Draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019
John Glen Excerpts(7 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019.
It is a great pleasure to serve under your chairmanship, Sir David. The Treasury has been laying statutory instruments under the European Union (Withdrawal) Act 2018 to ensure that the UK continues to have a functioning regulatory and legislative regime for financial services should it leave the EU with no deal or implementation period. The regulations are part of that work and fix deficiencies in UK legislation that relate to the UK’s prospectus and listing regimes, as well as its transparency framework, to ensure that they function appropriately after exit.
The approach taken in the statutory instrument is consistent with that of other statutory instruments being laid under the 2018 Act in maintaining existing legislation at the point of exit where possible to provide continuity, but amending relevant legislation where necessary to ensure that it works effectively in a no-deal context. It amends the legislation that implements the prospectus directive, the transparency directive, the consolidated admissions and reporting directive—CARD—and related legislation to ensure that the UK continues to have an effective prospectus and listing regime and an effective transparency framework to regulate activity in the UK’s capital markets.
The prospectus directive harmonises rules across the European economic area to govern the format, content, approval and distribution of prospectuses. Prospectuses contain information on issuers seeking admission to trade on a regulated market or issuers seeking to offer securities to the public. The transparency directive provides for EU-wide transparency requirements that ensure that issuers with securities, such as bonds or shares, who are admitted to trading on an EU-regulated market publicly disclose certain information. CARD sets out the rules governing the admission of securities to official stock exchange listing and the information to be published on those securities.
The UK legislation implementing the prospectus directive, the transparency directive and CARD needs to be amended, given that the UK will be outside the EU’s legal, financial regulatory and supervisory framework in a no-deal scenario. The amendments will ensure that the UK continues to have a functioning prospectus regime, listing regime and transparency framework in that scenario.
First, under the prospectus directive, certain public bodies are exempt from the requirement to produce a prospectus. The statutory instrument extends the exemption to the same set of public bodies in all third countries post exit. If a UK-only approach were taken, EEA public bodies that currently access the UK market would be obliged to produce a prospectus to issue securities in the UK, which they would not be required to do when issuing in the EEA. Additionally, extending the exemption to public sector bodies of third countries is consistent with the UK treating EEA member states and third countries equally.
Secondly, under the current arrangements, EEA issuers can passport prospectuses approved by another EEA regulator for use in the UK. Post exit, the statutory instrument will require EEA issuers to obtain the Financial Conduct Authority’s approval of their prospectuses when seeking access to the UK’s capital markets. That is in line with our current treatment of third countries and with the approach taken across other financial services statutory instruments laid under the 2018 Act.
The statutory instrument also introduces grandfathering arrangements that enable any prospectus approved by an EEA regulator and passported into the UK before exit to continue to be eligible in the UK up to the end of its validity, which is usually 12 months after initial approval. That includes prospectuses that are supplemented with further information as necessary.
Furthermore, the explanatory memorandum for the statutory instrument states:
“in a no deal scenario, HM Treasury intends to issue an equivalence decision, in time for exit day, determining that EU-adopted IFRS”—
international financial reporting standards—
“can continue to be used…to prepare financial statements”
for UK transparency and prospectus requirements. That decision will enable EEA state-registered issuers in the UK that are making an offer of securities, or that have securities admitted to trading on a UK-regulated market, to continue to use EU-adopted IFRS when producing their consolidated accounts. The decision aligns with the Government’s approach to provide post-exit regulatory continuity. It is supported by the FCA and has been welcomed by industry.
Additionally, the SI will transfer responsibility for powers and functions currently held and carried out by EU authorities to the appropriate UK institutions. Specifically, it transfers powers to the Financial Conduct Authority from the European Securities and Markets Authority—ESMA—to create and amend certain binding technical standards. It also transfers powers to the Treasury from the European Commission, including the ability to make delegated Acts pursuant to the relevant legislation. The transfer of functions is consistent with the current split between the regulatory role of ESMA and the legislative power of the Commission. The SI also makes further amendments to other retained UK and EU legislation to ensure that the prospectus regime, listing regime and transparency framework function correctly in the UK once it leaves the EU.
Finally, the SI removes the requirements for the FCA to share information and co-operate with EU regulators, as such an obligation would not be appropriate as of exit day, given that there will be no guarantee of reciprocity. The FCA, however, will continue to have the ability to co-operate with EU counterparts through the existing framework in the Financial Services and Markets Act 2000, consistent with the current arrangements with all other third countries.
Certain provisions of the prospectus regulation have applied since July 2017 and July 2018, and the remainder of the legislation is due to apply from July 2019 after the UK leaves the EU. It is the Government’s intention to domesticate the remaining provisions as they will constitute the prospectus regulatory regime from July 2019. However, the European Union (Withdrawal) Act will convert into UK law only EU legislation that is already in force and applies immediately before exit day. Therefore, remaining provisions of the prospectus regulation will be domesticated via a statutory instrument laid under the Financial Services (Implementation of Legislation) Bill and in-flight files legislation. The Bill as currently drafted requires the affirmative resolution procedure for every statutory instrument made under it, provided that Parliament has an opportunity to debate and discuss each file that the Government are implementing.
The UK has played a leading role in shaping the prospectus regulation for the benefit of consumers and industry. It is welcomed by industry and acts to cut the costs to business of producing a prospectus in the UK. In terms of industry engagement and transparency, on 12 December 2018 the Treasury published the instrument in draft with an explanatory policy note published on 21 November 2018 to maximise transparency for Parliament and industry. Throughout the drafting process, the Treasury has been working closely with the FCA and has also engaged the financial services industry using the assistance of TheCityUK as a convening body for the appropriate representative firms and trade bodies on the SI, and it will continue to do so in future.
To conclude, the Government believe that the proposed legislation is necessary to ensure that if the UK leaves the EU without a deal or an implementation period, the UK’s prospectus regime, listing regime and transparency framework can continue to function appropriately post exit. I hope colleagues will join me in supporting the regulations. I commend them to the Committee.
John Glen
I thank the hon. Member for Oxford East for her examination of the points that have arisen. I will initially address her concerns about the appropriateness of the judgments that the Treasury and I, as a Minister, are making.
I do not think the hon. Lady and I agree on our interpretation of the powers under the 2018 Act. I feel as though we are having quite a lot of scrutiny as we go through the process. Each SI, as I explained, goes through a thorough process of engagement with industry and the regulators, and I do not recognise the notion of mission creep. I acknowledge the concerns that the hon. Lady raised this morning, and I have started to respond to them by letter, which she will receive imminently. I will take account of what she said and look very carefully into the matter, but let me now address some of her specific points.
