Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018 Draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018

Lyn Brown Excerpts

Tuesday 4th December 2018 General Committees

[Lyn Brown (West Ham) (Lab)]

It is an absolute pleasure to serve under your chairmanship, Mr Evans.

As we know, the regulations before us are two of a large number of statutory instruments relating to preparations for a potential no-deal Brexit. We expect around 70 to have been tabled by February. With this process, we have effectively begun to construct the bare bones of a functioning regime for financial regulation post Brexit.

Labour has consistently advocated for consolidated legislation on financial regulations. Since 2010, we have been faced with confusing, piecemeal legislation. There were financial regulation Acts in 2012, 2013, 2014 and 2015, and there have been more since—reams of reams of detailed amendments to legislation that was already complicated. On top of those Acts, Delegated Legislation Committees like this have attempted to scrutinise the many pieces of secondary legislation that have been needed to correct technical errors.

Put simply, we are concerned that the process for these Brexit regulations is not accessible or transparent. Not only does that make our role more difficult; it raises questions as to how stable the regulations will be if they do need to be used in respect of the industry itself or the wider public. My colleagues who are normally in this place, because I am not one of the economists in my team, have been reassured by the Government that these measures will not come into force should a deal be agreed before 29 March, but many of these powers could be applied whatever happened with Brexit. Which provisions will be revoked or substantially modified if, for example, we go into an implementation phase and no deal has, rightly, been ruled out as a possibility?

Before I ask my other questions, I want to make it clear why I think the regulations are important. The global financial crisis a decade ago taught us that the trading of derivatives and other securities needed to be better regulated within a transparent framework, and with robust infrastructure to monitor and enforce compliance. During the crisis, there was behind-the-scenes, over-the-counter buying and selling of complicated financial contracts, introducing risks that regulators and financial firms themselves could not properly assess or manage. There was no requirement to keep proper accessible records in the midst of that terrible crisis, and regulators could not always know who had bought which derivative and from whom. That meant that they could not know which banks or other financial institutions were exposed to bad loans or wrongly priced assets, gumming up the works of the financial system, and which were close to going under.

That is why, in the immediate aftermath of the crisis, it became a priority of the G20 in 2009 to move the regulation of over-the-counter derivatives to a regulated clearing framework. That change was put in place across the EU by the European market infrastructure regulation, which is implemented by the European Securities and Markets Authority. Having a robust, transparent infrastructure for derivatives trading imposes compliance requirements on firms across the EU, but it does help to protect us from a repetition of the events of 2008—we hope.

Colleagues will be aware that the draft Central Securities Depositories (Amendment) (EU exit) Regulations 2018 will make technical changes to ensure that the UK still has functioning regulations for central securities depositories, or CSDs, in the event of no deal. The regulations will transfer the power to make equivalence decisions from the European Commission to the Treasury. They will transfer powers from ESMA to the Bank of England, enabling the central Bank to recognise third-country CSDs after Brexit. They also make amendments to the transitional regime so that third-country CSDs can continue to provide services relating to the UK after exit.

The draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 are intended to ensure that the UK’s legal framework for the reporting of derivatives trades to trade repositories continues to operate effectively after Brexit. Of course, we support the general aim of improving the transparency and predictability of the settlement of securities transactions. However, I do have some specific questions.

The explanatory memorandum for the draft central securities depositories regulations says that they aim only to ensure that the UK’s framework will continue “to operate effectively”. Will the Minister clarify whether any departure at all from EU rules is envisaged, however small? The Treasury website’s guidance on those regulations states that an application before exit

“will be subject to existing UK law…while that application is being considered.”

Will the Minister elaborate on whether there is any difference between the UK law that applies to applications before exit and the onshored regulation, once firms switch to it?

Similarly, the transfer of regulatory powers does not tell us anything about how UK-based companies will be affected in their future relationships with other countries’ financial sectors. How will any decisions about third-country equivalence be taken in situations where in the past there was a joint decision by European and other authorities? In previous SIs, equivalence decisions have been transferred to the Treasury, not to the Bank of England. Will the Minister elaborate on why in this case it has been decided to transfer them to the Bank of England instead? How and why was the decision reached? Was it consulted on?

Our strongest commitment, as with all no-deal SIs, is to ensuring that such amendments to our regulations need never be used. We hope that they never will be, because a no-deal scenario is something that no responsible Government would allow to happen.

On the broader question of financial regulation, Labour will take measures to ensure that there is public faith in the financial and investment system. We will not repeat the light-touch regulation mistakes of the past. We have commissioned independent experts to report on how the regulatory system should be reformed to ensure that the kind of behaviour that caused such terrible damage during and before the financial crisis can never happen again. We know that people and society want and need banks in which they can safely deposit their money, that lend responsibly and that provide credit to finance investment across the whole country. All I can say is that I wish we were discussing how to do that, rather than these no-deal Brexit preparations.

