether there is any new thinking buried in the text, and I would value an assurance from the Minister that there is good reason why those parts of the instrument are written in fresh language, as opposed to being cross-referenced to language that already exists.

In the second SI, on capital requirements, there is a clear policy change, which is there because the situation demands it. The change, as has already been spoken about, is the recognition of EEA countries as not being of zero risk and hence requiring a capital buffer. In a no-deal scenario, after 29 March such sovereign debt will have to be assigned a risk factor. Surely this will put UK banks at a commercial disadvantage. It is no good to give as an excuse, as is done in the impact assessment—and it was great to see an impact assessment, by the way, so I must put that on record—that most institutions will use the “internal ratings based” approach. While assigning risk to EEA loans is not mandatory with the IRB banks, if they do not take account of the fact that, for other purposes, such assets will be recognised as having some degree of risk, one would hope that this would be challenged by the regulators. Does the Minister agree with that analysis? Why did the impact assessment not look at some way of maintaining the status quo? For instance, it might have contained a statement that the sovereign debt of EEA countries would be treated as zero risk, or it could have included an order-making power for the Treasury to define individual countries as having zero risk.

Short Selling (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the noble Lord, Lord Bates, for his introduction and once again declare my interest in the register as a director of the London Stock Exchange plc.

It is fair to say that when this legislation was negotiated, a lot of it was directed against the markets in London, so if anyone is worried that the regime will run without so many requirements for consultation, it should not be the UK. I had the advantage of participating in scrutiny on Sub-Committee A of the Secondary Legislation Committee, on which I sit. As the Minister explained, in consequence, there has been an extension to the Explanatory Memorandum, and I thank him for that. The correspondence about that is in Appendix 2 to the report. As he said, it mainly concerns the use of sovereign credit default swaps for hedging purposes. That is the single issue to which I shall return.

By way of background, sovereign credit default swaps and their short selling was a highly contentious issue at the time of the eurozone sovereign debt crisis, with many wanting to ban sovereign CDSs altogether, blaming them for escalation to the crisis. It took several months of my life turning that around to establish that there was such a thing as legitimate hedging of correlated assets. Due to that sensitivity, it is worth more clearly explaining that in consequence of changes made in the regulation, there is a widening of the scope of the assets that sterling CDSs could be used to hedge—which, again, the Minister explained— which happens by removing the EEA reference and replacing it with a global one. I do not object to that widening—there was a choice between narrowing or widening, and widening probably goes with the open approach of the UK—but it means wider possible use of sterling credit default swaps. I want to ensure that that is properly understood, should anyone ever read this debate.

It would also be worth knowing what, if any, assessment of the additional volume that is expected to create, if any such calculation has been done, especially in the event of a no-deal Brexit, when some more chaotic things may be happening of the variety that was of concern during the eurozone sovereign debt crisis. I am still confused why Articles 8.4, 8.5 and 8.6 of the delegated act regulation have been deleted. Deleting those paragraphs removes the requirement for a Pearson correlation coefficient of 80% as part of the high correlation definition under Article 3.7(b) of the short selling regulation. The 70% threshold is retained under Article 3.7(c), within Article 18 of the delegated Act. Article 18 was cited in correspondence with the sub-committee as what the Treasury will follow when it takes over setting the correlation conditions.

I do not object to the Treasury taking over setting correlation conditions, because I think it has a good interest in what happens to hedging using sterling CDSs. I just want to know whether 80% is out of favour, whether something happened to replace it prior to the regulation, or whether that change is another widening.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this statutory instrument. I thank him, first, for forcing me to understand a little about short selling; it took several hours to get a reasonable knowledge of it. What I found most difficult were the various exemptions. I sought help from the department to try to understand them. It was pointed out to me that, in some ways, that was the wrong question. The key essence of much of what we are doing tonight is in Section 8 of the European Union (Withdrawal) Act. I remember the debates on that provision with great care, and the overwhelming requirement of Section 8 is that it should not be used to change policy, except as required for the smooth transition.

Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Wednesday 28th November 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, first, I again thank the noble Lord, Lord Bates, for his introduction; it makes a change not to be the expert in the room. I greatly welcome this legislation and have just a few points to make, some of which follow up on those made by the noble Baroness, Lady Drake.

