Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Lord Haskel) (Lab)
My Lords, if there is a Division in the Chamber while we are sitting, this Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Judicial Pensions (Remediable Service etc.) (Amendment) Regulations 2023
(4 months ago)
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Lord Bellamy
That the Grand Committee do consider the Judicial Pensions (Remediable Service etc.) (Amendment) Regulations 2023.
The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Bellamy) (Con)
My Lords, your Lordships last considered matters relating to judicial pensions following the McCloud judgment on 15 June, when the Judicial Pensions (Remediable Service etc.) Regulations 2023 were before them. On that occasion, in answer to a question from the noble Lord, Lord Ponsonby, I said that I hoped your Lordships would not be troubled by this matter again. Unfortunately, a small technical point has arisen on those 2023 regulations that we were then considering; these amendment regulations address that point. Perhaps I could briefly explain.
As your Lordships may recall, in 2015 the Government introduced new pension arrangements across the public sector following a report from the Public Services Pensions Commission. As far as judges were concerned, the new arrangements were set up in the Judicial Pensions Regulations 2015, which I will refer to as the 2015 scheme. Those aged over 55—that is, those approaching retirement —were allowed to remain in their previous legacy schemes and were not required to join the 2015 scheme, as every other judge was required to do.
Those judicial arrangements were then challenged by younger judges who said that they were victims of age discrimination in being required to join the 2015 scheme without the option to remain in their previous legacy schemes, which were supposedly more favourable. The challenge succeeded in the McCloud case in 2018 so, after various consultations and actions, Parliament passed the Public Service Pensions and Judicial Offices Act in 2022; in effect, it remedied the McCloud judgment by giving everyone the option to choose between their previous legacy scheme and the 2015 scheme. I understand that around 3,000 judges were affected by the McCloud judgment and that the process of allowing them the option to choose is currently in train and is so far proceeding according to plan. However, a group that apparently numbers between 30 and 50 judges has a particular situation: largely prior to the McCloud judgment, they made payments into the 2015 scheme. Typically, it was top-up payments, pension transfer payments or other supplementary payments.
However, as it turns out, through the effect of the McCloud judgment and what is thought to be the effect of Section 61 of the Equality Act, they were never technically in the 2015 scheme. In law, they always remained in their legacy schemes, so what is the status of the payments that were made into the 2015 scheme to which these judges did not, in law, belong? It is simply to correct that issue that these regulations are being put before your Lordships.
Effectively, the regulations simply say—one sees it in particular on page 2 of the regulations in the new Regulation 38A, which is introduced into the 2023 regulations—that the value payments made into the scheme are referred to as purported value payments and are to be treated as having been received by the scheme. Although there was doubt about whether they could be received by the scheme, this now deems them to be treated as having been received by the scheme. There are similar parallel provisions in relation to the various kinds of transfer payments that we are referring to.
That is, as I understand it, the essential purpose of these regulations: simply to tidy up a point. I have to say that it is not a particularly clear point, but the Government feel they should make assurance doubly sure by putting that matter beyond argument.
Finally, another group of judges numbering no more than three, I gather, benefit from an earlier judgment—the O’Brien judgment—which said that fee-paid judges were actually entitled to a pension. Those judges similarly made some payments into the 2015 scheme and the question is about the exact status of those payments. These regulations again provide that those payments are deemed to be in the 2015 scheme. I know there is a famous phrase that we have too much damned deeming going on in the legal system, but this is simply there to clarify the position.
Unless I have omitted some fundamental point or made any misstatement, that is the essential purpose of the regulations and I beg to move.
Lord McNally (LD)
My Lords, it is a great pleasure to follow the noble and learned Lord, Lord Bellamy. I held his position in the Government between 2010 and 2013. I became Minister of State at Justice with the now noble Lord, Lord Clarke—Ken Clarke—as Lord Chancellor. One of our first visits was to go across Parliament Square to pay a courtesy call on the Supreme Court. He was, of course, in his element as a QC and a former Home Secretary, but I was filled with trepidation when soon after we arrived three Supreme Court judges bore down on me, clearly to seek some discussion on some high point of law—some difficult and abstruse point. I need not have worried: what they wanted to press me on was judicial pensions. There was some passion in that. I remember one of the first stages in the coalition Government, which probably ended up in the 2015 Act, was to try to address the various anomalies and uncertainties in judicial pensions, so it is with a sense of closure that I come this afternoon to support what the noble and learned Lord memorably described at an earlier stage as
“44 pages of the densest technical complexity one could imagine”.—[Official Report, 15/6/23; col. GC 375.]
Why am I not surprised that that should be the legislation dealing with judges’ pensions?
I am sure that we share with the Minister the hope that this is the final tweak to the regulations. In voicing our support from these Benches, I ask him how the regulations fit in with the more general objectives of judicial reform. Will we see a judiciary—particularly a senior judiciary—more diverse in social, gender, ethnic and educational background than hitherto has been the case? Does the Minister agree that it is important that our legal system should as much as possible reflect the society it serves? There is much to admire in the intellectual quality, integrity and independence of our judiciary. Its members are most certainly not “enemies of the people”, but they must not be seen as a Brahmin caste, separate from society as a whole.
The direction of travel in recent years has been slow but steady. I hope that a sensible and secure pension scheme will underpin the flexibility and social mobility necessary to retain confidence in and respect for our judiciary.
Lord Ponsonby of Shulbrede (Lab)
My Lords, I too remember when the noble Lord, Lord McNally, had his time in office as a Minister of State.
