Brexit: Economic Analysis of Various Scenarios
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The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, with the leave of the House, I will repeat the Answer to an Urgent Question given in another place earlier today by my honourable friend the Financial Secretary to the Treasury:
“Mr Speaker, today the Government published the analysis of the economic and fiscal effects of leaving the EU, honouring the commitment made to this House.
It is important to recognise that the analysis is not an economic forecast for the UK economy; it only considers potential economic impacts specific to EU exit and it does not pre-judge all future policy or wider economic developments. The analysis sets out how different scenarios affect GDP and the sectors and regions of the economy against today’s arrangements with the EU.
Four different scenarios have been analysed: a scenario based on the July White Paper; a no-deal scenario; an average FTA scenario; and an EEA-type scenario. Given the spectrum of different outcomes, and ahead of the detailed negotiations on the legal text of the deal, the analysis builds in sensitivity, with effectively the White Paper at one end and the hypothetical FTA at the other.
I turn now to the outcome of the analysis. The analysis shows that the outcomes for the proposed future UK-EU relationship would deliver significantly higher economic output—around 7 percentage points higher—than a no-deal scenario. The analysis shows that a no-deal scenario would result in lower economic activity in all sector groups of the economy compared to the White Paper scenario. The analysis also shows that in the no-deal scenario, all nations and regions of the UK would have lower economic activity in the long run compared to the White Paper scenario, with Northern Ireland, Wales and Scotland all being subject to a significant economic impact.
What the Government have published today shows that the deal on the table is the best deal. It honours the referendum and realises the opportunities of Brexit. It is a deal that takes back control of our borders, our laws, and our money. Let me be very clear to the House and to those who say that the economic benefits of staying in the EU mean we should overturn the result of the referendum: to do so would open up the country to even further division and turbulence and undermine the trust placed by the British people in our democracy. What this House and our country face today is the opportunity presented by the deal: a deal that honours the result of the referendum and safeguards our economic future; or the alternative, the risk of no deal or indeed of no Brexit at all”.
Lord Davies of Oldham (Lab)
My Lords, I am grateful to the noble Lord for that short series of comments on this important issue.
Of course Her Majesty’s Opposition respects the referendum result but no one can offer much respect to the botched Brexit negotiations, in which the Prime Minister neither meets our six points nor her own red lines. Do the Government accept that the choice cannot be between her deal and no deal? Do they not recognise that we need a deal to support jobs and the economy, and which guarantees that important standards are sustained and protections are clearly in place?
There is a real worry about the Government’s position as a result of the negotiations, and this House and the other place will hear a great deal about that in the next few weeks.
Lord Bates
The choice before us is clearly between a deal and no deal. Many people have speculated over the past two and a half years as to what would happen. They said that no agreement would be reached in December and that we would not get the EU (Withdrawal) Act through Parliament. Both those things have happened. Also, crucially, they said that we would not reach a deal this November, which the Prime Minister has secured. It is a good deal for this country, which is being put before Parliament as promised. Also as promised, we are supplying, in a transparent way, the economic analysis of that, included in technical notes, so that the House can come to an informed decision.
Baroness Kramer (LD)
My Lords, the Chancellor this morning—I am sure quite inadvertently—suggested in a number of media interviews that the deal being presented to Parliament would offer a level of prosperity only marginally poorer than that of remaining in the EU. Of course, he was reading from the wrong column of his own report. Is he now willing to make the correction and confirm, as the Institute for Government and others have, that the nearest comparison to the proposed deal is the column entitled “Modelled White Paper with 50 per cent NTB”—non-tariff barrier—“sensitivity”, which blows a complete cannonball through that assertion and, indeed, shows that the option on the table is far more damaging even than the EEA or Norway option?
Lord Bates
The analysis shows a range of possible outcomes because we do not know, at this stage, what the outcome will be of the negotiations. We have set out a proposal in the White Paper that is backed up by the political declaration, and we want to see that achieved. To help the House and indeed others to prepare for that, we have provided for a whole range of scenarios. That includes sensitivity analysis, which would allow for just the point the noble Baroness has highlighted—about different types of trade outcomes—to be factored in before people come to a conclusion.
Baroness Quin (Lab)
My Lords, is it not clear from what the Minister has said that what is in front of us is not delivering exactly the same benefits, which is what we were promised by the former Brexit Secretary in the other place? What discussions have the Government had with the City of London about the exclusion of services? The figures seem to show that the economy of London—which, it was previously thought, would do rather well out of this situation—is being quite badly affected because of the exclusion of the service sector which is so important to our economy.
Lord Bates
I can confirm that the economic analysis being undertaken is for the economy as a whole—goods and services—and that is reflected in the regional pages. Further analysis by the Bank of England, which we believe will be released in about 40 minutes’ time, will give another view that will be helpful to Parliament and to others who wish to see what the impact would be. But we are absolutely confident that the deal as presented represents the best opportunity for this country, and that is backed up by the analysis.
Lord Dobbs (Con)
I wonder whether my noble friend could help me understand this. He said, in his own words, that there is a clear choice between this deal and no deal, but the Statement finished off with a third alternative: no Brexit at all. Could he elaborate: in what circumstances could there be no Brexit at all?
Lord Bates
We have the EU (Withdrawal) Act which, of course, commits us to a course of action. The choice I mentioned was clearly the preference that we would have a deal as negotiated by the Prime Minister, but that is subject to the will of Parliament as expressed in a meaningful vote on 11 December, and we are seeking to inform that debate.
Lord Wigley (PC)
My Lords, the Minister will be aware that the Welsh economy benefits substantially from European structural funds. At the time of the referendum, guarantees were given by those campaigning for Brexit that these funds would continue way into the future, not just up to 2020. What assumption was made in this document about the continuation of such funding for the Welsh economy?
Lord Bates
I do not have specific information on that. I know that, when we leave the European Union, the intention is to establish a fund to seek to address the points that the structural funds dealt with. On whether Wales will continue to benefit from or be eligible for the structural funds, I am very happy to write to the noble Lord on that and what is covered in the analysis.
Lord Fox (LD)
My Lords, the tabulation clearly links the importance of migration to future GDP. In fact, going from free movement to zero migration reduces GDP by a further 2%. In that case, does the Minister share my frustration that his colleague in the other place is still delaying publishing the immigration Bill? When will it be published? It is extremely important to this country’s future.
Viscount Ridley (Con)
Is my noble friend at all concerned about what appears to be a circular argument in the analysis of the Treasury, in which it assumes its own conclusions? Essentially, it says that if there are no gains from separating from the EU, there will be net losses from that separation in proportion to the degree to which we separate.
Lord Bates
This is not Treasury analysis; it is government analysis. It has been drawn up in collaboration with departments such as BEIS, Defra and DExEU, which have had a significant input. We believe that the analysis supports the case for backing the deal that has been presented to us.
Lord Stoddart of Swindon (Ind Lab)
My Lords, does the Minister agree that the forecasts made during the referendum have proved utterly false and that we should therefore take note of what is being said by the Bank of England and others? Secondly, does he agree that the referendum was not simply about trade or money, but whether this country makes its own laws and decides not to continue to pay into the EU’s coffers?
Lord Bates
All of those points were made, but the important one concerns the nature of the analysis itself. It is analysis, not a forecast. The forecast will take into account many other things, such as productivity improvements and demographic changes—those are for later. What was promised was economic analysis of the impact of leaving the European Union in different scenarios.
Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018
Lord Bates Excerpts(5 years, 5 months ago)
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Lord Bates
That the draft Regulations laid before the House on 17 October be approved.
Relevant document: 3rd Report from the Secondary Legislation Scrutiny Committee (Sub-Committee B).
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, these draft regulations have been laid under the European Union (Withdrawal) Act 2018 as part of government preparations for a scenario in which the UK leaves the EU without a deal. As with other instruments, this does not intend to make policy changes other than to reflect the UK’s position outside the EU in that eventuality. This instrument addresses legal deficiencies in the markets in financial instruments regulation, the markets in financial instruments directive and in related domestic financial services legislation and EU delegated regulations, which I shall collectively refer to from here on in as MiFID II.
MiFID II regulates the buying, selling and organised trading of shares, bonds, and complex financial instruments. It governs the practices of investment banks, exchanges and portfolio managers, among others. MiFID II came into effect on 3 January 2018. These regulations are essential to the financial services sector, and key parts of legislation would be inoperable without them.
In its report of 21 November, Sub-Committee B of the Secondary Legislation Scrutiny Committee drew this instrument to the special attention of your Lordships’ House. The SLSC focused on the SI’s approach to the transparency regime, which I will address specifically.
MiFID II requires buyers and sellers on financial markets to disclose specified data, such as price information for their trades, which brings transparency to price formation in financial markets. It also provides exemptions from these transparency requirements in several cases. Formulas are used to calculate whether a trade may qualify for an exemption to these transparency requirements. Generally, these formulas are calculated using pan-EU trading data.
In a no-deal scenario, the UK is not expected to have access to the pan-EU trading data, which is necessary for calculating these thresholds. This instrument therefore grants the Financial Conduct Authority a set of temporary powers that will allow it some controlled flexibility over how the MiFID II transparency regime operates in the UK. These powers will operate during a transitional period of up to four years. If the Treasury feels that the FCA can fulfil its transparency functions before the end of the transitional period, the Treasury may end this period by the issue of a direction.
In addition to temporary powers, the FCA is also provided with some longer-term flexibility to reflect the fact that it may be necessary to use reliable trading data from other countries in calculating transparency thresholds after exit. The four-year transitional period for the FCA’s temporary powers is necessary to give the FCA time to adjust its IT systems and gather relevant market data so that it can administer an effective transparency regime in a no-deal scenario.
In its report to the House, the Secondary Legislation Scrutiny Committee mentions the adequacy of FCA resourcing to carry out its new responsibilities. The Treasury has worked closely with the FCA to deliver MiFID II, and the FCA is confident that it will have sufficient resources to operate the transitional transparency regime. Before exit day, the FCA will publish a statement of policy on how its temporary powers will be used. The Treasury can refuse to approve the FCA’s policy statement on specified grounds. The ability for the Treasury to object to such a statement by the FCA was raised by the Secondary Legislation Scrutiny Committee in its report, which noted Parliament’s interest in understanding the reasons for an objection, should one be made.
