Draft EEA Passport Rights (amendment, Etc., and Transitional Provisions) (EU Exit) Regulations 2018

Ian Murray Excerpts

Wednesday 24th October 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Austin. The Treasury is in the process of laying around 70 statutory instruments under the European Union (Withdrawal) Act 2018. That is being done to ensure that a functioning legislative and regulatory regime for financial services is in place should the UK leave the EU without a deal or an implementation period. This is the second debate in the House as part of that programme, and I look forward to several more in the weeks ahead.

The overriding objective of that work is, as far as possible, to maintain continuity at the point of exit by maintaining legislation as it currently exists. Where existing EU legislation would not operate properly in the UK context, we need to amend it to ensure it works effectively after we leave. We are therefore using powers delegated to Ministers under the withdrawal Act to fix deficiencies in applicable EU law that will be transferred directly to the UK statute book at the point of exit, and to fix existing UK law to ensure that it is not deficient on and after exit day.

[Ian Murray (Edinburgh South) (Lab)]

I am grateful to the Minister for giving way so early in his contribution. I hope he will tell us before he finishes what projections the Treasury has made of the number of potential job losses in the financial services sector if the UK leaves the EU without a deal.

[John Glen]

I will be very happy to address that point in due course, either in my introduction or when summing up.

That work will provide the UK’s financial services sector with much-needed certainty about regulatory requirements in the event of no deal, and ensure that firms can continue to do business in the UK. That is consistent with the Government’s position that, although the best outcome is for the UK to leave with a deal, in the meantime we must—and we will—continue preparing for no deal. I want to underscore the point that the tabling of this statutory instrument was a planned activity that was widely anticipated by the regulator and industry.

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[John Glen]

I cannot give my hon. Friend a precise figure, but it would be a considerable change in the way that the regulators operate and would need a considerable reconfiguration of resources in an ideal scenario. Having had conversations with Sam Woods and Andrew Bailey at the PRA this morning, it is a scenario for which they have made contingency provisions.

The volume of applications received by the UK regulators is expected to increase significantly, as many hundreds—perhaps thousands—of EEA firms submit applications for UK authorisation. That will include applications from large and complex businesses with a substantial UK presence. To minimise the disruption faced by EEA firms and UK businesses and consumers due to the loss of EEA passporting rights in a no-deal scenario, the draft regulations fulfil the Government’s commitment, made on 20 December last year, to introduce legislation to establish a temporary permissions regime.

[Ian Murray]

The Minister said a few moments ago that the regulations would allow UK financial firms to continue doing business as regulated businesses in the UK. Can he say whether they would be allowed to continue doing business in the EU?

[John Glen]

I am sorry if I made a mistake in what I said; the regulations actually allow EEA firms to continue operating in the UK. The reciprocal right of UK firms to operate in the EEA does not exist at the moment. That is a reciprocal decision that we hope will be in the interest of EEA states to make with respect to the comfort of their citizens, who receive financial services from UK firms, but that is not something that has happened yet.

This regime would enable EEA firms operating in the UK, via a passport, to continue their activities in the UK for up to three years after exit day, allowing them to obtain UK authorisation or transfer business to a UK entity as necessary. The regulations would also give the Treasury the power to extend the regime, which is crucial to alleviate the potential scenario in which some EEA firms cannot be authorised within the three-year period. The Treasury would not be able to extend the regime as a matter of course, but only if it considered it necessary to do so. The use of the power would also need to be based on a robust assessment from the FCA and PRA regarding the effects of extending or not extending the period. The length of the regime could only be extended by 12 months at a time. The instrument that would extend the regime would be subject to the negative procedure, and that has been drawn to the special attention of the House of Lords by the Secondary Legislation Scrutiny Committee Sub-Committee B, in a report published last week, on 18 October.

My officials and I judged that choice of procedure to be appropriate, given that the power to extend the regime is conferred by the draft regulations under discussion today, which are subject to the affirmative procedure. I reassure hon. Members that we take parliamentary scrutiny seriously, and although this affirmative instrument introduces the power to pass regulations via the negative procedure, the Treasury believes that if similar provision were to be made by an Act of Parliament, it would also be via the negative procedure, not least because the power is so tightly drawn.