As I understand it, much of the problem with cold calling is that the cold callers—in this case, the introducers—are offshore. We will not be able to get at those generators of leads and they will attempt to sell on their information, which at the moment they may do quite successfully. The UK buyer of those leads would then presumably be committing an offence by following them up with a cold call, on the assumption that the person buying the information is not already, for example, the financial adviser to the individual concerned. Those following up, having bought that information in this hypothetical case, would be subject to the penalty. They should therefore be too scared to do it, so nobody buys leads and offshore cold calling stops because they cannot sell their ill-gotten gains. I think that is how it is meant to work, but it would be good to hear that confirmed.

We still have to address the wider issues of cold calling, beyond protecting pensions. I hope that, having dealt with this issue, we will not think that it is “job done” and that is the end of it. Following the noble Baroness, Lady Drake, I shall look at some of the issues that were not dealt with after the consultation period. The first was the time limit for having given consent. If the case in question happened 20 years ago, it rests on whether a person would reasonably expect to be contacted. It is probably quite a sophisticated system if the caller has information about the person because they already have a policy, for example. It all sounds very formal, and they go through some kind of identity check. I understand that the reason for not doing anything was the fear of setting a wider precedent within the GDPR, but that is a common excuse that is used more widely.

There may be more that could be done in due course because there is also consent by inertia, which was mentioned by the noble Baroness, Lady Drake. Perhaps after a time lapse, instead of saying that someone is not allowed to make the call, there could be a halfway house of having to make sure that the person still consents to receiving calls, especially if they are on a related product rather than the product they have already been advised on. The existing client relationship could become very stretched, especially where one firm is taken over by another which has a wider suite of products on offer. A client might expect a much narrower relationship than would come from an enlarged entity. I am not sure that the recipient of a cold call stating that the caller is the successor of Bloggs and Co would know that the call should not perhaps have been made.

Ultimately, we may have to look at more than just pensions. If we are successful, that lucrative strand for the scammers and the cheaters will be closed off, but individuals who have diligently put money into ISAs—especially if they have put it into stocks and shares ISAs over the period since ISAs started—can have as much saved in them as they might have in a pension fund. So when these organisations start looking for where else they can swindle people, those might be next on their list.

I urge that we do not think that this is “job done”. This instrument is excellent as far as it goes, but it is a work in progress and we have to continue to keep an eye out for where the scams move to.

[Lord Tunnicliffe (Lab)]

My Lords, subject to a satisfactory response from the Minister to the queries by the two noble Baronesses, I warmly welcome these regulations. I am sure many people will value the fact that cold calling is reduced, particularly in this important area.

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

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

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?

Scrutiny of Secondary Legislation

Debate between Lord Tunnicliffe and Baroness Bowles of Berkhamsted

Monday 6th November 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I will speak, first, to the procedural issues to which the regret Motion directly refers and then turn to the anti-money laundering and terrorist-funding measures which these instruments have introduced.

Noble Lords will know that I take a great deal of interest in secondary legislation, particularly when it pertains to Treasury matters. I am therefore familiar with the reports that the Secondary Legislation Scrutiny Committee produces. In recent years I have rarely read such a scathing assessment from the committee about the Government’s approach to the checks and balances, such as impact assessments, public consultations and timetables, which underpin our legislative process. At the very least, I would expect the Government to learn from the errors that they have made. However, they appear not to have learned anything. In the Government’s response to the committee, Stephen Barclay MP, the new secondary legislation champion, stated:

“My officials have alerted me to a similar issue where the General Election purdah period has also had an impact on finalisation of the impact assessment for the implementation of the Payment Services Directive 2. The Government will shortly be laying the Payment Services Regulations 2017, which implement the Directive. Whilst a final impact assessment for implementation of the Directive has been submitted to the RPC, the Government will not be able to publish an impact assessment that has been through RPC scrutiny alongside the Regulations”.


I ask the noble Lord: how many more pieces of secondary legislation will be subjected to sub-standard preparation?

One of the most striking aspects of the Secondary Legislation Scrutiny Committee’s report is the number of occurrences of bad practice that it has noted. First, there is the timing. The three SIs in question were laid on 22 or 23 June and came into force on 26 June, thereby breaching the convention which expects instruments to be laid 21 days before they come into law. The Government go on to say that the general election held on 8 June made it impossible to meet the 21-day deadline, but the Treasury consultation closed in November 2016—nearly a year ago. Why did it take the Government until April of this year to publish the final regulations? It should be of concern to us all that, as the committee says, the Government’s default position is to reduce the time available for parliamentary scrutiny.