Provisions have been included so that the Treasury may refuse to approve an FCA statement should it potentially prejudice any international agreement that the UK hoped to reach, or the Treasury believes that the statement is incompatible with international obligations. In a no-deal scenario, it is important that the Treasury can manage international negotiations effectively, and this mechanism is a sensible way of ensuring this. The FCA supports this approach. Parliament will also be able to scrutinise and question Treasury Ministers and the regulators on its approach to the use of these temporary powers, as Parliament does now.
The Secondary Legislation Scrutiny Committee also noted that it would have been helpful if the FCA’s policy statement on its use of these powers could have been made available before the debate. This was not possible, as the FCA needs sufficient time to consider the drafting of such a statement. The FCA has provided assurance that a statement of policy will be ready at least four weeks before exit, if the UK leaves the EU without a deal. I turn to other issues contained in this SI.
Certain functions under MiFID II are carried out by EU authorities, principally the European Commission and the European Securities and Markets Authority, known as ESMA. The Commission and ESMA will not carry out these functions once the UK leaves the EU. This instrument therefore—consistent with other SIs—transfers the functions of the Commission to the Treasury, and ESMA’s functions to the FCA and the Bank of England. The instrument also transfers responsibility for making binding technical standards from ESMA to the FCA, the Bank of England, or the Prudential Regulation Authority. This is in keeping with the approach set out in the Financial Regulators’ Powers statutory instrument, which was debated in your Lordships’ House on 17 October 2018.
This instrument also deletes provisions that will become redundant when the UK leaves the EU, such as requirements regarding automatic recognition of an action by an EU body. In addition, this instrument removes obligations on UK authorities to share information with EEA authorities’ obligations, although this does not preclude UK authorities from co-operating with the EEA; it can do so on a discretionary basis.
A key set of provisions of concern will be the treatment of third-country regimes. Under MiFID II, a third-country regulatory regime may be determined by the European Commission to be equivalent to the requirements of MiFID II. So that MiFID II equivalence regimes operate effectively in the UK after exit, the Treasury will take on the Commission’s function of making equivalence decisions for third-country regimes. Existing Commission equivalence decisions will also be incorporated into UK law and will continue to apply to these third countries.
The Government have introduced a temporary permissions regime, as set out in the EEA passport rights regulations 2018 made on 6 November. This will enable EEA firms and funds operating in the UK through a passport to continue their activities in the UK for a limited period after exit day and allow them to apply for UK authorisation or transfer business to a UK entity as necessary. This instrument makes provisions for EEA firms operating in the UK under the temporary permissions regime, by ensuring that they will not be deemed in breach of the UK’s MiFID II rules if they can demonstrate that they have complied with corresponding provisions in the EU’s MiFID II rules.
Without these provisions, such firms would be faced with possible conflicts of law and duplicative regulatory regimes, which would impede their operations in the UK. This provision will apply only to certain provisions of MiFID II during the temporary permissions regime, and only where the EEA MiFID II requirement has equivalent effect to the UK MiFID II requirement.
This instrument also includes transitional arrangements for data reporting service providers which report transactions to regulators and publish transparency data. Under the transaction reporting regime in MiFID II, investment firms must submit a report to their national regulatory authorities following a trade. These reports are used by regulators to detect market abuse. Under the regime, UK branches of EEA firms do not send transaction reports to the FCA but to their home regulator, and this information is then shared between EU regulators. As automatic sharing of information will no longer occur, this instrument will require UK branches of EEA firms to report to the FCA. The instrument also provides that firms will continue to be required to report on trades in financial instruments admitted to trading, or traded, on trading venues in the UK and the EU. This maintains the FCA’s existing scope for the monitoring of markets.
The Treasury has been working closely with the FCA, the Bank of England and industry bodies in respect of this instrument. It was published in draft form, with an Explanatory Note, on 5 October 2018, to maximise transparency to Parliament, industry and the public ahead of laying. Regulators and industry bodies have generally been supportive of this statutory instrument.
This Government believe that the proposed legislation is necessary to ensure that MiFID II continues to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations. I commend the regulations to the House and I beg to move.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for presenting the instrument and I thank both noble Baronesses for the variety and depth of their questions. I tried to understand the instrument—I put quite a lot of effort into it—and I thank Treasury staff for helping us to do so. I came across a clear need for the maintenance of MiFID II in our law; I accept entirely the general direction of the instrument towards preserving it. Fortunately, I did not come into contact with the entire 900 pages, which is probably the only reason I can claim for still being sane.
I came across some of the concerns that have been expressed. The most worrying area, at least to me, is the temporary powers that the FCA is to have. Why has the SI not been delayed until we have sight of the FCA’s statement of policy on the use of temporary powers? No matter how expert one may be, we do not have a clear view of what powers we are giving away and what impact that may have. If that is not possible—clearly, that is the Government’s position—surely the statement of policy should be brought before Parliament. Its impact will be as big as that of granting the concept of temporary powers.
Can the Minister assure us that in those four years, the temporary powers will not be used to water down MiFID II? That seems an important step towards transparency in these intricate markets. I can see why the industry would want those watered down. It is crucial that the Government be able to assure us they will resist that, and that the temporary powers will not be used to water it down.
Finally, I would like to come back to the FCA having sufficient resources. In the past, the most detail the Minister has given is to say “it will have sufficient funds because it will be able to pre-set the industry, so funds are not a problem”. The noble Baroness hit the nail on the head: it is not about funds but available pools of talent. In the letter the Minister will undoubtedly write concerning this instrument, could we have some clarity, direct from the FCA, on why—in this very highly paid industry, where there is strong competition for talent—it is so confident it will be able to access the available talent to do the task required for this SI and the others considered today?
Lord Bates
My Lords, at this hour a letter is an attractive proposition. I counted some 27 questions, which is a pretty respectable ratio from the three distinguished speakers in this debate. I will try to deal with as many as I can in the time available. Clearly, I will have to read the Official Report with officials to see if there are any points we need to write on; I suspect there will be. Therefore, if we run out of time, I will include other answers in that communication.
The noble Baroness, Lady Bowles, asked why the amended thresholds which appear in Article 5(1)(a) and 5(1)(b) of the Commission of Delegated Regulation 2017/567—thresholds for determining which equity instruments are liquid—have not been changed. However, replacing references to Union data with UK market data in the legislation would change which instruments were classed as being liquid for UK market participants.
On the FCA not having the data, it needs sufficient time to build systems to analyse market data independently from ESMA. It estimates that this will take four years. As noted, the Treasury can end this period earlier if the transparency regime cannot operate earlier. The FCA does not have all the data relating to firms in the UK, as EU firms currently report back to their own competent authority and not to the FCA.
Baroness Bowles of Berkhamsted
Does not this very regulation enable that, within the transition period, the FCA will collect that data? That is one of the other provisions. Although it might not have it now, after Brexit, as soon as we are into the transition period, it will have it.
Lord Bates
Of course, in the event of a deal, that would be the case, and that is what we would expect to happen. On the transitional period that the noble Baroness, Lady Bowles, asked about, it took approximately four years to develop the detail of the current transparency system and put it in place. On her point about the FCA being held accountable, and what parliamentary oversight of the FCA’s decisions there would be—a point also raised by the noble Baroness, Lady Drake, and the noble Lord, Lord Tunnicliffe—the powers being granted to the FCA are necessary to uphold market stability. These powers will generally be constrained to situations where their use is necessary for the advancements of the FCA’s integrity objectives. The FCA will be held accountable in two ways. First, it will be required to publish a statement of policy explaining its approach; the policy statement could come into effect only if the Treasury did not raise objections. Secondly, Parliament will be able to further scrutinise and question Treasury Ministers; if the Treasury objected, the FCA would need to revise its statement.
The noble Baroness, Lady Bowles, asked about the transitional powers. Without these powers—
Baroness Bowles of Berkhamsted
I am sorry to interrupt again, but I think that the noble Lord just said that Treasury officials would interrogate the FCA about its policy and that it would have to change it if they did not like it. However, my understanding of the regulation is that they can do that only with regard to either international standards or if it would interfere with some international negotiation. The provision does not appear to have been put into the legislation as an all-round general policy; indeed, I think that the whole idea is that the Treasury is not supposed to interfere with what the FCA does. So I am not sure that this line from the Treasury—“We’re going to make sure it’s all right”—fully stands up.
Lord Bates
That is a good one for the letter. We will certainly address that point; it is a legitimate question to ask.
The noble Baroness, Lady Bowles, asked whether the FCA consultation was timed to come out after the debate should have occurred. No, the FCA operates completely independently of the Treasury. She also asked whether we had considered keeping the post-trade transparency even if pre-trade transparency is suspended. Simply replacing references to EU market data with UK market data in the legislation will result in significantly different calculations and thresholds for market participants. The FCA can use the data available to it. The intention is to maintain the outcomes of the transparency regime. Transparency will continue to operate during the temporary period.
The noble Baroness, Lady Drake, said that the instrument should not set bad precedents. It has been drafted in accordance with Section 8 of the EU withdrawal Act, and some policy changes are an unavoidable result of addressing deficiencies. We have sought to maintain the intended policy outcome of the legislation. She asked whether a sudden change in the requirement would be hard for firms to deal with. We have announced plans to grant the regulators temporary powers to phase in new requirements that would apply to firms in a no-deal exit. Those powers must be exercised by the regulators in accordance with their statutory objectives, as set by the FSMA. This is a sensible measure to ensure that firms have the time needed to adjust in an orderly way.
The question about whether the FCA has enough human capital to carry out its functions and responsibilities is interesting, I undertake to feed that point back to it, and it may feel better placed to respond. The FCA has reported to the Treasury that it is confident that it will have sufficient resources to operate the transitional transparency regime, due to the preparations that it is making. As it set out in its 2018-19 business plan, a significant proportion of its resources are already focused on the forthcoming exit.