Lord Ponsonby of Shulbrede (Lab)
Well, one of my roles is to be a lot of trouble—although I will not be a lot of trouble in this particular debate.
The noble Lord spoke about the Supreme Court judges talking with passion about judicial pensions. As a lowly magistrate, I have sat in magistrates’ retiring rooms with district judges, and I can say that they talk with equal passion about judicial pensions—I have heard about it for a number of years. A number of them are of course part-time district judges, and the matter is of great importance to them.
The noble Lord said that he approaches this debate with “a sense of closure”. I think that everybody hopes for a sense of closure on this issue, so the first question that I put to the Minister is: are we right to think that this is the last time that we will hear about this issue? It would be interesting to hear his reflection on that.
Previously when I have taken part in these debates, I have had sitting behind me my noble friend Lord Davies of Brixton, who is an actuary and an expert on these matters. The particularly interesting question that the noble Lord, Lord McNally, raised was on how these pension reforms will fit in with the wider objectives for the judiciary as a whole in building diversity and flexibility and other desirable objectives, which will affect pension entitlements, one way or another. If the Minister could say something about this in the wider context, that would also be of interest.
I have a further question about the likely timetable for implementing this remedy. Is it already under way and when might it be complete? A final question is on whether any judges would need independent advice on whether they should accept these proposals. Is it their responsibility to get their own independent advice? I do not know how that works. Is there an expectation that judges should take independent advice before receiving these pensions?
Other than that, we clearly support the measures as far as they go. I look forward to the Minister’s response.
Lord Bellamy (Con)
My Lords, I thank noble Lords for those remarks. I respectfully tiptoe in the distinguished shoes of the noble Lord, Lord McNally—let me make it absolutely clear: he was one of the most astounding Ministers in the ministry for many a long year. The Government entirely accept and support the sentiments he expressed that the judiciary should reflect as fully as possible the society it serves. There is still a way to go on that, and we may well touch on it in the debate on the next statutory instrument, where I have some observations to make on that very point.
All I can say from a pensions perspective is that it is important to be able to attract very good people into our judiciary. We increasingly call on them to do very difficult and demanding work. The judicial pension scheme is aimed at being a secure and attractive scheme sufficient to ensure that we attract a competent, robust and diverse judiciary. It is difficult for the Government to go beyond that but, clearly, this has to be a part of the general move to make sure that we have a sufficiently diverse and competent judiciary. As far as that general point is concerned, it is indeed a matter of ongoing concern to the judges that that should be the case, as both noble Lords said.
In relation to the points raised by the noble Lord, Lord Ponsonby, I hope—again—that we will now see the end of these processes and that we have now got it right. As your Lordships will appreciate, it is a fiendishly complicated area. It has been complicated by some quite intense litigation in the background. Judges may well want to take independent advice, but the judiciary has shown no lack of either independence or knowledge about the pension arrangements in the various fora in which that has been debated. It is partly because of the detail into which the Government have had to go that these statutory instruments have been introduced. I understand that the timetable for implementation is in the next few months. It is rolling forward and there should be no further difficulty; we very much hope that the end is in sight.
I hope that I have answered your Lordships’ questions and points. I see that the noble Lord, Lord Ponsonby, is quickly refreshing his notes. I commend these regulations to the Committee.
Employment Tribunals and Employment Appeal Tribunal (Composition of Tribunal) Regulations 2023
(4 months ago)
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Lord Bellamy
That the Grand Committee do consider the Employment Tribunals and Employment Appeal Tribunal (Composition of Tribunal) Regulations 2023.
The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Bellamy) (Con)
My Lords, this draft instrument will delegate the power to determine the composition of employment tribunals and the Employment Appeal Tribunal to the Senior President of Tribunals. The regulations form part of a wider ongoing policy on the part of the Government to create a single judiciary in which all parts of the judicial system form a seamless whole, whether courts or tribunals, and to further the work of ensuring consistency of operation within the tribunal system.
Your Lordships may recall that, in the very old days —I am not completely sure but this may even predate the noble Lord, Lord McNally—tribunals were, in effect, almost a part of the department to which they were associated. Down the end of the corridor in the Ministry of Health or the Ministry of Social Security, there would be a tribunal that was supposed to review the decisions of the department. Over the years, however, it has been the Government’s policy, pursued particularly by the Labour Government and later by the coalition, to create a proper, independent, separately administered tribunal system.
From mid-2007 onwards, we have had a formalised, unified tribunal structure, in which all the various tribunals form the first tier. We have First-tier Tribunals, which consist of a series of tribunals dealing with social security, educational special needs, immigration and asylum, and various other things, with an appeal to the Upper Tribunal. The whole is presided over by a Senior President of Tribunals, who is currently the right honourable Sir Keith Lindblom. The Senior President of Tribunals decides on the composition of those various tribunals, across the board.
For historical reasons, employment tribunals have been an exception to this system. As your Lordships will recall, employment tribunals have a rather special history: they were originally called industrial tribunals and were set up at a time when, to gain public confidence, it was thought—rightly so—that those tribunals should have a particular statutory set-up shared jointly by what are now the Department for Business and Trade and the Ministry of Justice. The composition of employment tribunals was set out separately under the Employment Tribunals Act 1996. As your Lordships know, the original idea, dating from the 1970s, was that there would always be someone representing the workers, someone representing the bosses and a legal chairman of that composition.
