Closure of Santander Banks
John Glen Excerpts(5 years, 2 months ago)
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The Economic Secretary to the Treasury (John Glen)
I commend the hon. Member for Lanark and Hamilton East (Angela Crawley) for securing the debate. Just before I came over from the Treasury, I noticed that there will be a three-hour debate on the matter next Thursday, in which rather more Members will be able to contribute. I know that bank branch closures can be difficult for the communities affected, and particularly for the most vulnerable customers. The Government are keenly aware of that, and later I will go into more detail on what support is in place for those customers. After lobbying from SNP Members, I had the opportunity to visit Scotland last autumn, when the Royal Bank of Scotland was carrying out a review, so I am very engaged in this matter.
It is clear that the way we bank is changing. More and more of us—the process is very rapid—are choosing to bank online or through an app, and fewer people are choosing to visit a traditional branch, as we used to. Between 2011 and 2016, branch usage declined by 42%, whereas mobile banking usage increased by 354% between 2012 and 2017. That is unprecedented consumer change, and banks have obviously had to adapt to remain competitive in the circumstances. That adaptation has involved virtually all the main banks taking tough decisions about their respective branch networks.
Decisions on branch networks can be unpopular, and I understand why, but they are not ones that the Government can make. To be fair, the hon. Lady recognised that in her observations on the Santander decision. Branch network decisions are commercial decisions for the bank’s management team, and the Government do not intervene in them because we believe that commercial firms are best placed to make commercial decisions. The flexibility to respond to changes in the market is what makes the UK’s financial services sector one of the most competitive and productive in the world.
Dr Philippa Whitford (Central Ayrshire) (SNP)
The closure in my constituency will be the fourth bank that my town has lost, and the town has a high proportion of retired people who do not bank online or use their phone for contactless payments. My mother will never bank online. It is really two decades too early to withdraw these banks. Their ATMs go, too, so there is a problem for people who want cash in our town.
John Glen
I will talk in a few minutes about the ways in which we have intervened to try to find solutions to the circumstances in which the hon. Lady’s constituents find themselves. As I am sure those Members who have spoken are aware, the UK financial services sector is a whole-UK phenomenon, and Edinburgh in particular is important to financial services. The Government want to protect the sector, which is why we do not make the direct intervention that some may be looking for.
The Government firmly believe that the impact of branch closures should be understood, considered and mitigated, where possible, so that all customers, wherever they live, can continue to access over-the-counter banking services. The first step is to ensure that customers feel informed and supported when a branch closes, which is why the Government support the industry’s access to banking standard. All the major high street banks have signed up to the standard, which commits banks to a number of outcomes when a branch closes. First, they commit to give at least three months’ notice of a closure and explain their decision clearly; secondly, they commit to consider what services can still be provided locally, and communicate alternative ways to bank clearly to customers; and thirdly, they commit to ensure that support is available for customers who need extra help to bank online or, where that is not possible, to access services at the local post office. The standard is not just a checklist that banks need to go through; it is about being considerate of customers’ concerns when a branch closes.
In the case of Santander, I am pleased to inform the House that it took a number of steps when announcing the restructure of its branch network. Not only did it proactively contact all customers, as per the requirements of the standard, but it set up a dedicated phone line for customer queries about the changes for the duration of the closure programme. Furthermore, its branch teams will be proactively contacting known vulnerable customers to ensure that they are properly supported and advised on how to continue to bank locally. This includes all customers over the age of 75 who have visited the branch in the past 12 months, as well as those customers who have sight impairments or mobility issues, power of attorney, or are known by the team to be vulnerable. Where needed, this support can include: walking customers to the post office to introduce them to the post office team and demonstrate how they can carry out their banking; introducing them to staff in a neighbouring Santander branch; or helping customers to switch their account to another nearby provider. The teams will also take the time to talk to vulnerable customers about how they bank, changing the frequency of their statements and ordering cash cards, and to demonstrate how to use ATMs and contactless cards.
I acknowledge the point made by the hon. Member for Central Ayrshire (Dr Whitford). My father died a couple of years ago and I have been trying to migrate my mother to do more of this stuff online, otherwise the burden falls to me. I recognise that there are limits to that process but, in this case, a great deal of sensitivity has been shown to help customers to adapt to the new environment.
Angela Crawley
I appreciate what the Minister has said about the measures that Santander has taken. It is very noble of the bank to offer to walk someone to a post office—or to take them on the train to Glasgow in my case—but I am not hearing from him what the Government are doing to regulate financial services when they continually close branches across the UK. That is what I want to hear from the Minister.
John Glen
I promise the hon. Lady that I will come on to talk about that. It is about the relationship between the banks and the post office in the instance where it is the last bank that is closing. I am not here to defend the commercial decisions of banks, but I do think that the measures taken in this case look quite comprehensive with respect to dealing with vulnerable customers.
Liz McInnes
I am grateful to the Minister for giving way. He paints a rosy picture of what Santander is doing to help vulnerable customers, but the fact is that it told my constituents in Middleton that they could bank at Middleton post office, which is earmarked for closure and will be moving into a branch of WHSmith, so in my constituency it most certainly is not in touch with what is going on in the town centre.
John Glen
I am not seeking to paint a rosy picture. I am setting out plainly the facts about what the bank has undertaken. I obviously cannot account for the way in which every single branch has handled things. I note the hon. Lady’s observations and I am very happy to look into what she says, or to make a link to Santander for her.
I hope that the hon. Lady will agree that this support demonstrates that there is a commitment to the spirit, not just the letter, of the standard, which is warmly welcomed. To ensure that all banks meet the requirements of the standard, the Lending Standards Board monitors and enforces it. Last year, it published its annual report on banks’ adherence to the standard and found that, overall, firms’ engagement was positive and genuine. However, there were some areas where banks could do even more, and the Lending Standards Board is using the full range of tools and sanctions at its disposal to work with banks where they fall short.
Marion Fellows (Motherwell and Wishaw) (SNP)
I thank the Minister for giving way. I wish to raise again the kind of work that Santander is doing in introducing people to post offices. Is he aware of the appallingly low rates of pay given to sub-postmasters for doing banking work, especially in places where there are no banks left?
John Glen
I am aware of the concerns raised in that area and I have met postmasters about that. That area is the responsibility of my colleagues in the Department for Business, Energy and Industrial Strategy, but I note the point the hon. Lady has made.
I have recognised when I have participated in debates over the past 13 months that there have been some concerns around the provision of post office banking services. The Government recognise that some customers just prefer, or need, to carry out their everyday banking over the counter. That is why we support the Post Office’s commercial agreement with 28 high street banks and building societies, which enables 99% of personal banking customers and 95% of small business banking customers to carry out their everyday banking at one of the 11,500 post office branches. While I concede that the range of services offered by post offices may be more limited than that offered in a traditional bank branch, the services provided through the extensive post office network ensure that essential banking facilities, such as depositing and withdrawing cash, or depositing a cheque, remain available in as many communities as possible.
Marion Fellows
I know that this is a Department for Business, Energy and Industrial Strategy fiefdom, but the Minister is saying that banks are closing and post offices are good, yet post offices are also closing simply because of the low return that sub-postmasters are receiving for doing banking business. That takes so much of their time and they are earning much less than the minimum wage per hour.
John Glen
I note the points that the hon. Lady raises but, as I have said to her, I cannot comment on this matter directly from my vantage point in government. However, I would just point out that since 2010, post office branch numbers have been at their most stable for decades, and 99.7% of the national population now lives within 3 miles of a branch and 93% lives within a mile of their nearest post office. I am very sympathetic to discussions of rurality, given the nature of my constituency, and almost 99% of the rural population live within 3 miles of a post office.
The Government believe that too few customers know about these excellent services so, at my predecessor’s request, UK Finance and the Post Office have been working together to launch a five-point action plan to raise awareness of post office banking services. Members may have seen posters in post offices or advertisements for the services in papers, or noticed the Post Office logo on their bank’s leaflets and websites. When I was new to office last year, there were concerns about the execution of that relationship, and I followed up and wrote to both parties to ask for assurances about the delivery of the programme.
The Government cannot reverse the changes in the market and in customer behaviour, nor can they determine firms’ commercial strategies in response to those changes. Today’s debate has focused on the loss of traditional banking channels, but it is important that we do not lose sight of a range of innovations in the retail banking market. They are bringing real benefits to consumers of all types, as I saw for myself on my visit to Scotland last summer.
No matter how the market changes, however, the Government will continue to take positive action to maintain access to vital banking services and ensure that banks support communities across the UK when their local branches close.
Dr Whitford
I thank the Minister for giving way.
The banks that have already left my town did not leave any ATM behind. Because of the low fees earned through the LINK system, more and more ATMs in rural locations, particularly across Scotland, are also closing. Many people are not remotely ready to live in a totally cashless system, so is there anything that the Government can do at least to ensure that there are ATMs in every community?
John Glen
I am grateful for that intervention. The Government recognise that widespread free access to cash remains extremely important in the day-to-day lives of many people up and down the country, and LINK, the UK’s cash machine network, is committed to maintaining free access to cash through its extensive footprint of ATMs. The Government set up the payment systems regulator to ensure that the UK’s payment systems work in the interests of their users. The regulator is closely monitoring the situation and holding LINK to account for its commitments to maintain the broad geographic spread of ATMs across the UK.
I draw the attention of the House to the debate to which I envisage I will be replying next Thursday. I hope that it will give hon. Members an opportunity to make further points, which I will be happy to take on board.
Question put and agreed to.
Contingent Liability
John Glen Excerpts(5 years, 2 months ago)
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The Economic Secretary to the Treasury (John Glen)
I can today confirm that I have laid a Treasury minute informing the House of a contingent liability that HM Treasury has taken on in relation to the sale of certain NRAM loans acquired by HM Treasury during the financial crisis. Although the sale of those loans was completed in 2016, the Government are now amending the contractual protections that were provided to the purchaser, in order to facilitate the potential future sale of NRAM.