The noble Baroness, Lady Drake, asked about the Secondary Legislation Scrutiny Committee report saying that the powers could have been made available to the House before the debate. Unfortunately this was not possible because the FCA had given priority to making regulatory rules fit for purpose in a no-deal scenario, to avoid significant disruption of financial markets. It would also be unusual for the FCA policy to be ready prior to the passing of legislation to which it relates. She also asked about the scale of what was covered—
Lord Tunnicliffe
In my experience it is not unusual for enabling legislation to be accompanied certainly by draft regulations. Often the House has demanded that, to give it proper comfort that it is right to give those powers.
Lord Bates
We are not talking about the secondary legislation; we are talking about the statement—but I take on board the noble Lord’s point.
The noble Baroness, Lady Drake, asked how many firms would be directly impacted by the SI. The answer is approximately 3,300 UK firms and 1,650 EEA firms. The FCA estimates that changes to reporting requirements and IT processes will affect approximately 1,500 branches of EEA firms, and that this will result in a one-off cost to business of £8.75 million.
The noble Baroness, Lady Drake, asked whether the statement would be ready. We have said quite specifically that it will be ready at least four weeks before exit. On views expressed by stakeholders, the Treasury has engaged with a wide range of stakeholders, representing large international firms as well as smaller UK businesses.
The noble Lord, Lord Tunnicliffe, asked whether the SI makes policy changes. The UK is putting in place all necessary legislation via the EU withdrawal Act to ensure that there is a functioning legal regime in the event of a no-deal exit in March 2019. He asked whether the FCA will have adequate resources. I covered that point in response to the noble Baronesses, Lady Bowles and Lady Drake. He also asked about the temporary permissions regime that applies for a limited period and who would decide when it ends. The length of the temporary permissions regime is determined in accordance with the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, made on 6 November.
In a previous debate, the noble Lord, Lord Tunnicliffe, asked why the Treasury is solely responsible for the equivalence decisions, which relates to this debate. Across all financial services statutory instruments, the Commission’s functions are transferred to the Treasury. The transferral of equivalence powers is in keeping with this approach. Equivalence decisions are made by the issue of Treasury regulations. Regulations are issued by statutory instrument and subject to parliamentary scrutiny.
Again in a previous debate, the noble Baroness, Lady Bowles, asked whether the impact assessment is accurate given the cost to firms and how extensive MiFID is. The estimated costs of familiarisation have been calculated using the formula given at the end of the impact assessment and relate only to the cost of reading and understanding the instrument. Of course, affected firms will also need to familiarise themselves with a number of materials that are already published.
The noble Lord, Lord Tunnicliffe, asked a further question about whether temporary powers would water down MiFID II. The temporary powers are included to try to preserve outcomes for transparency. Without these flexibilities there would be a cliff-edge risk as to how the transparency regime operates. It would create uncertainty for firms and business, which we are trying to avoid.
With those responses, and the undertaking to study in detail the Official Report and to write on the specific questions raised, I beg to move.
Short Selling (Amendment) (EU Exit) Regulations 2018
Lord Bates Excerpts(5 years, 5 months ago)
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The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, this statutory instrument forms part of the work being delivered to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period. As a responsible Government we are of course preparing for all potential scenarios, despite remaining confident of securing an ambitious deal with the EU.
The instrument has been drafted using powers delegated to Ministers under the European Union (Withdrawal) Act 2018 to address deficiencies in applicable EU law relating to the regulation of short selling that will be transferred directly on to the UK statute book at the point of exit. It will also amend relevant parts of the Financial Services and Markets Act 2000. This is in order to provide continuity, given that the approach of the European Union (Withdrawal) Act is to maintain existing legislation at the point of exit. The instrument has already been debated in the House of Commons this morning.
Short selling is the practice of selling a security that the seller has borrowed, with the aim of buying the security back at a lower price than the price that the seller sold it for. The short selling regulation, the SSR, was introduced after the financial crisis to enable the EU to act to suspend or ban short selling in cases where financial stability was at risk. It covers the EU’s regulatory oversight of short selling and certain aspects of credit default swaps, and relates to financial instruments that are admitted to trading or traded on an EEA trading venue.
Post exit, the SSR will no longer be effective in maintaining the framework to regulate short selling and certain aspects of credit default swaps in the UK. This is because in a no-deal scenario the UK will be outside the European Economic Area and therefore outside the EU’s regulatory, supervisory and legal framework. The solution is therefore this instrument, which will amend the retained EU law related to SSR to ensure that it continues to function effectively in the UK post exit.
The instrument makes the following amendments. First, it will amend the scope of the regulation to ensure that it captures instruments admitted to trading on UK venues and UK sovereign debt only. The SI will therefore not capture instruments admitted to trading only on EEA trading venues. Furthermore, amendments have been made under the instrument that change the scope of the UK’s powers to address threats to stability or market confidence in the context of the regulation. Currently the SSR allows the UK to act against instruments that have their most liquid market in the UK or if the instrument was first admitted to trading in the UK. That has the effect of requiring the UK to seek consent from the relevant EU regulator if it wants to take action on the basis of an instrument that has its most liquid market elsewhere in the EU or was first admitted to trading on an EU venue. The instrument removes that provision. In line with other third-country instruments, the UK will in future be able to take action against any instrument traded on a UK venue. The UK will be required to consider threats to UK market confidence and financial stability only before using these powers.
Secondly, the instrument transfers functions currently carried out by EU authorities to the appropriate UK bodies. For example, powers will be transferred from EU supervisory bodies to the FCA as the most appropriate regulator, given its expertise in regulating short selling currently. These include the power to make technical standards: for example, to take action on all instruments admitted to trading on a UK venue, not just those for which the UK is the most liquid market. Functions are also transferred from the European Commission to the Treasury, as in other statutory instruments, including the power to specify when a sovereign credit swap transaction is considered as hedging against a default risk.
Thirdly, the instrument will maintain a number of existing exemptions. Certain exemptions are already provided for reporting requirements, the buy-in regime and restrictions on uncovered short selling for shares that are principally traded in a third country. These will be retained. In respect of the last point, the FCA will take on the responsibility for publishing the list of relevant third-country shares. This ensures continuity by recognising the European Securities and Markets Authority’s list for two years following exit day. Additionally, the instrument will maintain the SSR’s exemption for market makers and authorised primary dealers. Market makers will be required to join a UK trading venue and notify the FCA at least 30 days before exit should they want to benefit from this exemption. Those who have done so already will not see any change. The exemption means that firms can carry out certain market-making activities and primary market operations without disclosing their net short position, and they are not required to comply with restrictions on uncovered short selling, provided that they meet certain thresholds.
Additionally, amendments provide HM Treasury with the power to set relevant thresholds after exit. The instrument will also allow market participants to use UK credit default swaps to hedge correlated assets and liabilities elsewhere in the world rather than just the EU. This will ensure that UK firms can continue to use UK sovereign credit default swaps to hedge correlated assets or liabilities issued by issuers outside the UK.
Lastly, the instrument deletes provisions that facilitate co-operation and co-ordination across the Union. Currently member states must notify other regulators ahead of taking action to restrict short selling, with other regulators then determining whether to apply corresponding restrictions. This SI deletes these provisions, as well as deleting the European Securities and Markets Authority’s intervention powers except in exceptional circumstances.
The SI makes technical amendments to existing UK legislation—in the case of Part 8A of the Financial Services and Markets Act 2000, to ensure that the UK can continue to respond to requests for information from overseas regulators. The UK intends as far as possible to maintain a mutually beneficial working relationship with the EU, in the same way we currently co-operate with non-EU regulators under the existing provisions of the Act.
It should be noted that, in accordance with the comments we received from the Secondary Legislation Scrutiny Committee, the Explanatory Memorandum for this instrument has been revised and relaid. The revisions to the Explanatory Memorandum provide further clarity on amendments made to ensure that UK firms could continue to use UK sovereign credit default swaps to hedge correlated assets or liabilities outside the EU. It addressed why amendments had not been made to the buy-in procedure in Article 15 of the SSR, clarifying that this is repealed by Article 72 of Regulation 909/2014 and that, given that will not be in force before exit day, we cannot use EU withdrawal powers to enable it. A separate instrument will make this amendment. Lastly, it clarified that notifications given to the FCA continue to be effective for exemptions for market-make—therefore, they will see no change.
In summary, the Government believe that, should the UK leave the EU with no deal or implementation period, this SI will provide for a framework to regulate short selling and certain aspects of credit default swaps effectively post exit.
I hope that noble Lords will join me in supporting these regulations. I commend them to the House and beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank the noble Lord, Lord Bates, for his introduction and once again declare my interest in the register as a director of the London Stock Exchange plc.
It is fair to say that when this legislation was negotiated, a lot of it was directed against the markets in London, so if anyone is worried that the regime will run without so many requirements for consultation, it should not be the UK. I had the advantage of participating in scrutiny on Sub-Committee A of the Secondary Legislation Committee, on which I sit. As the Minister explained, in consequence, there has been an extension to the Explanatory Memorandum, and I thank him for that. The correspondence about that is in Appendix 2 to the report. As he said, it mainly concerns the use of sovereign credit default swaps for hedging purposes. That is the single issue to which I shall return.
By way of background, sovereign credit default swaps and their short selling was a highly contentious issue at the time of the eurozone sovereign debt crisis, with many wanting to ban sovereign CDSs altogether, blaming them for escalation to the crisis. It took several months of my life turning that around to establish that there was such a thing as legitimate hedging of correlated assets. Due to that sensitivity, it is worth more clearly explaining that in consequence of changes made in the regulation, there is a widening of the scope of the assets that sterling CDSs could be used to hedge—which, again, the Minister explained— which happens by removing the EEA reference and replacing it with a global one. I do not object to that widening—there was a choice between narrowing or widening, and widening probably goes with the open approach of the UK—but it means wider possible use of sterling credit default swaps. I want to ensure that that is properly understood, should anyone ever read this debate.
It would also be worth knowing what, if any, assessment of the additional volume that is expected to create, if any such calculation has been done, especially in the event of a no-deal Brexit, when some more chaotic things may be happening of the variety that was of concern during the eurozone sovereign debt crisis. I am still confused why Articles 8.4, 8.5 and 8.6 of the delegated act regulation have been deleted. Deleting those paragraphs removes the requirement for a Pearson correlation coefficient of 80% as part of the high correlation definition under Article 3.7(b) of the short selling regulation. The 70% threshold is retained under Article 3.7(c), within Article 18 of the delegated Act. Article 18 was cited in correspondence with the sub-committee as what the Treasury will follow when it takes over setting the correlation conditions.