On the processes that the Government went through to make the equivalence decision, the decision will be made in time for exit day. The position that we have considered is to have the same rules as the EU, and the FCA has provided a technical assessment of the suitability of using the EU-adopted IFRS in the UK. We consider EU-adopted international financial reporting standards to be suitable for the specific purposes of preparing financial instruments for transparency directive requirements, and preparing a prospectus. That is because they enable investors to make a similar assessment of the assets and liabilities, financial position, profits and losses, and prospects of an issuer as financial statements drawn up in accordance with the UK-adopted IFRS, with the result that investors are likely to make the same decision about the acquisition, retention or disposal of its securities.
The intended decision recognises the interconnected nature of the UK and EU regimes, and it has been strongly welcomed by industry. In fact, if we did not adopt it, we would essentially oblige issuers to adopt a different way of presenting accounts. Arbitrarily asserting a differentiated regime would create burdens for those in the EU and other third parties.
When it comes to consultation engagement, I recognise that we have not undertaken a formal consultation on this statutory instrument, but it was published in draft on 12 December and we worked with the FCA throughout the drafting process to ensure that it was effective and fair. During that process, we engaged with industry, which expressed the view that the SI is not contentious, and that it largely reflects the minor changes to the legislation that will be necessary as a result of our withdrawal from the EU. Minor drafting changes suggested by industry as part of our engagement on the statutory instrument have been incorporated into the final version to improve the clarity of the text.
I will now clarify our approach to the prospectus directive and public bodies exemption. To address a deficiency arising from our withdrawal from the EU, we are extending such exemptions to bodies of that type in all third countries. In the absence of prudential justification, we cannot keep the scope of the existing exemption, which is for EEA bodies only, because we cannot offer preferential treatment to the EEA. We are obliged to treat public bodies in the EEA in the same way as we do other third-country public bodies. Restricting the exemption to UK bodies would exclude EEA public bodies that currently use the exemption, and they would have to start producing prospectuses in order to access the UK’s markets. That would negatively impact the attractiveness of the UK’s markets.
Our approach offers the most appropriate balance between investor protection and maintaining the effective functioning of the UK’s primary markets for capital. The hon. Lady’s substantive point was that we have made an arbitrary assessment, which constitutes policy origination. I assert that it is an intelligent interpretation of the most market-appropriate fix in the undesirable and urgent situation of no deal, against the Government’s intentions. I have now put that on record as our motivation.
The hon. Lady also raised issues about cost. As the SI largely replicates the current regulatory regime—except for the changes that are necessary to reflect the UK’s position outside the EU—it should have no significant impact on UK issuers accessing the UK’s capital markets. Such issuers will continue to operate as they did prior to the UK’s withdrawal from the EU. For example, they will secure approval for their prospectus directly from the FCA, as they do now. That is intended to minimise, as far as possible, the impact on issuers.
The issuers who are impacted will need to understand the changes, and the hon. Lady raised—as the hon. Member for Wallasey (Ms Eagle) did this morning—the question of how the relevant costs are computed. They are set out in an annexe to the explanatory memorandum, I believe, but I will draw attention to them in the letter that I am drafting to the hon. Member for Oxford East. We expect there to be a one-off cost of approximately £700 per firm, as she acknowledged. Given that the SI is designed to replicate the existing regime, we do not expect there to be any business change that will result in further transitional costs. Our engagement with industry during the drafting of the SI did not highlight such concerns about costs.
Anneliese Dodds
I am grateful to the Minister for those clarifications. To be absolutely clear, the equivalence gap that I was concerned about was not about EU IFRS and whether they are equivalent to UK rules. It was about non-EEA countries’ accounting rules and the process by which the FCA deems them to be equivalent. That process does not seem to be set out clearly in the SI. I am concerned that it could take the FCA some time to assess that equivalence, and that within that time costs could be imposed on business. Sorry; I obviously did not express that point sufficiently clearly.
John Glen
To be honest, I think the best thing is to write to the hon. Lady and set out my response clearly for the record, and also to make it available to the Committee.
The hon. Lady asked what we are doing in the SIs within the remit of section 8 powers on deficiency fixing, and I can say a little more about that. The 2018 Act, which gives Ministers the power to lay the SIs before the House, was debated thoroughly, and it represents the considered view of Parliament as we prepare to leave the EU. The section 8 powers were the subject of particular scrutiny and debate, and we spent approximately 12 hours in Committee debating the clause that grants them. What constitutes a deficiency in retained EU law is clearly defined in section 8 of the Act, and the Treasury is clear that the relevant SIs fall within the scope of that power. I do not think that the scrutiny that has taken place so far would have allowed us to reach this point, if that had not been the case.
On the question of whether the FCA has the resources to carry out the extra functions, we are absolutely clear that it does. It has had the additional resource of 130 full-time equivalents over the past year. Its business plan for 2019-20 will give more detail on that, but it has the discretion to raise more from a levy should that be needed. I accept that £16 million has been diverted to Brexit-related SIs, but I contend that that work is wholly necessary to prepare for the unwelcome outcome of a no-deal scenario without an implementation period.
The hon. Lady asked for an explanation regarding the FCA’s sub-delegation powers to legislate. Regulation 72 provides the FCA with the powers to make technical standards for the purposes specified in part 3 of schedule 2 to the SI. Currently, the European Securities and Markets Authority exercises those powers. As the powers relate to technical standards currently made by ESMA, it was considered appropriate to delegate them to the FCA rather than to the Treasury. Again, that is consistent with the financial services legislation domesticated under the 2018 Act.
The hon. Lady also drew attention to the in-flight files Bill. The challenge is that in a no-deal situation without an implementation period, a whole body of work is ongoing, some of which we have been very involved in, as a country within the EU, and some of which we absolutely desire to happen but will not land fully until after exit day. It would be possible to adopt the four files at the start of the in-flight files Bill, as per the terms that we discussed on Second Reading, only if we fixed the deficiencies in the language. They would essentially mark the next iteration of an evolution in the regulations on prospectus. In the same way, the general review that would cover the benchmarks we discussed this morning would have to be in the schedule of files. Those would not be the four that are nearly done, so we would have to make a judgment subsequently.
If I may, I will conclude the discussion. I will examine the record, and if there are any outstanding points, I will write to the hon. Lady and make my response available to the Committee. The Government contend that the SI is needed to ensure that the UK has an effective prospectus regime, listing regime and transparency framework. We seek to do that within the letter of the law. If the UK leaves the EU without a deal or an implementation period, we must ensure that we have made the appropriate provisions for the legislation to function. I hope that the Committee has found the sitting informative and will join me in supporting the regulations.
Question put.
Draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019
John Glen Excerpts(7 years, 1 month 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 Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019.
