Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, Etc., and Transitional Provision) (EU Exit) Regulations 2018

Maria Eagle Excerpts

Tuesday 22nd January 2019 General Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve on the Committee with you in the Chair, Sir David. It is a pleasure to once again sit across from the Minister. I am grateful to him for his opening comments.

We are yet again in Committee to discuss a Treasury statutory instrument that makes provision for the financial regulatory framework after Brexit in the event that we crash out of the EU without a deal. On each such occasion, I and my Labour Front-Bench colleagues spell out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation passing through Committee. The frustration that we must spend time and resources—£4.2 billion—creating a framework that might never be used has already been expressed in Committee. I am sure that hon. Members are aware that yesterday there a Committee divided because of ambiguities over customs arrangements for our Crown dependencies. Just before Christmas, we sought a debate on the Floor of the House concerning the transposition arrangements for MiFID, but were rebuffed by the Government. Today, we are yet again being asked to pass legislation without any impact assessment having been provided and with many aspects of the legislation going unexplained. That is just not good enough.

Because of the dangerous game being played by the Prime Minister and her party, instruments being passed through Committee may well not disappear into the ether on 29 March. They could represent real and substantive changes to the statute book, so they need proper and in-depth scrutiny. Equally, we must bear in mind the stress that financial markets would be under were the Government to allow the no-deal scenario to be realised. This instrument must be considered through that lens.

As the Minister explained, the main purpose of the instrument is to transfer responsibilities from EU institutions to the Bank, PRA and FCA and to establish a temporary intra-group exemption regime. That regime will initially last three years, to ensure that intra-group transactions can continue to be exempted from EMIR requirements. Colleagues will be aware that the EMIR system was created in the wake of the financial crisis to ensure that over the counter derivatives would be logged and cleared—conducted through central clearing counterparties in many cases, as the Minister explained—and, where necessary, that margin would be posted. That was required to provide more market transparency and to prevent the kinds of contagion that were in evidence during the financial crisis. EMIR has not been a completely uncontentious technical package of legislation—quite the opposite. There has been controversy about its scope. When I was a Member of the European Parliament, I was involved in discussions about its scope when applied to non-financial firms.

We must act to secure the future of UK derivatives clearing services. Those services play an important role in helping to increase the resilience of our financial system by decreasing the risk of trading. A no-deal Brexit could pose significant risks to access by European traders to services in the UK, as well as vice versa, so although many elements of these measures would be necessary in the event of no deal, we need to know that there would be reciprocation from the rest of the EU. That means working with our partners in the EU to guarantee that we will be granted equivalence rights for UK clearing services in the case of no deal if the Government insist on not ruling that out. I hope that the Minister will inform us of any assurances that he has received from ESMA and others on that point.

As was echoed in the Minister’s comments, the explanatory memorandum for this instrument states that it is aimed at making

“derivatives markets safer and more transparent”

in the event of no deal, but I have questions about the drafting that I hope the Minister can answer. The first and most significant point is that, yet again, we are in Committee without an impact assessment for the instrument. That contradicts the claim on the first page of the explanatory note for these measures, which states:

“An impact assessment of the effect that this instrument, and other instruments made by HM Treasury under the 2018 Act”—

the European Union (Withdrawal) Act—

“at or about the same time…is available from HM Treasury…and is published alongside this instrument at www.legislation.gov.uk.”

I wasted quite a bit of time looking for the impact assessment. Incidentally, I also looked for the instrument; it is not on that website, either, from what I can see. Later on in the text of the explanatory memorandum I understood why. Section 12.5 states:

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

[Maria Eagle (Garston and Halewood) (Lab)]

Does my hon. Friend agree that such statements, whether they were drafted when the intention was to publish a proper impact assessment, as it states, are misleading to the Committee? I have every sympathy with staff rushing to prepare all kinds of statutory instruments, but the fact is that it completely undermines the capacity of the Committee properly to scrutinise this instrument.

[Anneliese Dodds]

I strongly agree. My hon. Friend is absolutely right that our civil servants are being placed under enormous pressure. None of us underestimates the enormous challenge they face, but equally, as Members of this House, we need to be able to scrutinise legislation properly. That requires knowing when we will have those kinds of documents available to us or otherwise.

