UK as a Financial Services Hub

Anneliese Dodds Excerpts

Wednesday 6th February 2019 Westminster Hall

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

It is a pleasure to participate in this debate, and I congratulate the hon. Member for Hitchin and Harpenden (Bim Afolami) on securing it. It has been an interesting debate, particularly when it comes to hearing about how Members’ professional experience has informed their approach to these matters in Parliament.

As many Members have said, financial and related professional services are an important area of the UK economy, and they contribute just over a twentieth of the UK’s overall economic output. There are interesting developments in the sector, which has traditionally not reflected the diversity of UK society. With the Women in Finance charter, changes are being made to reduce the pay gap. In relation to other characteristics, action is being taken to increase the number of people in the sector who have disabilities or are from black and minority ethnic or working class backgrounds.

We have discussed the fact that many people in the sector are not based in London or the south-east. I will add one statistic: there are more than 100,000 people employed in banking and finance in the north-west, which makes it the area with the third-largest number of people working in the sector, outside London and the south-east.

We have had an interesting discussion this morning about the sector’s tax contribution. Reference has been made to research undertaken by PwC that suggested that about 1p in every 10p of Government revenue comes from the sector. Let us be clear that that is counting the tax contributions of everybody who works in the sector, so it is not just looking at corporate taxation. As we all know, the corporation tax rate has been reduced. That has meant that the amount of corporation tax, in relative terms, has reduced. In absolute terms, it has gone up, but that is because these banks and so on have returned to profitability after the financial crash, so actually the burden has gone down in that area. Of course, it has also gone down when it comes to the bank levy, which has been scaled back. A surcharge has been applied as well, but when we look at both of them over time, we see that that burden is also going down.

Reference was made to stamp duty on shares. That stamp duty brings in about £3 billion of Government revenue a year. It is one of the most efficient and least avoided taxes, and for that reason Labour is considering extending it as part of a financial transactions tax. I would be very happy to talk to the hon. Member for Hitchin and Harpenden about how that would work.

As many hon. Members have said, financial services contribute significantly to Britain’s exports. In 2016, they were worth about £61 billion, with a surplus of £51 billion over imports of—yes, obviously—£11 billion. Of course, that is very significant in a situation in which other areas that traditionally were important for Britain’s export strength face tremendous headwinds, not least in relation to manufacturing, given the current uncertainty about Brexit.

As the hon. Member for Hitchin and Harpenden rightly mentioned, the UK is increasingly integrated into global markets. I would argue that the UK is already a very important hub when it comes to the Chinese financial markets, for example. About two thirds of renminbi payments outside mainland China and Hong Kong flow through London, so we are already catching quite a lot of that business. In addition, a number of Chinese firms have established themselves here. However, we need to be clear: yes, that activity is increasing, but, as others have said, we have to be sanguine about its current size. TheCityUK, in its report entitled “Key Facts about the UK as an international financial centre”, says that only about 0.4% of UK financial services exports currently go to China. That may of course increase in the future, but if we compare that with the 44% of our exports that go to the EU, there is a massive difference. As my right hon. Friend the shadow Chancellor of the Exchequer has intimated many times, it must continue to be possible for our financial services companies to win business across Europe and, reciprocally, for European companies to win business here.

As I have said many times during delegated legislation Committees on no-deal legislation, the UK Government have failed to prioritise sufficiently our financial services. I absolutely agree with the comments in that regard by the hon. Member for Aberdeen North (Kirsty Blackman). We appear to have accepted an outcome whereby equivalence, rather than passporting, is the likely eventuating circumstance, and of course that equivalence will operate on virtually exactly the same basis as it currently does for nations such as the US and Japan, which are far less dependent on access to the EU27’s markets than the UK is. On the question of how equivalence would work in the future, the point is that it would work the same for all third countries. If there were to be a stricter regime generally, that would apply to us in just the same way as it would to Japan and the US—the point is that it can also be removed at any point, from the perspective of the EU Commission—rather than there somehow being a more onerous regime for the UK, which I think would not be the case.

I very much associate myself with the remarks by the hon. Member for Bromley and Chislehurst (Robert Neill) concerning the current legal services conundrums and how they can have some kind of certainty on many regulatory issues.

Only very late in the day did our Government start to stress the shared interest of the UK and the EU27 in maintaining access to UK financial services. That was an enormous shame, because we have a mutual interest both in financial stability and resilience and in ensuring that the EU27 can continue to access the deep pool of capital that is available via our financial services. That recognition came only after a much longer period, sadly, in which a very damaging zero-sum narrative had developed, with the cut in corporation tax suggesting an intention to race to the bottom on tax and regulatory standards. That was immensely frustrating. What the hon. Member for North Warwickshire (Craig Tracey) described in relation to the insurance industry is actually what I am finding right across the financial services sector. There is no appetite anywhere, from what I can see, for a bonfire of regulations. Actually, the concern is to try to prevent regulatory turbulence and ensure that there is co-ordination into the future, and yet a picture has developed of a zero-sum approach whereby the UK would seek to reduce those regulations. I think that that has been very damaging.

On that issue, although I agreed with much that the hon. Member for Hitchin and Harpenden said, I did not agree with his comments about EU regulation. Actually, one root of the financial crisis was the misalignment of risk with reward. That was targeted by the cap on bankers’ bonuses, and rightly so. A second root of the financial crisis was the lack of transparency in financial markets—dark pool trading and so on. That was targeted by MiFID, which encouraged many other countries to adopt the kind of transparency standards that existed in the UK before. I therefore think that we need to be very careful about mounting any kind of wholesale assault on those regulatory systems. When it comes to having robust regulation of systemic providers of market infrastructure, I think that that is a very sensible approach and, indeed, it is one that has been supported a lot of the time by UK actors.

Co-ordination of regulation will become ever more important with more innovation in delivery models of financial services. I strongly agree with the comments by the hon. Member for Henley (John Howell), who is no longer in his place, about the need for regulations to keep in step with new developments—for example, in relation to digital currencies. I also agree with the comments made about the workforce, who are incredibly important. We need to ensure that we still have access to people from other countries who can contribute so much to our financial services.

I am a little surprised that we have not talked much in this debate about the contribution of financial services to investment, particularly in business. We need to be clear about what has happened over time. In 1988, almost a third of banks’ UK lending went to businesses. It is now less than a tenth, so there has been an incredible change over time. The Labour party thinks that we need to do something to deal with that. We need to learn from what other countries have done in relation to national investment banks—KfW in Germany, in particular. We need to look at the RBS branch network. I share the anger of the hon. Member for North East Derbyshire (Lee Rowley) about the closure of some of that network.