Times have moved on a lot since. The Judicial Review and Courts Act 2022 set out a new framework, which provides that the Lord Chancellor has the power to determine the panel composition of employment tribunals, which he can delegate to the Senior President of Tribunals. These regulations implement that provision and allow the Lord Chancellor to delegate to the Senior President of Tribunals powers to determine the panel composition of employment tribunals, thus bringing them more fully within the unified system of tribunals and making the panel composition the same as all other tribunals.
The Senior President would be able to issue practice directions of the types of cases that can, for example, be heard by a judge alone, but he has to consult the Lord Chancellor about any practice direction that he is minded to make. The idea is to update the system, to create a more flexible process and to bring arrangements for employment tribunals and employment appeal tribunals in line with those that apply across the unified tribunal system.
Your Lordships will know that, particularly following the Covid pandemic, the tribunal system has been under great pressure. There is a need to be as flexible as possible to tackle these backlogs and to implement processes that are as efficient as possible. I take this opportunity to say that tribunals, particularly employment tribunals, have recovered well from the pandemic; the outstanding case load is falling and is below the pandemic peak. Members of employment tribunals and the judges in this sphere have done great work to tackle the backlog.
There is a matter that relates to what the noble Lord, Lord McNally, asked about on the previous statutory instrument: the status of non-lawyers who work in the judicial system. I will not call them lay members, as that phrase is not particularly appealing to them. It is not the Government’s intention that this should be a kind of backdoor to reduce the role of non-lawyers in our legal system. The Government’s view is that, from time immemorial, non-lawyers—citizens—have played an essential part in our legal system as a whole. That might have been as magistrates—the noble Lord, Lord Ponsonby, is a notable example—in a jury, or as members of tribunals.
We feel that this “lay participation” brings an extra texture, adds extra confidence, brings extra insights and greatly enhances the system as a whole—particularly from the point of view of diversity, which was the point made by the noble Lord, Lord McNally. You are drawing on a wide pool of potential appointments to tribunals and, generally speaking, that is an avenue in which you can enhance diversity in the wider judicial system. The regulations are not intended to undermine that in any way. I have had the great privilege of sitting as a judge in the Employment Appeal Tribunal, where the effect of the lay members was particularly striking. I will follow the noble Lord, Lord McNally, with a moment of personal reminiscence. In those days, the Employment Appeal Tribunal had some very distinguished trade union members: I think of George Wright of the Transport and General Workers’ Union; Norman Willis, the former secretary-general of the TUC; and others— I think I just missed Jack Jones, but only by a short margin. They brought enormous skill, wisdom and common sense to the operation of the appeal tribunal, and one would not wish to jeopardise that.
I thought that I would take the opportunity to make the Government’s position on that point clear. This statutory instrument is designed to bring employment tribunals in line with the rest of the system and to enable us to be as flexible as possible without in any way undermining the principle of lay participation, which I have just emphasised. On that basis, I beg to move.
Lord McNally (LD)
My Lords, it is perhaps one of the wonders of our system that the noble and learned Lord, Lord Bellamy, and I should both have had the same job in government. I am not a lawyer, whereas he is a very distinguished lawyer and indeed a very distinguished judge. I used to be—if you are going to invite people of my age to speak at these gatherings, you are going to get some reminiscences—very nervous of that. At any meeting, I would say, “I have to explain that I am not a lawyer”. Then I entertained a distinguished jurist from the United States and explained that I was not a lawyer, and he said—very slowly—“Then I will speak very slowly”, so I stopped doing that.
I should also say that, in background and upbringing, I belong to a generation that was—and is—supportive of dialogue rather than confrontation in industrial relations. The Employment Tribunals Act and the setting up of the tribunals certainly underpinned and strengthened that approach to industrial relations. Of course, we will probably give a nod to it today.
Baroness Lawlor (Con)
My Lords, it is a great honour to follow the noble Lord, Lord McNally, but I do not have his great experience or knowledge. I will make a very lay man’s point. I thank my noble and learned friend Lord Bellamy for his illuminating outline of the background to this question and the history, taking us through why the Government are now keen to unify the employment tribunals within the overall structure of the tribunal system and keep them more obviously within judicial law than they might have been before.
My question is one of clarification. My noble and learned friend explained that the Government do not seek to reduce or undermine in any way the lay composition of employment tribunals in future. Will there be specific instructions to the Senior President about the composition of the panel, including whether one, two or three members will be present? Will there be guidance on the balance between judicial and lay members?
In particular, I pick up on the point from the noble Lord, Lord McNally, about the employer-heavy element in tribunals. I recall when my noble and learned friend Lord Bellamy brought the academic freedom Bill through the House last year. At the time, it seemed important to me that we did what we could to redress the balance for single employees battling against a powerful establishment, often with the law behind them but unable to bear the pressure of finances and the stress that such cases can bring. For these reasons, I say to my noble and learned friend the Minister that it is necessary to keep this in perspective, even if we want to bring it in line with our overall judicial system.
Lord Ponsonby of Shulbrede (Lab)
My Lords, in his opening remarks, the noble and learned Lord said that this is not a backdoor to reduce the lay members within the judicial system. He went some way to say how much judges appreciate working with lay members, who are sometimes experts in other fields. The two noble Lords who spoke before me raised concerns on exactly this issue.
