Financial Services (Implementation of Legislation) Bill [Lords]

(Limited Text - Ministerial Extracts only)

2nd reading: House of Commons & Money resolution: House of Commons & Programme motion: House of Commons & Ways and Means resolution: House of Commons
Monday 11th February 2019 Commons Chamber

[The Financial Secretary to the Treasury (Mel Stride)]

I beg to move, That the Bill be now read a Second time.

I should begin by paying tribute to my noble Friend Lord Bates for piloting the Bill through the other place so successfully. I am sure that the House will recognise the importance of supporting our financial services industry no matter what the outcome of negotiations on leaving the European Union. The UK’s position as a world-leading financial centre is critical to our prosperity. In 2017, the financial sector contributed £131 billion to the UK economy. It employs over 1 million people across the country, two thirds of whom are outside London, including in the thriving financial centres of Edinburgh, Belfast, Manchester and Cardiff. UK exports of financial services were worth over £77 billion in 2017, which highlights the importance of the sector on the global stage.

[Mary Creagh (Wakefield) (Lab)]

I am sure it was an oversight, but in his list of UK financial services centres the Financial Secretary neglected to mention the Yorkshire centres of Leeds and Halifax—of course where the Halifax bank was born—and the many building societies that remain in our area.

[Mel Stride]

I thank the hon. Lady for that very appropriate intervention. She is quite right to mention the local presence of financial services across the United Kingdom.

My right hon. Friend the Chancellor of the Exchequer has already set out the Government’s long-term vision for the future success of the UK’s financial sector, based on world-leading positions in the markets of the future, whether in green finance or in FinTech, and we are pursuing an ambitious global financial partnership strategy to cement our trading relationships with key partners.

However, we also need to ensure that we have appropriate regulations in place, with the right balance between protecting stability and fostering competitiveness. We aim to be the safest and most transparent place to do business, leading the race to the top and always championing high regulatory standards in financial services markets. The Bill will ensure that, in a no-deal scenario, the UK’s regulatory landscape will not fall behind its international counterparts.

The Government have been clear that we do not want a no-deal scenario, but it remains the role of a responsible Government to continue to prepare for all possible outcomes. That includes the event that we reach 29 March without a deal. In those circumstances, we will have brought on to our statute book the vast body of EU legislation that needs to be operative at the point of exit. However, the powers under the European Union (Withdrawal) Act 2018 relate only to legislation operative immediately before exit day. A number of pieces of EU legislation will not be covered by the powers conferred under the withdrawal Act. They include proposals that are either already agreed but which have not yet been implemented, or those that are soon to be agreed beyond our exit from the European Union.

[Mary Creagh]

The Minister talks about the in-flight legislation and the proposals as they appeared in the other place. When they first appeared in the other place, they were missing a couple of bits relating to the taxonomy of environmentally sustainable activities that would allow companies to green-check their revenue streams, and to new disclosure requirements for asset owners such as pensions schemes, which is of great concern to the Environmental Audit Committee. Can he explain why those two proposals were left off the list? The Bill has now been amended in the other place, but why were they originally missing?

[Mel Stride]

I think this is an example of Parliament carrying out its process and legislation being improved as a consequence. The most important point is where we have ended up. Having listened to the arguments put forward in the other place, the Government chose to embrace the amendments that brought those two particular files into the scope of the Bill.

The Bill provides a mechanism through which the UK will be able to implement in-flight financial services legislation. They fall into two categories. The first category of files relates to those that have been agreed while we have been a member of the European Union, but will not apply or be in force prior to the UK’s exit from the EU on 29 March. In a no deal and in the absence of the Bill, there would be no effective way to implement those files in a timely manner, as each would require primary legislation. The Bill allows the Government to domesticate each of these files in whole or in part via an affirmative statutory instrument. It further provides a power to fix deficiencies within them.

[Robert Neill (Bromley and Chislehurst) (Con)]

Will my right hon. Friend give way?

[Nicky Morgan (Loughborough) (Con)]

Will my right hon. Friend give way?

[Mel Stride]

I will give way first to my hon. Friend the Member for Bromley and Chislehurst (Robert Neill), but wait with great anticipation for the intervention of my right hon. Friend the Member for Loughborough (Nicky Morgan).