Of course, we need to focus on vulnerable consumers as well. Although we have seen many positive innovations in that space, that often has not been the case for consumers on low incomes. I will add one statistic to this debate, which is that about one in three families in the UK do not have the financial wherewithal to pay for a new cooker if their current one stops working. That quite extreme lack of financial resilience is now very present in our communities. Consumer credit debt is still far too high, not least for people with overdrafts, credit card debt and/or hire purchase debt. We need to see much more strenuous activity on that. I was very pleased to hear the comments of the hon. Member for Hitchin and Harpenden about credit unions in that regard. Yet again, I urge the Government to focus on better integrating credit unions into the Help to Save programme. I also ask the Government to look again at having a proper tribunal process for the businesses that were dealt with so badly during the RBS Global Restructuring Group scandal, so that there is some redress for small firms that may have been impacted on by banks’ practices.

[Graham Stringer (in the Chair)]

May I request that the Minister leaves a small space of time at the end of the debate for the mover of the motion to wind up?

DRAFT DEVOLVED INCOME TAX RATES (CONSEQUENTIAL AMENDMENTS) ORDER 2018

Anneliese Dodds Excerpts

Monday 4th February 2019 General Committees

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

It is a pleasure to serve on this Committee with you in the Chair, Mr Gapes. I am grateful to the Minister for his helpful explanation. As he set out, this is a relatively straightforward set of measures that are consequential on the 2014 Act and the current situation with Scottish income tax. We obviously needed to have some of this secondary legislation laid before the House, to ensure that income tax reliefs, deductions and PAYE continue to operate with the Welsh rates of income tax component and also with the changes that have occurred in the Scottish situation.

Obviously, this instrument is in keeping with the established procedures relating to devolved powers and we will therefore not oppose it. However, I have one question for the Minister—it might be easier for him to write to me afterwards—about the arrangements for gift aid donations. The explanatory note states that the approach being taken will ensure that no donor will be made worse off as a result of having made a gift aid donation. Similarly, the impact assessment states that there will be no or negligible impact on charities as a result of these measures. Presumably, however, there would be some impact on the Exchequer, given that there is an assumption that individuals would be treated in practice as if they were still UK basic rate taxpayers, and obviously we already see some changes in the Scottish system around the income tax structure. It might therefore be helpful to have a little more information on this. However, that is really the only question I have about these measures.

Draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019

Anneliese Dodds Excerpts

Wednesday 30th 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, Mr Bailey. I am very grateful to the Minister for his explanatory remarks. Once again, I sit opposite him to discuss a statutory instrument that would make provisions for a regulatory framework after Brexit in the event that we crash out without a deal, which I hope is less likely following the House’s decision last night. On each previous occasion, my Labour Front-Bench colleagues and I spelled out our objections to the Government’s approach to secondary legislation.

The volume and flow of secondary legislation on our exiting the EU is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken, but establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Secondary legislation ought to be used for technical, nonpartisan and uncontroversial changes, because it allows limited accountability. Instead, the Government continue to push through contentious legislation with high policy content by using this vehicle. As legislators, we have to get this right. These regulations could represent real and substantive changes to the statute book, so they need proper, in-depth scrutiny. In this light, the Opposition want to put on record our deepest concerns that the process regarding these regulations is not as successful and transparent as it should be.

The Minister spelled out the fact that the first SI relates to the 2009 UCITS directive, which sets out a common set of standards for investor protection for regulated investment funds that can be sold to retail investors in the EU. The directive established a passporting system to enable UCITS to be marketed and sold to the general public throughout the EU, and to enable UCITS management companies to manage UCITS that are located in other member states. The directive was transposed into UK law through domestic legislation and FCA rules. Many would say that the directive has been successful: it has facilitated far greater choice for investors, and I understand that there are now more than 10,000 funds available to UK investors as a result of the directive. Almost three quarters of those are passported in from the EU27 under the UCITS directive. A large number of non-UK UCITS funds are managed by UK businesses under the directive—by asset value, it is £1.8 trillion-worth out of the £9 trillion industry across Europe. Some £375 billion-worth of that is held by UK investors.

I should express my gratitude to the industry for providing me with those figures. It has indicated that in the event of a no-deal Brexit, UCITS funds from the EU27 could not be marketed to UK investors in a straightforward manner. Furthermore, it would not be easy to list UCITS exchange-traded funds on the London Stock Exchange. Given that this SI largely preserves the status quo on the availability of UCITS funds and exchange-traded funds—albeit temporarily—there is support in the industry for the intention behind it, because there would undoubtedly be problems under a no-deal Brexit.

None the less, the Minister needs to answer some questions on this SI. It is essential that we properly understand its impact—not least because, in common with so many others that we have considered in Committee, it uses secondary legislation to amend primary legislation, which is of course the definition of Henry VIII powers. In addition, the FCA and others have raised considerable concerns about unregulated collective investment schemes, or UCIS. Many of us have heard horror stories about these, with examples that have badly let down their investors or even operated as Ponzi schemes. In the circumstances it is essential that regulations are sufficiently encompassing and do not lead to unsophisticated investors being presented with overly risky products. At the same time, the asset management industry, particularly people who are involved with investment in UCITS, is an important part of the financial services industry. Given that the industry supports one in 10 jobs in our country, it is a matter of regret that our Government have failed to prioritise seeking a better deal for financial services as part of their negotiations, and that the quest for passporting rights was quickly dropped in favour of some form of equivalence. Of course, whether to agree that will be entirely in the European Commission’s gift.

That has already led to economic activity in this area shifting out of our country. Companies from Hermes Investment Management to Legg Mason, Janus Henderson Investors, Jupiter Asset Management and Polar Capital all appear to have created additional positions, functions or operations in the EU27 rather than the UK because of the need to secure service continuity for current and future investors. As I understand it, the issue of delegation, which is essential in this area, is still not fully resolved. It remains unclear on what basis UK companies will be able to manage investments for fund companies based in the EU27. I hope that the Minister updates us on when he expects the Commission to give ESMA the green light to enable concrete discussions to take place on that score.

My second question relates to the legal basis for the draft regulations. They are said to be made under both the European Communities Act 1972 and the EU (Withdrawal) Act. Surely it is rather peculiar to have those two parent Acts, given that one is about giving effect to EU law whereas the other is about inherited EU law. Perhaps the Minister can explain why those Acts form the basis for the draft regulations.

Thirdly, we have been provided with an impact assessment for the draft regulations, albeit we received it just this morning. Clearly that is better than nothing, but it gave us limited time to acquaint ourselves with the impact assessment.

[John Glen]

Ten past 10.

[Anneliese Dodds]

Thank you. That impact assessment suggests there will be a need to charge inbound EEA passporting firms as third-country firms, but that to

“reduce the impact of leaving the EU on funds, the government has committed to reviewing Section 272,”

which governs this process. It adds:

“This will be done through a future legislative vehicle.”

It would be helpful if the Minister provided us with some details about that. Does he envisage that happening at the end of the three-year temporary permissions regime or at some other point? It would, of course, require legislative change.

I turn to the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations. I am grateful to the Minister for explaining the basis for that instrument. As he explained, the EU regulation has been used far less than many would have hoped, given that it was intended to encourage long-term investment.

