Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019

Anneliese Dodds Excerpts

Monday 7th October 2019 General Committees

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

It is a pleasure to serve with you in the Chair, Mr Wilson, and, as always, to sit across from the Minister in yet another Delegated Legislation Committee relating to financial services. I am grateful to him for that explanation of the statutory instrument, but it leaves a number of questions unanswered.

First, there seems to be a lack of clarity about the locus for application of the measures. The Minister referred at various points to the fact that the Government have laid before Parliament many such instruments in relation to no deal, but as the made affirmative procedure was used, the measures are already in place, regardless of the manner in which the UK will exit the EU. That is not very clear in the explanatory memorandum, which flits between no deal and circumstances where a deal has been reached.

I wonder whether that is an implicit acknowledgement that whatever deal the Government conclude, it will not explicitly cover some of the issues surrounding the co-ordination of financial services regulation. I have been looking closely at what the Prime Minister said last week and what has been released by the Government. There does not appear to be a clear indication of the regulatory regime for financial services. Perhaps the Minister could indicate whether that reflects a situation where all the previous SIs that we have looked at, including today’s, will be the legislative context even if there is a deal. Currently, it does not seem that a deal will cover financial services, at least from what I can see.

The most significant element of the Solvency 2 directive is the removal of the distinction between European economic area and non-EEA insurers and reinsurers. That is done through regulation 4, which amends the Solvency 2 exit SI, which we have talked about, through, as the Minister mentioned, the insertion of a new definition of “special purpose vehicle” in the Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019, and regulation 5, which amends the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 so that the relevant Solvency 2 requirements in retained EU law apply to all UK special purpose vehicles, regardless of whether the insurer or reinsurer transferring the risk is regulated in the UK or elsewhere.

I would be curious to know whether the Treasury has conducted any risk analysis of the measure, and what it might regard as potential difficulties in removing that distinction and creating a single regime. Was any consideration given to retaining two separate regimes—one for UK insurers and reinsurers and those with equivalent regulations, and another for third-party countries without equivalent regulations? It would be interesting to hear about that. Also, what support is being offered to those in the financial services industry affected by the changes and the adoption of a single regime?

Returning to the fact that the SI amends FSMA, I asked the Secretary of State for Digital, Culture, Media and Sport when FSMA will be updated on legislation.gov.uk to ensure that the version available there accurately represents the legislation in its current form. I was told that it has been updated until the end of 2016. Since then, 951 amendments have been made to the Act; indeed, the Minister has discussed many of them with me in Committees similar to today’s.

I was informed that a fully revised version would be available only at the end of the year—clearly beyond when the Government say that they want to leave the EU. I am very concerned about this. It is now difficult for those who wish to comply with legislation to understand what is in that crucial Act, FSMA. It seems to be symptomatic of a piecemeal approach. In this SI, we have again had post-hoc amendments to legislation that has already been passed. Can the Minister make a commitment to the Committee that he will work with the Department for Digital, Culture, Media and Sport to ensure that this process can be sped up? I am very concerned about the impact on compliance if we do not even have an up-to-date version of that fundamental Act.

--- Later in debate ---

[John Glen]

I am happy to address the points raised by the hon. Member for Oxford East, and the point made by the hon. Member for Linlithgow and East Falkirk. The SI follows the same process as all SIs. With respect to Solvency 2, the simple reality is that the legislation was amended between the previous presumed exit date and this one. We have simply brought that up to date, and the ILS-related mechanism derived from, and made reference to, the Solvency 2 provision. As a consequence of that relationship, which was something that we authored in the UK, it made sense to update both at this time, given that they are within the same category.

The hon. Member for Oxford East asked what would happen to this SIs if we got a deal. If a deal is secured, any withdrawal agreement Bill will make provision to defer any Brexit SIs that are not needed in a deal scenario until the end of the implementation period. We expect that the Bill will achieve this through a blanket deferral of Brexit SIs that come into force on exit day until the end of the implementation period. We expect that the Bill will also ensure that Ministers can revoke or amend any EU exit SIs as appropriate, so that they deal effectively with any deficiencies arising from the end of the implementation period. In the circumstances that we are talking about, following a hopefully successful conclusion of the deal-making process, we would have a 14-month implementation period, as per the plans at the moment, in which to make provision for the enduring solution. We will ensure that onshoring regulation is not commenced if there is a deal and a transitional period is agreed with the EU.

The hon. Lady asked about the difference between EEA and non-EEA firms. The UK special purpose vehicles are already subject to the same Solvency 2-derived requirements, regardless of whether they are accepting risks from EEA or non-EEA firms. The distinction in the Risk Transformation Regulations 2017 simply reflects the fact that EU law applies only to deals that involve EEA firms. This notional distinction will no longer make sense after exit, so it is being removed, but it will not affect any deals already in place. There is no distinction for these regimes in practice—all deals must comply with UK standards, so equivalence is not necessary.

The hon. Lady referred to her question to the Secretary of State for Digital, Culture, Media and Sport and to the update of FSMA on the gov.uk website. The National Archives is working to have FSMA updated in time for exit day, and the Treasury is helping with this work. I am not more familiar with the situation than that; obviously my officials helped me answer that question, but I would be happy to examine the matter closely and come back to her on that.

[Anneliese Dodds]

I am grateful to the Minister for making that commitment, because his answer contradicts what his Secretary of State said in an answer to me: that the updates would be ready only at the end of this year. I welcome that, and hope the Minister can try to reach towards the date he gave, because otherwise I really worry about people trying to comply with the legislation without having it in front of them.

[John Glen]

I do not try to contradict my colleagues in Government, but that is the information I have received. I will provide clarification as soon as I can.

Turning to the points made by the hon. Member for Linlithgow and East Falkirk, I recognise the distinction between the Government’s perspective on these matters and his party’s. All I can say is that the financial services industry, which is significant in Edinburgh and Glasgow, is made secure by this process. He may—and indeed does—disagree with the Government about what should happen, but I assure him that in a no-deal scenario, the interests of the financial services industry in Scotland will be looked after as best they possibly can.

I thank the Committee for its consideration of this SI, and the points made by hon. Members on the Opposition Benches. In conclusion, the deficiency fixes in this SI will ensure that the UK’s prudential regime for insurance and insurance risk transfer remains prepared for withdrawal from the EU in any scenario. I hope the Committee has found this evening’s sitting informative, and will now be able to join me in supporting these regulations.

Question put and agreed to.