May I start by saying what a pleasure it is to serve under your chairmanship, Mr Gray?
As the Committee will be aware, the Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues 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, and a large number of debates on the SIs 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 and approved by the House of Lords on 18 January.
The SI will fix deficiencies in UK law relating to the regulation of financial benchmarks, to ensure that it continues to operate effectively post-exit. This legislation is important for the regulation and integrity of financial markets in the UK. The approach taken aligns with that of other SIs being laid under the European Union (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 benchmarks SI makes amendments to retained EU law on financial benchmarks, known as the EU benchmarks regulation—the BMR—and ensures that the UK continues to have an effective framework to regulate financial benchmarks.
Benchmarks are publicly available indices used in a wide range of markets to help set prices, measure the performance of investment funds or work out amounts payable under financial contracts. They play a key role in the financial system’s core functions of allocating capital and risk, and impact huge volumes of credit products and derivatives. The EU BMR sets requirements on benchmark methodology, transparency and governance.
Benchmarks must be approved in order to be used in the EU after the conclusion of the EU BMR’s transitional period at the end of 2019. To provide benchmarks for use in the EU after that, benchmark administrators located in the EU may apply for authorisation or registration. Third-country administrators or benchmarks may be approved through equivalence, recognition or endorsement. Approved administrators and benchmarks are placed on to the public register maintained by the European Securities and Markets Authority: ESMA.
In a no-deal scenario, the UK would be outside the European economic area and the EU’s legal, supervisory and financial regulatory framework. The UK legislation implementing the BMR and related legislation therefore needs to be updated to reflect that and ensure that the UK’s benchmarks regulation operates properly in a no-deal scenario.
The draft regulations therefore make the necessary amendments to the retained EU legislation to ensure that the regimes are operable in a wholly domestic context. First, this instrument amends the scope of the BMR to apply to the UK only. From exit day, benchmarks and administrators outside the UK will be subject to the onshored third-country regime, and must be approved via recognition, endorsement or equivalence for use in the UK.
Ms Angela Eagle (Wallasey) (Lab)
Could the Minister give the Committee an idea of how many people will have to be put through the system, which interacts with our very large financial sector? How many are involved in what he is talking about now? Will it be a big issue for the Financial Conduct Authority or will it be a tick-box exercise? How many countries and organisations are involved?
John Glen
Since 2015, the FCA has allocated £16 million to its Brexit onshoring exercise, which has ramped up to 158 full-time staff since March last year, when it had only 28. Following scrutiny from the Secondary Legislation Scrutiny Committee and further dialogue with the FCA, we in the Treasury are convinced that the FCA has the resources to continue to do that work. Publicly available machine-to-machine software onshores those approved through European national competent authorities to the FCA so that they are completely up to date. We foresee no difficulties in that process, but resources have been added. The hon. Lady asks about the number of countries involved. I cannot give her that information now—I do not have it available to me—but I will be able to write to her with it.
Secondly, the instrument establishes a requirement for the Financial Conduct Authority to create a UK benchmarks register, which it will maintain from exit day. Following the transitional window in the BMR, supervised entities may use a benchmark in the UK only if either the relevant administrator or the benchmark is on the FCA register. The instrument will ensure that benchmark administrators that the FCA has already authorised or registered ahead of exit day are automatically migrated from the ESMA register to the FCA register on exit day. It will do the same for third-country benchmarks or administrators that the FCA has already recognised or UK firms have endorsed.
Thirdly, the instrument includes a new transitional provision that takes EU and third-country administrators and benchmarks that appear on the ESMA register at exit day as the result of an approval under the BMR outside of the UK, and temporarily migrates them on to the FCA register for 24 months, beginning with exit day. That will enable continued use of those benchmarks in the UK for a 24-month period, unless and until an application for approval in the UK is refused, or unless they are removed from the ESMA register during that time. That will provide continuity for administrators and users, and minimise market disruption. Administrators and benchmarks subject to that transitional provision must become approved by the FCA under the third-country regime to enable their continued use in new contracts in the UK after that period.
Additionally, the SI removes obligations in retained EU law for the FCA to co-operate and share information with EU regulators as, with no guarantee of reciprocity, those obligations would not be appropriate as of exit day. However, the FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act 2000, as it is currently able to with all other third countries.
Furthermore, certain regulatory functions under the BMR are currently carried out by EU authorities—primarily the European Commission and the European supervisory authorities, including ESMA. Once the UK leaves the EU, EU bodies will no longer have a mandate to carry out those functions. Therefore, the SI transfers the functions of the Commission to the Treasury, including the power to adopt delegated Acts based on the underlying legislation. The SI also transfers to the FCA the functions of ESMA, such as the function to maintain a register of benchmarks and the power to make binding technical standards. That delegation is in line with the way we have conducted similar SIs across the board.
Finally, the SI makes further minor amendments to retained EU legislation to ensure that the UK’s benchmarks regime operates effectively once it leaves the EU. Taken together, these measures will ensure that the UK retains an effective framework to regulate financial benchmarks. The Treasury worked very closely with the Financial Conduct Authority in drafting the instrument. It has also engaged the financial services industry on the SI, and it will continue to do so. On 8 January, the Treasury published the instrument in draft along with an explanatory policy note, to maximise transparency to Parliament and industry.
In conclusion, the Government believe that the changes made by the instrument are necessary to ensure that the UK has an effective regime for regulating benchmarks and that legislation functions appropriately if the UK leaves the EU without a deal or an implementation period. That is not the Government’s expectation or desire, but it is consistent with the preparation we are doing. I hope Members will be able to support the draft regulations, which I commend to the Committee.
Ms Eagle
It is a pleasure to serve under your chairmanship, Mr Gray—I think for the first time. It is important for us to do a little translation of this highly technical set of instruments that are before us in the event of no deal; I presume that when he replies to the debate, the Minister will confirm that these changes will automatically become defunct if there is a deal.
What we are really talking about with benchmarking is the price of particular assets and contracts being swapped, traded or changed. As my hon. Friend the Member for Oxford East so pointedly observed, this is about trillions of pounds swilling through various international markets in—
Ms Eagle
In assets, cash, pensions, contracts, swaps and all the things that currently make up our global trade in such issues. As the Minister points out from a sedentary position, many people’s future retirement plans are crucially dependent on getting this right.
These kind of EU regulations came into being in the first place because of the LIBOR scandal and the evidence of significant cheating in creating the prices of these benchmarks for these trades to happen. Until the LIBOR scandal, nobody had really looked at how international benchmarks such as LIBOR were generated. Everybody thought it simply happened according to market mechanisms, and that absolutely nothing nefarious was going on.