Although my brief is to accept the proposals of the Government without reservation—which I do, of course —I have reflected on my own experience. A number of magistrates sit on a number of tribunals; I can think of about 10 colleagues who do this, as it is quite common. Some sit on employment tribunals and some on other tribunals. Sometimes they are experts and sometimes they are lay people in other contexts. I remember a couple of separate discussions, with a magistrate who was a trade unionist and with magistrates who were employers, all of whom sat on these employment tribunals and were sceptical about the changes foreseen by these regulations. That scepticism was about money-saving and about trying to get consistency within the system when there is no merit beyond that consistency itself. There needs to be more of a reason than just consistency to make a change such as this. The noble and learned Lord gave us some reassurances in his opening, but there is scepticism out there nevertheless.
The question that both the noble Lords asked is: after these regulations go through, what criteria will the Lord Chancellor look at, if and when proposals come for more tribunals to be determined by single judges sitting alone, rather than by a panel of three? Will there be a process to review this? We heard from the TUC and I gave my personal anecdotes about colleagues with whom I have sat, and it seems to me that the justification of consistency alone is not sufficient. There needs to be a more profound justification to make this change. I look forward to the noble and learned Lord’s response.
Lord Bellamy (Con)
I thank noble Lords for their comments. On the mechanics of this—I will be corrected by those sitting behind me if I get this wrong—if your Lordships approve these regulations, that in itself delegates to the Senior President of Tribunals the power to decide on composition. There is no further step by the Secretary of State; he simply delegates it, as he is empowered to do under the 2002 Act.
It is then for the Senior President of Tribunals to issue a practice direction setting out how he proposes to exercise those powers. There have already been some consultations in relation to that, which are possibly those referred to by the Trades Union Congress. The Senior President has intimated that, until he has the power to make the practice direction, it is not appropriate for him to make the result of the consultation public. I am sure we will know that in due course, but it is not too difficult to speculate, as a lot of reservation has been expressed about the very point that your Lordships are making. This point is not new; it is in the public domain. In effect, it is: “Don’t tinker with the well-established working relationships of employment tribunals”. That is thoroughly understood.
The Senior President of Tribunals does this job with all tribunals across the piece. Employment tribunals are special up to a point, but this is a job that he does and, if I may say so, we have to acknowledge that we have a wise and experienced president, as I am sure we will in the future. I am equally sure that he will exercise those powers responsibly.
Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations
(4 months ago)
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Baroness Vere of Norbiton
That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations.
The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)
My Lords, these regulations have been laid to update the UK’s list of high-risk third countries in Schedule 3ZA to the Money Laundering, Terrorist Financing and Transfers of Funds (Information on the Payer) Regulations 2017, which I will refer to as the money laundering regulations.
The Government recognise the threat that economic crime poses to the UK and our international partners, and are committed to combating money laundering and terrorist financing. The Government are committed to bearing down on kleptocrats, criminals and terrorists who abuse the UK’s financial and services sectors. The Economic Crime and Corporate Transparency Act built on the earlier Economic Crime (Transparency and Enforcement) Act to ensure that the UK has robust, effective defences against illicit finance.
The money laundering regulations provide the legislative framework for tackling money laundering and terrorist financing, and set out various measures that businesses must take to protect the UK from illicit financial flows. Under these regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries, which are listed for these purposes in Schedule 3ZA to the money laundering regulations. These are countries identified as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes which could pose a significant threat to the UK’s financial system.
This statutory instrument amends the money laundering regulations to update the UK’s list of high-risk third countries. It removes Albania, the Cayman Islands, Jordan and Panama from the list, and adds Bulgaria, Cameroon, Croatia, Nigeria, South Africa and Vietnam. This means that the UK’s high-risk third-country list will be aligned with the decisions of the Financial Action Task Force, the global standard-setter for anti-money laundering and counterterrorist financing.
FATF’s methodology ensures that countries around the world are subject to expert, robust evaluations of their anti-money laundering and counterterrorist financing regimes. Where countries are found to have strategic deficiencies which they fail to address, FATF members can agree to add them to one of two lists: jurisdictions under increased monitoring and jurisdictions subject to a call to action.
By aligning our own high-risk third-country list with that of FATF, we ensure that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. This protects the UK financial system from illicit finance linked to the jurisdictions being listed. Where countries have made significant progress to address their strategic deficiencies, it is equally important that we recognise that and promptly remove them from the UK’s list.
This is the eighth SI amending the UK’s list of high-risk third countries to respond to the evolving risks. In June, Schedule 3ZA was amended to remove Cambodia and Morocco after they were de-listed by FATF, but otherwise updates to the high-risk third-country list have been paused since November 2022. As set out in the Explanatory Memorandum, that was to allow time for a full impact assessment to be conducted. This was required due, in particular, to the listing of Nigeria and South Africa, given their significant economic ties to the UK. The pause in updating Schedule 3ZA has led to the need for this more significant SI, with six countries being added and four removed.
I am aware that many noble Lords have expressed frustration at parliamentary time being taken up by these relatively routine matters, which keep our high-risk third-country list aligned to FATF. The Economic Crime and Corporate Transparency Act enables the Government to amend the money laundering regulations to create an ambulatory reference to the FATF lists. This will result in the same legal effect, with regulated businesses being required to apply enhanced due diligence to relevant business relationships and transactions with these countries, but without the need for secondary legislation after every change to the FATF lists.
The Government will bring forward an SI to implement this provision in the MLRs shortly and, in notifying the Committee of this, I emphasise two things. First, the Government retain the authority and autonomy to deviate from the FATF list at any time if the Government change their policy decision with regard to mirroring the FATF lists and, secondly, if we were to do so, it would require further secondary legislation and a debate in both Houses of Parliament.