On this occasion, due to sensitivities surrounding the commercial negotiations, it was not possible to notify Parliament of the particulars of the liability in advance of the amendments to the contractual protections being agreed with the beneficiaries.
The contingent liability relates to certain market standard time and value capped warranties and indemnities confirming regulatory, legislative and contractual compliance. The maximum contingent liability arising from these warranties and indemnities is £1 billion.
I will update the House of any further changes in respect of NRAM as necessary.
[HCWS1299]
Treasury
John Glen Excerpts(5 years, 2 months ago)
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John Glen
The SI also retains exemptions in MAR—and amends the scope of the exemptions to UK-only—that relate to certain trading activities that cannot be enforced against the regulation.
[Official Report, Thirteenth Delegated Legislation Committee, 23 January 2019, c. 4.]
Letter of correction from the Economic Secretary to the Treasury:
An error has been identified in my contribution to the debate on the draft Market Abuse (Amendment) (EU Exit) Regulations 2018 and draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019.
The correct statement should have been:
Draft Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019
John Glen Excerpts(5 years, 2 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019.
It is a pleasure to serve under your chairmanship, Sir Christopher. As part of contingency preparations for a no-deal scenario, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments before the House under the European Union (Withdrawal) Act 2018 to deliver that, and a number of debates on statutory instruments have already been undertaken in this place and in the House of Lords. The SI being debated today is part of that programme and was debated in the House of Lords yesterday.
The SI will fix deficiencies in UK law for financial markets and insolvency regulations to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the withdrawal Act—providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context. The instrument being debated today concerns insolvency-related protections that are provided to systems and central banks under the EU settlement finality directive. “Systems” for these purposes are entities such as central counterparties, central securities depositories, and payment systems. These systems provide essential services and functions relied on by the financial services sector. For example, central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. They guarantee the terms of a trade even if one party defaults on the agreement, reducing counterparty risk.
Under the SFD, a European economic area-based system can be designated by its member state’s designating authority. Once a system is designated, funds or securities placed in that system by a system user cannot be clawed back in the event of the system user going into insolvency. This framework is intended to benefit both systems and their users. In particular, a system may provide services on more favourable terms to a user if it has SFD protections in place. In certain cases, membership of a system is contingent on those protections being provided, as that is an essential tool for the system to manage risks. Designation is therefore important, as it facilitates the smooth functioning of, and confidence in, financial markets.
The Bank of England and the Financial Conduct Authority are the designating authorities in the UK. When the Bank or FCA designates a system, it currently informs the European Securities and Markets Authority—ESMA—which places it on the EU register of designated systems. The SFD provides similar protections to central bank functions across the EEA. Collateral received by an EEA central bank in accordance with its functions, such as emergency lending, cannot be clawed back if the relevant counterparty to the central bank is subject to insolvency proceedings. The relevant EU laws—the SFD and the financial collateral arrangements directive—are implemented in the UK via the Financial Markets and Insolvency (Settlement Finality) Regulations 1999, the Companies Act 1989, the Financial Collateral Arrangements (No. 2) Regulations 2003 and the Banking Act 2009.
Should the UK leave the EU without a deal or implementation period, there will be no framework for the UK to recognise systems designated in EEA jurisdictions, which in turn may risk the continuity of services from those designated systems for UK firms. This SI introduces changes to mitigate risks to UK firms, to ensure that settlement finality protections continue to operate effectively following the UK’s withdrawal. First, the SI introduces a UK framework for designating any non-UK system. To do that, the Bank of England’s existing powers to designate and charge fees will be expanded to non-EEA systems, so that they can be designated under UK law. Moreover, the Bank of England will be able to grant protections to non-UK central banks, including EEA central banks, that already receive protections under the SFD. That will help to maintain the effect of the current framework, providing continuity to UK firms accessing systems and central banks, while assisting UK firms in accessing the global market. In making those changes, the SI also maintains existing designations for UK systems that were made by the Bank of England before exit day.
Secondly, the SI establishes a temporary designation regime. That provides temporary designation for a period of three years to existing designated EEA systems that intend to be designated under the new UK framework. The purpose of temporary designation is to allow time for designation applications to be processed by the Bank of England, while ensuring continuity of access for UK firms to relevant EEA systems immediately after exit day. The SI also grants the Treasury the power to extend that period, should the Bank of England need more time.
The Treasury has been working very closely with the Bank of England and the Financial Conduct Authority in drafting this instrument. The Treasury published the instrument in draft, alongside explanatory notes to maximise transparency to Parliament, industry and the public, on 31 October 2018. The Treasury has engaged with the financial services industry, in particular systems, on the SIs and will continue to do so going forward. Last Wednesday the Treasury also published the impact assessment that accompanies the SI. The impact assessment confirmed that there is no impact to UK firms as a result of bringing forward this legislation. However, there will be costs to EEA firms, which will need to familiarise themselves with the UK regime and pay fees to the Bank of England in order to be designated.
In conclusion, the Government believe that this legislation is necessary to ensure the smooth functioning of financial markets in the UK, if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the draft regulations, which I commend to the Committee.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Aberdeen North for raising those issues. I will start with the Opposition Front-Bench spokesman’s opening comments. He questioned the appropriateness of our journey through these many SIs. It is profoundly concerning to me that we have such a high volume to deal with every week. All I can do is ensure that the work has been done on the impact assessments, and that the engagement with industry has been thorough and its concerns responded to. I reassure him that, clearly, we are within the scope of the powers under the legislation.
Hon. Members asked a number of specific questions, which I shall try to address. The hon. Gentleman expressed concern about the provision being applicable only in a no-deal situation. I can confirm the SI is just for a no-deal scenario. The temporary designation regime allows EEA systems that currently benefit from UK protections under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 by virtue of the UK’s membership of the EU to continue to do so after exit. As the hon. Member for Aberdeen North pointed out, the Bank of England clarified on 24 January which have already expressed a desire to join.
Kirsty Blackman
Can the Minister explain whether, in the event of the Prime Minister’s deal getting through and there being some sort of implementation period, he envisages a transitional regime or whether everything will just go ahead as it is currently?
John Glen
I am very happy to respond. In the situation that we have a deal, which is what the Government wish to happen, we would enter the implementation period. That means we would have continuity of current arrangements until we secured the enhanced equivalence solution, which we would be working towards, by the middle of next year, before the end of the implementation period.
The hon. Member for Stalybridge and Hyde expressed concern about the cost. We estimate that 126 EEA firms benefit from UK protections via the SFD and would therefore be in scope for this regime. Each firm is expected to have a one-off familiarisation cost of £210, so the total cost would be £27,000.
The hon. Member for Aberdeen North asked about the extension of the Bank’s power to designate non-EEA systems, which she posited was a significant policy change to the EU SFD and therefore incompatible with the general onshoring approach. The key point is that if, in the undesirable circumstances that we leave the EU with no deal, the UK becomes a third country and therefore is treated the same as any other non-EU jurisdiction, the new regime would need to reflect that. The SFD is a directive rather than a regulation and so allows for a degree of member state discretion on transposition into national law. I suspect that is why there is the impression of some arbitrary decision being taken.
A number of member states, including the UK, have in place or are working towards a framework for designating non-EEA entities. I would therefore submit that the Bank’s power to designate non-EEA systems is not a significant policy change from how the SFD framework currently operates in the EU at member state level. I note the hon. Lady’s observations about how her approach would differ, in that, if changes were made to the EU directive, we would submit another SI. I cannot give her the explicit rationale for why we did not adopt that approach, but I am happy to write to her on that point.
The hon. Lady also raised concerns about who had looked at the SI and asked about hits on the website. I do not have that data. I do not know whether it has been collected; I do not think it has. We engaged with stakeholders, including the financial services industry, while drafting these SIs, and they were published in advance. We shared the draft legislation with industry to allow stakeholders the opportunity to familiarise themselves with our approach and to test our understanding of the impact, and it was welcomed and supported. I cannot give the hon. Lady a precise answer about the iterations leading to the final SI being laid before the House, but I can say that there are no concerns about where it has ended up.
The hon. Lady asked about my view on the likelihood of no deal and whether it has changed. Obviously, we cannot completely rule out the possibility that the UK will leave the EU without a deal, but from my perspective as a junior Treasury Minister, it is important that I deliver a fully functioning legislative and regulatory regime come what may, and that is what I am determined to do. We have engaged with stakeholders to ensure that happens. The Commons continues to debate and, I hope, approve SIs relating to no deal, but I think the process the Government are going through is well known.
The hon. Member for Stalybridge and Hyde asked what the procedure would be for extending the temporary designation regime. Under this instrument, the Treasury will be able to extend the temporary designation regime by an additional 12 months beyond the initial three-year period. We would do that by laying a negative SI, given that we would not be substantively changing anything; it would be an administrative change. We would lay a written ministerial statement before both Houses in advance of laying that SI, in order to inform them of the situation.
Jonathan Reynolds
I suspect that the Minister may need some inspiration to answer this question, but could that be a cumulative process? Could it be used only once, or could a series of annual negative SIs be laid to prolong the process in perpetuity?
John Glen
I am grateful for the advice I have received, mystically, from behind me. It could be a multiple approach, but, again, that would be justified in the written ministerial statement. It is quite difficult to see how that would go on in perpetuity, but if there was a justification from the Bank of England, that would be made clear and that would happen.
Kirsty Blackman
As the Minister managed to get divine inspiration for that question, he might manage to get some for this one. He has talked about the cost to companies of having to make these changes and go through the registration process. I failed to ask about, and the Minister did not mention, the additional cost that the Bank of England might incur from administering the transitional designation regime.