There are two issues with the SI. The first concerns empowerment of the FCA. My colleagues and I have frequently referred to the fact that the process of legislating for no deal has in many cases provided the FCA with unprecedented powers, potentially overshooting what is required to transpose the EU acquis. Indeed, colleagues will not have missed the conclusions by City A.M. following the recent Treasury Committee hearing on this subject; it stated that the process involves regulators being given “‘unprecedented’ powers”—its words, not mine. However, in this case, we seem to have undershooting, specifically in relation to the FCA’s powers to create a register of ELTIFs.

ESMA, the EU-level regulator, does not merely have the ability to create a register of ELTIFs; it is under a duty to do so. However, the draft regulations only empower the FCA to keep such a register; they do not require it to do so. There is a direct contradiction between regulations. Article 3 of the 2015 EU regulation on ELTIFs states:

“ESMA shall keep a central public register”.

The draft regulations do not just substitute “FCA” for “ESMA”; they give the FCA a power, rather than a duty, to keep a register. Regulation 6 states:

“The FCA may keep a central public register”.

I note the use of the word “may”, not “must” or “shall”. The Minister needs to explain that discrepancy before the Committee can accept this SI.

There seems to be a drafting mistake. The draft regulations seem to empower the FCA to designate ELTIFs as such across the EU, rather than empowering it to recognise them as such within the UK for the purposes of then recognising them as the new category of LTIFs. To try to explain this horrendously complicated area, I am going to differentiate my pronunciation of ELTIFs—European LTIFs—and LTIFs, the new category the Government suggest they are creating. This point is very difficult to explain without having the relevant pieces of legislation in front of us. The Minister will remember the comments of my hon. Friend the Member for Garston and Halewood (Maria Eagle) in a previous Committee.

[John Glen]

I do recall. On that specific point, I checked with my officials, as I said I would. Their understanding was that that was not common practice. So I am doing all that is expected, based on the practice of Ministers in this position.

[Anneliese Dodds]

I am grateful to the Minister for that clarification, if that is the case. However, even if it were not the case previously, there is a prima facie argument that it would be useful for Committees of this type to be able to see in the committee room the previous regulation and be able to compare it with what is being suggested. Otherwise, it is extremely hard for us to understand exactly what is being proposed in some of the very complex changes that are being implemented.

That difficulty had its apogee with the MiFID—markets in financial instruments directive—transposition regulation. I will not go into all the details; I have discussed the matter with the Minister many times. The Opposition had hoped to debate that subject on the Floor of the House because it was recognised in that case that a Keeling schedule was necessary, effectively to track changes. It would be helpful for Members in all such Committees to be able to see the direct impact of changes from this no-deal legislation. Otherwise, it is very difficult to understand.

[Kirsty Blackman (Aberdeen North) (SNP)]

Even if the documentation that was made available to MPs beforehand related to the relevant legislation, that would be a slightly better position than the one we are in now, and it would not require a Government Minister actually to bring the legislation with him.

[Anneliese Dodds]

I absolutely agree with the hon. Lady. She is right that it would be helpful. In many cases, we are talking about the initial legislation, which itself was relatively complex and has often been amended. It would be useful for all of us during this complex process to have some aid in that regard.

In its amendment of article 5.1 of the EU regulation, the statutory instrument would give the FCA an extra-territorial power that it should not have. That is obviously fairly problematic because, whatever kind of Brexit occurs, ELTIFs will continue to exist under EU as well as UK law. It is EU-level authorities that will provide their initial designation for the EU27. To explain that quickly, articles 4 and 5 of the ELTIF regulation set out the conditions for the designation and authorisation of ELTIFs. In the draft regulations presented to us today, article 7 amends articles 4 and 5.1 of the EU regulation in quite a strange direction.

Article 4 refers to LTIFs, but article 5.1 talks about applications for authorisations of ELTIFs and says that application for authorisation as an ELTIF shall be made to the FCA, and sets out the process for application for LTIFs. I am sorry that this is very complicated but it underlines the confusing nature of the SI.

It seems that the proposed article 5.1 as amended is wrong because ELTIFs will continue to exist under EU law after Brexit. It will not be in the FCA’s gift to recognise and authorise them outwith the UK. We need just a small change to article 5.1, which should read: “An application for authorisation within the UK as an ELTIF shall be made to the FCA.” Will the Minister assure us that he will look into that and seek to amend the legislation accordingly, if that concern proves genuine and is not just my reading of the text?

--- Later in debate ---

[John Glen]

Once again, I will begin by thanking the hon. Members for Oxford East and for Aberdeen North for their thorough examination of the statutory instruments; I will do my very best to answer in detail the points that they have made, and where I cannot, I shall write to them as soon as I possibly can.

The hon. Member for Aberdeen North discussed impact assessments. We now have an impact assessment, which was circulated, as she acknowledged, at 10 past 10 this morning and covers all the statutory instruments that will be laid until 11 February. There has been a desire on my part and that of my officials to meet the necessarily exacting standards of the RPC. As I say, that is my responsibility, but I would point out that this is an unprecedented process, doing 53 SIs for financial services, 45 of which have now been laid, and working on each one individually. I hope the existence of the impact assessments up to 11 February—obviously there will be some more after that—will give her some comfort, but the points that she made have been heard.

I will come on to the other points that the hon. Lady made, but I will now turn to the issues raised by the hon. Member for Oxford East. She made some initial observations with respect to the volume, flow and appropriateness of the SI mechanism that I may have heard before, but I acknowledge her sincerity and take them in the spirit in which they are intended. We are acting within the terms of the withdrawal Act, and I have never sought to pretend that this process is optimal, but it is a practical measure to give business continuity and give the industry the answers they are concerned about.

I also recognise that the degree of uncertainty is not helpful, but I draw the attention of the hon. Lady and the Committee to the remarks of Sam Woods, deputy governor of the Bank of England, who said in April last year that we would have 5,000 to 10,000 jobs moved by day one, which is between 0.5% and 1% of financial services jobs in the UK. There is an enormous resilience in the financial services sector, and this process is about ensuring that there is minimal disruption in the event of no deal.

Moving on to the specific points made by the hon. Lady, she said that in a no-deal scenario, EU UCITS could not be marketed in a straightforward manner in the UK. The temporary marketing permissions regime is intended to prevent the market disruption that would result from a sudden end to passporting rights. The regime ensures that the business model of EEA fund operators marketing into the UK can continue for a temporary period while we transfer to the UK-only regime. That includes the new sub-funds, and reflects our intention to allow EEA firms and funds to continue their business operations for a temporary period.

If we did not allow new sub-funds to enter the temporary permissions regime after exit day, there would be a significant risk to the role of the London Stock Exchange as a global hub for exchange-traded products. Therefore, including sub-funds in the temporary marketing permissions regime reduces the risk to the London Stock Exchange and ensures continued access for UK customers to new EEA funds in future. That was a direct change from laying this SI in November and December; we laid it again on 6 December in response to feedback from the markets. There is an iterative process, hence the time constraint that puts pressure on the impact assessment.