I do not object to the Treasury taking over setting correlation conditions, because I think it has a good interest in what happens to hedging using sterling CDSs. I just want to know whether 80% is out of favour, whether something happened to replace it prior to the regulation, or whether that change is another widening.
Lord Bates
I thank noble Lords for their scrutiny, and I shall address some of the points raised. The noble Baroness, Lady Bowles, asked why the instrument deletes the provisions on correlation between assets liabilities and sovereign debt in another member state. That is because, after exit, we will be concerned only with the sovereign debt of the UK, so technical provisions on correlation to sovereign debt across the EU will no longer be relevant. They must reference the rest of the world, not just the EU. It cannot be confirmed at this stage what impact this may have on the volume of instruments that are traded.
The noble Lord, Lord Tunnicliffe, asked whether this SI potentially challenged the principle of no policy change. Like all SIs we are making under the European Union (Withdrawal) Act, this is not intended to make policy changes except where necessary to reflect the UK’s position outside the EU and aid a smooth transition. Changing the scope is an example of where a change was necessary, as noted by the noble Baroness, Lady Bowles. She also asked about the reference to Article 15 of the SSR. The SI needs to be made to provide the UK with an effective framework to regulate short selling and certain aspects of credit default swaps after Brexit. By not approving this instrument, the FCA would not have the necessary oversight of UK markets in relation to short selling, which, of course, would be a precarious position to be in.
The noble Baroness, Lady Bowles, asked about the change in the use of sovereign CDS positions for hedging purposes. As references to member states are being replaced with the appropriate UK reference, the provisions around cross-border hedging would be deleted. To ensure that firms can continue issuing UK sovereign credit default swaps as a hedging tool, development provisions have been onshored to allow market participants to use UK sovereign CDSs to hedge assets or liabilities located anywhere in the world.
The noble Baroness, Lady Bowles, asked about thresholds. Any future CDS correlation thresholds will be future policy, and it will be a decision for the Treasury. I think that that deals with most of the points raised in this debate, and I commend the SI to the House.
Privacy and Electronic Communications (Amendment) (No. 2) Regulations 2018
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Lord Bates
That the draft Regulations laid before the House on 1 November be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, for most people in the UK, their largest financial asset will be their pension, which unfortunately makes pensions an attractive target for fraudsters. As I am sure the House is aware, pension scams have had devastating consequences. Scams can leave people to face retirement with limited income, unable to rebuild their pension savings. Cold calling is not only a nuisance but the most common method used to initiate pension fraud. I am aware of the strength of feeling on tackling cold calling from recent debates in this House and in Committee. According to Citizens Advice, the most recent statistics show that 97% of pension fraud cases brought to it originated from a cold call. That is why the Government are taking action to ban pensions cold calling.
Before we discuss the legislation I will present to the House today, allow me to briefly explain how the current system works. Currently, the Privacy and Electronic Communications Regulations 2003, or PECR, permit firms to cold call consumers for marketing purposes, subject to a couple of exceptions: where the consumer has notified the caller that they do not wish to receive such calls, or has listed their number on the telephone preference service. The current regime therefore permits cold calling unless a consumer has proactively opted out.
The purpose of the legislation under discussion today is to amend PECR in order to much more tightly restrict firms from cold calling consumers on their pensions. It does so by creating an explicit opt-in regime prohibiting all such calls unless one of two tightly drafted exemptions applies. Importantly, the exemptions do not apply to so-called introducers. Introducers are the marketing firms which seek to establish “leads” which they pass to financial advice firms. It is introducers who undertake the majority of pensions cold calling.
The ban will make it clear to consumers that any pensions cold call they receive from an unknown caller is illegal and likely to be a scam call, so they should hang up. To help future-proof the regulations, the definition of,
“direct marketing in relation to pension schemes”,
in the SI has been drafted widely. This will help to ensure that we capture new activities which may evolve in future, as well as activities that we know scammers already use today.
So that the ban does not have an unnecessary or disproportionate impact on legitimate activities, the Government have provided two narrowly defined exemptions. The first is where the consumer has given consent to a caller to receive direct marketing calls on their pensions. This exemption has been included so that consumers seeking information on pension products are able to do so. The SI is fully in line with the GDPR, which sets a high standard for consent.
The second exemption is where the consumer,
“has an existing client relationship with the caller”,
such that they would expect to receive such calls. This is so that individuals are able to receive information about investment opportunities from firms with which they have a client relationship. Crucially, the exemptions apply only where the caller is authorised by the Financial Conduct Authority or is the trustee or manager of a pension scheme. This means that there are no circumstances in which introducers, as defined, are permitted to call consumers on their pensions.
As many noble Lords will be aware, a similar ban on cold calling by claims management companies was implemented through the Financial Guidance and Claims Act 2018, which was skilfully taken through your Lordships’ House by my noble friend Lord Young, who joins me on the Front Bench this evening. The present SI has been drafted so as to achieve a consistent approach to both bans. The ban will be enforced by the Information Commissioner’s Office, a world leader in the protection of information rights. The Information Commissioner’s Office has tough enforcement powers, which include fining offenders up to £500,000. From 17 December 2018, directors of companies making unlawful calls may be personally liable for penalties of up to £500,000.
The Government are working with partners across the public, private and charity sectors to ensure that news of the ban reaches as many people as possible. To support the industry to keep within the law, the Information Commissioner’s Office will publish updated guidance when the ban comes into force. I will take this opportunity to thank stakeholders across the industry and the third sector for their helpful comments on the drafting of the regulations through consultation over the summer. As a consequence, I am pleased to say that we have a set of regulations which our stakeholders can get behind.
In summary, the Government believe that the proposed legislation is necessary to tackle the scourge of pension scams and help protect customers and consumers from pension fraudsters. I hope that noble Lords will join me in supporting these regulations and I commend them to the House.
Baroness Drake (Lab)
My Lords, I welcome these regulations, which restrict firms in cold-calling individuals regarding their pension schemes. The Explanatory Memorandum was clear and helpful in setting matters out. This was a point of considerable concern during the passage of the Financial Guidance and Claims Act 2018, when the Government gave a commitment to ban cold calls on pensions. It is pleasing to see the product of that commitment in these regulations.
As we all know, the threat of pension scams—in fact, the threat of financial scams—is a growing problem. The scale of these unsolicited calls and the number of people impacted is alarming. The estimates from the Money Advice Service indicate that there are 250 million scam calls per annum. Most cases involving pension scams start with cold calling and if someone is scammed out of their pension savings, the effect can be not only devastating but lifelong and irreversible. Scams can originate from sources other than onshore cold callers—for example, from social media and offshore callers—but these regulations will make a significant contribution to protecting individuals. I acknowledge that there are many positives in the regulations. The definition of direct marketing set out in paragraph (5) of new Regulation 21B in relation to pension schemes has been drafted widely, which is helpful. Organisations which breach the ban may be liable to pay compensation to the victim, be subject to enforcement activity by the Information Commissioner’s Office and, as the Minister referred to, face a penalty of up to £500,000.
Lord Bates
I thank noble Lords for their questions. I will try to address the points that were raised. The noble Baronesses, Lady Drake and Lady Bowles, asked why we have not considered banning all cold calls. Pensions cold calling is a special case where levels of consumer detriment are particularly high. The Government are determined to tackle the scourge of nuisance calls, but a balance needs to be struck between ensuring that consumers are adequately protected and providing the right conditions for the legitimate direct marketing industry to operate. Government efforts are focused on taking action against companies that deliberately break the rules, not on penalising legitimate businesses that comply with the law.
The noble Baroness, Lady Bowles, made a specific point about extending this to cover all investments. The wording used—
“direct marketing in relation to … pension schemes”—
is broadly defined in the SI to capture the marketing of any investment product, not only conventional pension products, to be acquired using pension funds. However, it does not cover marketing in relation to funds held in other products that may serve to provide retirement benefits, such as a lifetime ISA, as this would go beyond the powers currently in the enabling Act. However I accept her point that our approach should be continued vigilance rather than claiming that it could never be changed in future.
The noble Baroness, Lady Drake, asked about the definition of “reasonably envisage”. It is drafted to set up an objective rather than subjective standard. It would be determined on a case-by-case basis. Consideration would be given to the nature of the firm with which there is a relationship. Is it the kind of firm that could provide pension services, for instance? She asked whether the exemption gives a preferential market position to those with an existing relationship. It enables consumers to hear from the existing provider and enables them to make informed decisions about their pensions.
It was suggested that the ban would be ineffective because it does not cover calls from overseas. The Information Commissioner’s Office has arrangements with international—including non-European—regulators to enable enforcement action where companies operating abroad make calls to the UK which would appear to be unlawful if made in the UK. Companies based in the UK which contract or instruct companies based abroad to make calls into the UK must comply with data protection legislation. In fact, this is a good moment to note that the PECR and this SI sit alongside the Data Protection Act 2018 and the GDPR in this respect.
The noble Baronesses, Lady Drake and Lady Bowles, raised a very fair point about potential inertia by people ticking boxes. We have all inadvertently done that or not done that, as the case may be. The GDPR provides a very high threshold for consent. Consumers cannot provide consent through a pre-ticked box. Consent must be actively given under the GDPR.
The noble Baroness, Lady Bowles, asked why the FCA is not prohibiting the use of personal data collected by third parties through cold calling. Organisations are already required to process or handle personal data in accordance with the Data Protection Act—a point which I have already made. The Data Protection Act 2018 and the GDPR include significantly stronger sanctions for breaches than the legislation they replaced. Processing data in contravention of data protection principles could attract fines of up to approximately £17 million, or 4% of the company’s global annual turnover, whichever is higher.
I do not know whether I have reached the threshold set by the noble Lord, Lord Tunnicliffe, for adequately responding to the questions. If I have not, I will be happy to write, but on the basis of what I have said I commend the regulations.