I conclude by noting that the high-risk third-country list is an important mechanism that the Government have to clamp down on illicit financial flows from overseas threats, but we will also continue to use other mechanisms to respond to wider threats from other jurisdictions, including, for example, by applying financial sanctions.
These amendments will enable the money laundering regulations to continue to work as effectively as possible to protect the integrity of the UK financial system. I beg to move.
Lord Sharkey (LD)
My Lords, it is a pleasure to speak to this made SI, which is a model of its kind. It is succinct, admirably clear and well supported by a helpful EM and an exemplary impact assessment. We are happy to support it and we have only a few comments to make.
We continue, of course, to be enthusiastic about the work of FATF both in general and in the particular cases of money laundering and terrorist finance which are addressed by this SI. It is clear from the EM that FATF is extremely active in these areas. Reading the appendices to HMT’s updated guidance of 4 December makes it clear that there are both significant signs of progress and significant issues yet to be resolved. The removal of four countries from the old Schedule 3ZA is somewhat outweighed by the addition of six countries, two of which—Nigeria and South Africa—represent large challenges to the implementation of successful MLR regimes. Nevertheless, for many of the countries on the new Schedule 3ZA brought into being by this SI, FATF has been able to detect progress but not yet sufficient progress to warrant removal from the list.
As the Minister pointed out, the United Kingdom has revised this list seven times previously to follow FATF’s findings and I think we all hope that this revision will be the last in its current form. Debating this SI in the Commons on Monday, the Economic Secretary to the Treasury said, as the Minister explained:
“I am aware that many noble Lords have expressed frustration at parliamentary time being taken up in the other place by such relatively routine matters to keep our high-risk third countries list aligned to the task force’s”.—[Official Report, Commons, First Delegated Legislation Committee, 8/1/24; col. 4.]
I have no idea who these people are, but clearly they were extremely influential because the Economic Secretary to the Treasury has proposed a solution, as the Minister explained. He proposed using the powers in the Economic Crime and Corporate Transparency Act to amend the MLRs to create an ambulatory reference to the FATF list which will result in the same legal effect as at present, but without the need for a SI every time there are changes. All of that seems much more sensible than having to debate an SI every time the list changes, but it raises the question of whether the Government have in contemplation any adjustments to the current FATF list that they want to make independently of the list itself, as it were. Perhaps the Minister could comment on that when she replies.
Returning to the current instrument, I commend the impact assessment. It is thorough, reasoned and appropriately self-critical. I am, as are the authors of the assessment, somewhat sceptical about what appears to me a likely false precision in the associated costs of implementing this SI. The high-level estimate of £237 million for transition costs seems just that—very high—as does the upper estimate of £131 million per annum in ongoing costs. The impact assessment thoroughly explains the data problems involved in arriving at these estimates and explains the methods and proxies used to arrive at them. It concludes its summary by saying that:
“Over the longer term the government is taking proactive steps to improve the available data on the cost of compliance with MLRs, which should help to inform IAs in future years”.
Will the Minister write to us saying what these proactive steps are and over what timescale they will be adopted?
The IA reminds us that the NCA believes that,
“it is a realistic possibility that over £100 billion pounds is laundered every year through the UK or through UK corporate structures”.
It goes on to say that:
“In particular, the size of the UK’s financial and professional services sector, the openness of our economy and the attractiveness of London for investors makes the UK particularly exposed to international money laundering risks”.
These risks will not disappear, but the UK’s role as a money laundromat should reduce as the MLR provisions in this SI and elsewhere take effect. Will the Minister undertake, in any subsequent revisions to our MLR regime, to give us the latest estimates of money laundered through the UK or UK corporate structures? We need to see clear evidence that our MLR regime is working.
Lord Livermore (Lab)
My Lords, I am grateful to the Minister for introducing the latest iteration of the list of high-risk countries from the Financial Action Task Force. As she outlined, this is a routine piece of secondary legislation and one that we are pleased to support.
I note that often there is only a relatively small number of countries added or removed from the list but that, on this occasion, there are significantly more countries involved. Specifically, Albania, Cayman Islands, Jordan and Panama have been removed.
In past debates, the Government have said that UK institutions do not necessarily stop enhanced due diligence just because a country is removed from the list. However, the impact assessment accompanying this SI states that if no action were taken to update the list, firms would have to continue undertaking enhanced due diligence on Albania, Cayman Islands, Jordan and Panama, which have rectified the systemic deficiencies identified by the Financial Action Task Force, leading to unnecessary costs for UK firms. These two statements might potentially be contradictory, and I would be grateful if the Minister could clarify exactly what the appropriate level of due diligence is for a country removed from the list. Is it defined anywhere, or are firms simply able to determine their own levels?
Finally, I note that Gibraltar remains on the list, despite previous assurances that the authorities there are making good progress on implementing the Financial Action Task Force’s recommendations. Can the Minister provide an update on Gibraltar’s progress and indicate whether she sees Gibraltar coming off the list in the near future?
Baroness Vere of Norbiton (Con)
I am grateful to both noble Lords for their contributions to this short debate. I will try to answer as many questions as possible. The noble Lord, Lord Sharkey, has already asked for a letter; I am very happy to provide him with one because I absolutely do not have the information that he requires on the steps that we will be taking in order to improve the data in the impact assessment.