[Robert Neill]

I am very grateful to my right hon. Friend for giving way. I entirely support the thrust of what is sought to be done here, as does the financial services sector. None of us wish that it should ever be necessary, but given that we are seeking to set out these safeguards, can he help in relation to one matter of in-flight legislation? In clause 3(1)(e), there is specific mention of the inclusion of

“delegated acts under the Prospectus Regulation”.

The financial services sector very much welcomes that being included, because it is important. On the other hand, for another important piece of in-flight legislation, the Securities Financing Transactions Regulation referred to in clause 1(3)(f), there is no use of the words “delegated acts”. It is anticipated that under both examples level 2 legislation, as it is called, might be desirable, so can the Minister help by explaining why the distinction has been drawn in that way?

[Mel Stride]

I thank my hon. Friend for his question. He is quite right, although the reference to the Securities Financing Transactions Regulation is, I think from memory, in clause 1(12), line 35 or thereabouts—the fourth file although the fifth measure in the list, the earlier two being combined. As to the main point on which he seeks clarification, the Bill will bring into effect those measures, as amended or otherwise, by affirmative statutory instrument at the time they are brought in. It will then be a case of the way in which those measures are dealt with in terms of the delegated powers to which he refers.

[Nicky Morgan]

I thank the Minister for giving way. In his letter to colleagues last week, the Economic Secretary stated that the Bill will allow for the Government to choose to implement only those EU files or part of those files which they deem beneficial for the United Kingdom. The Minister talks about whole or parts of legislation. Is he able to set out which of the files or parts of legislation the UK does not intend to implement, and how they will make the decision about what is or is not beneficial to the United Kingdom?

[Mel Stride]

I would make two points. First, where we will end up with the various files that are the subject of the Bill will, to some degree, be determined by where we end up shortly after or after any no-deal exit. I would imagine that at that point the EU would also wish to be negotiating with us on those measures. Secondly, the files themselves, under the schedule as opposed to clause 1, are being negotiated at the moment. We therefore do not have clarity on the exact form they will take.

The second category of files, as I explained, are those that are still in negotiation. These are files that the UK has, in many cases, played a leading role in shaping, and that could bring significant benefits to UK consumers and businesses. The Bill also allows the Government to domesticate these files, in whole or in part, via affirmative statutory instrument. Given that the UK will not be at the negotiating table when the files are finalised, we will be unable to advocate for the interests of the UK’s financial services sector during those negotiations. The Bill therefore provides the Government with the ability to make adjustments to the files that go beyond the deficiency fixing powers for the agreed files. These powers are clearly defined and proportionate.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

I am extremely grateful to the Minister for giving way. As he has outlined, these are powers that would only be used in the event of a no deal. As a Treasury Minister, I would imagine he is probably losing more sleep than most Government Ministers at the prospect of a catastrophic no-deal situation. Will he outline what reporting mechanisms will be introduced by the Treasury for how these powers are used, either by the Treasury or by Treasury-affiliated bodies such as the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority?

[Mel Stride]

I am pleased to report that the Bill, as amended in the other place, allows for reporting in respect of the statutory instruments on a six-monthly basis—that commitment is in the Bill—and that there will be four periods in total. The first period of six months will commence from the moment the Bill receives Royal Assent. The report will both look backwards at the powers that have been exercised up until that point and forwards to those powers that may be exercised in the coming period. As to other organisations, such as the Bank of England, there will be a requirement for annual reporting on the basis of the measures undertaken by those regulatory organisations.

[Robert Neill]

The Financial Secretary is being extremely generous, but it may actually speed things along. Can he help me on one matter relating to the second class of legislation, the level 1 files? He set out a list of files that are included in the second category. Is it intended that that is entirely exclusive? The Bill deals largely with the procedure for dealing with these files. I have in mind, for example, the proposals that are being developed by the Commission on non-performing loans and on business crowdfunding services—again, areas where the UK has had a good deal of input into initial discussions but that are not actually listed in the Bill. Is it intended to deal with those? If so, in what way?