However, we then discovered that a great deal of nefariosity—I do not know whether that is a word—was going on, and that people’s rewards for indulging in that nefariosity were colossal. That is why all these regulations had to be immediately generated. That is the first thing. This is about a hugely important area of potential market manipulation and cheating, the risks of which, until we became aware the LIBOR scandal, were tiny and the rewards from which, if one indulged in it and got away with it, were colossal.
We also need to think not only about the individual market manipulation that might happen if we get this wrong, but about financial stability itself. If 2008 taught us anything, it was that these very complex and increasingly complicated global money and asset markets, for which these benchmarks effectively represent what is meant to be a market-generated price, are the weakest and least-regulated points across the world. The regime that is the most hands-off becomes the weakest, and—at the same time, paradoxically—the strongest defence against manipulation and disaster.
We know disasters such as the global financial crash affect real people’s lives across the globe. The draft regulations might look like very dry, boring, technical changes that the Minister has brought before us, but they are actually crucial. They are about real issues of financial stability, potential market manipulation and cheating. If we do not get this right, we will become the weakest link.
It is therefore absolutely and utterly crucial that, if we are to establish this kind of regime, we had better be sure that we are doing it correctly, that we have the time to do it correctly and that we have enough people in the FCA with enough sophistication to do it correctly. I worry about the size of our market—£130 billion in gross value, according to the Minister’s own figures. With the sudden ramping up from a mere 28 employees at the FCA to 158 full-time staff, which the Minister talked about, they are going to have to be some of the most sophisticated people on this earth. I hope he is paying them properly—[Interruption.] Not him personally, but the Government, of whom he is the representative in Committee. They had better be good at their jobs. I want the Minister to reassure us about that.
Is the FCA up to it? I do not mean to be horrible, but the Minister is suddenly giving it a lot of responsibility, with new staff: if we get it wrong and there is regulatory arbitrage to be exploited in the way the system works, we know that it will be. That might include leaving loopholes for huge market manipulation and enrichment at the expense of customers, pensioners and the people who are investing in the instruments, who will be traders. If the Minister does not get it right, the consequences will be huge.
How big is the risk? The impact assessment does not really talk about how big it is or the likely costs of the changes. I congratulate the Minister on being one of the few Ministers who has managed to produce an assessment to put before one of these statutory instrument Committees, which we are attending in great numbers at the moment. Large numbers of his ministerial colleagues have not been able to do that, which is a disgrace. That is the way in which the Government are dealing with the situation we find ourselves in.
The costs that the Minister puts before us are described as “unknown: likely significant” or “significant”. There is an inability to quantify the cost to business and to those who are in the market of the sudden change and the no-deal scenario. At a macro level, it is significant but unknowable, but at a micro level, in annex A, the Treasury has come up with a ridiculous little formula for the familiarisation costs for individual companies—as an ex-Treasury Minister, I am familiar with that kind of thing.
The Treasury has decided that the familiarisation cost of a statutory instrument for one firm is the number of words in the statutory instrument divided by the number of words that one can read in a minute—as if being able to read the statutory instrument means that one automatically understands it. In one of the most complex areas of regulation and statutory authority, that is the best that HMRC can come up with.
By the way, that figure has to be multiplied by one over 60 and by the hourly wage rate, which is £330 for a solicitor or legal executive with more than four years’ experience. What a joke! Is the Minister really suggesting that if one could read the statutory instrument at so many words per minute, one would automatically understand what it meant? I have been in the House for 27 years, and I can read quite a few words a minute, but I must confess that I have never come across a statutory instrument that I can automatically understand just because of that, especially in such a complex area.
John Glen
I am grateful to the hon. Members for Oxford East and for Wallasey for their scrutiny of this measure, and I shall endeavour to answer the points made.
On the general opening remarks of the hon. Member for Oxford East, all I can say to her is that the Government are not taking any powers beyond those that exist within the withdrawal Act. To the points made by the hon. Member for Wallasey, I say that there has been an attempt at every juncture to be thorough in the way that we have examined the optimal way to transition and onshore these powers, that we have engaged with industry and the regulator, and that we have done that with their consent and allowed scrutiny through that process, even in a condensed period.
I will now address the four points that the hon. Member for Oxford East raised. The first one was around the issue of the relationship with the in-flight files and the fact that there are ongoing challenges to this regulation, which is in the process, essentially, of being fully adopted.
There is a European supervisory authorities review file in the in-flight files Bill, but that is separate and additional to this onshoring process; the regulation is in force already, but it is in a transitional phase. Many requirements in the regulation already apply. It is simply the case that some benchmark administrators are not required to apply for authorisation until 2020. However, on the broader issue, if subsequently the ESA file that is in-flight then makes an EU-wide update, then—in a no-deal scenario—we would have to make that decision at a future point.
The second point that the hon. Lady raised was about deemed equivalence of the EU27. I responded to the hon. Member for Wallasey earlier with respect to the publicly available machine-to-machine software, to ensure that at the point of a no-deal moment—not what the Government expect—at the end of March, we would be completely up to date with decisions made across national competent authorities across the EU at that point.
The hon. Member for Oxford East referred in her remarks to a transition period. Well, we would not have that transition period in a no-deal situation, so it would not apply. I sense that she wants to intervene and I am very happy to give way.
Anneliese Dodds
I appreciate the Minister’s sincerity in trying to respond to my comments, and I apologise: I do not think I expressed myself clearly. I was referring to the fact that there could be a divergence between the benchmarks still approved in the UK during the 24-month period—I probably used the wrong language to describe that—and what applies in the EU27, because this regulation says that a benchmark can be retained in the UK even if it is not in the EU27, if the FCA considers that taking it off would not be compatible with its strategic objective and so on.
John Glen
On the maintenance of benchmarks if they have been dropped from the ESMA register, I was going on to say that this SI enables the FCA to exercise judgment. It does not have to follow ESMA decisions. The FCA objectives are in place to protect UK markets and consumers. In a no-deal situation, that is a function that the FCA would have to take on.
I have set out the transition mechanism for decisions that have already been made, but in a no-deal situation we would absolutely face a very challenging environment. I am sympathetic to the comments of the hon. Member for Wallasey about the resourcing of the FCA in that situation; it would be significant. In this corpus of 53 SIs, I am concerned about making the transition process clear. There would be a lot of legislation to pass and work to be done in a no-deal situation subsequent to this process.
Anneliese Dodds
I know that the Minister and his officials are doing the best they possibly can in the extremely difficult situation that they should not have been put in, but I want to press him on this. These regulations are described as putting into practice the EU benchmark regulation; they are not described as dealing with any eventualities that could come out of no deal. In that situation, surely if we are just following the EU benchmark regulation, we should use the criteria that ESMA uses on benchmarks, not other criteria for the FCA’s objectives. That falls outside the scope of these regulations.
