Draft Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019

Peter Dowd Excerpts

Wednesday 27th February 2019 General Committees

[Peter Dowd (Bootle) (Lab)]

It is a pleasure to see you in the Chair, Mr Davies. Once again, the Minister and I are in a Committee Room discussing a statutory instrument that would set up a regulatory framework after Brexit in the regrettable event that we parachute out of the EU without a parachute. On each such occasion, my Labour Front-Bench colleagues and I have explained our objections to the Government’s approach to secondary legislation. The Minister referred to financial stability, but the best way to maintain financial stability would be through continued access to a customs union and a single market—that is a hint that he may wish to take to the Chancellor.

The volume and flow of secondary legislation on EU exit raises deep concerns about accountability and proper scrutiny—I have just raised a very similar matter in the main Chamber. The Government say that no policy decisions are being taken, but establishing a regulatory framework inevitably involves policy and raises questions about resourcing and capacity, as we have heard many times. The Government should be using secondary legislation to make technical, non-partisan and uncontroversial changes, but they are persistently using it to push through contentious legislation with high policy content.

As legislators, we have to get this right. The draft regulations could represent major changes to the statute book, so they need proper, in-depth scrutiny. In that light, the Opposition put on the record our deepest concerns that the process behind them is not as accessible and transparent as it could be, or as the Minister suggests.

The draft regulations will introduce into UK law a regime for securities financing transactions. They set out a process to allow the Financial Conduct Authority to suspend reporting obligations for up to a year. It would be useful to understand the logic of the one-year period. What assessment has been made of the subsequent impact on transparency standards?

Regulation 8 will give the Bank of England and the FCA powers to draft technical standards. Has any consideration been given to allowing Parliament to undertake that role or giving it greater oversight? It is not completely clear—I would be grateful for clarification from the Minister—why the requirement for the ESMA to draft certain regulatory standards is being replaced with the option for the FCA to do so. In particular, will he assure us that the draft regulations are not being used to dilute democratic accountability?

Regulation 23 will give the Treasury the power to make more secondary legislation. I would like the Minister to provide more information on that, if possible, especially in relation to scope and accountability.

Part 4 of this SI makes provision for trade repositories, which is a different subject with different EU regulation. The SI seems to allow the FCA to issue new penalties. The Opposition feel that that is not the sort of thing that should be done through an SI. We note that the FCA has been asked to issue a statement of policy for penalties, but surely that should have been done before the SI was introduced, not afterwards. That seems perfectly reasonable. The explanatory memorandum states that these regulations include:

“Changes to the treatment of EEA branches of financial services firms in the UK, so that after exit, EEA branches operating in the UK must report their transactions to a UK trade repository. This will bring treatment of EEA branches into line with the current treatment of other third country branches in the UK.”

I would be grateful to hear more from the Minister about that. For example, could it represent a change to regulatory standards? That would be quite worrying. I note that the explanatory memorandum refers elsewhere to

“reporting the same data on the same templates, but to two separate trade repositories.”

Again, I seek clarification on whether there could be any changes to such a template.

The explanatory memorandum also states:

“Given the highly regulated nature of financial services, the volume of trade between UK and EU markets, and a shared desire to manage financial stability risks, the UK proposes a new economic and regulatory arrangement that will preserve mutually beneficial cross-border business models and economic integration for the benefit of businesses and consumers. Decisions on market access would be autonomous in our proposed model, but would be underpinned by stable institutional processes in a bilateral agreement and continued close regulatory and supervisory cooperation.”

The use of the word “new” does not suggest continuity. Similarly, the phrase “preserve mutually beneficial” suggests some element of selection and discretion. It will not surprise the Minister to learn that the Opposition do not always share the Government’s analysis of what is beneficial for our economy or our constituents. I would be grateful if the Minister elaborated on the planned “autonomous” nature of the decisions on market access.

Why are parts still highlighted on pages 6 and 7? Is that a drafting error? Is it a sign of the hurried chaos of the process? As the Opposition have made clear numerous times, this process is unprecedented in its scale and scope, and there are unquestionably many areas that have received insufficient scrutiny. The potential for problems to be discovered only after the fact is very real. In fact, on Monday it was rightly acknowledged that there had been mistakes in the drafting of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. Last week, the Financial Regulators’ Powers (Technical Standards etc) and Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2019 had to make technical amendments to correct measures passed just last December—not years ago, but pretty recently. I have to say that we opposed those regulations and called for greater scrutiny of them.

The Minister knows that we have identified drafting errors in other SIs that have been presented to us. Indeed, during a Committee sitting last week in the other place, the Conservative peer Lord Lexden voiced concerns about the number of drafting errors in instruments. I want to make it clear that I do not believe that this is the fault of civil servants, who are working enormously hard on this package of legislation in extremely difficult circumstances—they have a Herculean task. The fault is in the process. The Government are recklessly pushing through the process with incredible short-termism and a lack of respect for the magnitude of the task and for Parliament in general.

I note that the ESMA is having its responsibilities shifted to the FCA through regulations. I am forced, once more, to give voice to our concerns and queries about this unprecedented transfer of powers via secondary legislation. What consultation has there been on this transfer? Were other institutions considered? What resourcing has been provided? Has the Minister considered the possibility that too many powers are being given to the FCA—more than is practical?

The Opposition have repeatedly stated our increasing alarm at the Government’s unfolding approach to regulating financial services: still no overall plan, still no indication of how different pieces fit together and still, above all, no clarity. I put on the record again that the Government are continuing to put the economy at risk through their shambolic handling of Brexit. Rather than pushing through such a large volume of piecemeal secondary legislation, we clearly need a consolidated piece of primary legislation that can be scrutinised in the proper way.

I know that the Government do not like a great deal of scrutiny and go out of their way not to enable it—well, there we are—but it does not alter the fact that that is what we are asking for. The regulations will transfer far too much power, have possible ramifications that are too significant, and they are shrouded with too many unanswered questions. We cannot in conscience just wave through something like this. Therefore, we do not feel that it would be responsible to agree that the Committee has considered them adequately today.