--- Later in debate ---

[John Glen]

I thank the hon. Members for West Ham and for Glasgow Central for their points, and I will endeavour to answer all of them. I recognise that some of the scenarios are obviously not desirable, and I echo their comments about that. We are seeking a deal, and the framework of the deal for financial services would give us provision for early equivalence decisions before the end of the implementation period, and we hope that will happen. We believe that the regulations are necessary to ensure that the UK retains a fully functioning legal regime for the trade repositories and central securities depositories in the event of a no-deal scenario. I also want to make the point, which applies in response to both hon. Ladies’ comments, that the Government do not, in any eventuality, see the UK financial services sector trading on some deregulatory arbitrage basis, where we somehow remove ourselves from the context in which we have been so intimately involved within the EU with respect to regulations. The hon. Member for West Ham made reference to the Pittsburgh agreement in 2009 to improve transparency, and we stand by that. A holistic review was undertaken following the crisis and the ESMA rules came into effect to try to address that.

On the point about how stable the regulations on central securities depositories will be when needed, we have engaged extensively with the regulators and with industry, and we are confident that we will ensure a stable and functioning regime at the point of exit. With respect to what happens if there is a deal, the withdrawal agreement Bill will include provision to delay, amend or revoke statutory instruments made under the European Union (Withdrawal) Act 2018, so we would make a decision based on what was appropriate at that time.

The hon. Lady asked about the differences between the transition regime for CSDs and full authorisation or recognition under CSDR. While a CSD is within the transitional regime, it will be subject to the recognised clearing house regime in part 18 of the Financial Services and Markets Act 2000. Other legislation, such as the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001, is also relevant. Recognised clearing houses must be recognised as part of the Bank of England, which gives an exemption from the general prohibition under FSMA IV regulated activity. A recognised clearing house may provide clearing services in the UK.

Once a UK CSD has been authorised, or a non-UK CSD has been recognised, the onshore CSDR regime will apply to it. That consists of the EU CSDR and the UK’s 2014 and 2017 regulations that implement it, and CSDs are given a separate exemption in section 285 of FSMA. As the hon. Lady pointed out at the start, the regulation is complicated by the way that those markets function. That regime is more extensive than the recognised clearing house regime and contains more detailed requirements about the operation and supervision of CSDs.

The hon. Lady also asked whether there would be any departures from EU law. The legislation is drafted using powers under the European Union (Withdrawal) Act 2018, so there is no policy innovation or deviation. That Act does not allow such policy changes, except where necessary to address deficiencies in language or such like. No changes are made to the regulatory requirements on CSDs.

The hon. Lady asked about the appropriateness of the Bank of England recognising non-UK CSDs. The Bank of England is obviously the UK regulator responsible for the authorisation and supervision of UK CSDs. It has a process in place for the recognition of UK CSDs and therefore has the most relevant experience for recognising non-UK CSDs. That sort of pattern has been followed throughout the construction, engagement and laying of these statutory instruments, so where the Commission is appropriate for making equivalence decisions, that comes to the Treasury, because we are equivalent, and the same with ESMA and the Bank of England.

[Lyn Brown]

There is one bit that the Minister has not touched on, which is third-country equivalence.

[John Glen]

The regime that we would be onshoring for the future recognition of third countries would be a matter for us to consider, on the same basis that we would be onshoring EU entities that would have a new legal entity in the UK. It will be the same process, but one that we would essentially have to do domestically, rather than relying on the ESMA framework.

I now turn to the points of the hon. Member for Glasgow Central. I acknowledge the recurrent but appropriately made comments about her party’s position. All I can say is that I have tried to conduct this in as professional a manner as possible. The regulators have the resources available. They have a supervisory framework and, through the levy, they have the ability to make the appropriate resources available.

The hon. Lady asked about the temporary registration regime, which is intended to allow existing EU trade repositories to continue to provide services to the UK. It allows the new UK legal entities, which are part of an ESMA-authorised group, to submit an application. In terms of the process for that application, she mentioned the drafts on the site. I cannot give her the responses to the letter of 25 October, but I undertake to write to her on that. I need to speak to the regulators to understand where they are with that.

The hon. Lady also made a point about the degree of engagement that we have had with the EU. We have had a wide range of discussions with our EU counterparts—I have not personally, but my officials have—on matters relating to our withdrawal from the EU and this matter.

The UK Government and regulatory authorities will continue to do everything we can to ensure a smooth adjustment for firms and customers on both sides. Unfortunately, as with many of these matters, we cannot determine the EU’s response. That has been a challenge over this period. It is inevitable that, in a no-deal scenario, hostility will break out. It is in the interests of all market participants, regulator-to-regulator, Government-to-Government, to continue to work closely together, because that is in the interest of stability.

I believe that has addressed most, if not all, of the points raised.