Secondly and perhaps even more significantly, despite the scale of the impact that this measure will have, the Government did not see fit to publish an impact assessment at the same time as the instrument. The net cost to businesses will be £5.2 million a year—not an insignificant impact. The absurdity of this situation can be summed up by paragraphs 11.2 and 11.3 of the Explanatory Memorandum published alongside the regulations. Paragraph 11.2 reads:

“The Impact Assessment will provide further detail on impact for small businesses”.


Paragraph 11.3 goes on to say:

“No specific action is proposed to minimise regulatory burdens on small businesses”.


Frankly, the Government had no idea whether action was required, given that the final impact assessment had yet to be published. What is the Government’s excuse this time? Will they say that the Regulatory Policy Committee was also affected by the general election? However, the committee makes the point that the RPC is an independent body. Do its role and functions change during a general election? Did all the RPC’s work cease?

We are as unconvinced as the committee was that the Government could not have published provisional or indicative figures in the memorandum. Given that the draft impact assessment was completed on 13 April 2017, that would seem to have been entirely possible. Why did the Government choose not to pursue this course of action and, given that this is clearly not going to be a one-off, will the Government commit to publishing provisional figures in future if an impact assessment is not available?

I should now like to address the substance of the three instruments. I start by making it very clear that we support efforts by the Government to tackle money laundering and terrorist financing. We agree with the Government’s objective of making the financial system as hostile as possible for illicit finance, and it is right that businesses know their customers and manage their risks. Indeed, we welcome the Government’s decision to clarify that an estate agent should consider that they enter into a business relationship with a purchaser as well as a seller. Estate agents must now apply due diligence checks to both parties and, in so doing, close an existing loophole.

It is also encouraging to see that the Government have acted on PEPs. A firm will now be required to assess the risk posed by each individual on a case-by-case basis. The FCA guidance states that UK PEPs should be treated as low risk unless the firm has identified independent high-risk factors. This is a common-sense change which we support.

However, as I am sure the Minister would expect, there are omissions from the regulations and elements of policy which we query, so I have a number of questions for him. Perhaps the most striking omission from the regulations is a reference to providers of gambling services other than casinos. The Government have explained that this decision,

“was based on evidence that indicated the gambling sector was low risk relative to other sectors”.

What evidence was produced suggesting that money laundering in the gambling sector was low? Whom did the Government consult beyond the gambling industry, and did those other stakeholders share different views about the potential for money laundering and terrorist financing?

Although I confess to being concerned by that omission, I am pleased that the Government have been explicit that this will be reviewed by 26 June 2018. This report— to be produced by the Treasury and the Home Office—must identify, assess, understand and mitigate the risks of money laundering and terrorist financing. This is a substantial piece of work and, given that one reason we are here this evening is the Government’s failure to meet a deadline, I would like the Minister to say how long they anticipate that this process will last. Whom do the Government intend to consult and, with particular reference to the gambling sector, what criteria are the Government using to determine whether the status quo should be maintained?

I turn to due diligence, which makes up a substantive part of the SI. Part 3 of the main money laundering regulations outlines the three different levels of due diligence that companies have to apply based on the specific nature of a business relationship. The Government have stated that they do not want to be prescriptive and, as such, they have made the decision not to publish guidance alongside these instruments. However, it strikes me that this is exactly the sort of area where prescription is required. I note that it will be up to the regulators—the Financial Conduct Authority, HMRC and the Gambling Commission—to produce guidance on how to carry out these checks. Have the regulators been in contact with each other to ensure that there is consistency where necessary, as well as delineation between the three due diligence categories? Businesses and the regulators will require clarity and this will be achieved only if there is integrated working.

On the matter of the regulators, this will place a further strain on their resource capacity. HMRC in particular has in recent years faced reduced budgets with increased demands. I would be interested to know whether HMRC, the FCA or the Gambling Commission have contacted the Government asking for additional resources. I am sure the Minister will highlight that the Government intend to hire an additional 5,000 HMRC staff, which is welcome news. However, how many of those staff will have anti-money laundering responsibilities?

On the specifics of enhanced due diligence—the highest category—the regulations stipulate that “additional independent, reliable sources” and increased,

“monitoring of the business relationship”,

are needed in order to fulfil the requirements of the legislation. But what practical differences would the Government expect to see under enhanced measures and what would be regarded as sufficient monitoring?