The hon. Lady raised the issue of assurances on ESMA and on portfolio delegation. I refer to the comments of the chair of ESMA, who said on 3 October that in the case of a no-deal Brexit, EU regulators and ESMA

“should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators…ESMA has coordinated the preparations for such MOUs together with the EU27 NCAs.”

More recently, the Luxembourg regulator stated that the

“delegation of investment management, portfolio management and, or risk management to UK undertakings shall continue to be possible without any disruption post-Brexit”.

I wish it could be more transparent and sooner, but I am convinced and assured that that work is going on and that it will be completed in time.

The hon. Member for Oxford East raised the issue of why the FCA was not required to keep a register of LTIFs and the issue of the power not the duty. The power to keep the register is being transferred to the FCA. As there are currently no LTIFs set up in the UK, there is no register of those funds online. The FCA keeps a register of small UK AIFMs that manage similar funds, European venture capital funds and European social entrepreneurship funds.

The best thing is for me to obtain some assurance from the FCA about its plans, which are, in reality, at a relatively early stage because we are simply trying to transition over at this point. The detail of its ongoing regime and responsibilities will be a matter for it to convey in due course.

[Anneliese Dodds]

We have been told throughout the process that there will be no watering down of regulations under the withdrawal Act. I appreciate that this is an abstract case, because we do not yet have a category of investments operating in the UK that would fall into that designation, but that is not to say that one will not be created in future. If we do not have that requirement, there would surely be that resiling. Will the Minister endeavour to talk to the FCA to make sure that, if such investments start to operate in the UK, it will keep a register of them? Surely that is what the EU legislation requires.

[John Glen]

From my point of view at this point, it seems reasonable not to suggest that there will be a register for something that does not yet exist, but the hon. Lady’s point is perfectly reasonable. I will write to the FCA following what she has said.

[John Glen]

I am sympathetic to what the hon. Lady says, but she has to understand that the regulator is the regulator, and it will have reasons in terms of the market actors around that. My view is that it would be entirely appropriate for the regulator to have that register, and I would expect to see clear market-driven reasons for why it would not be necessary. Again, it would not be responsible for me to make a commitment without knowing all the background factors, but I will write to the regulator to express the Committee’s concerns and ask what its approach would be in the circumstances where those funds existed in the United Kingdom.

[Anneliese Dodds]

I am grateful to the Minister for what he has said, but the regulator is required to carry out what this House requires it to do. If we are talking about ESMA, it is meant to carry out what it has been required to do by EU-level policy makers. That EU legislation requires that the register shall be kept, so we need something more emphatic if we are to stick to the existing distribution of responsibilities.

[John Glen]

It is an interesting debating point. Had the hon. Lady seen the report of my appearance yesterday before the Treasury Committee with the chief executive of the FCA and the deputy governor of the Bank of England, she would know that we work collaboratively with the industry to do what is right. The intention of this process is not to deregulate in any way—there is no attempt by the Treasury to create some wriggle room to remove the obligation of the FCA. I understand the hon. Lady’s point, and I expect there to be continuity between the current and future regimes on the FCA’s reporting requirements. I will seek clarification on that point.

HMRC Estate Transformation

Anneliese Dodds Excerpts

Tuesday 29th January 2019 Commons Chamber

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

I was given advance notice of the contents of this statement while I was in the Chamber for Treasury questions, and therefore time has been limited to prepare for it. I am surprised that we are now discussing this matter given that I and many of my colleagues have repeatedly raised problems with the Building our Future programme and generally been met with one-sentence answers from the Government.

The Minister maintains that this announcement has come today because of the successful securing of sites for 13 regional centres, so I hope that he will indicate to this House which centre was secured yesterday to justify this statement being presented today. When will he publish the list of precise locations of each of these centres, given that he maintains that we have today secured those new places? That would be enormously helpful for us, because without that information we will be forced to conclude that this statement has been made today for reasons other than its newsworthiness.

In July 2014, HMRC published the Building our Future proposals on reforming tax collection services for the next five years. In November 2015, HMRC announced plans to cut the number of offices from 170 to the 13 that are, apparently, having their locations announced today. In January 2017, the National Audit Office published its report on that process. It indicated that that original plan was unrealistic. It stated that the estimate of estate costs over the next 10 years had risen by nearly £600 million—almost a fifth—with more than half of that being due to higher than anticipated running costs for the new buildings. The National Audit Office also forecast a further 5,000 job losses and said that the costs of redundancy and travel had tripled from £17 million to £54 million due to this programme.

So what exactly is happening now among the HMRC workforce as a result of Building our Future? Some 73% of HMRC staff surveyed said that the Building our Future plans will undermine their ability to provide tax collection services. Half of them said that it would actually undermine their ability to clamp down on tax evasion and avoidance. I have to say that that was my assessment as well when I visited a number of current and former HMRC offices right across the country— 10 of them—over the past few months.

The Government say in this statement that

“90% of the staff that”

HMRC

“had at the start of this transformational journey”—

a piece of jargon if ever I heard one—

“will move to a new regional centre or finish their careers in their current offices.”

During the visits that I conducted, I did hear about staff finishing their careers—they were finishing their careers early because they could not travel to the new regional centres that the Minister is trumpeting today. People from Wrexham were being expected to travel every single day to Cardiff or to Liverpool. People from Exeter were being expected to travel to Bristol. These journeys are simply not feasible for people with caring responsibilities and simply not feasible on public transport.

I note that the Minister said that having city centre locations leads to a situation where it will be possible to recruit local graduates, but of course what his Department has forgotten, and what the NAO reminded him of a couple of years ago, is that in many of these city centre locations the labour market is far tighter, so we often find that there is actually an enormous recruitment problem rather than the bonanza that might be suggested to people who read his statement uncritically.

At the end of the statement, the Government accept, it seems, the need to learn from expertise. I will quote the sentence, although it pains me a little to do so given its construction:

“As HMRC gears up to manage the workload resulting from exiting the European Union, it is also providing additional space in regional centre cities”,

which I assume means offices,

“for additional staff and retaining some space for longer so that the planning”—

of what, we do not know—

“can benefit from the knowledge and experience of existing personnel.”

Well, that raises almost as many questions as it answers. The situation is still unclear about where 5,000 extra customs staff will go—a point I will return to later.

None the less, that sentence, as garbled as it is, suggests that HMRC wants to build on existing experience, but that principle is just not being followed in the Building our Future programme. We had within HMRC centres of excellence across a whole range of different specialisms, whether income tax fraud or the different kinds of multifarious problems that taxpayers can have in filling out their self-assessment forms. Many of the staff who were employed in those specialisms have either already left or are thinking of leaving. A great example of this is what we have seen happening in Swindon, which was previously a centre for income tax fraud. There is now a centre of excellence being built up on that in Liverpool, but with none of the same staff and with none of that expertise. It is being built up from scratch, creating huge inefficiency.

