Draft Financial Regulators' Powers (Technical Standards Etc.) (Amendment Etc.) (EU Exit) Regulations 2018

Anneliese Dodds Excerpts

Wednesday 10th October 2018 General Committees

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

It is a pleasure to serve on the Committee under your chairmanship, Sir David. I am grateful to the Minister for the explanation that he provided.

As the Minister mentioned, the SI is intended, as I understand it, to enable regulators, particularly the Bank of England, the Prudential Regulation Authority, the Payment Systems Regulator and the FCA, to remedy any deficiencies in binding technical standards, so that they can operate effectively from the point of the UK exiting the EU. The SI also, as I understand it, and as stated in the explanatory notes, but not necessarily reflected in the Minister’s remarks, enables authorities to have ongoing responsibility for making technical standards required under retained EU law in financial services and amending them so that they remain fit for purpose in the future. It is not just about exit day. As I understand it, it is about a potentially much longer period, at least as expressed in the explanatory notes and my reading of the SI.

The regulators’ powers are subject to the constraints in the European Union (Withdrawal) Act, as the Minister explained. They are limited to addressing deficiencies and dealing with any failure of UK law to operate effectively after exit, and that power is time limited under the withdrawal Act.

We first have to question why we have ended up here. It is deeply worrying that the Government feel that they have to go down this path because of the possibility of a no-deal Brexit, which the Brexit Secretary now recklessly describes as offering countervailing opportunities. I am not sure about the Minister, but I have yet to find somebody working in financial and related professional services who can find any countervailing opportunities from a no-deal Brexit. Maybe he has and it would be great to hear of it, if so.

[John Glen]

There are some.

[Anneliese Dodds]

Perhaps a couple of hedges but not many beyond that, I would expect. We could be pushed in this direction by the Government’s dogmatic rejection of a customs union with the EU and their inability to accept the reality.

As a result of that disturbing situation, it is right that those in Government who do want to act responsibly provide us with some kind of assurance of regulatory continuity, hence this SI, but I would say from the beginning that there is a misunderstanding in these proposals: the idea that technical, level 2, standards are non-political.

For two years I was a Member of the European Parliament and negotiated for the Socialists and Democrats a number of level 2 measures, relating to a raft of post-crisis financial services legislation: MAD/MAR, EMIR, CARRP, CSDR and last, but certainly not least, MiFID II. Parliamentarians were deeply involved in negotiations on those level 2 measures, which addressed a massive range of different issues. Of course, those negotiations were with the European Commission as well as regulators, mainly ESMA, in the case of the negotiations I was involved with.

The regulations seem to suggest that there would be public consultation only on changes and no more extensive engagements. That ignores the fact that so-called technical standards can emasculate the intent of legislative proposals at a stroke. One good example of that would be around the new regime in MiFID II for regulating commodities trading, where there is a lot of evidence, as Members will know, that having virtually non-regulated commodities markets had led to spikes in the cost of commodities, which had then led to serious problems in many countries in the global south, including potential famines.

Parliamentarians believed they had got to a situation and agreed at so-called level 1—primary legislation level—that we would have a new regulatory regime that would impose position limits on different types of commodities. That would mean we would not have that kind of speculation pushing up prices again, because we would not have individual traders controlling huge parts of these really important markets, and manipulating them just for financial gain. But the technical standards were really weak initially. We had a big fight and got them back to a much better position—that was through a political process, not a technical one. It would be interesting to hear the Minister’s thoughts on whether we are really considering these level 2 measures to the extent that they require. Of course, we as parliamentarians do not want to be poring over level 3, which is the real technical nitty-gritty. That would not be sensible but level 2 measures surely require more scrutiny than we are offered here.

I would like the Minister to respond to three questions. First, at EU level there is a strong institutional aid to the promotion of financial stability in the form of Finance Watch, which is funded by the EU. We lack any such body in the UK. That is significant, given where we are today, 10 years since the fall of Lehman Brothers. I hope the Minister can reflect on how the political imperative of ensuring financial stability will be ensured, or otherwise, by these arrangements.

It is interesting to look at the language and narrative that Government have given in relation to these proposals and contrast that with some of what has come from EU level. I quote from the report by Irish MEP Brian Hayes just before the summer in the European Parliament. It stated:

“In the absence of a transition period, the Commission and the European supervisory authorities must be prepared to protect financial stability.”

That was the first value that he isolated, yet we tend to find that a bit of an afterthought in Government communications on this topic.