I am aware that the Minister said to me at the last such Committee that I attended that the Regulatory Policy Committee was looking at a number of the no-deal related Brexit SIs in the round, in terms of impact assessment, but that its processes take some time to work through and we should receive the assessment soon. I understand the challenges facing the Regulatory Policy Committee—it is facing an almost impossible task—but we need those assessments. When does the Minister expect the Regulatory Policy Committee to be finished with its task? Was it the right decision for it to lump together a number of different SIs and conduct the impact assessment collectively? Is that approach being taken to other bodies of legislation? I know that financial services are particularly complex, but presumably we have similar complex constellations in other areas of no-deal planning. Committee members need to have some degree of certainty that more information will become available. Hon. Members are deeply concerned about that.

Secondly:

“Part 2 of this instrument also introduces a power for the FCA to suspend the reporting obligation for a period of up to one year and with the agreement of HM Treasury, in a scenario where there is no registered or recognised UK TR available.”

I was not able to find out before the sitting whether that provision exists within EMIR itself—that the reporting obligation would be suspended if there was no recognised or registered TR at EU level—but it would be helpful to hear from the Minister in what scenario the Government envisage that a UK trading repository would not be available. He said in his comments that this was unlikely, but if this has been identified as a potential issue and if gaps in provision are possible, we should be making provisions now for equivalence, so that there would not be any risk of detriment to UK market participants, but there does not seem to be anything in this SI, which aims towards that.

Five of the registered trading repositories seem to my eye—admittedly non-expert—to have at least some kind of a presence in London, whereas only two of them are based entirely outside the UK, in Poland and Sweden. Therefore, the converse question also applies. What will happen to the EU’s EMIR regime if UK-based trading repositories cannot provide a service to EU27-based traders? I ask specifically about this because it is surely essential that the reporting obligation is maintained so that transparency continues to be a feature of both UK and EU27 derivatives trading. This is a highly internationalised activity.

Thirdly, the statutory instrument states:

“Provisions relating to TR appeals, fines, supervisory fees, penalties and other supervisory requirements are being omitted and replaced with provisions that align with those already contained in the Financial Services and Markets Act 2000 (FSMA) concerning supervision and enforcement”.

However, no indication is provided here of whether these are more or less onerous. Can the Minister enlighten us on that score? Again, there is no clear indication here of the additional resourcing that might be required. That is something we talked about a lot in this Committee until now. This is occurring in a context where the FCA has never before had responsibility for dealing with the supervision of EMIR-related functions.

Finally, the draft regulations transfer powers from the European Commission to the Treasury and from ESMA to the FCA, as with MiFID no-deal transposition, which has already been passed. Most equivalence decisions will be made by the FCA, but as the Minister just confirmed again, those on central counterparty clearing houses will ultimately be made by the Bank of England, so this will not be occurring through the collegiate system that applies currently at the EU level. Will the Minister give us more background? Why is it happening? It sounds like a policy judgment, but we have not been provided with a rationale. As the Opposition have pointed out before in Committee, the Government are effectively trying to transpose the Lamfalussy process into the UK institutional context, but the Commission and ESMA do not interact in the same way as the Treasury interacts with the FCA. There is a different relationship. It is surely inappropriate to port the powers over without any change to supervision. I hope the Minister will give us some assurance on that point. Also, we really need clarity on when the impact assessment will be available if we are to be willing to allow this SI to pass.

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[Maria Eagle]

I rise to support my hon. Friend the Member for Oxford East on the points she made, and on some of the points made by the hon. Member for Aberdeen North. I was appointed to this Committee last week. I do not normally spend my time considering derivatives of the over-the-counter version—or any other kind. However, having spent many years as a Minister—and therefore knowing how to look at legislation—I found, when I looked at this instrument, something else that I would like to raise with the Minister. When I was a Minister I used to spend my time, before I came to Committees, making sure that my officials would bring along to the Committee all instruments referred to in the regulations, to enable the Committee, if it wished to look in detail at some wording, to be able to understand what that meant. I thought that having the other instruments in the Committee room was the norm. What we have here is an instrument that refers in terms, for example in part 2, to regulations from 2013, and then sets out:

“In regulation 2, in paragraph (1), for the definition of ‘the EMIR regulation’ substitute—

‘“the EMIR regulation” has the meaning given in section 313 of the Act;’.”