The temporary permissions regime would ensure both that firms can continue servicing UK businesses and consumers for a temporary period after exit day, and that they have appropriate time to prepare for and submit applications for UK authorisation and can complete any necessary restructuring. The PRA and the FCA can manage the expected applications for UK authorisations from EEA firms that were previously operating in the UK via the passport in a smooth and orderly manner.

The draft regulations are a pragmatic response to a complex problem, and are needed to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. I note that the Secondary Legislation Scrutiny Committee report has acknowledged the importance of the regulations in achieving that objective, and I emphasise to the Committee how widely desirable they are both to the industry and to the regulators.

It is also important that industry understands what we are doing, how it will work and why it is necessary. To aid that, the regulations were published in July in draft form along with an explanatory policy note to maximise transparency and understanding before their introduction. The regulators responsible for the authorisation and supervision of financial services firms are now in the process of consulting industry to ensure that the rules that would apply to firms in this regime function properly when the UK leaves the EU.

To conclude, the regulations are essential to ensuring that we have a functioning financial services regime in a no-deal scenario. They provide reassurance for EEA financial services firms, UK businesses and the customers they serve that they will continue to be able to operate here, no matter what the outcome of the negotiations. The City’s success is based on being the most open and dynamic financial centre in the world. Ensuring that EEA financial services firms can continue to operate here after exit day will help to maintain that status, protect jobs and preserve tax revenues to fund our vital public services. I hope that colleagues will join me in supporting the regulations, which I commend to the Committee.

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[Ian Murray]

It is a great pleasure to serve under your chairmanship, Mr Austin, to consider what is, in the Minister’s words, one of the most significant pieces of secondary legislation he has known.

[Ged Killen (Rutherglen and Hamilton West) (Lab/Co-op)]

Does my hon. Friend agree that given that, in the Minister’s own words, there is nothing of comparable significance to this statutory instrument, it is extraordinary that no Scottish National party Member is here to stand up for Scotland’s financial sector?

[Ian Murray]

I am delighted that we managed to contrive that intervention to put on the record that there is no one here from the third party of this House. Under the normal procedures of a Committee of such significance, it gets the right to respond, but has decided to pass up that opportunity. Given what the Minister said about the significance of the statutory instrument, there perhaps should be someone from that party here.

That does not take away from the fact that the statutory instrument says everything we need to know about the Government’s stance on Brexit. They are having to put through a statutory instrument to ensure any EEA firm that does business in the UK will be able to continue to do so after we leave the European Union in the event of no deal. There is utterly nothing from the Government about what will happen in the event of no deal. With the Prime Minister being stabbed in the back and hanging from the noose—in the words of Conservative Back Benchers—it looks increasingly unlikely by the day that we will end up with anything other than no deal or something close to it. What will happen to UK financial services firms that operate in the European Union?

I intervened on the Minister to ask whether he would expand on the fact that the Treasury is doing a significant amount of work. It should be commended for that work, but the Minister was questioned at least a dozen times in the House this week about the impact on jobs and this country’s GDP of a no deal scenario, or indeed a Chequers scenario or a Canada plus plus plus scenario. He fundamentally refused to answer that question.

In my earlier intervention, I asked whether the Minister could tell us the impact on jobs in the financial services sector in the event of no deal, which is what the statutory instrument is about, and he said he would answer in his summing up. I suspect that, by the time he gets to his summing up, he will not have a figure from the Treasury analysis, either because he does not have one, or because it is one that the Government do not want people to hear.

I hope the Chancellor comes to the Dispatch Box on Monday with a copy of the report from the Office for Budget Responsibility and lays out the impact of staying in the European Union, a no deal scenario, which is what the statutory instrument is about, a Chequers scenario, a Canada plus plus plus scenario, an hon. Member for North East Somerset (Mr Rees-Mogg) scenario, and the former Foreign Secretary’s scenario. For our financial services sector, it is merely a couple of reporting quarters away. I hope the Chancellor lays out the impact on jobs of leaving the European Union under all those plans, and everything in between, even if the Government give us just a range.

