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

Anneliese Dodds Excerpts

Wednesday 9th January 2019 General Committees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

--- Later in debate ---

[John Glen]

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

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

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

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

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

[Anneliese Dodds]

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

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

[John Glen]

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

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

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