To understand the meaning of that, one has to have the regulation to hand. I do not see any copies of the regulation that the instrument refers to here. It was always the practice when I was in Government, and I am sure it was the practice of some Conservative members of the Committee who have been in Government in their time too, to have in Committee all the regulations referred to and being amended, so that if somebody had a particular point to make about a particular part we could see clearly what was being changed, what the implementation of that change would mean, and whether the wording appeared appropriated.

Here, we are left with nothing, in practice, but the explanatory memorandum. We have to take on trust—not that I am saying that I do not trust the Minister—that what we are being told in the explanatory memorandum is in fact being done by the wording that we see in the instrument. I think it is poor practice, if I might say so, and I hope that he will take this back to his Department, to come to Committee with instruments that effectively alter other regulations without making them available in the room. Any officials who had left me in that position as a Minister would have known about it. In fact, I used to ensure that such things were correct in Committee.

I know that there is a big burden of statutory instruments at present, and I understand that Ministers are hard pressed, but it is not right in terms of proper scrutiny for us not to be able to understand the meaning of the regulations. Regulations under the European Union (Withdrawal) Act 2018 are more complex than many because they often simply refer to amendments to primary legislation. Here we have a suite of three regulations, but I was not on the Committees that considered the other two.

It makes it increasingly difficult for an ordinary, intelligent person to understand what the hell is going on. That is not good for scrutiny, for the Minister, for the Government, or for good governance, and it leads us to the impression that what is happening is rushed, has not been thought through, and may be defective. If it is, it will not be possible for members of the Committee to pick up the defects. That is a real problem for proper parliamentary scrutiny.

My hon. Friend the Member for Oxford East referred to part 2. When I was reading the explanatory memorandum, one of the things that jumped out at me, as it clearly jumped out at her, was in paragraph 7.16, on page 6:

“Part 2 of this instrument also introduces a power for the FCA to suspend the reporting obligation for a period of up to one year…in a scenario where there is no registered or recognised UK”

trade repository. I immediately wondered in what circumstances that might be the case. The Minister made a reference to that, and said that it would be highly unlikely—but it is not so unlikely that steps are not being taken in the instrument to deal with it.

Can the Minister tell me how many UK-registered trade repositories there are, and in what circumstances—unlikely though they might be—he envisages that this part of the instrument might have to come into force, or that the powers specified might have to be used? As he said, the whole purpose of the regulations, whether they are operated by EU institutions or by the Treasury, the Bank and the Financial Conduct Authority, is to try to prevent the disaster of the global financial crisis that resulted last time from insufficiently prudent, untransparent regulation of such trades. Will he give us a bit more detail about why he has felt it necessary to include such a provision in the regulations?

I agree with the remarks made thus far by my hon. Friend the Member for Oxford East and others about the lack of any kind of impact assessment. It struck me that there is not even a guesstimate of the cost. Will the Minister tell us what trades we are talking about? If the regulations were referring to a couple of hundred thousand pounds a year, we would not worry as much about it as we would if we were dealing with the equivalent of a quarter or a half of our GDP. Will he tell us what level of financial dealings the regulations relate to?

[Kirsty Blackman]

I am struck that in these Committees, the Government do an impact assessment for more than £5 million of costs to businesses, but not for under £5 million of costs to businesses. If that is all the information we have to go on, that is sketchy, at best.

[Maria Eagle]

The hon. Lady makes a good point, and perhaps the Minister would like to comment on that as well.

The other point I would like to make is about the financial and resource burdens that the transfers made through the regulations will put on those who inherit the obligations and functions that used to be carried out by the EU institutions. That appears to be the Bank and the Prudential Regulation Authority part of it, the Financial Conduct Authority and, of course, the Treasury. There is nothing I can see that suggests that extra resources will be passed on to the FCA and the PRA part of the Bank for dealing with the additional obligations that the regulations place upon them. While they may well have experts in such instruments and this kind of trading already on their staff, the work that they are going to be expected to do as a consequence of the regulations, if they have to be used, would be different to the work they are already doing.