John Glen
I think, with the greatest respect, that the hon. Lady is getting two things muddled up. At this point, we are onshoring what already exists. We have a 24-month transition period during which, in a no-deal situation, there would be considerable engagement with industry and regulators about how we would adopt the criteria as a national body independent of the European supervisory authorities. If we were in that situation, we would clearly need to develop a new framework altogether for regulation. How we would harmonise with other bodies outside the UK would depend on the basis of that no deal. If the hon. Lady is asking me whether I am setting out in this SI a comprehensive regime for an independent verification of benchmarks over the next two years in a no-deal situation, I should say that no, I am not.
Ms Eagle
It is difficult to think of scenarios that we hope will not happen. We all hope that at some stage sense will break out and there will be time to do this disentangling. Will the Minister reassure me that if there is no deal, the regime that these changes will put in place will be in place the day after no deal, and that there will not be large numbers of loopholes through which very rapid trading, which can be instantaneous, can occur, leading to huge profiteering?
Anneliese Dodds
The Minister is being enormously generous in giving way. I appreciate his comments, but I would like this put on the record. What I take from his remarks is that these regulations are hybrid. They are not just about onshoring the existing regime, because if they were they would not include the reference to the FCA deciding on these matters because of its strategic objectives. Rather, they are partially about the creation of a new regime. As such, they depart from what is allegedly the template for these regulations.
John Glen
I am grateful for both points. I will first respond to the hon. Member for Wallasey. I assure her that the regulation will onshore and will not create any cliff-edge risks around the loopholes that she refers to. We have worked very closely with the FCA, which provides the technical expertise. I will address her point about the resourcing of the FCA in a moment.
For the record, I do not accept the characterisation of hon. Member for Oxford East of the regulations as hybrid. In a no-deal situation, there would need to be a lot of extra work to create a new permanent regime. In terms of the divergence between the UK and the EU27, the FCA will not necessarily know why a benchmark has been removed from the ESMA register after exit. It is therefore prudent to give the FCA the discretion to make its own assessment so it is able to protect UK markets and consumers. In a no-deal situation, we would be in a world very different from the one we are used to and we take the view that the provision fixes a deficiency caused by our withdrawal.
The hon. Member for Wallasey raised the importance of the benchmarks being regulated, and I absolutely agree. The SI will ensure that the regulatory regime in the UK will operate effectively in a no-deal scenario. I reassure her that the SIs in the programme have passed through the usual quality control procedures and we have engaged extensively with the FCA in drafting them.
Based on my earlier comments about the additional full-time equivalents that the FCA has had this year in preparing effectively to manage the programme, I am confident that it has adequate resources. Regarding the future pressure, the FCA is not funded by the Government but by a levy on industry, so it will be up to the authority to bring that forward in its plan, which it will do shortly for 2019-20.
I note the observations about the familiarisation costs and the mechanism to calculate them. To be clear, the SI has been assessed to result in an estimated one-off familiarisation cost of £8,300, which, shared between the 16 UK benchmark administrators authorised under the regulations, is £518 each.
John Glen
I will, however, write to her to explain how we have used it. I acknowledge her scepticism about the situation.
The hon. Member for Oxford East raised a point about the definition of “commodity” not being in the EU regulation. As I cannot respond here and now, I am grateful for her graciousness in allowing me to write to her.
On the LIBOR points that the hon. Member for Wallasey raised, the UK did have eight domestic benchmarks but they were superseded by the EU’s more comprehensive range. The regime we are now part of is more thorough than it was 10 years ago.
The hon. Member for Oxford East asked whether it was appropriate for the FCA to assess the critical benchmarks. Just to contextualise that for the benefit of the Committee, I should say that the FCA carries out its assessment against the conditions relating to critical benchmarks set out in the benchmarks regulation. The FCA will present its conclusions to the Treasury. The Treasury must make regulations designating a benchmark as critical if the FCA makes a recommendation in accordance with the requirements of the amended provisions. The FCA is the appropriate body to carry out that assessment due to its technical expertise. That is consistent with the current split of functions between the Commission and ESMA, and it has been onshored appropriately.
The hon. Member for Wallasey asked about the wider impacts. I acknowledge her recognition of a green impact assessment, published on 8 February. Impact assessments for the SIs focus narrowly on the changes that the instruments make and on how businesses will need to respond. I concede that they do not deal with the broader economic impact of leaving the EU. There is considerable debate about what that would mean in a no-deal scenario and my judgment is that there would be a significant impact, in the short term particularly.
The impact assessment of the European Union (Withdrawal) Act 2018 deals with the impact of the parent Acts, and the Government have also published analysis, as the hon. Lady will know, of the potential economic impact of a range of scenarios. I must stress that the SI mitigates the impact of leaving the EU without a deal, and if it were not in place industry would face greater disruption and cost.
In conclusion, the changes are needed to ensure that the UK has an effective regime for regulating benchmarks and that the legislation functions appropriately if the UK leaves the EU without a deal or an implementation period. I believe that I have dealt with Opposition Members’ points. I hope that the Committee has found the sitting informative and will now join me in supporting the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019.
Exiting the European Union (Financial Services)
John Glen Excerpts(7 years, 1 month ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the draft Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019, which were laid before this House on 21 January, be approved.
Mr Deputy Speaker
With this we shall take the following motion:
That the draft Money Market Funds (Amendment) (EU Exit) Regulations 2019, which were laid before this House on 24 January, be approved.
John Glen
As the House will be aware, the Treasury has been undertaking a programme of legislation under the European Union (Withdrawal) Act 2018 to ensure that if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the United Kingdom. The two statutory instruments being debated today are part of this programme. The disclosure regulations, as corrected by the corrections slip published on 12 February, will address deficiencies related to the UK’s implementation of EU rules that govern the exchange of confidential information between European economic area and third country regulatory and supervisory authorities. Once the UK is outside the single market and the EU’s joint supervisory framework for financial services, amendments will be needed to these rules so that they continue to operate effectively in a scenario where the UK leaves the EU without an agreement. The money market funds regulations will fix deficiencies in UK law on money market funds and their operators to ensure they continue to operate effectively post exit. The approach taken in these pieces of draft legislation aligns with that of other statutory instruments being laid under the 2018 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.
Let me deal first with the Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019. As Members across the House will know, an important function performed by financial services regulators is the gathering of supervisory information from firms. Regulators use this information so that they can ensure that regulated firms are operating in a way consistent with regulatory requirements and so they are alerted to any development that may need supervisory intervention. As a great deal of financial services activity takes place across borders and across regulatory regimes, the ability of national regulators to co-operate with each other and to exchange information is vital if they are to discharge their supervisory functions effectively.