Secondly, I am very concerned whether the regulators, particularly the PRA and FCA, have the requisite capacity. That is related to the point made earlier about whether parliamentarians have the capacity to deal with the huge volume of SIs. Of course, it is the PRA and FCA that would have to deal with the arrangements for level 2 legislation. What assessment has been undertaken by the Government of their readiness to accomplish that task? I say that having looked at the document that has just been released by the FCA, snappily entitled “Brexit: proposed changes to the Handbook and Binding Technical Standards—first consultation”, which is 781 pages long. Admittedly, quite a lot of that is a new revised handbook, but it is a very big task that we are giving to our regulatory authorities. It is not clear that they really have the requisite capacity to deal with that task. For example, if we look at some of the new burdens that might be applied to the FCA, the document states that credit rating agencies that are currently registered with the European Securities and Markets Authority and that wish to register with the FCA will need to send the information by exit day—that is information on all credit ratings issued and not withdrawn. We are talking about a lot of information that will have to be transferred to the FCA. Will it be able to cope with that?

The last question I have is about regulatory co-ordination. From my reading of the SI and the explanatory memorandum, these arrangements are not just about the exit point but about ongoing arrangements that are intended to ensure that binding technical standards will remain effective. It is not clear how co-ordination will be ensured between what occurs on the UK side and on the EU side. We could say it would be a function of a no-deal Brexit, which the SI is intended to deal with, but I am concerned by some of the suggestions. For example, the FCA document suggests that we should just remove binding technical standards, such as requirements to co-operate in

“supervisory activities, for on-site verifications, and investigations and exchange of information between competent authorities”.

That seems to be the assumption underlying what a no-deal Brexit would look like. I hope the Government will further consider what future regulatory co-ordination could look like at the same time as we are staring down the barrel of no deal.

--- Later in debate ---

[John Glen]

I am happy to answer any parliamentary question. I think we said there are about 70 SIs, but that will not be fully accurate.

The hon. Member for Oxford East asked, at the macro level, whether financial stability will be protected. The statutory objectives of the regulators for financial stability will not change. They are enduring. A tripartite system was set up as a consequence of the crash. I think there is broad cross-party agreement on the need for that to continue, and it will.

The hon. Lady asked about holding regulators to account. Parliament will be involved in every aspect of the process to onshore EU financial services regulations, so all the changes the Treasury proposes to level 1 legislation and delegated Acts will be put before Parliament for it to approve. Any transfer of responsibility to the regulators, including any transfer of powers to make technical standards, will be put before Parliament for it to approve through affirmative-procedure SIs.

The Treasury is working closely with the Bank of England, the PRA, the FCA and the PSR on how to fix deficiencies, including in the technical standards that we propose should become the responsibility of regulators. As was said, the Treasury will be required to approve all the deficiency fixes proposed by the regulators to ensure they are consistent with the deficiency fixes that Parliament will be asked to approve in onshoring.

[Anneliese Dodds]

The Minister is saying that there will be a change, to the extent that level 2 arrangements will be determined by the regulators. That is a shift away from arrangements at EU level, where parliamentarians—albeit European parliamentarians—are involved in negotiations about level 2 arrangements with the Commission and the regulator. That is a change. As I understand it, we are shifting to level 2 arrangements being uniquely the preserve of regulators, albeit with oversight from the Treasury, compared with a process where there is negotiation, in which parliamentarians are involved.

[John Glen]

We are seeking to give responsibility to the most appropriate body. The regulators are doing what they do. Frankly, some binding technical standards will not be suitably scrutinised or carried out within the Treasury. I refer back to the point I made about tier 1—or tier 2. Binding technical standards are sort of tier 3 within tier 2—it is a bit complicated—but basically, Parliament will have scrutiny over fundamental change, and the consequential changes that flow from that will be delegated to the appropriate body.

I think the hon. Lady asked whether this is about more than fixing deficiencies for exit. The withdrawal Act provides for the transfer of functions where necessary. Binding technical standards will need to be maintained by an appropriate body. After exit, that will be the UK regulators.

On what the hon. Lady said about her role as a Member of the European Parliament, it is absolutely right to say that we will have more to do because we will not have that scrutiny. As I understand it, MEPs can veto some binding technical standards proposals, but the UK FSMA framework of 2000 does not work in that way. Parliament has delegated technical rules to UK regulators, which is a difference.

The draft regulations set out the procedure where responsibility for future binding technical standards is transferred to regulators by other SIs. All those SIs will be scrutinised individually by separate Committees—I will probably be sat here introducing them—and subject to approval by Parliament under the affirmative procedure.

I turn to the Treasury’s authority over regulatory changes. It is appropriate that the Treasury approves all the deficiency fixes that the regulators propose, and Ministers will be accountable to Parliament for that. On the responsibility for binding technical standards that regulators will take on post-exit, the Treasury will need to approve future changes to those technical standards and will be able to veto a proposal for the two reasons set out in the draft regulations: if it appears the proposal would

“have implications for public funds”,

or if it would

“prejudice…negotiations for an international agreement”.