[Mel Stride]

I can confirm to my hon. Friend that the list is exhaustive in the terms he was discussing. In the case of non-performing loans, these matters were considered but it was decided that the number of these in relation to the number within the EU was relatively low and that existing tools that are available were adequate to deal with those particular matters. Hence, that particular issue does not feature within the scope of the Bill.

Changes cannot be made in such a way that the implemented files depart in a major way from the effect of the original legislation. However, the Government will have some flexibility to make adjustments in order to take account of the UK’s new position outside the European Union. As a result of amendments to the Bill during its passage through the other place, the Treasury will be required to publish a draft statutory instrument at least a month before laying it, alongside a report detailing: any omissions from the original EU legislation; any adjustments from the original EU legislation; and the justification for those adjustments.

The Treasury will be further required to publish six-monthly reports on how the power has been exercised and how it will be exercised in the following six-month period. Following contributions in the other place, the Government have also introduced a requirement for the financial regulators, the Bank of England and the Financial Conduct Authority, to report annually on their use of any powers sub-delegated to them as a consequence of the Bill.

Having gone through the Bill’s various provisions and outlined its importance both to our future financial stability and to making sure that we are in the right place in the unlikely and undesirable event that we face a no deal, I commend the Bill to the House.

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[The Economic Secretary to the Treasury (John Glen)]

I thank all Members for their contributions to the debate. As my right hon. Friend the Financial Secretary to the Treasury set out earlier, the Government do not want a no-deal scenario, but our job as a responsible Government is to prepare for all possible outcomes, including reaching 29 March without a deal. The Bill forms an important part of those preparations. In a no-deal scenario, it would ensure that we could maintain the UK’s reputation as a global leader and that the competitiveness of our financial services industry would be maintained. The UK has in many cases played a leading role in shaping these proposals over a number of years, and they will bring benefits to UK consumers and businesses once they have been implemented. I want to talk about the four or five themes that have been raised in the debate, after which I will address the points made by the hon. Member for Wakefield (Mary Creagh).

[Mr John Baron (Basildon and Billericay) (Con)]

I refer the House to my entry in the Register of Members’ Financial Interests. The Economic Secretary to the Treasury will be aware of our exchanges in Committee regarding EU regulations as they relate to key information documents and how KIDs are adversely affecting the assessment of investment trusts. The trade bodies oppose them, including the Association of Investment Companies, which has suggested that the investors’ response to them should be to “Burn before reading”. Can the Minister report back on his deliberations with the Financial Conduct Authority, which has been rather slow out of the blocks? Ultimately, it is the Government’s responsibility to get this right.

[John Glen]

I am happy to respond to my hon. Friend’s intervention. I acknowledge his expertise in this area and his excellent article in the Investors Chronicle this week. I would point out that, just last summer, the FCA issued a call for input and sought industry views on the next steps for packaged retail investment and insurance products—PRIIPs. That consultation closed on 28 September and the FCA is reviewing the responses carefully. It will publish a statement in the first quarter of this year. When I next see the chief executive of the FCA, I will challenge him on that publication date.

Let me turn to the substantive thrust of the concerns raised in the debate. The first relates to the desirability of no deal. As I have said, we do not want a no-deal scenario, but we need to be responsible and to plan for all eventualities. Our priority remains getting approval for the deal that we have negotiated with our European partners, which will deliver on the democratic choice of the British people.

Turning to the other preparations, we have now laid 50 statutory instruments before Parliament. The allegation from the hon. Members for Oxford East (Anneliese Dodds) and for Stalybridge and Hyde (Jonathan Reynolds) was that there had been no coherence to the Government’s work, but as the hon. Lady will know, we will have had 53 statutory instruments. We have more debates tomorrow and on Wednesday, and I think several more next week. We are addressing the deficiencies in all the major EU files and the relevant domestic legislation. This will ensure that we have a functioning financial services regime at the point where we leave the EU in a no-deal scenario. Our aim throughout this work has been consistently to minimise disruption for firms and their customers and to provide a smooth transition when we leave the EU.