The information gathered by regulators is often confidential and often commercially or market sensitive, so it is right that there are strict rules and safeguards on how regulators share such information with other regulatory authorities. EU law currently plays an important role in setting these rules. In order to ensure the effective functioning of the single market in financial services, the EU has developed a joint supervisory framework for national regulators and supervisory bodies in the EEA. This makes co-operation and the sharing of certain supervisory information between EEA national regulators mandatory.
In addition, the EU has established the European supervisory authorities—ESAs— which are responsible for co-ordinating the approach of EEA national regulators. Co-operation and sharing of certain information with the ESAs is also mandatory for EEA national regulators. As well as setting out what information should be shared, EU rules also include restrictions and safeguards. In the UK, these rules are implemented in Part 23 of the Financial Services and Markets Act 2000 and the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001.
For third country authorities, there are additional restrictions when disclosing confidential information. The UK regulator may need to be satisfied that the third country authority has protections for confidential information in place that are equivalent to those of the EU. There may also be a requirement to enter into a co-operation agreement with the third country authority. In addition, if the UK regulator is disclosing confidential information to a third country authority which originated from an EEA authority, the UK regulator may need to seek the consent of the EEA regulator which originally disclosed the confidential information.
If the UK leaves the EU without an agreement, the EU has confirmed that it will treat the UK as a third country and the UK will also need to treat EEA states as third countries. The UK will be outside the single market and the EU’s joint supervisory framework, so references in UK legislation to this framework, and to EU legislation and EU bodies, will be deficient and will need to be corrected so that the UK’s disclosure rules for confidential information will work effectively. In particular, the rules will need to be amended to reflect the third country relationship that will exist between the UK and EEA states. After exit, it would not be appropriate to provide for different rules and protections on the disclosure of confidential information by UK authorities depending on whether confidential information is being shared with EEA authorities or the authorities of non-EEA states. If this is left unamended, the UK would afford additional protections and less onerous restrictions to EEA states compared with other third countries. In addition where there are currently requirements to seek the consent of an EEA authority before the onward disclosure of information, these requirements will be retained only if an equivalent requirement also exists in relation to seeking consent from non-EEA authorities.
This instrument also provides for a transitional arrangement that will ensure that any confidential information received by a UK regulator before exit day will continue to be treated in accordance with the relevant provisions that existed before exit day. While it is necessary to amend the UK implementation of rules around disclosure of confidential information to ensure that they continue to operate effectively once the UK is outside the EU, it must be stressed that these amendments are in no way intended to diminish the level of co-operation that exists between UK and EEA regulators.
The Government and UK regulators believe that effective co-operation and co-ordination is essential for the effective supervision of financial services. UK authorities will be doing everything possible to ensure that effective co-operation continues. UK regulators have always been key players and key voices of sanity in the global supervision of financial services, as is demonstrated by the close and co-operative arrangements we have with regulators in countries outside the EEA. After exit, it will be necessary for the UK regulators to enter into co-operation agreements with EEA national regulators and with the ESAs. These agreements will help ensure that a high level of co-operation and information sharing will continue.
Kirsty Blackman (Aberdeen North) (SNP)
I am seeking some clarity on the first of these SIs and which day the Minister expects the disclosure of information regulations to come into operation. Am I right in thinking that exit day means exit day unless there is an implementation period, in which case it means at the end of the implementation period?
Kirsty Blackman
With respect, that is not what it says in the explanatory memorandum for the first SI, which suggests that it is needed in the event of any Brexit and not just in the event of a no-deal Brexit. The second one covers a no-deal Brexit, but I had understood that the first one was needed for any Brexit.
John Glen
I will examine that and, if I may, I will come back to it and seek to clarify it when I wind up this debate.
Both the Government and UK regulators attach very high priority to putting these agreements in place, and I am pleased to report that UK and EU regulators are making good progress in their discussions to finalise these agreements. The Treasury has been working very closely with the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority in the drafting of this instrument, and there has also been engagement with the financial services industry, including the publication of this instrument in draft, along with an explanatory policy note on 9 January. In summary, the Government believe that the proposed deficiency fixes are necessary to ensure that the UK has a clearly defined and operable set of rules for the disclosure of confidential information.
I turn now to the Money Market Funds (Amendment) (EU Exit) Regulations 2019, which relate to the establishment, management, and marketing of money market funds. Such funds invest in highly liquid instruments, and provide a short-term, stable cash-management function to financial institutions, corporations and local governments. They are commonly used by investors as an alternative to bank deposits. The regulations formed part of the response to the 2008 global financial crash to preserve the integrity and stability of the EU market, and to ensure that money market funds are a resilient financial instrument. They do so by ensuring uniform rules on prudential requirements, governance and transparency for managers of these funds.
Money market funds can either be structured as undertakings for collective investment in transferable securities—UCITS—or as an alternative investment fund. Therefore, they are regulated as UCITS or as an alternative investment fund, in addition to being regulated as a money market fund. The regimes for UCITS and alternative investment fund managers have been separately amended to reflect the UK leaving the EU by the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 and Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018, which were taken through Committee, where I believe I was joined by the hon. Member for Oxford East (Anneliese Dodds), and have now been approved in both Houses and will be made shortly. In a no-deal scenario, the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework. EEA money market funds, which currently provide the majority of money market services in the UK, would not be able to continue to service UK clients. The money market funds regulation therefore needs to be updated to reflect this and ensure that the provisions work properly in a no-deal scenario.
First, these draft regulations remove references to the Union which are no longer appropriate and to EU legislation which will not form part of retained EU law. These references will be replaced by references to the UK and to relevant domestic and retained EU legislation. Secondly, in line with the general approach taken to the onshoring of EU legislation, the SI will transfer functions currently within the remit of EU authorities; from the European Securities and Markets Authority to the FCA, and from the European Commission to Her Majesty’s Treasury.
As the UK’s regulator for investment funds and the current national competent authority for money market funds, the FCA has extensive experience in the asset management sector, and it is therefore the most appropriate domestic institution to take on these functions from the European Securities and Markets Authority. This statutory instrument transfers all powers exercised by ESMA to the FCA. The FCA will become responsible for technical standards on how funds should stress test their funds, and it will gain two operational powers to establish a register and reporting template for money market funds.
This statutory instrument transfers any power currently exercised by the Commission to the Treasury, in line with the other statutory instruments that we have taken through. Those powers all relate to creating rules concerning standards for money market funds, such as their liquidity and quantification of credit risk.