I cannot anticipate what they are, but all I know is that I would be subject to parliamentary scrutiny on that.

--- Later in debate ---

[John Glen]

Candidly, at the level we are at at the moment, in seeking a strong bilateral arrangement to determine the future dynamics of dialogue between the EU and the UK supervisory bodies, I cannot answer with that degree of specificity. I take the point and will seek to come back to him as soon as I can.

[Anneliese Dodds]

I am grateful to the Minister for giving way; he has been very generous. I have enormous respect for the hon. Member for Basildon and Billericay but, surely, it is important that whenever we talk about specific regulations we ground our discussion in an overall commitment not to seek to undercut EU-level regulation. Of course, there will be innovation and change, including at EU level. I would be surprised if these discussions are not happening in other European countries. I accept that the nature of the market is different in different European nations. But we have had this around many other regulations before. The danger is that we could end up with the mentality of a bonfire of regulation, which will overall have much more of an impact, because there are concerns that Brexit could be used as a means to undercut regulations generally. That is much more of a concern for industry than any specific regulation, in my experience anyway.

[John Glen]

I will take on that point, while also responding to the hon. Member for Glasgow Central, who made the same point about watering down of EU regulation. There is no provision to water down in the Act the regulations that we are seeking to onshore. The wider point has been made about the future direction. On that, again, I can be reassuring. We do not want to define ourselves as a nation by regulatory arbitrage.

I also acknowledge, as my hon. Friend the Member for Basildon and Billericay pointed out, that the financial services have ongoing issues with legislation that has been onshored while we have been members of the EU. They are not about reckless setting aside of prudential regulations. They are in areas, perhaps, on which there is greater emphasis in our UK financial services, as my hon. Friend mentioned, these are things that do not exist in other jurisdictions.

Those are matters that a future framework would at least give us a mechanism to examine and then there would be an understanding, if we achieve what we seek—reciprocal responses from both the sovereign regulatory supervisory bodies. But we are not starting from a point where we are seeking to deregulate.

On the point the hon. Member for Glasgow Central made about UK regulators losing influence, I visited Edinburgh and Glasgow over the recess and acknowledge the growing financial services hub that exists there. The UK is a major financial centre and UK regulators are major players in global forums for financial regulation. There are global colleges for supervision for banks, for example, where we are key players. Although I recognise that the context will be different, this is not the time for UK regulators to adopt a more detached role from international leadership in some of these areas.

Reference was made to the BBC report of the comment I made at the Lords Select Committee this morning about jobs. Throughout the last nine months that I have been doing this, I have been in frequent contact with firms about jobs lost. I was referring to a comment made by Sam Woods, the deputy governor of the Bank of England, about the contingency arrangements. In my opinion, it was not news; I was just reflecting what had been said by somebody else. Of course, contingency arrangements have been made, but I have seen no expectation or desire to move significant tranches of jobs to the EU beyond that. A deal would clearly arrest that fear. We have set out clear proposals on a future ambitious relationship with the EU. We hope that that will transpire, and we expect it to take place.

The other point was about rule-taking. We are not proposing that UK regulators will have to work within a framework, other than the UK Parliament framework. There would be parliamentary scrutiny of any significant changes that we wished to make, and we will set those changes in primary legislation.

The right hon. Member for North Durham made a point about the impact assessment. The regulations would have no cost to business, as they deal with the transfer of responsibility from the Treasury to the appropriate regulators. As a whole, the regulations will significantly reduce costs to business in a no-deal situation. That is the whole point--to ensure that the effects of the transition are minimised in an undesirable situation.

Through our dialogue with firms and trade bodies, we have attempted to minimise the disruption to firms, but it is inevitable that some preparation will be needed. The Government have committed to providing the UK regulators with the power to phase in regulatory requirements that will change as a result of exit, which will mitigate the cost to firms. Due to the wide scope of the changes needed and the broad set of firms affected, however, it has not been possible to accurately quantify the actual costs to firms—I concede that—but these regulations will reduce the cost to business in a no-deal scenario. That is undoubtedly their purpose.

[John Glen]

Because they will set a reliable regulatory framework that will mean that firms will not be at risk of defaulting or of not having the regulatory oversight that would not exist otherwise.

[Anneliese Dodds]

I would always hesitate to speak for my right hon. Friend the Member for North Durham, but I believe his question was actually about the cost to Government and the considerable amount of civil service time that is being eaten up by the process.

[John Glen]

With respect to that, we have prepared a narrative on the impact assessment, and I believe there is a conversation going on with the appropriate Committee to determine that, but we have not concluded that assessment. Obviously, it is necessary to move quickly to secure all these statutory instruments before the end of March. That has been our objective.