Central Securities Depositories (Amendment) (EU Exit) Regulations 2018
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That the draft Regulations laid before the House on 31 October and 6 November be approved.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, these are two out of around 60 financial services SIs being laid by the Treasury under the EU withdrawal Act. They form part of the preparations being undertaken to ensure, in the event that no deal has been agreed when we leave the European Union in March 2019, that a functioning legislative and regulatory environment will continue to be in place for the financial services sector. They deliver on a commitment made last December, when the Treasury announced that it would provide functions and powers to the Financial Conduct Authority in relation to trade repositories, and to the Bank of England in relation to non-UK central securities depositories, to enable them to manage in an orderly manner any cliff-edge risks arising from a no-deal scenario.
Trade repositories and central securities depositories provide services in the UK under EU regulation. Should the UK leave the EU without a deal or an implementation period, trade repositories and central securities depositories would be unable to provide services to UK firms until they had the appropriate permissions under the UK’s domestic regimes, given that the UK would be outside the single market for financial services. The SIs seek to ensure that there will continue to be a functioning regulatory regime and mitigate any disruption in the provision of services in that scenario.
First, I will discuss the trade repositories SI. Trade repositories collect and maintain records centrally on derivative transactions. Derivatives are financial instruments that can be used to hedge against risks such as interest rate fluctuations or asset price volatility.
The European Markets Infrastructure Regulation, known as EMIR, requires all information on European derivative transactions to be reported to trade repositories registered or recognised by the European Securities and Markets Authority. If trade repositories were unable to provide services to UK firms post exit, those firms would be unable to fulfil their reporting requirements under the UK’s regime and the UK regulators would lose access to valuable data used to monitor the UK market for financial stability risks.
The SI therefore introduces a number of measures to mitigate against that risk and ensure a smooth continuation of services from trade repositories to UK firms. First, it establishes a UK framework for the registration of UK trade repositories, while maintaining the same regulatory criteria for new UK trade repository applicants. To do that, ESMA functions relating to registration of trade repositories will be transferred to the Financial Conduct Authority. That includes the mandate to make technical standards specifying the information to be provided by trade repository applicants. The FCA is already familiar with the reporting requirements under EMIR, due to its role in supervising UK firms, which are subject to existing EU reporting obligations. That means that it is the most appropriate UK authority to take on that role.
Secondly, the SI provides powers to the FCA to consider applications ahead of exit day so that a trade repository can provide services in the UK as soon as possible following exit. Thirdly, it establishes a “temporary registration” regime for eligible trade repositories that will allow them to continue to provide services to the UK by forming UK-based subsidiaries. That provides temporary registration for a period of three years to UK trade repositories that are part of a group containing an ESMA-registered trade repository, the purpose being to allow additional time for their application for permanent registration to be considered by the FCA and to ensure continuity of services to UK firms. To enter the temporary regime, an eligible trade repository must, ahead of exit day, submit an application to the FCA for registration and set up a new legal entity in the UK.
Finally, the SI creates a conversion regime whereby UK trade repositories, currently registered by ESMA, are deemed to be registered by the FCA from exit day. To enter the regime, a UK trade repository must notify the FCA of its intention to be registered ahead of exit day. The conversion regime therefore ensures smooth continuity of services from UK trade repositories to firms.
Lord Tunnicliffe (Lab)
My Lords, I will take the statutory instruments in order, starting with the central securities depositories regulations. A characteristic of these SIs is that they tend to have two parts. I wish I had the same interests to declare as the noble Baroness because then I would come to this knowing something about it. Starting from scratch is quite a battle. My analysis of these SIs is broadly that there is a bit about the transfer of functions and a bit about the transitional provisions. They are more or less in those two groups. The transfer of functions is unexceptionable, except that I am not at all convinced that the Treasury should be solely responsible for the equivalence decision. That is a view that I shall take all the way through. The noble Lord does not have to answer me on this SI because I will bring it up on the last one, by which time a note might have arrived from the Box.
The transitional provision is more complex in all the SIs, but in particular with this one. When you dig into it you discover that apparently there is only one UK CSD and its transition will be little more than a formality, which is good to hear, since these organisations are so important in our lives. Non-UK CSDs have a more complex transition process, but, as far as I understood it, that was okay.
Similarly, the transfer of functions for the trade repositories is straightforward, except for my caveat on the Treasury’s role. I understand that there are five UK trade repositories, covered by paragraph 7.18 of the Explanatory Memorandum. Once again, it looks as though that is pretty well a formality. I found the non-UK TRs transfer regime more complicated, but the one feature I saw is that some new TRs—if they ever emerge—seem not to be fully registered for up to three years. Can the Minister explain why such a long period is necessary?
Lord Bates
I thank the noble Lord and the noble Baroness for their scrutiny of the statutory instruments. I will respond first to the noble Baroness, Lady Bowles, who asked about the difference between the current system and the onshoring SI. Before the CSDR, the recognised clearing house regime under the FSMA applies. After exit and the end of the transition regime, the onshored CSDR regime, which is more extensive, applies for any CSD.
The noble Baroness asked for more detail on how that process will work. The Bank of England sent a letter to non-UK CSDs, setting out the process through which CSDs may notify the Bank of England to enter a transitional regime following the UK’s withdrawal from the EU. The process is proportionate and straightforward, with questions we do not expect to be onerous for CSDs to answer. Non-UK CSDs are encouraged to indicate to the Bank of England their intention to notify from the point at which they receive the letter—so the letters have been sent. The Bank of England will treat these indications as notifications at the point that the legislation is made. We are therefore confident that non-UK CSDs will be able to make these notifications in good time. One specific element is that a non-UK CSD will continue to be subject to the existing requirements under the FSMA until the Treasury has made a decision on jurisdiction. Once that happens, these CSDs will be required to provide an application to the Bank of England six months after the Treasury decision. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit.
The noble Baroness asked about the familiarisation costs included in the regulations. I was looking at the algorithm in Annexe 5 and she made some points about that. I am happy to confirm that the familiarisation costs in the impact assessment cover only these instruments. They do not include FCA consultations or the broader impact of leaving the EU—just the specific provisions in this SI.
Baroness Bowles of Berkhamsted
May I go back to the point about when CSDs switch from being under the present UK regime to being under the new regime? It seems a bit peculiar. Is it the situation that while they are currently running under the UK regime, once they start to run under the onshored CSDR there will be an equivalence decision and they will then be under a tighter, more extensive regime? It seems very strange that as soon as you have recognised a country as having equivalence, you then require more rather than less—or have I misunderstood something?
Lord Bates
I certainly would not suggest that the noble Baroness has misunderstood anything. I will work my way through the pile: I have a feeling that I will have an answer for her very shortly.
She asked what would be amended if there were an implementation period. The legislation would not come into effect in March 2019 in the event of an implementation period. It would be amended to reflect the eventual deal on the future relationship, or to deal with a no-deal scenario at the end of the implementation period. Amendment would depend on agreement being reached with the EU.
The noble Lord, Lord Tunnicliffe, asked if was appropriate that the Treasury is the only body responsible for equivalence decisions. The Treasury takes the role of the Commission in equivalence decisions, but will be informed by advice from the FCA as necessary. As to why the regime will last for three years, the TRRs provide sufficient time for the FCA to be satisfied that the new TR fully meets the requirements set out in the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories SI, of which he and I have fond memories and which was published on 22 October. Three years was judged the most suitable duration period, based on consultation with the FCA. The timescale aligns with other temporary regimes such as the CCP temporary recognition regime.
The noble Lord, Lord Tunnicliffe, asked specifically about the transitional regime for central securities, and the noble Baroness, Lady Bowles, also referred to it. The transitional period is intended to allow non-UK CSDs to continue to provide services in the UK after exit. UK CSDs that have applied for authorisation prior to exit day will be automatically entered into the transitional regime. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit. Any non-UK CSD that fails to notify the Bank may be subject to public censure. A non-UK CSD that has notified the Bank and entered the transitional regime can continue to provide CSD services in the UK on the current basis for a certain period. For a CSD that has made an application for recognition to the Bank of England, that period ends when the application is decided. For a CSD in a jurisdiction that the Treasury has determined to be equivalent and that has not made an application to the Bank of England, that period extends to six months after the Treasury’s equivalence determination. I think that is a partial answer to the question raised by the noble Baroness, Lady Bowles.
The noble Lord, Lord Tunnicliffe, also asked why the Government are not bringing into UK law the settlement discipline regime. Certain CSDR provisions on settlement discipline do not come into force until after exit day. As a result, they cannot be considered retained EU law and are beyond the scope of the European Union (Withdrawal) Act 2018. Returning to the question asked by the noble Baroness, Lady Bowles, she said that it seems strange that once a country has been found equivalent, more is required of that CSD. Equivalence is a decision on the alignment of another country’s regulatory regime. This is a decision of the Treasury. The recognition of a specific CSD is a more technical decision at the level of that CSD, and that is made by the Bank of England.
Lord Tunnicliffe
Before the noble Lord sits down, I am fascinated to know what “public censure” looks like.
Lord Bates
Of course, that would be what the regulators engage in in the rigorous upholding of the rules that govern activities in their respective areas, whether it is the Bank of England, the Financial Conduct Authority or the Prudential Regulatory Authority. Any reprimand of any shortcoming they observe would be regarded as a matter of public censure.
I am grateful to noble Lords for their comments. I commend both these SIs to the House.
Mortgages: Cerberus
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Lord Sharkey
To ask Her Majesty’s Government what action they intend to take to ensure that those holding mortgages sold by UK Asset Resolution to Cerberus receive a fair deal, and are able to access good value fixed rate mortgages.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, the Government believe that better deals should not be beyond the reach of customers who continue to pay their mortgage. The Treasury is working closely with the Financial Conduct Authority and industry to explore what options are available to help customers with inactive lenders. In the meantime, Landmark Mortgages Ltd, which manages mortgages and was sold by UKAR to Cerberus in 2015, is an FCA-regulated organisation and is bound by the FCA principle of treating customers fairly.