The Government have dogmatically refused to reassess the Building our Future programme apart from when they have been forced to do so—as they acknowledge very, very briefly in this statement—and that is exacerbating problems in HMRC. The attrition rate is greater than the hire rate. We saw in 2014 an absolute reduction in staff of over 3,000 and in 2015 an absolute reduction in staff of over 4,000. In 2017, the UK had the second highest attrition rate out of the 55 countries that share data on their tax services. There has also been incredible mismanagement, with the release of 5,600 customer services staff and then, in 2015, the hiring of 2,400 new customer services staff. It is no surprise that morale is at rock bottom in HMRC.

I therefore want to ask some very quick questions of the Minister. Which new regional centre was secured yesterday? When will we have the list of locations of regional centres? If 90% of positions are retained or vacated due to people finishing their careers, does that mean that 10% of people in HMRC are going to be made redundant? Have there been any reviews of these plans in the context of Brexit? Has the Minister thought about the impact of this on the local economies that are so dependent on these jobs, as raised by many of my colleagues?

[Mel Stride]

I thank the hon. Lady for her response. I will pick up on some of the points that she has raised.

The hon. Lady asked why this statement is being delivered today. I think that she partly, at least, supplied the reason for that herself, in that she has shown a very keen interest in these matters, as have many other Members across the House, quite rightly. It is right, as we have always said, that we will be transparent in the roll-out of this transformation programme, and today is part of that process.

Towards the end of the hon. Lady’s remarks, she called for a review of our arrangements in the context of Brexit and the customs arrangements that our country may face. That is the second reason why it is important that we consider these matters. The debate this afternoon will rightly focus on preparedness, among other matters, and HMRC and its transformation programme lies at the heart of the issues that will be debated.

The hon. Lady asked for the locations of these sites. I believe they are all in the public domain, but I am happy to provide her with a list. She also made several observations about the NAO report and value for money. We are still confident that we will meet our roll-out end date of around 2025. In terms of value for money, there will be savings of some £300 million across the 10 years. I remind the hon. Lady that we will be getting out of a substantial number of private finance initiative contracts that the existing offices are engaged with—PFI contracts that were brought in under her party’s Government in 2001. One driver of additional value for money is that we will be able to unpick the unfavourable arrangements that her party’s Government got us into in the first place.

The hon. Lady asked about the cost of redundancy. I said in my opening remarks that some 90% of those who will be impacted by these moves will either conclude their career in their existing offices or relocate to the new regional hub. The overall thrust of these changes is to ensure that we are better equipped at getting in more tax. It is very much a Labour philosophy that every solution has to involve more money and more people, whereas our approach is adjusting with the times and getting offices in place that are fit for the 21st century, often using complicated data-based interrogation techniques, for which large regional hubs are the way forward.

Some of the 170 legacy offices that the hon. Lady seems so intent upon protecting had under 10 staff in them. Most of the processes carried out by those staff were manual in nature rather than technology-driven, so they were far less efficient. For example, over 80% of self-assessment returns are now done in a digital format, which is why it is important that we move to this model.

I turn to the hon. Lady’s remarks about the staff themselves, who have been at the heart of our considerations as we have rolled out this process. All staff are given at least one year’s notice of any proposed change. They are quite rightly given face-to-face meetings with their managers to discuss the changes and assistance that they may require. In determining the locations of the regional hubs, HMRC mapped out the journey to work of the staff who would be impacted, to ensure that that was one of the principles taken into account when assessing where the locations should be. Those who have extended travel arrangements as a consequence of any move may be given assistance with additional travel costs for between three and five years. Transitional offices, which the hon. Lady raised, will provide additional opportunities for continuity of HMRC’s work and the opportunity of employment for those within these arrangements.

There is a purpose to this. It is not just about saving money, closing offices, suggesting that we are ready for the 21st century or making change for the sake of change. The purpose of these changes is to ensure that we continue the excellent work that HMRC is carrying out in clamping down on avoidance, evasion and non-compliance. The proof of the cake is in the eating: some £200 billion has been brought in or protected since 2010, and we have one of the lowest tax gaps in the world at 5.7%. That does not happen by magic; it happens by having an HMRC that is lean, efficient and up to the job. I commend this statement to the House.

Oral Answers to Questions

Anneliese Dodds Excerpts

Tuesday 29th January 2019 Commons Chamber

[Mel Stride]

My hon. Friend raises two issues. On non-tariff barriers, we have made it very clear that we will implement a solution in the event of no deal, for example, that will be as friction-free as possible. But there will be requirements in that scenario for us to handle pre-custom declarations and various checks, which will come with having a border under those circumstances with the EU27. On our tariff policy, we will come to that in due course.

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

Stockpiling by business is at its second highest rate since 1992. The Treasury suggests that new customs paperwork for no deal would cost UK business £13 billion. When will the Minister’s boss, the Chancellor, stop arguing privately against no deal’s staying on the table and publicly take on the scorched-earth fantasists in his own party?

[Mel Stride]

The questions I have just responded to are in a similar vein and all lead back to one conclusion, which is that, if we are to avoid a no-deal scenario, there has, by definition, to be a deal that is agreed with the United Kingdom. We have a very good deal that the Prime Minister has negotiated and will be negotiating further with the European Union. It sees us respecting the outcome of the 2016 referendum but, most importantly, making sure that flows across our borders are as frictionless as possible.

Draft Market Abuse (Amendment) (EU Exit) Regulations 2018 Draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019

Anneliese Dodds Excerpts

Wednesday 23rd January 2019 General Committees

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

It is a pleasure to serve in this Committee with you in the Chair, Mr Davies. I am grateful to the Minister for those helpful explanatory remarks.

Of course, the Minister and I are here once again to discuss two of the many Treasury statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. On each such occasion, my Front-Bench colleagues and I have spelled 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 that passes through delegated legislation Committees.

As I mentioned yesterday in relation to another statutory instrument, the Committee takes place in the context of a Government refusal to allow debate on the Floor of the House concerning the exceedingly complex MiFID transposition legislation, and just a couple of days following a Division on statutory instruments to implement a customs union with our Crown dependencies, with little to no indication of how that would interact with our future customs relationship with the EU27. The prospect of no deal looms large, given the Government’s refusal to rule it out, so we must recognise that, on 29 March, instruments considered by delegated legislation Committees such as this may well become what we rely on, especially given the very real risk that the Government are simply running down the clock. Such instruments could represent real and substantial change to the statute book; they need proper scrutiny and in-depth analysis.

[Paul Masterton (East Renfrewshire) (Con)]

I take the hon. Lady’s point, but is it not a bit rich to go on about the necessary scrutiny when half the people on her own side have not turned back up after the Division?

[Anneliese Dodds]

I do not know why other hon. Friends are not here. I am sure they will be coming back soon. It may be because they have been informed that another vote is just about to happen. I apologise if my remarks have to be cut in half as a result, as the Minister’s were.