The Conservative party can fight internally all it wishes about who should have the keys to No. 10 and No. 11 and who should be doing the Brexit negotiations, but my constituency of Edinburgh South relies on financial services. We are talking about tens of thousands of jobs across Edinburgh and Scotland and the United Kingdom, billions of pounds in tax revenue to the Treasury every single year, and the underpinning of this country’s entire exporting system. Even if it were to come to pass, the Chequers plan, which looks as if it is just about as dead as the dodo, does not even mention the services sector. It is 80% of our economy, and it is not even mentioned in the Chequers plan.

[The Chair]

Order. Could we get back to the statutory instrument?

[Ian Murray]

The order is about the ability of EEA companies to continue to trade in the UK in a no deal scenario, but makes absolutely no mention of how UK financial services companies will be able to operate in the EU if we end up in such a scenario, and the statutory instrument has to kick in. It is important to highlight that the Government are doing an awful lot of work preparing for a no deal scenario in one way, but they are not doing it in the opposite way in terms of what the financial services sector has said.

The Chancellor said in a speech last March that he wanted full regulatory alignment between Britain and the EU for financial services post Brexit, which would mean that the statutory instrument would be redundant. However, he has been overruled because that is not what is on the table, either from the EU or from the Prime Minister in terms of her negotiating position in Brussels. If the Chancellor has now been overruled, perhaps the Minister can tell us what the Government’s position is with regard to UK financial services post Brexit in any scenario and the impact that leaving will have on financial services.

Is it possible even to deliver what is being asked for in the statutory instrument? The regulators are hardly well known for their efficiency and speed at the moment in dealing with minor issues regarding some of the scandals and overhangs of the financial services sector disaster in 2008. Paragraph 12 of the explanatory memorandum states:

“The impact on business, charities or voluntary bodies is that firms that currently operate in the UK on the basis of an EEA financial services passport will require a legal expert to examine the new legislation and understand its implications.”

They do not just need a legal expert; they need somebody of a much higher authority, probably a bit closer to God, to understand what the Government’s position will be with regard to the European Union.

Today’s statutory instrument is yet another that I have scrutinised in this place that is packed full of Henry VIII powers—no recourse to Parliament, no recourse to the people, and no recourse to the financial services sector. Has there been any consultation with the financial services sector on this statutory instrument? I expect there has been very little. Has anything been done on whether the regulators can actually deliver some of the stuff in a no-deal scenario? Today, in reports coming out of the Cabinet meeting, the Government are saying that Government-run ships might be needed to bring medicines and goods into the UK in a no-deal scenario—we may need to nationalise the shipping industry. That is coming from a Conservative Government, not the Leader of the Opposition. That is the kind of impact we are going to have if the Government continue on this trajectory of preparing for no deal and turning a blind eye to the interests of this country.

I say to the Minister what I have said to previous Treasury Ministers. I would like him to stand up and promise to my constituents that not one of them will lose their jobs in financial services as a result of the Government’s deal, no deal or otherwise, when we leave the European Union. I would like him to stand up and promise that to my constituents and the country, but I suspect he cannot. The reason is that the Government are jeopardising the whole sector and every single other sector. That is not just my words, but the words of the sector itself. One headline reads: “Finance industry tears into British Government’s Brexit trading plans” with regard to services and financial services. The Government have to go back and reflect on whether they are doing this in the interests of the country or in the interests of their party, and give me a cast-iron guarantee that none of my constituents will lose their jobs.

I am sure we will not be voting against this statutory instrument today because it is incredibly important—hopefully it will be unnecessary. Perhaps in the next few months, the Minister and some of his colleagues will realise that the Government and the country are heading towards the single biggest act of self-harm that the country has ever implemented, and they will put any deal back to the people and get the people to decide whether this is what they want for the future of this country. Anything else would be a total and utter dereliction of duty.

[John Glen]

First, I congratulate the hon. Member for Stalybridge and Hyde on his 13th statutory instrument. I assure him that we will have to celebrate at least his 30th together, in this room or one down the corridor.

As he always does, the hon. Gentleman has raised some very important matters and I will do my very best to respond. The first substantive point is whether these matters should be dealt with through primary or secondary legislation. This instrument and many others are affirmative instruments and we rightly have the opportunity to discuss this one today. That process was a matter of considerable debate during the passage of the Bill and was agreed by Parliament as the only practical way of proceeding. That sets the context for why we are doing that here.