John Glen
I am very happy to write to the hon. Lady about that. I think the cost would be minimal, and it would be in the context of the Bank’s overall work. I do not know whether the cost relevant to this directive can be isolated, but I will write to her in general about the resourcing of the work of the Bank of England.
The hon. Lady also asked whether the Government have decided not to recognise systems that are recognised by EU authorities. The mutual recognition process works by virtue of the UK being a member state and hence subject to the settlement finality directive. I may have raised this point earlier. When we leave the EU, we will no longer be subject to the SFD, so this is not a policy decision; it is a necessity to provide continuity in respect of EEA systems. That is why the temporary designation regime is being created.
There is also the question of our overall aspiration. Clearly, we hope to secure a deal, and therefore we have ambitious plans subsequent to that, during the implementation period, to have an ambitious arrangement with the EU where we have strong relationships, regulator to regulator. This SI is essential for ensuring that we continue to have an effective framework for financial markets insolvency in the UK in a no-deal scenario. I hope this sitting has been informative and that the Committee will join me in supporting this SI.
Question put and agreed to.
Draft Solvency 2 and Insurance (Amendment, Etc.) (EU Exit) Regulations 2019
Draft INSURANCE DISTRIBUTION (Amendment) (EU EXIT) Regulations 2019
DRAFT FINANCIAL CONGLOMERATES and Other Financial Groups (Amendment Etc.) (EU Exit) Regulations 2019
John Glen Excerpts(5 years, 2 months ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019.
The Chair
With this it will be convenient to consider the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019 and the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019.
John Glen
It is a pleasure to serve under your chairmanship, Sir Henry.
As the Committee will be only too aware, the Treasury has been undertaking a programme of legislation to ensure that if the United Kingdom leaves the European Union without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018 to deliver that. Debates on such SIs have already taken place in this place and in the House of Lords, and the SIs we are debating are part of that programme. We have at least 13 more to come.
The draft SIs before us will fix deficiencies in UK law on the prudential regulation of insurance firms, insurance distribution and financial conglomerates to ensure that they continue to operate effectively post exit. The approach taken in the legislation aligns with that of other SIs being laid under the EU (Withdrawal) Act, providing continuity by maintaining existing legislation at the point of exit but amending it, where necessary, to ensure that it works effectively in a no-deal context.
Three SIs are being debated today: draft amendments to the Solvency 2 regulations, the financial conglomerates and other financial groups regulations, and the insurance distribution regulations. The Solvency 2 regulations set out the prudential framework for insurance and reinsurance firms in the EU. Prudential regulation is aimed at ensuring that financial services firms are well managed and able to withstand financial shocks, so that the services that they provide to businesses and consumers are safe and reliable. Solvency 2 is designed to provide a high level of policyholder protection by requiring insurance and reinsurance firms to provide a market-consistent valuation of their assets and liabilities, to understand the risks that they are exposed to, and to hold capital that is sufficient to absorb shocks. Solvency 2 is a risk-sensitive regime in that the capital that a firm must hold is dependent on the nature and level of risk that a firm is exposed to.
The insurance distribution regulations set standards for insurance distributors as regards insurance product oversight and governance, and set information and conduct of business rules for the distribution of insurance-based investment products. The financial conglomerates and other financial groups regulations set prudential requirements for financial conglomerates, or groups, with activities in more than one financial sector.
The three draft SIs that we are debating amend those regulations so that they function properly in a no-deal scenario. The amendments to be made by the draft Solvency 2 regulations, first, remove references to the European Union and EU legislation, and replace them with references to the UK and UK legislation. It is important to stress that the high prudential standards of Solvency 2 are not being altered. Changes are being made to ensure that the Solvency 2 regime continues to operate as originally intended once the UK is outside the EU.
Secondly, the draft statutory instrument alters the arrangements for the regulation of cross-border European economic area groups of insurance and reinsurance firms that provide services in the UK. As in other areas of EU regulation, insurers and reinsurers are subject to the EU’s joint supervisory framework. That enables the requirements of Solvency 2 for a cross-border EEA insurance or reinsurance group to be applied to the group, with one EEA supervisor allocated lead responsibility for supervision of the group, in addition to supervision of solo firms by their respective EEA supervisors. Supervisory co-operation takes place through a college of supervisors in which all the interested EEA supervisors take part.
After exit, however, in a no-deal scenario, the EU has confirmed that it will treat the UK as a third country and that the UK will be outside the joint supervisory mechanisms that are the basis for the current treatment of groups in the EEA. Cross-border EEA groups may therefore become subject to group supervision by both UK and EEA supervisory authorities in the absence of equivalence decisions.
The statutory instrument will transfer responsibility for making equivalence decisions in relation to third-country regimes. Currently, a third country’s regulatory or supervisory regime may be deemed by the European Commission to be equivalent to the approach set out in Solvency 2. After the UK leaves the EU, Her Majesty’s Treasury will make equivalence decisions for third-country regimes.
The statutory instrument will transfer responsibility for a number of important technical functions from the EU authorities to the UK. Most significantly, the risk-free rate—the rate that insurance and reinsurance firms must use to value their liabilities—will be transferred from the European Insurance and Occupational Pensions Authority to the Prudential Regulation Authority. The PRA is the most suitable UK body to undertake the technical function of compiling the risk-free rate. It will also take on the responsibility of publishing the risk-free rate. In addition, responsibility for making binding technical standards, which are currently developed and drafted by the EU supervisory agencies, will be transferred to the PRA, in a manner consistent with the approach taken in the other statutory instruments that we are laying under the withdrawal Act.
The statutory instrument removes obligations for EU competent authorities to share information with each other. If the UK leaves the EU without a deal, it will no longer be appropriate to require UK regulators to share information with EU regulators. UK regulators will continue, however, to be able to use their discretionary powers to share information when doing so might be necessary to ensure that supervisory responsibilities are carried out effectively.
Preferential risk charges for certain assets and exposures that originate from within the EEA, and which are held by UK insurance and reinsurance firms, will be removed. A UK firm’s exposures from the EEA will now be treated in the same way as exposures from any other third country. The EU has confirmed that it will treat UK exposures as third-country exposures if we leave the EU without an agreement.
I will now turn to the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019. This instrument fixes deficiencies in the regulations and relates mostly to removing inappropriate cross-references to EU bodies and legislation. The instrument transfers to the Financial Conduct Authority the power to make technical standards for a template presenting information about general insurance policies—a standardised document to help customers compare policies and make informed decisions. That power is important as it enables the Financial Conduct Authority to update the document in the future, to ensure it continues to deliver useful information for consumers.
The instrument also transfers relevant legislative functions to the Treasury. Those functions give the Treasury the powers to make regulations about conflicts of interest, inducements, assessments of suitability, appropriateness and reporting to customers, and specifying principles for product oversight and governance.
Finally, I will address the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019. This statutory instrument makes changes to the definition of “financial conglomerate”. Under the EU financial conglomerates directive, a financial conglomerate is defined as a group with at least one entity in
“the insurance sector and at least one…within the banking or investment services sector”.
One of those must be located within the EEA. The others can be located anywhere in the world. This statutory instrument will amend the geographical scope of the definition, so that one entity must be located within the UK, rather than the EEA, to be subject to the UK regime.
This statutory instrument amends the definition of “competent authority” so that it no longer includes regulators based in the EEA. It transfers a number of functions from the EU authorities to the UK regulators. The European financial conglomerates directive requires EU authorities to publish and maintain a list of financial conglomerates, for example. That function will now be carried out by the FCA and the PRA. In addition, as with other financial services files, the responsibility for developing binding technical standards will pass from the European supervisory authorities to the appropriate UK regulator.
Finally, as is the case for the statutory instrument that amends the Solvency 2 regulations, this statutory instrument removes obligations for EU competent authorities to share information. If the UK leaves the EU without a deal, it will no longer be appropriate to require UK regulators to share information with the EU. However, the UK regulators will continue to be able to use their discretionary powers to share information where this might be necessary to ensure that supervisory responsibilities are carried out effectively.
The Treasury has been working closely with the PRA and FCA in the drafting of these instruments. It has also engaged the financial services industry on these statutory instruments and will continue to do so going forward. The Committee will have heard from the Association of British Insurers, in a letter of 1 February, how meaningful that engagement has been. In late 2018, the Treasury published these instruments in draft, along with explanatory policy notes, to maximise transparency to Parliament and industry.
Sir John Hayes (South Holland and The Deepings) (Con)
On the issue of familiarisation costs, which are dealt with in the SI and are specified more precisely in the explanatory memorandum, it is clear that business is impacted and will endure what are said to be one-off costs in the notes. Will the Minister say a word about that to assuage any doubts?
John Glen
My right hon. Friend is right to draw attention to the impact assessment, which covers two of the three statutory instruments. One of them, of course, did not require one because of the de minimis impact. We have done our very best to be as transparent as possible and to quantify those. In the vast majority of cases, it has been about one-off familiarisation costs rather than an enduring burden. I thank my right hon. Friend for giving me the opportunity to clarify that.
In summary, the Government believe that the proposed legislation is necessary to ensure that insurance and reinsurance firms, insurance distributors and financial conglomerates continue to operate effectively in the UK, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the regulations. I commend them to the Committee.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their thorough examination of these three statutory instruments, and I note their consistent objection to the use of that mechanism to deliver such changes. All I can say is that the Government have pursued the changes consistent with the powers in the Act, and that great care and diligence have been taken to liaise with regulators and the industry, and to engage with industry participants, as I think the ABI has confirmed.
Of course, the process is designed as insurance in the circumstances of no deal; it is not the Government’s policy that the regulations will need to come into effect. I fully accept the point made by the hon. Member for Stalybridge and Hyde about the broader need to look at the future in a fair way, and the concerns of the London Market Group representative, whom I will meet tomorrow to look at global financial partnerships. The Treasury is not just focused on no-deal planning.