Yesterday, in another Committee, I had a long discussion with the Minister about why an impact assessment had not been produced for the statutory instruments we were considering. I am grateful to him for the clarification he gave me earlier, but although we have an impact assessment for one of the instruments this Committee is considering—the credit rating agencies regulations—we do not have one for the market abuse directive and market abuse regulation transposition regulations. Yesterday, I and other hon. Members indicated our frustration at being required to be prepared to pass legislation without having been provided with an impact assessment, and that remains the case.

I note the comments by the right hon. Member for East Yorkshire about the details of the explanatory memorandum. In yesterday’s Committee, it was intimated in the explanatory memorandum that an impact assessment had been produced. The Minister generously said he had left that statement in the explanatory memorandum to draw the Committee’s attention to the fact that there was not an impact assessment. That was a valiant attempt to explain the situation, but it is my understanding that we have the same situation with the MAD-MAR regulations. I hope that is resolved as soon as possible. We need those impact assessments to be able to understand the potential impact of this significant legislation.

As the Minister explained, the two statutory instruments we are considering relate to important elements of the post-crisis financial architecture. With the Committee’s permission, I will discuss them in reverse order and begin with the credit rating agencies regulations. Regulations were introduced at EU level following credit rating agencies’ failure properly to assess the riskiness of complicated financial instruments—not least those structured finance products, such as collateralised debt obligations, that were backed up by sub-prime mortgages—in the run-up to the financial crisis. We all know the impact of what occurred then, when credit rating agencies were improperly regulated or, indeed, not regulated.

Arguably, credit rating agencies also facilitated the very sudden downgrade of the credit ratings of a number of countries, which obviously had a significant impact on their ability to borrow and on the cost of their doing so. If the Government continue on their current trajectory and we leave the EU without a deal, it will be essential that we do not dilute the regulatory framework for credit rating agencies in the UK, and that any ratings used for regulatory purposes, such as assessing capital adequacy, are robust.

With that in mind, I have a number of questions about the credit rating agencies regulations. First, I would like to push the Minister a bit more on the FCA’s capacity to deal with the new tasks and powers assigned to it by the draft regulations. I believe he said that the FCA now has 158 staff working on Brexit, but of course the draft regulations give it significant new powers with respect to criminal sanctions and investigations. Many of us may feel that such an extension of its role would have been better dealt with through primary legislation. I will come back to that, but there remains an issue with the FCA’s capacity to exercise those no-deal powers.

Yesterday, the Minister maintained that resourcing had not been raised with him at his last meeting with the head of the FCA. The Minister stated previously that the FCA would be able, in extremis, to garner additional resources by raising its levy on market participants. If there is a no-deal Brexit, markets may be operating in conditions of extreme uncertainty and considerable turbulence, so they may not greet an additional levy request from the FCA at that moment with unadulterated joy. I hope the Government are considering that point and what might happen if the FCA needs additional finance but its request is contested by market participants.

Secondly, under the draft regulations, the FCA will have the power to develop regulations relating to credit rating agencies. I am concerned about the scope of the draft regulations and whether they really fall within the powers provided by the withdrawal Act. In particular, regulation 3 states:

“The FCA may make such rules applying to credit rating agencies…(a) with respect to the carrying on of a credit rating activity, or (b) with respect to the carrying on of an activity which is not a credit rating activity, as appear to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives under Part 1A of the Act”—

the Financial Services and Markets Act 2000. That seems a very broad power: it appears to empower the FCA to add to the corpus of law developed by the EU in its regulations on credit rating agencies. It is unclear where the justification for such a power lies. Is it provided for by the withdrawal Act deficiency powers? If so, will the Minister indicate under exactly which circumstances he envisages the power being used? I think the Committee needs that information before it can approve the draft regulations.

I also have a question about co-operation. As the Minister outlined, the draft regulations will remove any obligation to co-operate in processes intended to ensure appropriate regulation of credit rating agencies. Again, that seems like a policy decision rather than a technical one. For example, although in theory it would be possible to participate in the European ratings platform from outside the EU, that appears not to have been envisaged— the draft regulations do not provide the mechanisms to allow even the possibility of it. It would be helpful to understand why not.

Lastly, I am a bit confused by the manner in which the draft regulations have been presented. For example, the background information in the explanatory memorandum focuses on the use of credit ratings for regulatory purposes, but of course the EU’s regulatory machinery for credit rating agencies also imposes a large number of requirements on the agencies themselves, including many requirements to prevent any kind of conflict of interest. They are not allowed to provide advisory services or rate financial instruments without sufficient high-quality information on which to base their ratings, and they have to disclose their models and methodologies and publish an annual transparency report.

There are also a number of requirements that relate to directors on boards. Those goals have not been referred to; I assume that that is because they were already dealt with in the 2009 credit agencies regulation, but I hope that the Minister can confirm that. On my reading, the purpose of the 2009 regulation was to set out the means of implementing those requirements, rather than to provide a level 1 justification, as it would be called in EU parlance.

I have a related concern that it could be difficult to perform functions that relate to the internal operations of CRAs outwith the regulatory colleges that operate at EU level. It would be helpful if the Minister indicated whether, in his view, those controls will be maintained adequately without such co-operation.

Let me move on to the 2018 draft regulations, which implement what is colloquially known as MAD-MAR. MAD-MAR II was implemented in 2014—

--- Later in debate ---

On resuming—

[Anneliese Dodds]

I had just begun to discuss the second SI, which implements what is colloquially known as MAD-MAR—the market abuse directive and the market abuse regulation. As I mentioned, MAD II was implemented in 2014 and contained provisions on insider dealing and the unlawful publication and communication of inside information and market manipulation. As well as empowering national regulatory authorities to investigate and deter those activities, MAR widened the scope of MAD, strengthening the regime for commodity and other derivative markets and banning the manipulation of benchmarks such as LIBOR and reinforcing regulators’ powers.

I have two questions about the instrument. As with the other, it “removes co-operation requirements”—to use the Minister’s terms—but it does not provide a clear legal basis for that co-operation to continue. I am rather concerned about that in the context of the many regulatory developments in that area, particularly where technology is radically changing the channels and methods of communication within financial institutions.

As I am sure the Minister and anybody else who has been covered by those regulations will be aware, a large number of records need to be held by any market participant who needs to disclose on potential insider information for five whole years under MAD-MAR. That includes a list of all people who might be receiving insider information, as well as a record of the conversation that might have relayed that information. If conversations are not recorded, minutes are required. Even the format of those minutes is stipulated in a template set out by ESMA, so the requirements are very detailed. There are various stipulations in the event that minutes are not agreed within five business days and so on and so forth.

An issue with that process is the emergence of modern, Snapchat-type applications, which maintain no record of any conversation. I know that the EU was grappling with that matter and that ESMA is aware and vigilant about it, but I am not aware of any legislative changes to deal with it. I hope that the Minister can assure us that he will work with the FCA to ensure that any undermining of the MAR provisions through the use of new technology would be dealt with firmly, and that he feels satisfied that the FCA would be sufficiently empowered to do so.