Lord Sharkey (LD)
My Lords, after Northern Rock went bust, many of its mortgages were sold by UK Asset Resolution to Cerberus, an American hedge fund not authorised by the FCA. At the time, UK Asset Resolution said that returning those borrowers to the private sector would mean that they would be offered new deals, extra lending and fixed rates. This was completely untrue. Instead, about 100,000 borrowers were trapped. They continue to pay very high interest and are not allowed by Cerberus to have a fixed-rate mortgage. Many are now in deep financial difficulty. Can the Minister tell those mortgage prisoners when they may be rescued from Cerberus and what lessons UK Asset Resolution has learned from this sorry episode?
Lord Bates
The noble Lord is right to highlight that this traces back to 2008 and the financial crisis, when we had immense irresponsibility in the mortgage lending system. Some mortgages were offered at 120% of the value of the mortgage, allowing people to self-certify their income. Those mortgages, banks and institutions were then rescued. As a result of state aid rules, they were then unable to offer new mortgages. The mortgage prisoners, to use the noble Lord’s term, were then doubly blighted by the fact that in the intervening time, the European Union mortgage credit directive came into effect, which introduced an affordability test which meant that they could not apply to transfer to another lender to achieve a mortgage at a lower rate—they were indeed trapped.
We have tried to find how we can help that situation. We are working with the FCA—we are aware of the representations being made—and will continue to do so. My honourable friend the Economic Secretary to the Treasury will be writing further on this important issue.
Lord Davies of Oldham (Lab)
My Lords, the months and years slip by. The Minister says that every constructive effort is being made, but there is precious little in the way of a solution to this problem for these mortgage holders. When a question involves a number of people in considerable difficulty and relates to difficulties with the banking and mortgage sector over a decade, it behoves the Minister to produce a better response than that we are looking four or five years ahead before we have made even a significant gesture.
Lord Bates
There is that aspect to it. I do not want to make a partisan point, but it is part of cleaning up the mess of the irresponsible lending happening in the past. These people find themselves in this situation. We and the Financial Conduct Authority are asking how we can work with the industry to come up with solutions whereby there might be greater flexibility for some people who are trapped to move to lower interest rate mortgages. At the moment, people who are on UK Asset Resolution mortgages may be paying 4% to 5%, but there are better deals, potentially, at 3% to 4%. How do they get on to them? If they have equity in their property, are up to date with their mortgage and have the income to justify it under the new rules, they can already move. It is those people who do not fall into those three categories for whom we need to work for a solution within the new European rules. That is what we are turning our attention to.
Lord Naseby (Con)
Does my noble friend fully understand that most of these people are, if I may use the phrase, very ordinary people? They are not experienced in financial matters in any depth, and it really is a particular problem. It is totally non-party political. It is an issue that the FCA should give greater priority to than it has done hereto. I hope not to have to stand up in a year’s time to ask this question again.
Lord Bates
It is a major issue. The average size of the mortgage held under UK Asset Resolution is around £120,000. People find themselves in these very difficult situations, but we are bound by the rules as they are. There will be some opportunity to offer a little bit of flexibility when the credit directive has to be onshored into UK legislation. There will be that opportunity, within tight limits, to look again at some of these aspects, and of course we will do that to the full with the FCA.
Lord Wrigglesworth (LD)
The mortgage prisoners that have been created by this deal between UK Asset Resolution and Cerberus are seeking to get further mortgages. Cerberus gave an undertaking when it bought this package of mortgages that they would be allowed to do so. Is the Minister saying that Cerberus is helping these people to get the lower mortgages that are available and to stop being imprisoned in the deal that was done at the time? Will UK Asset Resolution also ensure that if any future mortgages are sold off, the undertakings given will be upheld?
Lord Bates
My Lords, I will not go into the technical detail, but one of the conditions for Cerberus to operate in this country was that it operate under a regulated body, so it operates under Landmark Mortgages. It is not active in the lending market, so the people who can move to get the better deals are those who are up to date with their payments, have equity in their property and can meet the new affordability test. That is the conundrum that we are seeking to find a way through.
Lord Fox (LD)
My Lords, my colleagues, in two different ways, have asked the same question, which is what lessons have the Government learned, and how will they avoid this happening again? Will the Minister please answer that question?
Lord Bates
Yes: I think that lessons have been learned. I am very happy to make available to the noble Lord the response that the Economic Secretary to the Treasury gave to the chairman of the Treasury Select Committee on 12 November this year—which sets out many of the details of what we can learn—as well as the response from the Financial Conduct Authority to the noble Lord, Lord Sharkey. I am happy to make both available.
Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018
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That the draft Order laid before the House on 9 October be approved. Considered in Grand Committee on 21 November.
Universal Sustainable Development Goals
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The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I join others in paying tribute to the noble Baroness, Lady Suttie, for securing this debate. It is an important contribution to meeting the objectives of the SDGs and the voluntary national review—namely, that there should be consultation with parliaments. I thank her on behalf of the Government for making her time available for that purpose in this debate.
The noble Baroness referred to certain critical areas where she urged further action, although she recognised that the UK is respected as a global leader in development—a view that was widely shared in many of the contributions. We can be proud of that: UK aid is a badge of hope around the world. The noble Lord, Lord McConnell, highlighted the contribution made by David Cameron at the high-level panel in drawing up the goals—a point made also by the noble Lord, Lord Rogan.
The efforts of the noble Lord, Lord McConnell, in this area as co-chair of the All-Party Parliamentary Group for Sustainable Development Goals have been hugely influential in placing the goals in context. He made a significant point about the Addis summit on financing for development. Several noble Lords mentioned that this is not something that Governments can do alone; as the noble Lord, Lord Collins, said, it has to be done in collaboration with civil society, private companies and other Governments.
The noble Lord, Lord Hunt of Chesterton, recognised that we could learn a great deal from each other. In fact, I came to this debate from an excellent meeting at The Oval cricket ground with the Commonwealth heads of statistics, who have come together to share expertise and knowledge on how better to collect and use data for measuring the SDGs. There were some fascinating contributions on what is being done, particularly from some of the small island states such as Samoa. Also highlighted at that meeting was a point made by the noble Lord, which is the contribution of our expertise. In that context, he was referring to the Met Office, as I know personally from the work that it has done and continues to do in the Caribbean in forecasting major disasters. However, in this context, it is the incredible work done by the Office for National Statistics, which is at the heart of producing data in this area. Its expertise is a real prize for this country.
Before I turn to the many specific questions raised in the debate, perhaps I may follow the model of the noble Lord, Lord McConnell, and explain a little of the rationale behind the SDGs. We were all left with choices about what to do when the SDGs were drawn up. Some countries decided to dedicate a department to look after them and to appoint one person to be responsible for them. However, the SDGs cover a great breadth and touch every aspect of our political, economic and social life, as many speakers have said. Therefore, our judgment, which we set out in our agenda 2030, published at the beginning of this process, was that, rather than having SDGs as the responsibility of one department, with other departments perhaps shuffling their responsibilities on to that department, it would be better to ensure that all government departments were responsible for meeting the goals and targets in their specific area. We felt that the effort should be co-ordinated in a domestic setting by the Cabinet Office. Oliver Dowden, with whom I work very closely, has been responsible for this, and in fact we are both giving evidence to the Environmental Audit Select Committee for its report on this issue. Oliver Dowden is responsible for co-ordinating the work at the Cabinet Office, but the policy leadership sits within DfID.
I take on board some of the criticism about whether I am the right Minister to respond to this debate. Having had the week that I have had, I would have been thrilled to make way for other Ministers who wanted to respond. However, as the DfID Minister with responsibility for supporting our Secretary of State, Penny Mordaunt, on this issue in the department, and as the spokesman on Treasury matters in your Lordships’ House, I hope that I can respond to some of these issues.
The noble Lord, Lord McConnell, referred to Penny Mordaunt’s position and I would like to press that a little further. I was pleased that he remarked on how persuasive, powerful and passionate she was at the all-party parliamentary group event on 13 November. While I was at this Dispatch Box responding to the Budget debate, she was speaking at that event along with Richard Curtis. He does a tremendous amount to raise awareness of the goals internationally and in urging us to do more domestically.
Penny Mordaunt has been asked by the Prime Minister to be the Cabinet lead on the sustainable development goals, and it is right that we have a policy lead and a Cabinet-level voice. In addition to being Secretary of State for the Department for International Development, she is also the Minister for Women and Equalities. Many noble Lords touched on that important point about equality, and gender equality in particular. Therefore, she has a double role, which makes her the ideal person to ensure that government departments live up to their commitments.
Let me be clear about what those commitments are. The first thing that government departments have to do is to identify ownership within the department of the specific goals that fall within their policy remit. They must then report on progress towards those goals in their annual report and accounts. Responses from the annual report and accounts—the high-level summaries—are collated by the Cabinet Office and published. Then, crucially in terms of government, is how they work. Government effectively works through two mechanisms—two levers. One is the spending review, which will take place next year. The other is the single departmental plan, which is the strategy. The strategy must set out how the department will achieve the declared ambition of the Prime Minister and of this Government to meet their obligations under the sustainable development goals.
The process by which we will undertake this review is that we have been consulting with external stakeholders already. I pay tribute to the work of business in particular, and the work of organisations such as the UK branch of the UN Global Compact, whose events I have spoken at. There was a road show around the UK encouraging businesses to hardwire this into their planning. That was a useful exercise. The noble Baroness, Lady Walmsley, talked about the Institute and Faculty of Actuaries, which is now beginning to hardwire into its thinking—out of enlightened self-interest, I suggest—the need to adhere to those goals.
I will return to the contribution of the noble Baroness, which was significant in a number of regards. It highlighted the interconnectedness and the interlinkages to which she and the noble Lord, Lord Collins, referred between different goals. She talked about climate, which trips across goals 6, 7, 11, 12, 13, 14 and 15. Some people say it should actually be all of them, but those deal specifically with the environment. They of course will have cross-government responsibility. You cannot say that Defra alone is responsible for meeting our climate ambitions, although it leads on that along with BEIS. It is something that touches every aspect of government. Therefore, the goals in the single departmental plan must reflect that from each of the domestic departments.
On the voluntary national review, a website is available which I have highlighted. I know that the noble Lord, Lord Collins, said, “Not just electronically”, but there are many mechanisms by which people can feed into this review and tell us what they are doing—because it is not just about what the Government are doing.