Both hon. Members raised a number of specific points, which I will seek to address as succinctly as I can. They expressed concern about relying on secondary legislation to push through controversial legislation. I re-emphasise that the powers granted in the European Union (Withdrawal) Act 2018, under which the majority of exit SIs are being made, have restrictions to ensure the appropriateness of their use. The central objective of the SIs is to provide legislative continuity, which is what market representatives have sought. Such SIs are, of course, subject to the usual scrutiny provided by the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee. In addition, the Treasury has taken the step of publishing drafts of financial services SIs in advance of laying them before the House, to maximise transparency.
The hon. Member for Stalybridge and Hyde asked about equivalence and whether it was sufficient to protect UK industry. I agree that equivalence is not a sufficiently good outcome, and that is why the Government are working for a deal that aims for enhanced equivalence, which we would embed in the new relationship with the EU by June next year. Obviously, however, if there is no deal, we have to cover ourselves.
The hon. Gentleman also asked whether Solvency 2 can still operate effectively if preferential treatment for EU assets is retained, and whether removing preferential treatment is a political decision that the Government have made. The Commission has made clear that it intends to treat the UK as a third country after exit in the absence of a withdrawal agreement, and therefore we expect EEA regulators to remove current preferential treatment. It is only appropriate for the UK, in the absence of a reciprocal agreement, to treat EEA assets and exposures in the same way. We recognise that that may have a day one capital impact on insurers with EEA assets and exposures; that is why we intend to provide regulators with a transitional tool, as I discussed at the Treasury Committee last Tuesday morning, to ensure that firms have sufficient time to comply with changes overall with respect to legislation and rules.
The hon. Gentleman reflected on the concerns that the ABI expressed in its letter about too much power being transferred to the PRA for Solvency 2. The PRA has the expertise and resources to take on the technical functions being transferred from EU institutions and to ensure that they are met on an ongoing basis. There are existing safeguards within the Financial Services and Markets Act 2000 that place conditions on the PRA’s ability to exercise its powers. The Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 also require the Treasury to approve changes to technical standards by regulators to correct any deficiencies before exit day.
The hon. Gentleman asked which functions would come to the Treasury. Wherever the Commission exercises a legislative function, that is transferred to the Treasury, which can make changes to these regulations only through SIs in Parliament, where parliamentary approval will be required. On the lack of democratic accountability for the PRA, the changes are not intended to be long term; regulators, the Treasury and industry will work together to address the framework in the long term.
That will be a significant change, and one that I hope we do not pursue; I think there is a lack of understanding about how significant that change would be. However, we would do everything we could to ensure that we set that framework in the right way. Accountability to Parliament will be a priority whatever happens, and only functions carried out by EU regulators are being transferred. The hon. Member for Stalybridge and Hyde also asked why there cannot be more specificity regarding the relevant competent authority with reference to the conglomerates. The legislation specifies that it is either the PRA or the FCA, depending what type of regulated firm is covered, which fits with the UK’s existing framework.
The hon. Member for Glasgow Central again reflected on the ABI’s concerns, this time about the inefficiencies being created by making cross-border insurers subject to dual group supervision. We recognise that dual regulation may create additional costs for UK insurers that operate across the UK-EU border. However, that is a consequence of the UK’s decision to leave the EU rather than of this instrument, and in applying Solvency 2 in a UK-only context, the PRA needs to apply group supervision at the UK level, as it can no longer participate in the formal college of EU supervisors. Basically, the PRA will need to take account of the systemic risks that exist, and ensure they are covered for.
The hon. Member for Stalybridge and Hyde asked why insurance-based investment product definitions are being changed. The definition is not being changed; it will operate as before, but references to EU institutions and EU law need to be fixed. If there are outstanding issues on that point, I am very happy to correspond with him.
The hon. Member for Glasgow Central challenged the need for the Government to take additional powers in the draft insurance distribution SI. The instrument transfers relevant legislative functions of the European Commission, contained within the insurance distribution directive, to the Treasury. As the hon. Lady clearly understands, the Treasury has the powers to make those regulations about conflicts of interest, inducements, assessments and so on. They are important, because the IDD came into force only last year, and as such the Commission held those powers to ensure that the regulatory regime for the sale and distribution of insurance could be updated. Transferring them to the Treasury is in line with the Government’s standard approach to such powers as part of this process.
The hon. Lady asked about the resourcing of the PRA. As we have also discussed before, regulators are independently funded by levies on industry. The regulators have prioritised Brexit; I seem to recall that the FCA now has 158 full-time equivalents, up from 28 in March last year. I meet with Andrew Bailey regularly. I met him this morning and he confirms that those resources are in place, but if more is required he would be at liberty to raise a levy to secure those.
The hon. Lady referred to consumer welfare concerns about the IDD. I can reassure her that consumers will not lose out. There is no substantive change in the policy requirements on firms under this SI. Firms will still be required to prepare the standardised statement, with the same content as is currently the case and, indeed, as industry wishes.
I hope that I have dealt with the substantive points that were raised. I have a lot more material that I could go through, but I think I have faithfully addressed what was said. I hope that the Committee has found the sitting informative, and will be able to join me in supporting the three statutory instruments.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019.
Draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019
Resolved,
That the Committee has considered the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019.—(John Glen.)
Draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019
Resolved,
That the Committee has considered the draft Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019.—(John Glen.)
Equitable Life
John Glen Excerpts(5 years, 3 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
It is a privilege to respond to the debate. First, I congratulate my hon. Friend the Member for Harrow East (Bob Blackman) and the hon. Member for Leeds North East (Fabian Hamilton) on their tireless work on this issue, which has helped the Government to achieve so much. I attended a meeting of the all-party parliamentary group for justice for Equitable Life policyholders last September, and the respect of colleagues on both sides of the House for those Members’ work was clear.
This well-documented topic has been explored once again in detail today, with 10 eloquent and measured speeches by Members on both sides of the House. I need to declare an interest. My father worked in a glasshouse nursery all his life and paid in modest sums each month to Equitable Life. He received the compensation of 22.4% to a bond that he was paying into. Sadly, he died of mesothelioma aged 69, just two years ago. I know that it was a matter of grave concern for him, and he took the money and invested it somewhere else. I am very familiar with the long history of this case.
I want to take this opportunity to remind Members that, on this issue, this Government have taken more action than any previous one. Using the ombudsman’s findings, we determined the reduced returns that policyholders received to be £4.1 billion. That is significantly more than the £340 million arrived at by the previous Labour Government in the Chadwick review, which was then dismissed. That increase is because we generously assumed that every new investor consulted the incorrect regulatory returns and, on the sole basis of those returns, made an investment.
In 2010, we announced that up to £1.5 billion would be made available for payments. Those payments were tax-free, which increased their value even more. Out of that £1.5 billion, following representations from groups such as the Equitable Members Action Group, we decided to pay the group of with-profits annuitants in full. The total cost of those annual payments was estimated to be around £625 million. As several Members have mentioned, there is an additional £100 million contingency fund in place to provide for annuitants should they live longer than their actuarial forecast, and we expect the contingency to be drawn on from the middle of the next decade. The remaining funding was distributed pro rata to remaining eligible policyholders. The scheme operated successfully for around five years, and in 2016 the operation was wound down.
There has, reasonably, been a degree of repetition in the asks made today, and three key points were raised. I have listened closely to those representations, and I would like to deal with some of them in turn. First, I have received suggestions that all policyholder records should be retained indefinitely, in case further payments are made. There has been correspondence between the Treasury and the APPG on that matter, and I can assure Members that relevant records are currently retained and will continue to be as long as it is legal. I can reassure the House that there are no plans to destroy any records.
Secondly, I am aware that some are dissatisfied with the £1.5 billion and suggest that it is incompatible with the ombudsman’s report. However, Members will be aware that the ombudsman wrote to the APPG on that issue and said that the Government’s decisions could not be said to be incompatible with her report. That spending decision was taken in the wider context of other spending priorities. I recognise that there is a whole range of opinions about spending priorities. That is what we do—we make relative decisions. This decision needed to be fair to the taxpayer, who funded these payments, and £1.5 billion was, on balance, judged to be the most appropriate figure.
I want to be clear: when this settlement was made, it was not subject to future review by the Government. I note the inference by the APPG and Members from the statement at the time, but no specific commitment was made to return to that calculation. No obligation linked it to the future state of public finances. There have been representations that this issue should be reopened and that a further £2.6 billion should be paid to policyholders. The Government’s position on this is clear, and I have set it out in my letters to the APPG and my meeting with it last year. Being in government is about making difficult decisions. Our decision was to spend £1.5 billion, reversing and multiplying by four the previous Government’s dismissal of a commitment to £340 million. These difficult decisions are about how to be fair to both hard-working taxpayers and those in receipt of public spending and services, and where the need to spend public money is greatest.
I acknowledge the point made by my right hon. Friend the Member for New Forest West (Sir Desmond Swayne) concerning the imperative to provide for the next generation and, as several Members said, to restore trust in pensions and pension savings. There is cross-party consensus on that, and both parties have worked hard to achieve a lot in terms of auto-enrolment. There is more work to be done in that space. None the less, the House will recognise that the opportunity cost to the Exchequer of paying a further £2.6 billion is funding the salaries of 67,000 teachers, or 112,000 new nurses.
Gordon Marsden
I am listening with some concern, as I am sure other Members are, to what appears to be an edging further and further away from the commitments that we have all asked for this afternoon. The Minister talks about priorities. We could spend three hours in this Chamber talking about the priorities that this Government have given to tax cuts and other things. He needs to choose his words carefully in responding to what has been said.