There are some important elements raised by both noble Lords, Lord Sharkey and Lord Livermore, around whether we will make an independent—non-FATF—adjustment to the list. At the moment, we have no intention of doing so. The rationale is that there are of course many other routes to ensuring an appropriate level of due diligence, and we would therefore expect regulated firms to pursue those instead or in addition.
That raises the point that the noble Lord, Lord Livermore, talked about: if a country is removed from the list, what then? Does it come out of the naughty corner, off the naughty step, and back to being exactly the same as everybody else? Of course, that is not the case because there is a much more nuanced way of looking at it. It is good to follow FATF because one of the big benefits of that is that the enhanced measures are implemented in a co-ordinated manner by the international community. If the UK puts a country on the FATF list, then many other nations will do so too, which therefore magnifies the preventive effect.
However, the list is just one of the many measures to prevent illicit finance entering the UK. The money laundering regulations also require enhanced scrutiny in a range of situations that present a high risk of money laundering, including geographic risk. This is the case not just for those on the list of high-risk third parties; individual organisations will take their own view about the risks they perceive in a particular region and, indeed, in a particular sector in a particular region. Regulated firms will take into account credible sources where they identify the risk of money laundering, terrorism and designated entities operating in a country or significant levels of corruption. Noble Lords will know that regulated firms devote significant resources to this because it is in their interests to ensure that they do not support illicit finance. This means that, regardless of the listing, firms would still need to be nuanced. As is always the case in money laundering regulations, one cannot be too prescriptive because the circumstances are different for most of the regulated firms.
On the latest estimates of the amount of money laundering going on, when I took up this role in mid November, my first question was: how do we know it is £100 billion? Of course, we do not; it is an estimate. We will endeavour to provide estimates going forward, but it is a known unknown, and it is very difficult to establish the amount of money laundering going on because if we knew it was there, we would try to stop it, but we can certainly look to do that in future.
I recognise that the impact assessment has an element of certainty that perhaps does not exist. It is a very difficult thing to do, which is why there was a slight delay to laying this SI. Noble Lords will note that the impact assessment itself states that there is
“low to medium confidence in the accuracy of the overall quantitative conclusions”.
We will write to set out the steps we are taking to understand the impact of changing the list. It is the case that complying with money laundering regulations is an expensive business, but it is necessarily so to protect the integrity of the UK financial services sector. However, I will write with further information.
I will write to the noble Lord about what progress has been made in Gibraltar. My understanding is that it has made very good progress against its action plan, and we continue to work with it on this. We expect Gibraltar to be removed from the list soon due to the improvements in its illicit finance regimes. It is worth mentioning that we work closely with the overseas territories to ensure that they get the benefit of our expertise because they are treated as independent nations. They are members of a FATF-style regional body themselves. Part of the rationale behind FATF is to share understanding and make sure that we lift people to the highest possible standard in terms of stopping illicit finance.
Data Reporting Services Regulations 2023
(4 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Vere of Norbiton
That the Grand Committee do consider the Data Reporting Services Regulations 2023.
Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee
The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)
My Lords, both these instruments are made under powers in the Financial Services and Markets Act 2023, which I will refer to as FiSMA 2023. The regulations form part of the Government’s ambitious programme to deliver a smarter regulatory framework for financial services. As highlighted by the SLSC, these SIs replace areas of assimilated law—formerly known as retained EU law—in financial services with an approach to regulation that is tailored to the UK. Under this programme, the Government are delivering a regulatory framework that is logical, consistent and conducive to economic growth, while preserving the robust regulatory standards that are the cornerstone of the attractiveness of the UK markets.
I turn to the Data Reporting Services Regulations 2023. This instrument establishes a new legislative framework for the regulation of data reporting service providers—which I will now refer to as DRSPs—replacing the framework we inherited from the EU.
DRSPs are a type of financial market infrastructure that report trade data to either the public or the FCA. They are commercial entities that allow investment firms to fulfil their regulatory reporting obligations.
The appropriate reporting and dissemination of market data is key for markets to be supervised effectively, and for them to function properly. Information on trades and prices is essential for markets to properly value shares and other traded instruments, and therefore allow trades at the most effective price. More broadly, universal information is key in helping market participants to identify investment opportunities and evaluate positions.
There are three types of DRSPs. First, there are approved reporting mechanisms, which report details about transactions in financial markets to the FCA on behalf of investment firms. Secondly, there are approved publication arrangements, which publish trade reports to the public. Thirdly, there are consolidated tape providers, which collate trading data from a variety of sources and publish it in a single live data stream. All three of these types of DRSPs are vital to our financial services ecosystem and this instrument establishes a proportionate framework for their regulation, tailored to UK markets.
Under this new framework, the UK’s expert financial markets regulator, the FCA, will make detailed firm-facing requirements in its rulebook, making regulation for DRSPs more agile and more able to respond quickly to market developments and emerging technologies. This instrument also delivers on the Government’s Edinburgh reforms commitment to set up a regulatory framework for a UK consolidated tape. Currently there are no consolidated tape providers in the UK. This means that market participants must purchase market data from individual trading venues or data vendors to get a cross-market view, which is burdensome and costly.
It is the Government’s view that a UK consolidated tape will improve market transparency and facilitate data access, making it easier and cheaper for market participants to meet best execution requirements and manage risk. That is why the Government consulted on a number of legislative changes to facilitate the emergence of a consolidated tape as part of the wholesale markets review. There was broad support for the Government’s proposals which this instrument delivers. Most notably, this instrument introduces a power for the FCA to run a tender process to select one or more consolidated tape providers per asset class, and removes requirements which previously made running a tape in the UK commercially unattractive. These reforms will facilitate the emergence of a UK consolidated tape for any asset class. This will improve market efficiency, lower costs for firms and investors and make UK markets more attractive and competitive.