As I have mentioned, EU money market funds are structured and further regulated as UCITS or alternative investment funds. This statutory instrument makes provision to ensure that EU money market funds can use the temporary marketing permissions regime, as legislated for in the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 and the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018. Following an assessment by the FCA and the submission of a written statement to both Houses, the Treasury will be able to extend that by a maximum of 12 months at a time. It will also allow for EU money market funds that are currently marketing into the UK, and any subsequent UCITS sub-funds, to continue to market into the UK for up to three years after exit day.
This statutory instrument amends the scope of the regulation to apply to the UK only, with the effect of only allowing the marketing of UK-authorised MMFs or MMFs managed by UK fund managers. However, further amendments maintain the eligibility of EEA MMFs with temporary permissions to continue to market in the UK at the end of the temporary marketing permissions regime if they gain the required permissions to market as a third country fund under the UK domestic framework.
Money market funds that are UCITS will be required to gain authorisation under section 272 of FSMA, while the managers of money market funds that are alternative investment funds will need to notify under the national private placements regime. The UK currently has a very small domestic market that relies heavily on EEA money market funds, so these provisions address the cliff-edge risks that could arise as a consequence of defaulting to a UK-only market. That will ensure that local government, businesses and other UK investors can continue to access their investments and have a choice of money market funds to use for cash management.
As with the previous statutory instrument, the Treasury has been working very closely with the FCA in the drafting of this statutory instrument and engaging with the financial services industry. I would like to put on record my gratitude to TheCityUK for convening appropriate representative bodies throughout the process. In November the Treasury published the statutory instrument in draft, along with an explanatory policy note, to maximise transparency to Parliament and industry.
In summary, the Government believe that the proposed legislation is necessary to ensure that the framework for money market funds continues effectively, and that the legislation continues 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 would like to respond to the point raised by the hon. Member for Aberdeen North (Kirsty Blackman). Parliament will amend the regulations as necessary for a deal scenario. If we have a deal, an amendment process would apply to all the regulations that we have taken through. Most of them would need to be repealed, but we would do so according to the terms of the deal. I have nothing more to say at this point, and I commend these regulations to the House.
Anneliese Dodds (Oxford East) (Lab/Co-op)
First, may I associate myself with the heartfelt tributes that have been paid to my hon. Friend the Member for Newport West (Paul Flynn), and I express my sympathies to his family?
We are here to discuss two no-deal statutory instruments appertaining to financial services. Members will be aware that the Conservative Government refused to allow a debate on the Floor of the House about arguably the most significant such SI—the one concerning the markets in financial instruments directive, which was sufficiently complex to require a Keeling schedule. The Government did agree to a recent debate on an SI concerning securitisation, but of course that was not a no-deal SI, and the debate only happened when the Opposition prayed against the SI. Members may be forgiven for scratching their heads about why the Conservative Government have adopted such a different tactic this time; I am sure Members can come to their own conclusions on why this debate is taking place on the Floor of the House today.
These statutory instruments make provision for a regulatory framework after Brexit in the event that we crash out without a deal. The volume of such legislation is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken as part of the no-deal process. However, establishing a new regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Secondary legislation ought to be used only for technical, non-partisan and non-controversial changes, because of the limited accountability it normally allows; instead, the Government continue to push through far-reaching financial legislation via this vehicle.
As legislators, we have to get this right. The regulations could represent real and substantive changes to the statute book, and as such, they need proper and in-depth scrutiny. I am slightly surprised to see some Government Members shaking their heads at the idea that we need appropriate scrutiny. It is incredibly important, and in the light of that, the Opposition would like to put on record our deepest concerns that the process regarding regulations in the event of no deal is not as accessible and transparent as it should be.
The rationale for these SIs is preparation for a no-deal Brexit—something that continues to be retained on the table by the Conservative Government despite clear evidence of the harm that that is doing to our economy. Last week in this Chamber, I mentioned the concerning slowdown in growth rates and the shift into recession of our manufacturing sector. The financial sector has not been immune; quite the opposite. As many Members will know, Ernst and Young has created what it calls a Brexit tracker, which monitors the public statements of more than 200 of the biggest financial services companies operating in the UK. As of January this year, the tracker showed that more than a third of the financial services companies that were tracked indicated that they are considering moving or have confirmed that they will move some of their staff or operations outside the UK. As we consider these two financial services SIs, we must reflect on why the current Government continue to retain the so-called option of no deal, especially given that the House has emphatically shown its opposition to such an outcome.
The first SI appears to cobble together three sets of legislative changes to a variety of parent legislation. The Minister, as he always does, made a valiant attempt to present a coherent case, but we are talking about three different sets of changes. As with other SIs that the Opposition have contested, the parent legislation includes primary legislation, not least, as the Minister acknowledged, FSMA. Yet again, we see here the operation of Henry VIII powers.
In connection with that, I note that as of last Thursday, 288 changes have been made to FSMA as part of the preparation for no deal. That is an enormous number of changes to primary legislation, and it has been delivered in a completely piecemeal manner. We have no indication of when Government will present us with a finalised and integrated version of the new no-deal legislation, coupled with the primary legislation that it amends. Perhaps the Minister, in his concluding remarks, can tell us whether his Department has such an overview and, if so, whether it would be willing to share it with the House and the public so that we can better understand what the financial services regulatory system would look like in the event of no deal.
The explanatory notes for the regulations were truly a masterpiece of the kind we have come to know well from no-deal SIs. I note that Her Majesty’s Treasury uses the crystal mark on some of its documents. I am sorry to speak so bluntly, but HMT would perhaps have done well to use the crystal mark’s drivel detector—its words, not mine—on the explanatory notes. All they did was to list the bits of legislation that were being changed. In no case did they explain why, aside from maintaining that doing so was necessary to address deficiencies. Yet again, we find questionable decisions being taken with no explanation.
Not all the changes in the regulations appear even to relate to the EU. For example, there are changes relating to disclosure requirements and to the Panel on Takeovers and Mergers—in regulation 2—but there is no indication why those changes have been made. Again, definitions are changed, such as that for short selling regulation information, but it is not clear whether that definition will be replaced elsewhere or, indeed, why it had to change in the first place.
Perhaps most worryingly, we see yet again a shift away from EU requirements, which suggests that these measures are potentially going beyond direct transposition and instead diluting existing provisions. For example, the wording of one article of the EU regulation on short selling and certain aspects of credit default swaps—sorry, that is not a lovely name to pronounce—is amended from “shall, where possible” to “may”. From my reading, the amended provisions relate to the obligation to liaise with third countries concerning the identification of where shares are traded, but it is not clear why that obligation should be watered down. There is a similar change to the 2014 market abuse regulation, where “shall, where necessary” is altered to “may”. It appears that the UK’s co-ordination with non-EU countries and its relations with the EU27 are being altered through these measures. The withdrawal Act does not provide the authority to do that.