The hon. Member for Glasgow Central (Alison Thewliss) made a point about the breadth of the power in this legislation. We have worked hard to ensure that this is a clearly defined power and that changes cannot be made such that the implemented files depart in a major way from the original legislation. However, the Government will retain some flexibility to make adjustments to take account of the UK’s new position outside the European Union. The amendments proposed by the Government require the Treasury to publish draft SIs at least one month in advance of laying, as well as a report detailing where there have been omissions and changes and giving the justification for those changes. We believe that the report will allow parliamentarians to scrutinise the changes before the SIs are laid. If the UK were forced to take on EU legislation either in whole or not at all, it is likely that we would be able to domesticate very few of these files in good time, so even the positive aspects of the reforms would be delayed. This is a pragmatic measure to deal with the reality of a very undesirable situation, and our approach has been endorsed by the industry, with which we have engaged in the preparation of the Bill.

[Alison Thewliss]

The Minister talks in his letter about how things are deemed to be beneficial for the UK, but he and I will have very different opinions on what would be beneficial for the UK, or indeed on whether Scotland should be part of the UK, so how can he say that that is not a policy decision?

[John Glen]

We are talking about a no-deal scenario, which we cannot fully anticipate or set out in legislation. However, there would be a full discussion and additional legislation in those circumstances.

For the benefit of the House, I want to clarify the industry engagement that has been undertaken on this Bill. The Treasury engaged with industry ahead of the introduction of the Bill, and the financial services industry has been expecting many of the files for some time. For example, the industry will be generally supportive of the changes that will be implemented with the European market infrastructure regulation regulatory fitness and performance programme—EMIR REFIT—file, which introduces changes to regulations for clearing and reporting requirements, to make them more proportionate and to provide further clarifications. We have been engaging to deliver what the industry expects.

With respect to accepting EU laws after exit, the Bill is not about accepting such laws wholesale. We will be able to implement only those pieces of legislation that are beneficial to the UK, because we will be able to choose the files, or specific provisions within those files, that we are going to implement. For those files that we have already agreed at EU level but not yet implemented, we will be able to fix deficiencies similar to what was done in relation to the European Union (Withdrawal) Act 2018. For those files on which negotiations will be ongoing at the point of exit, we will be able to make some adjustments to them to take account of the fact that we will not be around the negotiating table when they will be finalised.

Moving on to the model for financial services regulation more generally, the Government of course recognise that this legislation should apply only for an interim period while we consider a sustainable, longer-term approach that balances the need to ensure appropriate parliamentary oversight of financial services legislation after leaving the EU with the need to maintain the flexibility and competitiveness of our regulatory regime. That is why the model in the Bill would apply only for a temporary, non-extendable two-year period post exit, specifically in a no-deal scenario, and to specified EU files only. The Government will take forward our approach for a sustainable long-term model in due course.

Turning to the points made by the hon. Member for Wakefield, the UK has publicly led on the development of sustainable finance, as she set out, and the Government are committed to the sustainable finance agenda and are a leader in green finance. That is why we have included these files in the Bill. We recognise that the files form part of the EU’s response to the Paris climate change agreement and the UN sustainable development goals. The Government support the aims of the files and do not consider them harmful to industry at their current stage of development. As such, we were pleased to add them to the schedule to the Bill, and we thank the noble Lords who recommended their inclusion.

I stress again that this legislation involves a temporary measure, with the delegated power limited by a two-year sunset clause and subject to the affirmative procedure in each and every instance of its use. Following constructive engagement in the other place, the Bill is clearer about the power contained within it and has much stronger reporting requirements than at its introduction.

I thank all right hon. and hon. Members for their contributions to this debate. I am sure that we can agree on the importance of continuing to support the UK’s world-leading financial services industry in any future scenario. I look forward to discussing the Bill further in Committee, and I commend it to the House.

Question put, That the Bill be now read a Second time.

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19:19

Division 324

Ayes: 293

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Conservative: 284
Democratic Unionist Party: 9

Noes: 248

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Labour: 211
Scottish National Party: 25
Liberal Democrat: 6
Plaid Cymru: 4
Independent: 1
Green Party: 1

Financial Services (Implementation of Legislation) Bill [Lords] (Programme)