John Glen
It is not about party politics; it is about saying that when we came into government, in the absence of a resolution to this matter, we increased the figure from £340 million, which the last Labour Government were proposing, to more than £1.5 billion. In the light of those facts, it is a bit unreasonable to criticise what I am saying. While I appreciate and empathise with the fact that some policyholders who have invested their funds have not received the funds that they hoped for, like my late father, and that this impacted on their plans and futures, we have taken the best action that we could have to resolve the Government’s part in these reduced returns. We have done more than any previous Government.
I draw colleagues’ attention to Equitable Life’s own research from 2011, which suggested that their policyholders wanted the Government compensation to draw a line under this issue. I agree with them. The Government’s view is that this issue is now closed, and as a Minister I have never been in the business of offering false hope.
Draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019
Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019
John Glen Excerpts(5 years, 3 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019.
The Chair
With this it will be convenient to consider the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019.
John Glen
It is a pleasure to serve under your chairmanship, Mr Bailey.
As the Committee is aware, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the European Union without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. To deliver that, the Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018, and a number of SI debates have taken place in this place and in the House of Lords. The draft SIs to be debated today are part of that programme. The approach taken in this legislation aligns with that in other SIs laid under the Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
The subjects of the two sets of draft regulations being debated together today are collective investment schemes and long-term investment funds. The draft SIs relate to the management, administration and marketing of investment funds, which are investment products created to pool investors’ capital and invest it in financial instruments such as shares, bonds and other securities.
Within the EU, the framework covering regulated funds predominantly sold through retail investors is provided by the directive on the undertakings for collective investment in transferable securities, commonly known as UCITS. Long-term investment funds are a sub-category of alternative investment funds that promote long-term investment such as in infrastructure, small and medium-sized enterprises and real assets. They are often sold to institutional investors, such as pension funds.
Alongside the regulations on alternative investment fund managers, on venture capital funds and on social entrepreneurship funds that were approved by this House on 16 January and in the other House on 22 January, the draft instruments under discussion will ensure a functioning UK investment fund regime if we leave the EU without a deal.
In a no-deal scenario, which is not the policy or aspiration of the Government, the UK would be outside the single market and outside the EU’s legal supervisory and financial regulatory framework. Therefore, retained EU and domestic law relating to the regulation of UCITS and long-term investment funds needs to be updated to reflect that, to ensure that the provisions work properly in a no-deal scenario.
I will first outline the changes in the collective investment schemes regulations. Overall, this instrument will maintain the investment rules of UCITS, as set out in the EU directive. However, it will make changes to address deficiencies and to ensure a functioning regime. First, the draft regulations remove references to the Union and to EU legislation, which will no longer have legal effect, replacing them with references to the UK and UK legislation where appropriate. That includes removing references to the passporting system and binding requirements for information sharing. The instrument will also establish a distinction between the UCITS regimes in the UK and the EU. Funds authorised in the UK will be called UK UCITS.
Secondly, all UK UCITS must have a depositary that is incorporated in the UK or another European economic area state. Currently, it is possible for an EEA firm to establish a branch in the UK and to carry out the functions of a depositary. To ensure proper regulatory oversight, however, the draft instrument will remove that provision and will instead ensure that all depositaries of UK UCITS are incorporated in the UK.
Similarly, the instrument will ensure that management companies of UK UCITS are incorporated in the UK, whereas currently they may be incorporated in the UK or another EEA state. However, to align the changes with the temporary permissions given to EEA firms passporting into the UK by the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, the draft regulations provide a transitional arrangement so that the requirements for managers and depositories of UK UCITS to be incorporated in the UK do not affect such depositories or managers if they have temporary permission to operate in the UK.
Thirdly, the draft regulations will transfer the power to make binding technical standards from the European Securities and Markets Authority to the Financial Conduct Authority. As the UK’s national competent authority within the EEA, the FCA is already responsible for supervising investment funds and has extensive expertise and experience making rules relating to the sector. The draft regulations will give the FCA the power to specify the information that the operator of the fund must provide to the FCA for the operation of a UCITS fund.
To offer continuity for EEA funds and the UK customers they service, the regulations create a temporary marketing permissions regime for EEA UCITS to continue to market into the UK. That was part of the announcement by the Government in December 2017 to create a temporary permissions regime for EEA firms and funds. It will allow an EEA UCITS that currently markets into the UK under a passport, and subsequent new sub-funds of an existing umbrella fund, to continue to market to UK customers, as it could before exit day, for a period of up to three years.
Following an assessment by the FCA on the effect of extending or not extending the period, the Treasury will have the power to extend the period for a maximum of 12 months at a time, in line with other transitional regimes that have been put forward. In order to ensure transparency in the process, the Treasury will make a written ministerial statement to both Houses in the event of the Treasury seeking to extend the temporary power, prior to any statutory instrument being laid.
By the end of the temporary marketing permissions regime, the fund will need to gain recognition to continue to market to retail investors in the UK, as any other third-country fund is currently required to do. That will be under the current procedure outlined in section 272 of the Financial Services and Markets Act 2000. The Government are committed to reviewing the process and bringing forward legislation as necessary to ensure the UK can continue to efficiently recognise overseas funds.
The draft regulations also amend the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018, to bring forward the commencement date of the provisions relating to the temporary marketing permissions regime for alternative investment funds. That will allow the FCA notification window to operate as intended and at the same time as the regime outlined in the regulations.
I move on to the draft long-term investment funds regulations. Long-term investment funds are a further sub-category of alternative investment funds, which was introduced in 2015. However, it has to be said that the take-up across the EEA has been extremely limited. The FCA states that, as of December 2018, there are currently no such funds set up in the UK and therefore we believe there will be no impact on businesses or consumers. However, in line with the Government’s approach to European legislation and powers granted under the withdrawal Act, the regulations ensure that there is a functioning framework for long-term investment funds in the UK.
Like the collective investment schemes regulations, this SI maintains the existing investment rules for funds domiciled in the UK and addresses any deficiencies in legislation, including removing references to the EU and replacing them with references to the UK. It will also create a UK-only label of “long-term investment fund” to reflect that these funds will be in the UK and subject to UK rules.
Finally, as long-term investment funds are a sub-category of alternative investment funds, EEA managers of European long-term investment funds will be able to make use of the temporary marketing permissions regime for alternative investment funds, as legislated for in the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018, debated earlier this month. The Treasury has been working extremely closely with the FCA in the drafting of the instrument and has engaged with the financial services industry and will continue to do so. In November and December 2018, the Treasury published the instruments in draft, along with explanatory policy notes, to maximise transparency to Parliament and industry.
In summary, the Government believe that the proposed legislation is necessary to ensure that there is a functioning investment funds framework in the UK, which would provide continuity for UK investors and our asset management sector should we leave the EU without a deal or an implementation period. I hope colleagues from different parties will join me in supporting these regulations, which I commend to the Committee.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve on the Committee with you in the Chair, Mr Bailey. I am very grateful to the Minister for his explanatory remarks. Once again, I sit opposite him to discuss a statutory instrument that would make provisions for a regulatory framework after Brexit in the event that we crash out without a deal, which I hope is less likely following the House’s decision last night. On each previous occasion, my Labour Front-Bench colleagues and I spelled out our objections to the Government’s approach to secondary legislation.
The volume and flow of secondary legislation on our exiting the EU is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken, but establishing a regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Secondary legislation ought to be used for technical, nonpartisan and uncontroversial changes, because it allows limited accountability. Instead, the Government continue to push through contentious legislation with high policy content by using this vehicle. As legislators, we have to get this right. These regulations could represent real and substantive changes to the statute book, so they need proper, in-depth scrutiny. In this light, the Opposition want to put on record our deepest concerns that the process regarding these regulations is not as successful and transparent as it should be.
The Minister spelled out the fact that the first SI relates to the 2009 UCITS directive, which sets out a common set of standards for investor protection for regulated investment funds that can be sold to retail investors in the EU. The directive established a passporting system to enable UCITS to be marketed and sold to the general public throughout the EU, and to enable UCITS management companies to manage UCITS that are located in other member states. The directive was transposed into UK law through domestic legislation and FCA rules. Many would say that the directive has been successful: it has facilitated far greater choice for investors, and I understand that there are now more than 10,000 funds available to UK investors as a result of the directive. Almost three quarters of those are passported in from the EU27 under the UCITS directive. A large number of non-UK UCITS funds are managed by UK businesses under the directive—by asset value, it is £1.8 trillion-worth out of the £9 trillion industry across Europe. Some £375 billion-worth of that is held by UK investors.
I should express my gratitude to the industry for providing me with those figures. It has indicated that in the event of a no-deal Brexit, UCITS funds from the EU27 could not be marketed to UK investors in a straightforward manner. Furthermore, it would not be easy to list UCITS exchange-traded funds on the London Stock Exchange. Given that this SI largely preserves the status quo on the availability of UCITS funds and exchange-traded funds—albeit temporarily—there is support in the industry for the intention behind it, because there would undoubtedly be problems under a no-deal Brexit.
None the less, the Minister needs to answer some questions on this SI. It is essential that we properly understand its impact—not least because, in common with so many others that we have considered in Committee, it uses secondary legislation to amend primary legislation, which is of course the definition of Henry VIII powers. In addition, the FCA and others have raised considerable concerns about unregulated collective investment schemes, or UCIS. Many of us have heard horror stories about these, with examples that have badly let down their investors or even operated as Ponzi schemes. In the circumstances it is essential that regulations are sufficiently encompassing and do not lead to unsophisticated investors being presented with overly risky products. At the same time, the asset management industry, particularly people who are involved with investment in UCITS, is an important part of the financial services industry. Given that the industry supports one in 10 jobs in our country, it is a matter of regret that our Government have failed to prioritise seeking a better deal for financial services as part of their negotiations, and that the quest for passporting rights was quickly dropped in favour of some form of equivalence. Of course, whether to agree that will be entirely in the European Commission’s gift.