The hon. Gentleman made a number of points about the regime and how it will work, including landing slots. The regulators will have the ability to set landing slots if they so choose. We have been working closely with the regulators on that and expect them to organise and schedule the landing slots in an orderly manner. They are limited because they have to be in a two-year period from exit day. I will come on to the specific points made by the hon. Member for Edinburgh South, but I would stress that these are arrangements for a no-deal scenario. The Government are fully committed to securing a deal—and a deal on financial services that is in the best interests, as I fully acknowledge, of the financial services sector, which has a considerable footprint across the United Kingdom.

The amendments to domestic legislation, both primary and secondary, are consequential amendments to provisions of domestic legislation that reference the EEA passporting system, which will no longer be in effect after exit day. This is essentially a clean-up exercise to remove redundant references to passporting arrangements on the UK statute book. It does not result in any policy change. Provisions in any onshored EU legislation that reference the EEA passporting system will be similarly amended in the relevant individual exit statutory instruments that will be laid as part of the ongoing onshoring programme.

The hon. Member for Stalybridge and Hyde raised the issue of the extension period of around six to 12 months to three years. The extension is necessary to ensure a smooth transition for firms moving from the current system of passporting rights to full UK authorisation. It will bring the statutory deadline set out under the Financial Services and Markets Act 2000 in line with the overall three-year duration of the regime and will help to ensure the overall application process can be managed in an orderly manner. It will not disadvantage firms, as every firm in the regime will be able to undertake the same activities they were entitled to undertake before exit day.

Ultimately, the Government are committed to ensuring a smooth transition for EEA passporting firms to UK authorisation. The determination of the three-year window was made in close consultation with the PRA and FCA, based on estimates that they made of the number of applications they would be likely to receive for authorisation. We believe this is good news for firms. It will not give them uncertainty; it will give them assurance. UK businesses and customers will welcome that.

The hon. Gentleman asked about applications for authorisation that are rejected. I can tell him that we will have further statutory instruments laid later on to enable such firms to wind down their UK-regulated activities in an orderly manner. On the Government’s negotiating objectives for passporting, the Prime Minister has made it clear that Brexit will mean an end to passporting. The temporary permissions regime is about managing that transition. We have set out a proposal for an ambitious future relationship in our negotiations. I will set that out in a moment.

The hon. Member for Edinburgh South raised the issue of an impact assessment of a no-deal scenario. As he readily acknowledges, the Treasury is undertaking a wide range of analyses in support of the negotiations and preparation. He cited various scenarios, all of which have different assumptions according to the people citing them as being desirable. In a no-deal scenario, there are a range of outcomes. We could make assumptions about a degree of hostility or a degree of co-operation from our friends and neighbours in the EU. EEA members would not serve their consumers very well if they did not offer a reciprocal regime. It is impossible to make a meaningful financial or jobs calculation because it is conditional on a range of assumptions and is not possible to set out.

[Ian Murray]

I just do not accept that excuse. The Treasury does projections on every single aspect of its work every single day. Indeed, the financial services sector itself has said that up to 10,000 jobs could go on day one if there is no access to the single market, so let me make it easy for the Minister, as I tried to in the Chamber earlier this week. Will unemployment, as a result of any of the scenarios, go up or down?

[John Glen]

I have stated my and the Government’s position. We are working towards a deal that is in the best interests of the United Kingdom as a whole. There was an awareness of this measure on 20 December last year. It was laid on 11 July. The head of the PRA came to the Select Committee on 11 July and set out how desirable it was. With respect to the wider question of the economic consequences of different outcomes, it would be beyond the scope of this Committee if I set that out here and now. However, I can say that we must have a deal that is right for financial services and allows us flexibility going forward, but this measure is about making sure that we have adequate certainty for consumers who benefit from the financial services of EEA firms, and that is what this is about.

As to what will happen to UK firms that passport into the EEA , the Government, as I said, can take legislative action only in relation to EEA firms that passport into the UK. We cannot, through unilateral action, influence the status of UK firms operating in the EEA. However, as I said, it is hugely desirable for their consumers for them to do it. That is why we really want to avoid that situation and agree a deep and special partnership with the EU, as well as an implementation period, which is important for both.