What financial provision are the Government making to ensure that the FCA and the Bank have the relevant staff and resourcing to do this very important job that he is asking us to bestow on them? There does not seem to be any information about the impact on those who will acquire the extra burdens of doing this work, or the likely cost to the Government, the Bank, the FCA and any other authorities, of carrying it out in a way that will work as well as their current arrangements.

[John Glen]

I thank the hon. Members for Oxford East, for Aberdeen North and for Garston and Halewood for their clear questioning. I shall try very hard to answer the points raised.

I hear the frustration on the volume and the time that this scrutiny process is taking. All of the 63 statutory instruments we are bringing forward are under the terms of the European Union (Withdrawal) Act that we have previously debated.

The hon. Member for Aberdeen North referred to the issue of equivalence and what would happen with respect to the EU’s assessment of the UK. Clearly we cannot determine that unilaterally. We have as deep a dialogue as we can, but these are provisions for no deal. We have sought to engage deeply with the industry and all the different industry players to achieve an outcome that is as optimal as can be in the circumstances. That is why I put on record my absolute commitment to ensuring that we get a deal. I feel very keenly the frustration of the speeches on the process, and I acknowledge that it is not as it would be under normal circumstances.

In terms of the consultation with industry, we have engaged with stakeholders, including the financial services industry, while drafting the SIs. They are strictly limited by the enabling power, and therefore have limited policy choices within them. In some of the areas I cannot go further than what I said in my opening remarks, which is that we are transferring things over and dealing with deficiencies. However, I shall in a moment address the points raised.

We published a document in June, which set out the approach. We have been publishing draft legislation in advance of laying it to maximise transparency, and securing industry knowledge from TheCityUK and others along the way. We discuss EU exit preparations regularly with industry, which has helped us to understand the impact of the SI. We shared a draft version of the SI to allow stakeholders to familiarise themselves with aspects of it.

As to the key question raised in all three Opposition speeches, about impact assessment, I am conscious of the need to publish the relevant impact assessments as soon as possible and want to reassure the Committee that I am doing everything I can to make that happen. I met officials last week and this morning to try to expedite that and complete the necessary clearance processes. We will publish it as soon as possible.

[Maria Eagle]

Why does the explanatory memorandum say that it has been published?

[John Glen]

Because at the time it was printed it was anticipated that it would have been published by then.

As ever, I must stress that some firms would incur some costs adjusting to the changes made by the SIs, if they come into effect, but those costs are significantly outweighed by the benefit that is provided by ensuring that the legislation transferred by the European Union (Withdrawal) Act operates effectively after exit. Without the amendments made by the SIs firms would face far greater disruption to their businesses.

--- Later in debate ---

[John Glen]

I am happy to give clarification. Essentially the process of gaining approval for the impact assessment demands that we share certain information and provide it in an adequate form. Because of the unusual nature of the process and the volume of material, it is difficult to line up. As I said to the hon. Lady in the last Committee in which we served opposite each other, we submitted a group of SIs together, and are working as hard as we can to resolve that.

As Miles Celic, the chief executive of TheCityUK, said in a letter in November, these are exceptional circumstances, which require a unique response. We are doing everything to reach that, but I would not want the process to be truncated. We have not yet had an impact assessment that does not give us a green rating, and I want to make sure that that is how things will end up. However, I fully accept that the situation is not an optimal one. I take on board the observations of all three hon. Ladies, and all that I can say is that I am doing everything I can. I understand that that is inadequate in itself, and wish I could give a date, but it is not possible.

[Maria Eagle]

Given that it has not proved possible to do what the explanatory memorandum says has been done, why has not the Minister republished and corrected it?

[John Glen]

Because I wanted the opportunity to explain face to face in the Committee and, given the need to secure the SIs for industry, as I made clear in the quotation from TheCityUK, it is not the perfect process. [Interruption.] I understand the point that the hon. Lady makes but I think I have responded to it as reasonably as I can.