That has already led to economic activity in this area shifting out of our country. Companies from Hermes Investment Management to Legg Mason, Janus Henderson Investors, Jupiter Asset Management and Polar Capital all appear to have created additional positions, functions or operations in the EU27 rather than the UK because of the need to secure service continuity for current and future investors. As I understand it, the issue of delegation, which is essential in this area, is still not fully resolved. It remains unclear on what basis UK companies will be able to manage investments for fund companies based in the EU27. I hope that the Minister updates us on when he expects the Commission to give ESMA the green light to enable concrete discussions to take place on that score.
My second question relates to the legal basis for the draft regulations. They are said to be made under both the European Communities Act 1972 and the EU (Withdrawal) Act. Surely it is rather peculiar to have those two parent Acts, given that one is about giving effect to EU law whereas the other is about inherited EU law. Perhaps the Minister can explain why those Acts form the basis for the draft regulations.
Thirdly, we have been provided with an impact assessment for the draft regulations, albeit we received it just this morning. Clearly that is better than nothing, but it gave us limited time to acquaint ourselves with the impact assessment.
Anneliese Dodds
Thank you. That impact assessment suggests there will be a need to charge inbound EEA passporting firms as third-country firms, but that to
“reduce the impact of leaving the EU on funds, the government has committed to reviewing Section 272,”
which governs this process. It adds:
“This will be done through a future legislative vehicle.”
It would be helpful if the Minister provided us with some details about that. Does he envisage that happening at the end of the three-year temporary permissions regime or at some other point? It would, of course, require legislative change.
I turn to the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations. I am grateful to the Minister for explaining the basis for that instrument. As he explained, the EU regulation has been used far less than many would have hoped, given that it was intended to encourage long-term investment.
There are two issues with the SI. The first concerns empowerment of the FCA. My colleagues and I have frequently referred to the fact that the process of legislating for no deal has in many cases provided the FCA with unprecedented powers, potentially overshooting what is required to transpose the EU acquis. Indeed, colleagues will not have missed the conclusions by City A.M. following the recent Treasury Committee hearing on this subject; it stated that the process involves regulators being given “‘unprecedented’ powers”—its words, not mine. However, in this case, we seem to have undershooting, specifically in relation to the FCA’s powers to create a register of ELTIFs.
ESMA, the EU-level regulator, does not merely have the ability to create a register of ELTIFs; it is under a duty to do so. However, the draft regulations only empower the FCA to keep such a register; they do not require it to do so. There is a direct contradiction between regulations. Article 3 of the 2015 EU regulation on ELTIFs states:
“ESMA shall keep a central public register”.
The draft regulations do not just substitute “FCA” for “ESMA”; they give the FCA a power, rather than a duty, to keep a register. Regulation 6 states:
“The FCA may keep a central public register”.
I note the use of the word “may”, not “must” or “shall”. The Minister needs to explain that discrepancy before the Committee can accept this SI.
There seems to be a drafting mistake. The draft regulations seem to empower the FCA to designate ELTIFs as such across the EU, rather than empowering it to recognise them as such within the UK for the purposes of then recognising them as the new category of LTIFs. To try to explain this horrendously complicated area, I am going to differentiate my pronunciation of ELTIFs—European LTIFs—and LTIFs, the new category the Government suggest they are creating. This point is very difficult to explain without having the relevant pieces of legislation in front of us. The Minister will remember the comments of my hon. Friend the Member for Garston and Halewood (Maria Eagle) in a previous Committee.
Anneliese Dodds
I am grateful to the Minister for that clarification, if that is the case. However, even if it were not the case previously, there is a prima facie argument that it would be useful for Committees of this type to be able to see in the committee room the previous regulation and be able to compare it with what is being suggested. Otherwise, it is extremely hard for us to understand exactly what is being proposed in some of the very complex changes that are being implemented.
That difficulty had its apogee with the MiFID—markets in financial instruments directive—transposition regulation. I will not go into all the details; I have discussed the matter with the Minister many times. The Opposition had hoped to debate that subject on the Floor of the House because it was recognised in that case that a Keeling schedule was necessary, effectively to track changes. It would be helpful for Members in all such Committees to be able to see the direct impact of changes from this no-deal legislation. Otherwise, it is very difficult to understand.
John Glen
Once again, I will begin by thanking the hon. Members for Oxford East and for Aberdeen North for their thorough examination of the statutory instruments; I will do my very best to answer in detail the points that they have made, and where I cannot, I shall write to them as soon as I possibly can.
The hon. Member for Aberdeen North discussed impact assessments. We now have an impact assessment, which was circulated, as she acknowledged, at 10 past 10 this morning and covers all the statutory instruments that will be laid until 11 February. There has been a desire on my part and that of my officials to meet the necessarily exacting standards of the RPC. As I say, that is my responsibility, but I would point out that this is an unprecedented process, doing 53 SIs for financial services, 45 of which have now been laid, and working on each one individually. I hope the existence of the impact assessments up to 11 February—obviously there will be some more after that—will give her some comfort, but the points that she made have been heard.
I will come on to the other points that the hon. Lady made, but I will now turn to the issues raised by the hon. Member for Oxford East. She made some initial observations with respect to the volume, flow and appropriateness of the SI mechanism that I may have heard before, but I acknowledge her sincerity and take them in the spirit in which they are intended. We are acting within the terms of the withdrawal Act, and I have never sought to pretend that this process is optimal, but it is a practical measure to give business continuity and give the industry the answers they are concerned about.
I also recognise that the degree of uncertainty is not helpful, but I draw the attention of the hon. Lady and the Committee to the remarks of Sam Woods, deputy governor of the Bank of England, who said in April last year that we would have 5,000 to 10,000 jobs moved by day one, which is between 0.5% and 1% of financial services jobs in the UK. There is an enormous resilience in the financial services sector, and this process is about ensuring that there is minimal disruption in the event of no deal.
Moving on to the specific points made by the hon. Lady, she said that in a no-deal scenario, EU UCITS could not be marketed in a straightforward manner in the UK. The temporary marketing permissions regime is intended to prevent the market disruption that would result from a sudden end to passporting rights. The regime ensures that the business model of EEA fund operators marketing into the UK can continue for a temporary period while we transfer to the UK-only regime. That includes the new sub-funds, and reflects our intention to allow EEA firms and funds to continue their business operations for a temporary period.
If we did not allow new sub-funds to enter the temporary permissions regime after exit day, there would be a significant risk to the role of the London Stock Exchange as a global hub for exchange-traded products. Therefore, including sub-funds in the temporary marketing permissions regime reduces the risk to the London Stock Exchange and ensures continued access for UK customers to new EEA funds in future. That was a direct change from laying this SI in November and December; we laid it again on 6 December in response to feedback from the markets. There is an iterative process, hence the time constraint that puts pressure on the impact assessment.
The hon. Lady raised the issue of assurances on ESMA and on portfolio delegation. I refer to the comments of the chair of ESMA, who said on 3 October that in the case of a no-deal Brexit, EU regulators and ESMA
“should have in place with our UK counterparts the type of MOUs that we have with a large number of third country regulators…ESMA has coordinated the preparations for such MOUs together with the EU27 NCAs.”
More recently, the Luxembourg regulator stated that the
“delegation of investment management, portfolio management and, or risk management to UK undertakings shall continue to be possible without any disruption post-Brexit”.
I wish it could be more transparent and sooner, but I am convinced and assured that that work is going on and that it will be completed in time.
The hon. Member for Oxford East raised the issue of why the FCA was not required to keep a register of LTIFs and the issue of the power not the duty. The power to keep the register is being transferred to the FCA. As there are currently no LTIFs set up in the UK, there is no register of those funds online. The FCA keeps a register of small UK AIFMs that manage similar funds, European venture capital funds and European social entrepreneurship funds.
The best thing is for me to obtain some assurance from the FCA about its plans, which are, in reality, at a relatively early stage because we are simply trying to transition over at this point. The detail of its ongoing regime and responsibilities will be a matter for it to convey in due course.
Anneliese Dodds
We have been told throughout the process that there will be no watering down of regulations under the withdrawal Act. I appreciate that this is an abstract case, because we do not yet have a category of investments operating in the UK that would fall into that designation, but that is not to say that one will not be created in future. If we do not have that requirement, there would surely be that resiling. Will the Minister endeavour to talk to the FCA to make sure that, if such investments start to operate in the UK, it will keep a register of them? Surely that is what the EU legislation requires.
Kirsty Blackman
It would be helpful if the Minister explicitly said, “Yes, we would like the FCA to keep a register of those new LTIFs as they arise in the UK.” The form of that register could be decided later.
John Glen
I am sympathetic to what the hon. Lady says, but she has to understand that the regulator is the regulator, and it will have reasons in terms of the market actors around that. My view is that it would be entirely appropriate for the regulator to have that register, and I would expect to see clear market-driven reasons for why it would not be necessary. Again, it would not be responsible for me to make a commitment without knowing all the background factors, but I will write to the regulator to express the Committee’s concerns and ask what its approach would be in the circumstances where those funds existed in the United Kingdom.
Anneliese Dodds
I am grateful to the Minister for what he has said, but the regulator is required to carry out what this House requires it to do. If we are talking about ESMA, it is meant to carry out what it has been required to do by EU-level policy makers. That EU legislation requires that the register shall be kept, so we need something more emphatic if we are to stick to the existing distribution of responsibilities.
John Glen
It is an interesting debating point. Had the hon. Lady seen the report of my appearance yesterday before the Treasury Committee with the chief executive of the FCA and the deputy governor of the Bank of England, she would know that we work collaboratively with the industry to do what is right. The intention of this process is not to deregulate in any way—there is no attempt by the Treasury to create some wriggle room to remove the obligation of the FCA. I understand the hon. Lady’s point, and I expect there to be continuity between the current and future regimes on the FCA’s reporting requirements. I will seek clarification on that point.