Finally, it would be helpful if the Committee had a bit more information about how the Government intend to operate the system of notification of issuers when the issuer is not registered in the UK. Under MAD-MAR, the issuer would need to notify the competent authority of their home member state if they are not from the jurisdiction in which they operate. How will we ensure that issuers, many of whom will be from the EU27, are doing so under this new approach?

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

Anneliese Dodds 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.

--- Later in debate ---

[Anneliese Dodds]

The Minister is being generous with his time and none of us doubts his commitment to ensuring that the process works properly, but will he enlighten us as to the blockages that are preventing that? Is it a matter of resources or policy issues that have to be dealt with? It would be helpful for us to understand, because although it is wonderful to hear he is trying so hard to get it sorted out, the Committee needs more.

[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.

Draft Double Taxation Relief and International Tax Enforcement (Austria) Order 2018

Anneliese Dodds Excerpts

Monday 21st January 2019 General Committees

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

It is a pleasure to serve with you in the Chair, Mrs Main. As the Minister mentioned, the treaty is one of a number that we have discussed in Committee, and has been introduced following the UK’s ratification of the OECD’s multilateral instrument for double tax treaties.

My hon. Friend the Member for Huddersfield asked a pertinent question—why Austria? We have asked a number of times for an indication of the schedule that the Government are following, having passed the MLI, when negotiating such treaties. That indication would be helpful for us to understand which treaties are still to come before a Committee.

As I just mentioned, the treaty follows on from the ratification of the multilateral instrument. In fact, the explanatory memorandum to the order states that, by broadly adopting the MLI model, the Government have been able to

“encourage and maintain international consensus on the appropriate tax treatment of cross-border economic activity and thus promote international trade and investment.”

There are, however, a number of differences between the treaty and OECD model, and we have not been provided with an explanation of why that is the case. From my reading, it looks like there are about 16 differences between the treaty and what is set out in the MLI. I will not go through exactly which articles those differences crop up in.

Some of those deviations from the OECD model may well be valid, but if that is the case, the rationales are not explained in the notes supplied with the double tax order. I would surmise, for example, that the treaty contains no provisions on withholding taxes applied to interest, because the UK and Austria do not routinely impose such taxes on each other and there is therefore no locus for discussing that within the agreement.

Other alterations could be more problematic. A worrying difference between the double tax agreement and the OECD model is in article 22—the non-discrimination section. The provision in the OECD model relating to stateless persons is not included in the treaty. As with other double tax treaties that we have discussed in Committee, it is not clear whether that was at the request of the UK, because it has adopted a different approach to the OECD in that area, or whether, alternatively, it was at the request of Austria. It would be helpful to know that.

A large number of people now face statelessness, and that number is likely to increase because of violence and conflict in the world. As I am sure the Committee is aware, Austria has become home to quite a large number of people fleeing violence in other parts of the world, so it is quite important those people are not discriminated against in the tax system. The OECD’s model in the article on non-discrimination sets out that people who are stateless should not be subject to additional unfair taxes, but that provision is not in this double tax agreement. It would be helpful if we had an explanation of why that is the case.

Just to be completely clear: quite often when the word “stateless” is used in these discussions, it refers to stateless income. I am not talking about that but about stateless people. It may not be possible for the Minister to respond to that question in detail now, but I hope that, if not, he can do so by letter, please. It would be enormously useful when discussing these kinds of treaties if the Committee had an indication of why some provisions in the OECD model may have been adopted or otherwise, and why certain choices that are available in the OECD model may have been determined one way or the other.

Draft Local Government Finance Act 1988 (Non-Domestic Rating Multipliers) (England) Order 2018

Anneliese Dodds Excerpts

Monday 14th January 2019 General Committees

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

It is a pleasure to serve with you in the Chair, Mr Hosie. I am grateful to the Minister for that helpful explanation of the order. As he explained, it is relatively straightforward, changing the indexing formula for business rates from RPI to CPI, which was announced back in the autumn 2017 Budget.

Initially, that change was anticipated to come into effect in 2020, but as the Minister explained, in the light of the rise in inflation, the Treasury wanted to bring the change forward by two years. That was done for the last financial year—from April 2018—through the 2017 Local Government Finance Act 1988 order, and will occur this year through this order.

As the Minister mentioned, many groups lobbied for the change, which appears to be appropriate given that the retail price index was de-designated as a national statistic in March 2013—many reports and useful sets of evidence have indicated its deficiency. Indeed, the decision seems to be supported across the board, with the Treasury Committee also welcoming the switch, as well as many in the business community.

There are many problems with the Conservatives’ approach to business rates overall, not least the fact that the current system places bricks and mortar firms at a disadvantage compared with those that have an almost purely internet presence. Of course, there is still huge uncertainty on the future of local government funding, which is increasingly based purely on council tax and business rates. Those matters are not at issue here, however, with this relatively technical change. We therefore see no reason to oppose the order.

[The Chair]

Minister Stride?

Draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018 Draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 Draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018

Anneliese Dodds Excerpts

Wednesday 9th January 2019 General Committees

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

It is a tremendous pleasure to be in the Committee with you in the chair, Mr Sharma. As always, it is a pleasure to sit across from the Minister, and I am sure we will have many more discussions on such SIs this year.

Once again, we are here to discuss Treasury-related statutory instruments that would make provision for the financial regulatory framework after Brexit, in the event that we crash out without a deal. On each previous occasion, my Labour Front-Bench colleagues and I have spelled 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 the Committee. We have already pointed to the frustration at the fact that we must spend time and resources creating a framework that might never be used, as well as to the public money that has been spent on planning for what should not be viewed as a potential eventuality.

Anyway, because of the dangerous game currently being played in the Commons, the instruments passing through this Committee may well not disappear into the ether on 29 March, even despite yesterday’s welcome Government defeat. They could represent real and substantive changes to the statute book, and they therefore need proper and in-depth scrutiny. Equally, in the scenario that the Government allow a no-deal situation to materialise, we need to bear in mind the stress that financial markets would be under, so we must consider these three instruments through that lens.

As a general comment, I am sure it has not escaped the Committee’s attention that, yet again, the Government have failed to publish impact assessments for any of the three instruments before us. It is important for parliamentarians and the public to have access to those impact assessments, as the UK leaving the passporting system is likely to have significant consequences. As I mentioned on the last but one such Committee, we are now seeing a worrying trend in information not being produced in time for it to be taken into consideration before measures are passed.

Indeed, that arguably reached farcical proportions last night, when a new tax break was passed for corporations without any information about how corporation tax revenue would be reduced. We were told that that information would not be produced until after the measure was in place. We in the Opposition cannot fulfil our constitutional role as scrutineers of legislation when such information is not provided to us. Conservative Members also need that information if they are to adequately perform their roles as Ministers or Back Benchers. I hope this will be the last Committee where we are asked to pass new legislation without impact assessments having been produced beforehand.