I will now move on to the second instrument, the Securitisation Regulations 2023. This instrument also forms part of the Government’s programme to deliver a smarter regulatory framework for financial services, by establishing a new legislative framework that replaces the assimilated law on securitisation. Securitisation is the process of packaging loans to form instruments that can be marketed to investors. It allows firms to transfer the risk of their loans or assets to other investors. This in turn allows lenders to free up their balance sheets, to provide further lending to the real economy.
The introduction of the securitisation regulation in 2019 kickstarted high-quality securitisation activity after a decline in the market following the global financial crisis. The securitisation regulation did this by introducing robust regulatory standards which addressed financial stability deficiencies which arose after the financial crisis. The securitisation regulation also encouraged investors to invest in safer, simpler, transparent, and standardised securitisations, by granting this form of securitisation beneficial regulatory treatment.
The Treasury conducted a review of the securitisation regulation in 2021. This review aimed to bolster securitisation standards to increase market transparency and investor protections, and to develop securitisation markets, to facilitate increased real economy lending. The new framework that this instrument establishes will allow the independent financial services regulators—the FCA and PRA—to make and further reform most firm-facing rules for securitisation with more agility and proportionality.
These regulators will consider taking forward reforms in line with the outcomes of their own consultations and the review of the securitisation regulation in 2021. All of these were received positively by the industry.
Lord Sharkey (LD)
My Lords, I will speak first to the data reporting services SI. The Explanatory Memorandum for this instrument helpfully reduces its 28 pages to a succinct six pages. It makes plain what the scrutiny situation with regard to the SI will be. Paragraph 7.4 says:
“Before FSMA 2023, the FCA did not have any rule-making powers over DRSPs, except for some limited powers in respect of technical standards, as well as limited powers of direction enabling them to establish the current authorisation process. These were not sufficient to replace the detailed provisions currently in retained EU law”.
Paragraph 6.6 goes on to remind us:
“Separately, Section 11 of FSMA 2023 inserts new section 300H into FSMA 2000 which establishes a general rule-making power for the FCA in relation to DRSPs. Going forward, it will be the responsibility of the FCA to make firm-facing rules in relation to DRSPs within the powers established by FSMA 2023”.
These new FCA rules will not be subject to parliamentary scrutiny—unlike the retained EU law provisions, which were. We should be clear that Parliament will be bypassed by these new FCA rules.
In this SI, we are simply being asked to consider a set of framework proposals for these new FCA rules, not the rules themselves. The helpful de minimis assessment makes this point very clearly in its opening paragraph when it says:
“Retained EU law will be replaced with rules set by our independent and expert regulators, operating within a framework set by government and Parliament”.
We regret that Parliament is being excluded from effective scrutiny here.
There are some questions relating to this framework; I would be grateful if the Minister could address them. In paragraph 7.10 of the Government’s response to the consultation on the WMR, there is a note on the issue of removing the requirement for CTPs to provide data streams free after 15 minutes. The report notes that most respondents favoured removing this requirement but others argued that
“retail and non-professional investors currently benefit from this obligation and removing it, even for CTPs, could risk disadvantaging them”.
Have the Government discussed this with the FCA? Which approach is currently favoured? Are we going to leave the 15 minutes in or take it out?
In paragraph 7.11 of the WMR response, it is noted that some respondents suggested that
“the current requirement in legislation for market participants, operators and data reporting services providers to make data available on a ‘reasonable commercial basis’ (RCB) is not working”.
These respondents argued that this is because the FCA
“does not have sufficient enforcement powers and asked for the FCA to be given appropriate enforcement powers to control the cost of market data”.
Can the Minister say whether this framework SI will allow the FCA to take on these obviously necessary enforcement powers?
I turn now to the 44 pages of the second SI before us, the Securitisation Regulations 2023. We acknowledge the need for action in this area but, as with the previous SI, we strongly regret that Parliament is in effect excluded from scrutiny of the rules to be set by the FCA and PRA. There are several areas in the instrument where it would be helpful to hear more detailed explanations from the Minister.
Paragraph 7.12 of the EM notes:
“This SI makes some changes to the regulatory perimeter, including scoping out”—
I take that to mean “ruling out of scope” rather than “investigating”—
“non-UK AIFMs from the definition of institutional investor”,
and transferring
“the responsibility for the supervision of providing securitisations by occupational pension schemes”
from TPR to the FCA. Can the Minister explain on what basis these two changes are thought to be beneficial and to whom?
I am also puzzled by this comment in paragraph 7.14 of the EM:
“Due diligence requirements for occupational pension schemes will remain in legislation and be supervised by TPR”.
It goes on to say:
“These requirements will be restated as part of a further SI in 2024”.
Why is there a need for restatement? What deficiencies are there in the current legislation?
Paragraph 7.20 of the EM says that
“this instrument exercises sections 71N(3) and 71N(4) FSMA to allow the FCA to disapply or modify their rules in relation to securitisation activity”.
Are there any limitations here to what the FCA may do or does it have carte blanche to do as it sees fit, absent any scrutiny from HMT or Parliament? If there are any limitations, where are they set out?