Alongside the additional screening and scrutinising measures, larger businesses will also have to make changes to their management, and in some cases perhaps their structure. This underlines that committee’s point about the significance of these regulations. Businesses will be required to appoint one individual from the board of directors or senior management team to take responsibility for compliance with these regulations. Furthermore, the company must establish an independent audit function to examine and evaluate the effectiveness of policies, controls and procedures adopted by the chosen board member, and make recommendations and monitor their compliance. How many companies will this affect, and when are they expected to have complied with this aspect of the regulations? Can the Minister say more about the independent audit function? Could it be incorporated in the company’s existing auditing arrangements, or are they expected to be separate?

My final point relates to the issue of failure to co-operate. What mechanisms are in place if businesses fail to comply with these changes? Have the Government indicated the scale and extent of the reprimand they can expect from the regulators?

The main intent behind this Motion was to get to the bottom of the procedural irregularities which took place in the preparation of the regulations. The Government are not short of problems, and I am sure that they do not want to be accused of undermining the crucial work of your Lordships’ House in scrutinising secondary legislation. We will of course support the Government in preventing money laundering and terrorist financing, but however noble and vital a policy may be, there are principles and procedures which are necessary components to our legislative process and which must be followed. I can only hope that the Government take heed of the warnings from ourselves and the Secondary Legislation Scrutiny Committee. I beg to move.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, by chance this Motion is being debated on the same day that we have had the Urgent Question on the paradise papers. I would like to make a couple of short points before I get on to the main issues of timing. Seeing the paradise papers means that we cannot avoid having many more debates on tax avoidance and money laundering. It shows yet again that more has to be done on the transparency of British overseas dependencies and territories. I would like to point to an extract I have seen from the Government in the context of money laundering, which comes from the Companies House annual report 2014-15 and says that the,

“benefit in having an open, and up to date, register means that it has ‘many eyes’ checking the information … The more open the data is, and the more it is viewed, trust and transparency will increase”.

That says it all about closed registers.

Turning to the Motion, I am not a member of the Secondary Legislation Scrutiny Committee, and am not yet an expert in the intricacies of how secondary legislation is scrutinised here, but I was quite expert at dealing with, and changing, comparable processes in the EU. I find myself asking why the Government organised themselves to make this regulation just in time for transposition so that there was then no breathing space to permit proper parliamentary scrutiny when a general election was called. Time did not have to be so tight, but I fear that it is part of a pattern of seeing scrutiny of secondary legislation as a mere fig leaf for due process.

The fourth money laundering directive was completed some time ago. All but the final trialogues were completed when still under my remit as chair of the Economic and Monetary Affairs Committee of the European Parliament. It was not a difficult directive. It closely followed the Financial Action Task Force recommendations that came out in 2012. Despite being slowed down by the election of a new European Parliament, the summer break, and the palaver of appointing a new Commission, it was done and dusted, translated and published by June 2015, setting two years for transposition.

What filled those two years? It took 15 months to get a first consultation out. The consultation was not opened until 15 September 2016 and closed eight weeks later on 10 November. There were a total of 186 responses to that consultation. I have not tracked down a breakdown, but that number covers all the responses from supervisors and other Government departments, as well as from NGOs and industry. It is not a huge number. Unfortunately, I have not managed to find publications of the actual submissions, but have seen a summary in the following consultation.

By then, the timing problem had been created, but there was a follow-up with a second consultation and draft regulation after another four months; it opened on 15 March 2017 and closed on 12 April 2017. The regulation would have got to a touchdown only just in time even if an election had not been called. That first 15-month delay is unacceptable, because it was scheduled in that Parliament would be given minimum time and scheduled in that there was no contemplation of a vote against, because there would not have been time for changes even without an election. I cannot find any excuse in the subject matter for delay. It is frequently iterated that the UK is a leader in FATF. Back in 2012, it was known what the provisions were and where flexibility lay. If the Government are so keen to say that they lead the field by example, which by all means they should as host to a centre of global financial services, why were they pushing up against the deadline?

I know that amendments by way of the so-called fifth money laundering directive were soon under way. It might have been convenient to delay and try to do this at the same time as transposing the fourth directive. That does not seem appropriate, but if that were a reason for delay it means that convenience was given priority over parliamentary scrutiny. The European supervisory authorities managed to complete their consultation and guidance by November 2016, even though it is guidance for supervisors that they do not have to follow until June 2018. However, it helps with how to deal with risk assessment, and has already been referenced in the consultation that the FCA has launched. There is a problem in and around how you deal with assessing risk. In that regard, the Government possibly did their best by publishing the annex of factors from the directive in the regulation. However, a lot of businesses will have been left dangling, and wondering what they are going to do.