The alternative investment sector is clearly highly significant for the UK as a whole. There is significant employment in the sector, which was estimated to have around 4,000 people in 2009, and I am sure there are many more now. In addition, the investments the sector permits are essential to the good functioning of our financial system—they have a strong impact on the real economy. On the other hand, of course, weak and in some cases non-existent regulation of this sector was what promoted regulators at EU level to seek to improve accountability and transparency in the wake of the financial crisis, through the regulations that—in theory—are onshored through this set of SIs.

It is therefore essential that we properly scrutinise these measures and, indeed, all the other SIs that have been coming forward in relation to financial and related professional services. I have to say that it was unfortunate that we did not have the chance to discuss the new markets in financial instruments directive arrangements, despite their significance for the UK’s financial market infrastructure, but that is a discussion for another day.

Let me turn now to the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018. Of course, as the Minister set out, this instrument attempts to provide regulatory equivalence between the UK and EU regimes for alternative investment fund managers, or AIFMs as I will call them from now on, by maintaining the level of regulation of AIFMs in the UK, while providing an additional temporary permissions regime that would ensure continuity for EEA AIFMs already operating in the UK.

As eligible AIFs will need to notify the FCA prior to exit day if they wish to join this temporary permissions regime, I hope the Minister can clarify what measures are being put in place at the FCA to deal with those requests. I would be grateful if he could also confirm whether his Department has estimated the cost of this process and whether any extra funds have been set aside for this purpose. Also, it would be useful to know what kind of communication strategy has been developed to inform AIFs about this process.

In addition, and perhaps most substantively, the explanatory memorandum for this instrument states that it forms part of the Treasury’s contingency planning in the event that the UK leaves the EU with no deal. This instrument achieves that in part by maintaining the same level of internal regulation in the UK. However, as the explanatory memorandum goes on to state, if the UK were to leave the EU without a deal, we would no longer be part of the passporting system, which would impact UK financial interests in the rest of the EEA. That is surely the elephant in the room in this discussion.

I hope the Minister can outline what further efforts the Government are making to mitigate the impacts of these changes and to create a deal that would minimise the impact of our exit on financial services. Personally, I find it extraordinary that we seem to have shifted over the last few months from a position whereby passporting was viewed as the default to a situation where that is now seen as an unreachable goal, despite the fact that financial and related professional services employ one in 10 members of the UK workforce and such services are an enormous contributor to tax revenues and so on. These services really need to be allotted importance within these negotiations.

More specifically, as the Minister will be aware, one of the conditions of the alternative investment fund managers directive is that the depositary and fund service provider to the AIF must be an EU-based institution. What provision has been made for AIFs with UK-based depositaries or fund service providers? Will they lose their AIF status? Will they be assessed on an equivalence basis? Who will regulate them? If they need to switch to an EU-based institution and have not done so already, then the timetable is very, very tight for them.

There is another issue related to that. When it comes to the treatment of EEA-based AIFs, I found the Minister’s comments a little confusing. When he first talked about this issue, he said that it was important that those AIFs were not then treated as UCITS, with all the additional requirements, but of course we passed the UCITS-related onshoring measures, as I understand it, on 17 December. So it was not really clear in his comments what the articulation would be between those two onshored regimes. Maybe he could write to me about that.

I find it peculiar that the Minister suggested that things could work the other way round, namely that foreign UCITS could potentially be treated as if they were AIFs, so it would be important to exempt them from regulation. However, they would surely need to be covered by some form of regulation, which, as I say, I thought had been put in place on 17 December. Maybe he can get back to me on that issue, if that is all right.

Similar problems infect the other two SIs we are considering. Of course, social entrepreneurship funds and venture capital funds are now regulated, in practical terms, using a very similar approach to that in the AIF regime. Again, we still have this problem that although these SIs deal with the issue of internal regulation within the UK, we do not have a consideration here of the treatment of UK-based funds within the EEA post exit, and that is surely very important for domestic jobs and financial interests.

--- Later in debate ---

[John Glen]

Let me just finish with the points made by the hon. Member for Oxford East and then I will come to my hon. Friend’s points.

On the point about regulations on UCITS, I think the hon. Member for Oxford East was asking whether removing the AIF-related reporting requirements for the EEA UCITS, despite their being defined as alternative investment funds, will reduce transparency, in essence. It will not. This instrument carves out reporting requirements on alternative investment funds for funds that obtain recognised status from the FCA, to be sold as UK retail investments. As a result of that recognition process, the FCA will already receive all the information necessary for the effective supervision of the funds.

I want to come to the points made by my hon. Friend the Member for Basildon and Billericay. He kindly offered me the device of writing to him by letter, but in essence he set out a series of concerns, which he raised previously in a similar Committee in October, about the distinctions between the investment trust and the unit trust, and the application of key information documents and how they can be misleading. He drew my attention again to the concerns of the different industry bodies. For the edification of the Committee, I wrote to him, as he pointed out on 26 October. In Q1 2019, the FCA will publish its feedback.

My hon. Friend’s point about the obligation of the Government versus the regulator is very fair. I will reflect on his comments and have a regular dialogue. I met the chairman of the FCA this week. I have regular conversations and meetings with the chief executive, and I will make those points to him. That has to be set within the context that I am not licensed by this process to innovate, although I recognise that we must also accept that over the last 10 years we have reached a level of authority and reputation, when it comes to regulatory breadth and depth of oversight, that is commonly welcomed.

My hon. Friend has quite reasonably drawn attention to the lack of familiarity in the EU framework with some of the instruments in some jurisdictions outside the UK, which means that the appropriateness of those conclusions has sometimes been contested. I very much understand the issue.

[Anneliese Dodds]

I am grateful to the Minister for giving way; he is being very generous overall. Might I gently suggest that, as a Committee, we surely need to know whether the Government raised these kinds of issues at any point in their capacity in the Council, in their relations with MEPs in the Parliament or in their relationship with the Commission?

Of course, as the Minister mentioned, this is a separate process that the Government are undertaking. The UK has frequently drawn attention to the specificities of the British financial sector during the creation of many of these regulations; I experienced that regularly as a Member of the European Parliament. I am not clear whether the British Government made any entreaties about how the KIDs were set up and whether they appropriately covered investment trusts, but surely that would have been the stage. If we start to say that they should be changed at this stage, without having made those entreaties, I think that would raise eyebrows—to put it mildly.

[John Glen]

I respect the deep—deeper than my own—personal experience of both hon. Members who have spoken about that matter. In terms of the previous engagement of the British Government through their representations as the documents were constructed, I cannot account for that now, but I am happy to write to the hon. Lady about it.

The point that my hon. Friend the Member for Basildon and Billericay is making is that, in the future, when we leave the EU, we will have to take account of the combination of responsibilities to broadly align with common expectations in like-minded investment communities and to attend to real challenges that lead to perverse investment decisions and outcomes for investors, which my hon. Friend is very familiar with.

I hope that has covered the points raised. If there are other points that I have not answered, I will be happy to write to hon. Members.