I close by referring to paragraph 10.4 of the EM and the Q2 2024 date for the publication of the outcomes of the FCA and PRA consultations and, therefore, of their new rules. This is a long wait. It is extremely unfortunate that these outcomes and the final new rules are not available to Parliament to inform our debate on this SI. No doubt we will have many more financial services SIs in this Session. Will the Minister ensure that the relevant consultation outcomes and proposed new rules are available to Parliament before we debate future SIs?
Lord Livermore (Lab)
My Lords, I am grateful to the Minister for introducing these two grouped SIs, both of which we support.
The Explanatory Memoranda accompanying these regulations note that the repeal of retained EU law remains subject to the entry into force of commencement regulations in order to ensure that there is no overlap or gap between the two different regimes. How soon is commencement expected once this package of SIs has been debated and passed?
I note that the consultations and reviews underpinning these regulations were held in 2021. Although the industry has commented on drafts of the SIs, not all feedback was incorporated and, in some specific areas, the regulators’ rules are still being finalised. Is the Minister satisfied that the changes in timelines have been communicated adequately to the relevant entities? Does she believe that any further communication needs to take place before commencement?
The Explanatory Memorandum for the first of these SIs notes, as did the Minister in her introduction, that
“there is no consolidated tape provider in the UK”.
Apparently, the MiFID II framework “attempted” to bring one about but the requirements for running a tape were thought to have made it “commercially unattractive”. The EM goes on to outline new measures contained in the SI aimed at facilitating a UK consolidated tape, including giving the FCA the power to run a tender exercise based on revised governance arrangements.
I wish to ask the Minister three related questions. First, what practical impact is the lack of a UK tape having and what alternative data sources are being used? Secondly, what is the timescale for the tender process? Thirdly, what will the Government do should there be no suitable bids or if concerns around the governance of a tape remain?
The Explanatory Memorandum for the second of these SIs notes that the FCA will have the power to review and modify its securitisation rules for specific purposes. When is the next overall review of securitisation expected?
Baroness Vere of Norbiton (Con)
My Lords, I am grateful to both noble Lords for their consideration. I will definitely have to write. I am grateful to the noble Lord, Lord Sharkey, for all his questions; I am just not clever enough to listen, write them all down and come up with a response at the same time. Had he given me fair warning, I would have come very well prepared and been able to answer all his questions. I am sure I can, but I will have to do so in writing.
I take issue with the premise behind many of the noble Lord’s comments about where Parliament sits in all this. He asked why we are not discussing the very detailed rules around what sits at what is in essence the back end of the market, to ensure that it functions in an appropriate way. Independent regulators fulfil many different roles within our society. Obviously, the FCA and PRA do many of those within the financial services sector. We entrust to them the role of making the detailed rules. That was agreed when FiSMA was passed by your Lordships’ House last year.
I reflect on my recent experience as Aviation Minister, when I worked with the Civil Aviation Authority all the time. I did not expect to take to Parliament detailed rules about how to build a safe aircraft. It was agreed with FiSMA that we hand over certain elements to the independent regulators. Part of the reason for handing over the regulation of the back end is to improve the agility and proportionality of regulation and to respond to changes to the market. There is a feeling that we are not particularly agile at the moment, and we could do much better. Clearly, we want UK financial services to maintain their place at the very top of the global financial services sector. That is my overarching response to some of the questions raised by the noble Lord in regard to both SIs.
I turn to the tender process for the consolidated tape. I mentioned in my opening remarks that we intend to remove the 15-minute requirement and the requirement to have a per-user charge. However, we have given the FCA the power to run a tender process for a consolidated tape. It has chosen the bond markets first, and the process for developing that is now well under way. We expect the tape to be in place by 2025, if all goes well. Between now and a tape being in place, it will be for the FCA to decide what the tender looks like, given the data in the market now, the market players, what the technology looks like and what information is required by whom, at what price and when. The FCA will do that detail; it is certainly not within my skill set to be able to scrutinise that.
That is the power we are giving the FCA. It may well be—who knows?—that all sorts of things are included as part of that tender process. We have taken out the requirement to make data free after 15 minutes, but that does not necessarily mean that this would not be in the final tender or the winning bid. It is all about providing agility. Previously, people tried to set up or thought about doing consolidated tapes on a commercial basis, and it just does not work. As it has not worked, the industry feels that the best way to do it is via the FCA process. We have now given the FCA the powers to do that. It will move from bonds on to equities next.
The noble Lord mentioned some issues around enforcement powers, and I will have to write to him about that. Indeed, on many of the other questions, I will probably write with further information.
On the issues raised by the noble Lord, Lord Livermore, the industry has been extensively consulted on both of these instruments. Draft SIs have been published. We believe that the industry is fully aware of where things currently stand, and we communicate regularly with it. Of all the industries that I have worked with, financial services are fairly on the ball about what is happening in government and do not necessarily always need to be nudged into responding to consultations or looking at draft statutory instruments. I am content with the amount of interaction that we have had with the financial services sector.
Returning to the impact of the consolidated tape, the practical impact of not having one would be very difficult to quantify, but one might imagine that it would cause our markets to be slightly less efficient and, as all good economists know, efficient markets are happy markets. That is why we think it would be a positive step for the UK to start to have consolidated tapes—we expect there to be one for each asset class.
I feel that was a slightly substandard response, but I will write with more information.
Securitisation Regulations 2023
(4 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Vere of Norbiton
That the Grand Committee do consider the Securitisation Regulations 2023.
Relevant document: 7th Report from the Secondary Legislation Scrutiny Committee