Kirsty Blackman
One last time, Minister. If the UK Government are trying to do what they tell us they are trying to do—to replicate EU law in UK law—the most sensible thing to do would be to start with a requirement for the FCA to keep this. Should there be a change and it is decided that it is not necessary, we can then legislate down the line with secondary legislation to say, “Actually, we feel like this is not appropriate for our regulatory regime.”
John Glen
I think I have said all I can on that matter at this point. I will move on to the drafting point on territorial power for the FCA, which the hon. Member for Oxford East raised. I will consider that point carefully—there may be a drafting error. It is difficult for me to be certain about that now, but I will respond in due course.
The hon. Member for Aberdeen North raised the issue of how many people engaged with the draft legislation. She will probably not be surprised to know that I do not have the numbers in front of me, but we have sought wide engagement with the industry and stakeholders as the legislation has developed, which can be seen in the fact that we relayed on 6 December following engagement on the sub-funds point. I am happy to examine any data on that and write to her on that matter.
The hon. Member for Oxford East made a point—I think it was also made by the hon. Member for Aberdeen North—about the Government’s general policy of reciprocity in the prioritisation of certain areas in a no-deal scenario. We want to continue to engage constructively with EU partners and be in a position to deliver on the political declaration in a negotiated deal, in which we would respect the autonomy of both sides but would be ambitious about the degree of collaboration on recognition. We think that that is realistic—there is a very strong relationship with our regulators across the EU, and we expect that to continue.
I have answered most of the points that have been made. If there are any others, I shall write to both hon. Ladies on the Opposition Benches. I have demonstrated why we need this SI to pass in the event of the UK leaving the EU without a deal, and I hope the Committee can now support the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019.
Draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019
Motion made and Question put,
That the Committee has considered the draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019.—(John Glen.)
Oral Answers to Questions
John Glen Excerpts(5 years, 3 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Wes Streeting (Ilford North) (Lab)
The Economic Secretary to the Treasury (John Glen)
On 28 November, the Bank of England published analysis on how the short-term impact of leaving the EU could affect the Bank’s ability to meet its objectives for monetary and financial stability. That analysis is published independently and reported to Parliament, but in line with normal practice, no comment will be made on discussions between Ministers.
Wes Streeting
The Bank of England knows that no deal will be a disaster, and so do Ministers and the Chancellor, yet the Prime Minister is whipping her MPs to vote today for an amendment that will make it more likely. What does that say about the Chancellor? Does the continued presence of no deal on the table speak to his lack of influence, his lack of authority or his lack of courage?
Helen Hayes (Dulwich and West Norwood) (Lab)
I was contacted this week by a constituent who runs a business in Derry/Londonderry. He writes:
“The official position is that”
the recent bomb attack
“is nothing to do with Brexit; everyone I’ve spoken to finds this laughable—it is everything to do with Brexit. The danger, irresponsibility and absurdity really comes home to you when the bomb disposal Land Rovers are screaming past our office.”
What does the Chancellor think the implications of Brexit will be for jobs in Northern Ireland, when local employers feel like this?
Mr Alistair Carmichael (Orkney and Shetland) (LD)
Dame Caroline Spelman (Meriden) (Con)
The Economic Secretary to the Treasury (John Glen)
A consultation was launched in October, and we intend it to be as wide as possible. The consultation closes today and the Government will respond shortly, but we are very sympathetic to where my right hon. Friend is coming from.
Diana Johnson (Kingston upon Hull North) (Lab)
David Linden (Glasgow East) (SNP)
John Glen
What I can tell the hon. Gentleman is that banks must make commercial decisions on the basis of what works for them. When I visited Scotland, I found they were also keen to work with post offices and the Government’s provision to make sure that services can be delivered through the Post Office.
Nigel Huddleston (Mid Worcestershire) (Con)
Average wages in my constituency are below the national average, with many people earning the living wage. Tax rates really matter to them, so is that not precisely why we Conservatives voted for a tax cut for 32 million people, by contrast with the Opposition? Will we continue to be truly the party for working people?
Counter-terrorist Asset Freezing Regime
John Glen Excerpts(5 years, 3 months ago)
Written StatementsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
Under the Terrorist Asset-Freezing etc. Act 2010 (TAFA 2010), the Treasury is required to prepare a quarterly report regarding its exercise of the powers conferred on it by part 1 of TAFA 2010. This written statement satisfies that requirement for the period 1 July to 30 September 2018.
This report also covers the UK’s implementation of the UN’s ISIL (Daesh) and Al-Qaida asset freezing regime (ISIL-AQ), and the operation of the EU’s asset freezing regime under EU regulation (EC) 2580/2001 concerning external terrorist threats to the EU (also referred to as the CP 931 regime).
Under the UN’s ISIL-AQ asset freezing regime, the UN has responsibility for designations and the Treasury, through the Office of Financial Sanctions Implementation (OFSI), has responsibility for licensing and compliance with the regime in the UK under the ISIL (Daesh) and Al-Qaida (Asset-Freezing) Regulations 2011.
Under EU regulation 2580/2001, the EU has responsibility for designations and OFSI has responsibility for licensing and compliance with the regime in the UK under part 1 of TAFA 2010.
A new EU asset freezing regime under EU regulation (2016/1686) was implemented on 22 September 2016. This permits the EU to make autonomous Al-Qaida and ISIL (Daesh) listings.
The tables available as an online attachment set out the key asset-freezing activity in the UK during the quarter.
The recently passed Sanctions and Anti-Money Laundering Act will help ensure that UK counter-terrorist sanctions powers remain a useful tool for law enforcement and intelligence agencies to consider utilising, while also meeting the UK’s international obligations.
Under the Act, a designation could be made where there are reasonable grounds to suspect that the person or group is or has been involved in a defined terrorist activity and that designation is appropriate. This approach is in line with the UK’s current approach under UN and EU sanctions and would be balanced by procedural protections such as the ability of designated persons to challenge the Government in court.
Attachments can be viewed online at: http://www. parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2019-01-23/HCWS1267/.
[HCWS1267]
Draft Market Abuse (Amendment) (EU Exit) Regulations 2018
Draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019
John Glen Excerpts(5 years, 3 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.
The Chair
With this it will be convenient to consider the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.
John Glen
It is a pleasure to serve under your chairmanship again, Mr Davies. The Treasury has been preparing extensively for a range of outcomes in the context of the UK’s withdrawal from the EU, including a no-deal scenario. The draft regulations form part of the necessary work to ensure that there will continue to be a functioning regulatory and legislative regime for financial services if the UK leaves the EU with no deal and no implementation period.
Sir Greg Knight (East Yorkshire) (Con)
Although explanatory memorandums are not technically part of regulations, it is important that they be accurate and up to date in all respects. Will the Minister confirm that that is the case? In particular, will he confirm that the first sentence of paragraph 7.1 of both memorandums is still Government policy? It states:
“The UK will leave the EU on 29 March 2019.”
John Glen
I am happy to confirm that point—I wondered what my right hon. Friend was going to come out with.
As part of the programme that I have set out, the draft regulations will address legal deficiencies in retained EU legislation relating to market abuse and credit rating agencies. They are important for regulating market conduct practices and safeguarding market integrity. Their approach aligns with that of other legislation laid before Parliament under the European Union (Withdrawal) Act 2018, providing continuity by maintaining existing legislation at the point of exit, but amending deficiencies where necessary and introducing transitional provisions to ensure that they work as effectively as possible in a no-deal context. I shall first outline the 2018 draft regulations and then turn to the 2019 draft regulations.
Market abuse can involve a range of illegal practices relating to financial markets, including unlawful disclosure of inside information, insider dealing and market manipulation. MAR—the EU market abuse regulation, which came into effect in 2016—prohibits market abuse practices, thereby increasing market integrity and investor protection and enhancing the attractiveness of the EU securities markets for capital raising. It gives EU regulators powers and responsibilities to prevent and detect market abuse; the Financial Conduct Authority is the regulator that currently enforces it in the UK. MAR applies to financial instruments traded on EU trading venues, as well as market abuse that concerns such instruments anywhere in the world.
The 2018 draft regulations will make amendments to MAR and related legislation to ensure that the UK continues to have an effective regime to regulate market abuse once it leaves the EU. In line with our general approach of onshoring EU legislation by transferring powers and functions in the remit of EU authorities to the appropriate UK institutions, they will transfer powers from the European Commission to the Treasury, including the ability to make delegated Acts related to market abuse, and from the European Securities and Markets Authority to the FCA, enabling the FCA to make binding technical standards.
The FCA has consulted on its proposed changes to its binding technical standards, and it will continue to enforce the market abuse regime in line with its current role as part of the EU framework. That approach reflects the FCA’s extensive experience, expertise and capability to continue in that function post exit. I remind the Committee that it has 158 full-time employees working on Brexit—an increase from 28 in March 2018—and that in a few months it will publish its plans for the year 2019-20.
Furthermore, the statutory instrument retains the existing scope of MAR, so that it continues to apply to financial instruments traded on both UK and EU trading venues, as well as to conduct anywhere in the world that concerns these instruments. That means that the FCA will continue to be able to investigate, prohibit and pursue cases of market abuse related to financial instruments that affect UK markets, as far as is possible in a no-deal scenario. The scope has been limited to the UK and EU, and is not worldwide, given that markets in both jurisdictions are highly integrated due to the current arrangements.
The SI also retains exemptions in MAR—and amends the scope of the exemptions to UK-only—that relate to certain trading activities that cannot be enforced against the regulation[Official Report, 5 February 2019, Vol. 654, c. 1MC.] They include exemptions on monetary and public debt management activities, buy-backs and stabilisation, and accepted market practices. Power will be conferred on the Treasury to extend the exemptions related to monetary and public debt management activities. That power is currently held by the Commission.