I will make one further contextual point. I felt this very strongly at the excellent event at which the UK Stakeholders for Sustainable Development presented its report on measuring up. There are two ways that we can approach this. On the one hand, the Government can do their standard thing, which is to defend to the hilt their record on meeting every single objective, target and measure. They will have an argument for it, and we have skilled civil servants who can do that. Or we can say, “Listen. This is going to be done by more than one Government. This is long term. We are talking about 15 or 25 years for a lot of these targets. There will be lots of different political compositions”. Already, within the UK, it is not just a Conservative Government. There are devolved Administrations, local authorities and trade unions of different complexions as well. Therefore, if we are to address this, we need to go into it with a slightly more grown-up approach. We should say that we believe passionately that the SDGs represent a template for a good society that has been agreed internationally by all 193 member states of the UN General Assembly, and that we will work towards their implementation domestically and internationally.
If we take that approach, if someone wants to produce a score card and tell us that we are succeeding in one area such as access to clean water but we are not doing as well in another area—the noble Baroness, Lady Grender, mentioned housing—so be it. That is the benefit of having a measure. Before we had the SDGs we did not have any coherent measures. Therefore, we should not be afraid but should try to keep the debate at that level, where it seeks to recognise that this is a template that, I hope, successive Governments in this country and around the world will commit themselves to seeking to implement.
I always enjoy the contributions of the noble Lord, Lord Judd, in this House. Often I am too busy listening to him to take note of his remarks. But I noted one particular point that he made when he began. He challenged us to persuade him and the House that there is a culture and spirit of determination to get things done in these areas. I have tried to set out what our approach is on that. He also made a great comment that echoed something said by the noble Lord, Lord Rogan, which was to remind us that the excluded must be central. At the heart of this, what made these goals different was the statement that no one would be left behind.
I am very proud of what the Government have done over the past year under the leadership of our Secretary of State, Penny Mordaunt. She came to the department with a passion that those with disabilities should not be on the fringes of our consideration but central. One manifestation of this was an outstanding global disability summit, which we hosted in July. Many noble Lords were able to attend that. We simply brought to bear the convening power of the UK to draw attention to that issue, which was an important point.
The noble Lord, Lord Thomas, also reminded us that, while we have a lot of work to do, a lot of good work has been done. He talked about the Bribery Act being a gold standard internationally. If we are to have good governance in peaceful and inclusive societies—he mentioned in that context SDG 16 in particular—it is clear that we must have transparency. People in a country should be able to see where the money that comes into the country has been spent—money that is meant for them. Transparency and tackling of bribery is very important.
The noble Lord, Lord Rogan, touched on that again when he said that there was a responsibility not just on us but on individual leaders within those countries to do all that they can to ensure that the SDGs are met. He also mentioned the Equality Act and the Modern Slavery Act. When my time on the Front Bench is done, what I will be most proud of is working with our now Prime Minister on taking what is now the Modern Slavery Act through your Lordships’ House with the incredible amount of work that went on, done by many people in this House, to shape the legislation into its ground-breaking form.
Many noble Lords mentioned climate, particularly the noble Baronesses, Lady Walmsley and Lady Sheehan, and the noble Lord, Lord Collins. The voluntary national review findings will be presented to the UN high-level panel by Penny Mordaunt next year, so it makes sense that she continues her leadership through that process. There will be a submission of the main messages to the UN by 17 May; submission of the full report to the UN on 14 June; presentation of the voluntary national review at the high-level political forum between 16 and 18 July; and then the first heads of government level review of the sustainable development goals at the UN General Assembly in September. I should also point out that the Prime Minister has been asked to be the climate resilience champion at the UN Secretary-General’s climate summit next year. That will be a moment to raise this issue up the international agenda.
The noble Lord, Lord Hunt, asked us to learn from others, and I have referenced some of those points. The noble Lord, Lord Rogan, talked about the importance of setting an example, and we are conscious of that. As we go into the voluntary national review, we are trying to do things that are slightly different. What that needs to contain has been set out for us—the five goals that will be the particular focus of next year. That changes from year to year, and we will address that. One difference about the way the UK is doing this, as well as the volumes of data and statistics that come with this issue, is that we want to demonstrate an inclusive approach whereby we capture not just what the Government or even the devolved Administrations are doing but what is happening in civil society. That is crucial to delivering on these targets.
Therefore, I am happy that the government website we opened for feedback on UK sustainable development goals, which is easily accessible, has had 36 responses from civil society organisations so far. They include the Salvation Army and Stonewall, and academic institutions such as the University of Wolverhampton. Some really good responses have come in. The time to review the responses from civil society was going to conclude in November, but we have managed to move it to January. Until 11 January 2019, organisations can let us know what they are doing and what impact they are having in this area. That will give more time for engagement.
I am happy to give an undertaking that trade unions are an important part of our national life and should be consulted. The specific way in which we have gone about that is for the government departments responsible for specific goals to reach out to their stakeholders, including of course trade unions, and seek their opinion on what more they should be doing to reach the targets.
I hope that, in that brief summary of what has been an excellent debate and contribution to the voluntary national review process, a number of things have come out. The first is that it is not the responsibility of one party or one Government, but the responsibility of us all. Also central to this is the ambition that we not only achieve these goals but, in so doing, leave no one behind. That is a pledge which we continue to be committed to and will continue to work with others towards, and I know that all noble Lords who contributed to this debate agree with it as well. I thank again the noble Baroness, Lady Suttie, for giving us the opportunity to make those comments.
Brexit: Economic Effects
Lord Bates Excerpts(5 years, 5 months ago)
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Baroness Quin
To ask Her Majesty’s Government what recent discussions they have had with the Chambers of Commerce and Confederation of British Industry representatives in the United Kingdom’s regions and nations about the economic effects of Brexit.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, the Government continue to engage with business groups, including the CBI and the British Chambers of Commerce, on the economic effects of EU exit across the UK’s regions. We remain committed to ensuring that the views of business are reflected in our approach to Brexit, and businesses have responded positively to the draft of the withdrawal agreement published last week.
Baroness Quin (Lab)
My Lords, the Government announced in the other place on Monday that they would publish an economic and fiscal analysis of the effects of Brexit. In this House the Minister and his ministerial colleague, the noble Lord, Lord Callanan, have also said that there will be updated impact assessments of the effects of Brexit on our regions and nations. In view of the Prime Minister’s proposed deal, and also of the continuing concerns of business, can the Minister give us some outline of the timetable for publishing this additional information?
Lord Bates
Yes, I can. The position will be contingent on the outcome of the Council, but if there is agreement there on the proposal put forward in the withdrawal agreement, and also on the crucial element of political declaration on the future partnership, we would expect to produce that analysis and put it in the public domain next week.
Baroness Kramer (LD)
My Lords, yesterday the FT City Network—a forum of more than 50 senior city figures—spoke out in favour of a people’s vote. Another wave of City members wrote to the FT today with exactly the same message. The IoD, to its own surprise, found that a survey of its members produced a majority in favour of a people’s vote. Will the Government finally consider a people’s vote? For business, while no deal would be a catastrophe, the proposed May deal is so second-rate that it diminishes them.
Lord Bates
Talking to the British Chambers of Commerce, CBI and all the business organisations, I find that the one thing they all want is for a deal to be done. They want certainty. They want to understand where they are so that they can continue to trade and move forward. That is what the Prime Minister has put before us, that is what the Cabinet has agreed, and that is what we hope will be agreed at the European Council next week. That is the best way forward for Britain, and it is the best way forward for business.
Lord Cormack (Con)
My Lords, if we want clarity and certainty, all that a so-called people’s vote can do is prolong the agony, deepen the division and make it far more difficult to come to a sensible conclusion.
Lord Davies of Oldham (Lab)
My Lords, the Minister’s Answer to my noble friend Lady Quin was somewhat elliptical and roseate in hue. When we come to the question of the Commons having to consider the issue of the meaningful vote, is it not the case that the Minister in the Commons confessed on Monday that the economic analysis would of course depend on aspects of withdrawal, but with Britain still a full member of the European Community? How on earth can that prove to be realistic in people’s judgment on the withdrawal position?
Lord Bates
That was the decision that Members of the other place came to in the debate on Monday. They introduced Amendment 14 to the Finance Bill, which called on the Government to consider the long-term costs and benefits of moving to a new trading relationship with the EU and the rest of the world. The Exchequer Secretary said:
“I am happy to confirm that the baseline for this comparison will be the status quo—that is, today’s institutional arrangements with the EU”.—[Official Report, Commons, 19/11/18; col. 661.]
So we are doing what we have been asked to do by the other place.
Baroness Lister of Burtersett (Lab)
My Lords, in a statement last week, the UN rapporteur on extreme poverty and human rights said that Ministers were treating,
“the impact of Brexit on … poverty”,
as “an afterthought”. What assessment are the Government making of the likely impact of Brexit on the very high poverty levels in this country?
Lord Bates
Many people looked at the special rapporteur’s response, but also at the fact that the number of people in poverty has been steadily falling, that the number of children in poverty has been steadily falling, that employment is at record levels, that growth is on the up, that inflation is on the down, that our exports are rising and that growth and opportunity are there for jobs and education—which are the best routes out of poverty.
Lord Foulkes of Cumnock (Lab)
My Lords, can I just clarify something? Is it not the case that people such as the noble Lord, Lord Cormack, and the CBI, are only now cosying up to the deal proposed because they are absolutely scared—I was about to say “something” scared, but I had better not—of the alternative of no deal? The reality is that, all around the country, a momentum—if noble Lords will excuse the word—is growing in favour of a people’s vote. In a democracy, three years after a previous referendum, and now that we know what the conditions are and what the whole process involves, what is wrong with giving the people another say?
Lord Bates
In a democracy we had a people’s vote, which was the referendum—and the Government were re-elected on another people’s vote.
Lord Bates
Both the noble Lord’s party and mine stood on a platform of honouring the people’s vote that took place in 2016. We are now on the brink of an agreement which can remove the uncertainty so that this country can move forward, and that is why we are supporting it.