In addition, the SI retains references to emission allowances. That will allow UK firms to continue to participate in secondary market trading under the emissions trading scheme, despite the UK leaving it, and will enable the FCA to continue to monitor and enforce against UK-registered emission allowance market participants.
Additionally, the SI removes co-operation requirements between the UK and EU counterparts. The UK will no longer be obliged to share information related to market abuse with the EU, given that there would be no guarantee of reciprocity. However, the FCA will still be able to respond to information requests from third-country regulators; indeed the existing domestic framework for co-operation on information sharing with countries outside the UK already allows for that on a discretionary basis.
Finally, the SI will make further amendments to retained EU and UK legislation, including EU legislation that amends MAR, to ensure that it is operable in a UK-only scenario; to the Criminal Justice Act 1993 to remove references to directly applicable EU regulation; and to the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 to ensure that the UK’s market abuse regime works effectively once the UK leaves the EU.
Mr Ranil Jayawardena (North East Hampshire) (Con)
Will the Minister make it his business to ensure that credit rating agencies share information appropriately not only with each other and with regulators, as necessary, but with consumers? Too often, they are inaccessible to consumers, and consumers cannot even write to them to have the appropriate information registered with them. Will he make it his business to sort that out or to impart that to the FCA?
John Glen
To pick up from where I left off, the best solution would be for my hon. Friend the Member for North East Hampshire to write to me about his specific concern. I will look into it thoroughly and get back to him as quickly as possible.
Let me turn to the 2019 draft regulations. A credit rating is used to assess the creditworthiness of an entity or financial instrument for regulatory purposes. CRAR, the credit rating agencies regulation, was introduced after the financial crisis in 2009 to ensure that EU bodies—in this case ESMA—could supervise credit rating agencies in a suitable way. The draft regulations will amend CRAR and related legislation to ensure that the UK continues to have an effective framework to regulate credit rating agencies once we have left the EU.
First, the draft regulations will transfer supervisory and enforcement powers from ESMA to the FCA to ensure that the FCA can effectively supervise credit rating agencies and enforce the new UK regime, as well as becoming responsible for the regulatory functions relating to the endorsement process. I should note that this provision was drawn to the special attention of the House of Lords in the 9 January report of Sub-Committee A of the Secondary Legislation Scrutiny Committee. It is a sensible provision, given the FCA’s role in regulating the operation of markets and safeguarding market integrity; it will enable the FCA to assess whether a third country’s regulatory and legal framework is as stringent as the UK’s, thereby enabling credit rating agencies in the third country that are affiliated with a UK-based credit rating agency to endorse ratings into the UK for regulatory use.
Secondly, the SI will transfer equivalence powers from the European Commission to the Treasury, which will enable the Treasury to determine whether a third-country regime is sufficiently aligned in its regulatory outcomes to be declared equivalent and allow for the clarification process, allowing unaffiliated CRAs in third countries to issue ratings in the EU for regulatory purposes. That is consistent with the transfer of equivalence powers across other areas of retained EU law in SIs that have already been debated in this Committee.
Thirdly, the SI will enable credit ratings to be used in the UK for regulatory purposes, should those ratings be issued by a CRA established in the UK with an FCA registration. The instrument will also allow for a transitional period of one year to enable credit ratings issued prior to exit day by EU firms that register or apply for registration with the FCA to be used for regulatory purposes in the UK. Furthermore, the SI sets out that firms are required to establish a legal entity in the UK to register with the FCA.
There are three types of registration regimes that will smooth the transition from ESMA registration to FCA registration: the conversion regime, which will enable UK-established CRAs to notify the FCA of their intention to convert their ESMA registration; a temporary registration regime, which will allow newly established legal entities in the UK to operate in the UK if they are part of a group of CRAs with ESMA registration; and an automatic certification process, which will allow certified CRAs established outside the EU to notify the FCA of their intention to extend certification to the UK. As part of the additional powers granted to it, the FCA will receive pre-exit powers to begin the preparatory work for registering CRAs before exit day.
Additionally, references to EU institutions in relation to appeal rights will be replaced with appropriate UK bodies. Given the new enforcement powers given to the FCA, where its warning and decision notice will apply to CRAs, a right to appeal such actions has also been provided. The relevant UK body will be the upper tribunal.
Finally, further amendments to UK legislation are made. The Financial Services and Markets Act 2000 is amended to enable the FCA to charge fees in relation to its new supervisory functions in respect of CRAs, as well as ensuring that the FCA is exempt from liability for damages relating to its new supervisory functions.
The Treasury has been working closely with the FCA and the Bank of England and engaging with industry bodies on both instruments. They have both been published in draft form, accompanied by an explanatory policy note, to maximise transparency to Parliament, industry and the public before being laid before Parliament.
In summary, the Government believe that these SIs are necessary to ensure that the regulatory regimes relating to market abuse and credit rating agencies work effectively if the UK leaves the EU without a deal or an implementation period. I hope colleagues will be able to join me in supporting the regulations, and I commend them to the Committee.
John Glen
I am extremely grateful for the comments from the hon. Members for Oxford East and for Linlithgow and East Falkirk. I shall try to respond to the points raised in detail.
The hon. Member for Oxford East raised five substantive points on the credit rating agencies. The first referred to the impact assessments, whose importance I recognise. I will not go over the full discussion that we had in Committee yesterday, but for the benefit of this Committee, I confirm that I will make the assessments available as soon as possible. I am in discussions with the Regulatory Policy Committee to get the impact assessments completed to its satisfaction. It quite rightly has exacting standards, with which I am keen to fully comply. I can commit to publishing the impact assessments when they are ready; I hope that will be next week, in time for the SI we have scheduled for next Wednesday. That is my expectation at this point.
The hon. Lady also mentioned FCA resources—I will not repeat the numbers that I gave earlier—and said that the powers in certain areas appear to go beyond ESMA’s powers. Why has that been deemed necessary? The FCA has powers deemed necessary for a wide range of firms. It is appropriate that those powers are consistent and that the FCA exercises them in accordance with its statutory objectives. The obligations on CRAs under the UK regime will remain aligned with those in the EU.
A point was also raised about fees. Andrew Bailey, the chief executive of the FCA, has said that he expects to hold FCA fees steady for a year or two, assuming an implementation period. Obviously, if it were necessary to increase those resources in a no-deal situation, that cost would have to be borne. That is why the Government’s position is that we are seeking to secure a deal. This whole programme of SIs—all 53 of them for financial services—is a precautionary measure.
The hon. Lady raised the issue of co-operation arrangements between the UK and the EU post-exit. After exiting the EU, the UK will no longer be obliged to undertake co-operation and information sharing with EU authorities. We will remove that legal obligation but UK authorities will continue to establish ambitious co-operation arrangements with our EU counterparts. The hon. Lady’s deep expertise in this area is testimony that we in the UK have led much of the sharpening of the regulations within the EU.
The FCA will look to put in place alternative arrangements for co-operation and information sharing with ESMA and EU regulators. The FCA and ESMA have publicly stated their ambition to agree a memorandum of understanding in relation to CRAs. That is what we anticipate and it is confirmed in ESMA’s statement of 9 November 2018.
The hon. Lady also raised an issue around the relationship to the 2009 regulations of the FCA. It would be appropriate for me to reflect and write to her with more detail. I emphasise that the point of these SIs is to hold regulations steady before and after exit in the circumstances of no deal. I make the general point that if we have no deal, the obligation on the Government to come forward with a whole range of additional regulation in financial services would be immediate and significant. Clearly, what we are doing here is transferring the appropriate powers for continuity at the point of exit. We are not saying that that will be the final state.
The hon. Lady raised two significant points with respect to the market abuse statutory instrument. On the point about the co-operation requirements being removed, I do not need to say more than I have already. The aspiration to have an ongoing, positive dynamic is there but, of course, in an unplanned no-deal scenario, we cannot anticipate the degree of co-operation. We would seek to be proactive in driving that and there is obviously a desire from market actors for us to achieve that. Changes made by the SI, and existing gateways for the FCA sharing confidential information, will enable the FCA to continue to co-operate and share information with ESMA and EU regulators, where we choose to do so.
The hon. Lady wanted to know whether UK authorities will build co-operation arrangements for their UK counterparts. I think I have covered that. Memorandums of understanding are being negotiated between regulators and we hope to reach an understanding on those before the end of March. We cannot do that unilaterally, but progress is being made.
What is the impact on EU issuers? There will be a change for EU issuers with financial instruments admitted to trade or trading on UK trading venues. UK MAR requires EU issuers with financial instruments admitted to trading or traded on UK trading venues to provide such notifications and reports to the FCA. That will mean that EU issuers with financial instruments admitted to trading or traded on UK trading venues will need to send reports to the FCA and their home regulator.
The hon. Lady has deep knowledge of this subject and has set out the considerable burden that that would place on the FCA. As I say, that is unavoidable at this stage, but obviously we would need to do some more work following exit in this no-deal scenario. I am grateful for the comments of the hon. Member for Linlithgow and East Falkirk, and I reiterate that the Government’s objective is to secure a deal, but, in the absence of that, this is none the less a comprehensive piece of work. We are working hard to secure the impact assessments and a fully functioning regulatory regime in the instance of no deal, which I and the Government believe to be wholly undesirable.
I hope that that adequately responds to the questions on both those statutory instruments. I think I have demonstrated that there is a need for these provisions to be made and passed by this Committee. I acknowledge the enduring concern about impact assessments; I accept that we are not in the optimal place, and I can only say that I am doing all I can to meet the appropriately exacting requirements of the RPC. I can do no more at this stage. I ask for the Committee’s support for these regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.
Draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019
Motion made, and Question put,
That the Committee has considered the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.—(John Glen.)