Lord Deben (Con)
Would my noble friend reconsider that answer? After all, we had an election, and then two and half years later we decided that there was a chance for the people to have another vote on that. So merely to say that we have had a vote is not to say that we should never have a vote again. Is not the problem that the deal that has been done puts Britain into a significantly worse position than we are in as a member of the European Union?
Lord Bates
No, I do not accept that premise. If that were the case, we would not still be the number one location in Europe for foreign direct investments, or judged by Forbes to be the number one place to do business in 2018, which we are, and our exports would not be rising. The reality is that people want to remove the uncertainty, and to do that, we need to get behind this deal and get it done.
Lord Bates
I was with my noble and learned friend all the way until just before the end. There will be a meaningful vote, which we promised and which will happen some time in December, and then this place and the other place can make their views known on the proposed agreement. I very much hope that they will come in behind it and behind the Prime Minister so that we can move on and see it implemented.
Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018
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Lord Bates
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, claims management companies offer advice and other services to consumers making claims for compensation. They can provide vital support for consumers who may be unwilling or unable to bring a claim for compensation themselves. When the CMCs market functions well, these companies can act as a check and balance on business conduct.
CMCs are currently regulated by the Claims Management Regulator, under the Ministry of Justice. This regulatory regime was established in 2006 through the Compensation Act and was initially intended to be temporary. Reports of widespread misconduct suggested that the Government should act to strengthen regulation of CMCs. In 2015 the Brady review found evidence that the majority of stakeholders felt the Claims Management Regulator lacks the sufficient powers and resources to supervise the market properly. The Government took the first step to stronger regulation in 2016 through the Financial Guidance and Claims Act. This mandated the transfer of regulation to the FCA and the handling of complaints about CMCs to the Financial Ombudsman Service.
The aim of this legislation is to introduce a robust regulatory regime for CMCs that benefits consumers and is proportionate to the needs of the sector. We consulted on its provisions and we are confident that this legislation delivers on this aim. Through changes to the regulated activities order and the financial promotions order, this legislation makes claims management a regulated activity in England and Wales and in Scotland for the first time. This will require firms to seek authorisation from the FCA in order to promote and carry out claims management services.
The order defines the types of claims management activities that will be regulated by the FCA by creating seven different permissions across different sectors for different types of activity. This will mean that regulation will be comprehensive as each CMC will need separate permissions depending on the specific activities and sectors that it wishes to operate in, which will enable the FCA to take into account the different types of work across each sector and different activities. Regulation will also be kept proportionate as CMCs will need authorisation only for the activities they actually carry out.
This is a change from the previous regime, which set out one permission enabling claims management activity across six different sectors. These six sectors have been preserved from the previous regime and mean that CMCs must be regulated for their activities in personal injury, financial products and services, employment issues, industrial and criminal injuries, housing disrepair, and for seeking out, referring, and identifying claims. As the Economic Secretary noted in the other place, the Government are aware of increasing claims management activity in areas other than those I have just named. The Government will monitor the new regulatory regime and consider how best to meet this challenge.
The order also sets out which organisations are exempt from the FCA’s regulation. Concerns had been raised about the exemption of legal professionals, but I can assure the Committee that, first, solicitors are already strictly regulated by the Solicitors Regulation Authority for their work, which can closely resemble claims management work, and secondly, CMCs will not be exempt from regulation merely because they employ a solicitor. Rather the exemption is designed to ensure legal firms are not unduly burdened by dual regulation.
We have taken steps to make sure that this is a smooth transition. The FCA will be implementing a temporary permissions regime to ease the process for CMCs. The FCA is well placed to take on the regulation of CMCs, having already started to build the department which will oversee the transition of regulation. It is well resourced and has an expert pool of conduct supervisors and detailed knowledge of financial services. CMCs will be held to the same conduct standards as all FCA-authorised firms, and the FCA’s rules will provide a robust and proportionate framework for how CMCs should carry out business and treat their customers. The FCA will be able to use its regulatory powers to deal with CMCs that do not abide by its rules.
In summary, the Government believe that the proposed legislation is necessary to ensure that the regulation of claims management companies is fit for purpose so that consumers can benefit from a professional service that offers value for money. I hope members of the Committee will join me in supporting the order. I commend the order to the Committee.
Lord Tunnicliffe (Lab)
My Lords, I, too, welcome this statutory instrument and thank the Minister for introducing it. I also endorse what the noble Baroness, Lady Drake, has said, particularly her questions. I will not repeat what she said, but just observe that the regime will involve the Senior Managers and Certification Regime. I am sorry to hear that it is not as yet being used effectively. Perhaps the Minister will reduce our concerns. Perhaps it would be more top-of-mind if the reversed burden of proof originally in the scheme had been retained. Certainly, it is meant to be a regime which makes managers very clear of their duties, if not fearful. I endorse the idea of six bundled areas of responsibility being expressly divided into seven. I think that the noble Baroness, Lady Drake, asked whether there should be more than seven. It is a bit unfair of me, but I feel that the ombudsman becoming the financial ombudsman gives me a feel that he will be steelier and more effective.
The solicitor exemption depends on the exclusion that the activity is being carried on as part of their ordinary legal practice. The trouble is that we are talking about solicitors. They are paid to get around regulations. Who will be policing that boundary? Who will have responsibility for understanding what a particular solicitor is doing and saying, “Sorry, that should now go into the financial control”? The solicitors doing this work in the ordinary course of their business nevertheless need proper regulation. Is the Solicitors Regulation Authority up to the job?
Lastly, I understand that the CMRU staff will be redundant at a point when the FCA will, we hope, looking for similar skills. I would like to know the Government’s plans at a practical level for those staff.
Lord Bates
I thank noble Lords for their scrutiny of this SI and for their general welcome. I will try to address some of the key points and questions which have been raised.
First, the noble Baroness, Lady Drake, asked about estimates of numbers. According to the CMRU, there are current 1,238 authorised CMCs in operation. The overall number of authorised CMCs has been reducing on average by 10.9% per year for the past four years. The FCA’s modelling shows that it expects to take on 906 firms in 2019.
The noble Baroness, Lady Drake, and the noble Lord, Lord Tunnicliffe, mentioned the solicitors’ exemption and concern about potential regulatory arbitrage. The SRA and the FCA are in the process of updating their memoranda of understanding to ensure that the sector is closely monitored and properly regulated. The order contains a provision which disapplies the exemption from regulation by the FCA, should a CMC seek to avoid FCA regulation by employing a solicitor. That CMC will continue to be regulated by the FCA.
The noble Baroness, Lady Kramer, asked about solicitors, and not other regulated professionals, being exempt. Solicitors are already regulated by the Solicitors Regulation Authority. I understand the point that she made about that authority. The work of a solicitor advising on a claim is the same as, or very similar to, the work of a CMC seeking compensation for a consumer. As solicitors are regulated by the SRA for their usual activity, appropriate regulatory oversight is already present.
The Government have retained the other existing exemptions; we consider it correct that these bodies are not subject to regulation. That point was made by the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake. The FCA will continue to monitor exemption from claims management regulation if it moves or migrates into other activities. Of course, it will also retain the right to come back with further suggestions.
The noble Baroness, Lady Drake, asked about the exemption for trade unions.
Lord Bates
My Lords, I was just touching upon the code of practice for trade unions, in response to a point made by the noble Baroness, Lady Drake. The Treasury proposes to maintain the code for trade unions and will replace the MoJ on the monitoring board. The Treasury is working with the Trades Union Congress and Scottish Trades Union Congress at an official level and will publish the code in due course. The code is being amended, mainly to update it to reflect the transfer of regulation.
The noble Baroness asked about CMCs moving into other sectors. We will carefully monitor the effectiveness of CMC regulation and work with the FCA, the SRA and others to ensure that the sector is benefiting its customers. On the estimate of how many CMCs will not get authorisation from the FCA and what will happen to their cases, the number of CMCs has been declining, and I gave some statistics on that at the beginning.
The noble Lord, Lord Tunnicliffe, asked what will happen to the highly qualified CMRU staff. The CMRU and the FCA are currently agreeing the transfer of staff as part of their transfer scheme under the Financial Guidance and Claims Act. The details are still subject to discussion.
The noble Lord and the noble Baroness, Lady Kramer, asked whether the Solicitors Regulation Authority was up to the task. The SRA is subject to oversight by the Ministry of Justice and provides strict professional regulation. A memorandum of understanding between the SRA and the FCA is being reviewed.
Lord Tunnicliffe
My question was: who can call a halt and say, “No, it must transfer”? If you have a solicitor who is growing like Topsy, who will know that by now they should stop doing that and reregister as a proper claims organisation?
Lord Bates
That is something that I think the FCA would be liaising on. If it felt that its activities were aligned with a CMC then, as I mentioned earlier, that would mean it would have to continue to be regulated by the FCA. On the specific point, unless there is any inspiration on its way, I will write with clarification to the noble Lord.
The noble Baroness, Lady Kramer, asked if any action had been taken on CMCs doing their due diligence on data under GDPR. The FCA is in the process of updating and publishing its rules for the CMC regime. It will be working closely with the Information Commissioner’s Office, which is responsible for the oversight of data protection laws, to ensure that CMCs comply with the order, FCA rules and data protection legislation.
The noble Baroness asked whether the SRA was an effective regulator. The MoJ is responsible for the oversight of the SRA. The FCA and the SRA are currently reviewing their memorandum of understanding, and their conclusions will be published in due course. I think that covers most of the points.
Baroness Drake
Could the Minister clarify a point from one of my questions? Where an existing claims management company, authorised under the previous regime, transfers across to the FCA on the due date in April and is then subjected to the reauthorisation process but is not reauthorised, what happens in that instance to the caseload that it has been managing?
Lord Bates
They will be given 30 days to wind down their business in the event that that happens. I can write to the noble Baroness when I write to the noble Lord, Lord Tunnicliffe, and expand on that point if that would be helpful.
Baroness Drake
It is more about the consumer protection aspect that a group of people would be caught up in that, and I wondered who would carry on managing their cases. I am happy for the noble Lord to write to me about that.
Lord Bates
I will look at the record and check that I have answered the points as best I can and write regarding the points that I have agreed to. In the meantime, I beg to move.