The Minister appeared to suggest that this was to do with the exchange of confidential information and that we needed to have a different process. Surely, however, there are different ways of responding to the issue; there could have been measures in this legislation to deal with the problems and to ensure that information was appropriately guarded against anybody who might use it in an inappropriate way. However, we do not have that; instead, we have these provisions, with no explanation why.
Relatedly, there is no clear indication of the process to be used to determine which countries might be chosen for the conclusion of disclosure agreements mentioned by the Minister, or of the process required for those agreements. I absolutely agree with the point made by the hon. Member for Aberdeen North (Kirsty Blackman). Obviously, she was referring to the overall import of these regulations, but there are other ambiguities about timing. When it comes to the conclusion of disclosure agreements, does the process have to be completed by exit day? If it does, has that process started? If it has started, on whose authority has it started? Presumably, it is not the authority of this House. In addition, it would be helpful to understand why the Government have decided to follow a bilateral approach, rather than one that might have been integrated, with an integrated disclosure agreement that could have been signed with the European Securities and Markets Authority.
Finally, we are again informed that an impact assessment has not been conducted on this instrument, even though the explanatory memorandum states that there has been engagement with relevant stakeholders concerning the SI. It would be helpful if the Minister provided further details about that engagement.
Let me move now to the Money Market Funds (Amendment) (EU Exit) Regulations 2019—I will just talk about MMFs from now on. Obviously, the regulations are intended to implement the EU’s MMF regulation of 2018. As described by the Minister, that regulation was intended to make money market funds more resilient against disturbances in the financial markets, reduce the risks of runs in the markets, limit cross-border contagion and improve investor protection. That regulation immediately applied to new MMFs, from July of last year, but it came into practice for existing MMFs very recently—just last month. I will not go into all the details of the use of MMFs, but I would just add charities to the list the Minister talked about—there are a number of different bodies that use these funds.
The process of creating the regulation was led by a UK Labour MEP in the European Parliament, Neena Gill. As many Members may be aware, the process was controversial; it was not entirely straightforward, and there was huge debate about whether the UK should exactly follow the US approach or not. There was a lot of scepticism about whether the system of MMFs, in and of itself, should be encouraged. Many have described it as a system of shadow banking, because of its relative lack of transparency.
As with other SIs tabled by the Government, there are a number of problems with this legislation. First, it provides a new definition of money market funds that is arguably circular. It describes them as
“instruments normally dealt in on the money market which…satisfy…Article 2a(1)”
of the regulation. That is quite a different approach from the one taken by the EU, even back in the days of the Committee of European Securities Regulators. Before ESMA was created, there was an inclusive list of activities that would lead to classification as an MMF. A different approach is taken here.
Secondly, again as with other pieces of no-deal financial services legislation, there is no indication why and how the FCA, in particular, is meant to adopt the regulatory approach suggested in this SI. Regulation 6 provides it with the power to regulate MMFs, but without explaining how that will impact on its existing activities. The Minister intimated the different kinds of activities that the FCA will have to take on as part of this process, but they are very onerous. Just in relation to reporting templates, ESMA produced a 135-page report after consultation with stakeholders about what should go into those templates. I assume that similar levels of detail might be required for the FCA. This will not be a light-touch area to move into. Again, there is a lack of clarity about the extent of industry consultation on this SI.
As has often been the case with these SIs, we have had some rather strange throwaway comments in relation to this SI. The guidance accompanying it states that it does not include provisions that may be necessary to ensure Gibraltarian financial services firms can have continued access to UK markets in line with the UK Government’s statement in March 2018 and other provisions dealing with Gibraltar more generally. It also says that, where necessary, provisions covering Gibraltar will be included in future SIs. Does that mean that provisions for Gibraltar should have been covered but that there just was not time to consider them properly, or is there a procedural reason why they are not covered here? Again, will we need an omnibus SI at some point covering regulatory arrangements for Gibraltarian financial services?
Anneliese Dodds
I am really pleased to see the Minister nodding, and I look forward to his explanation of why this has been an issue.
Above all, we see secondary legislation being used expansively here, with no overall indication of how it will interact with other pieces of secondary legislation and, indeed, primary legislation. There appears to be no rhyme or reason why the Conservative Government wish certain SIs to be taken on the Floor of the House and others to be taken in Committee—aside, that is, from a desire to fill the timetable for this week, after their mismanagement of the Brexit process. Issues of such importance as our nation’s financial stability and resilience surely deserve better than this.
Kirsty Blackman
If they simply correct typos, that is absolutely fine. I was worried that they might have been the result of concerns raised about the legislation. I welcome that clarification.
The explanatory memorandum states that no consultation was undertaken. Once again, I think that consultation should have been undertaken on the SIs, and particularly the one that makes changes to the legislation. The explanatory memorandum states that no impact assessment was done, but it does say that
“a de minimis impact assessment has been carried out.”
This is the first time that I have seen that phrase used in an explanatory memorandum on a financial SI, and I do seem to be spending quite a lot of my life dealing with them—I am sure that the Minister is spending even longer. I do not know what a de minimis impact assessment is, and I do not know where I could find it, because it is certainly not provided on the website. I can find no further information on this thing that has apparently been done to assess the impact.
We have criticised the Government before for not carrying out impact assessments. I think that it would have been useful to have an impact assessment on this. In fact, I fully intend to challenge the Government on this. They carry out an impact assessment only when there is likely to be an impact of £5 million or more on businesses. They do not carry out impact assessments when there is likely to be an impact of millions, or indeed hundreds of millions, on consumers or individuals living anywhere in these islands. It strikes me that, according to the Government’s own better regulation guidance, this process is entirely unfit for purpose, given that it involves literally hundreds of SIs coming through, many of which could do with an impact assessment.
I will move on to the Money Market Funds (Amendment) (EU Exit) Regulations 2019, which is a no-deal SI. The Labour spokesperson made a comment about taking no deal off the table. [Interruption.] Mr Deputy Speaker, it would be easier to speak if it was a little quieter in the Chamber. We are not asking the Government to take no deal off the table now—the hon. Member for Thirsk and Malton said that we were doing so at a critical point in the negotiations; we have been asking them to take no deal off the table pretty much since the Brexit process started, because it should never have been an option in the first place. We are not asking for it to be done now; we were asking for it to be done almost three years ago.
The regulations also change the powers of the Financial Conduct Authority. I have raised concerns before about the powers of the FCA, and the fact that the Government are making piecemeal changes without any kind of overall strategy on what they expect it to look like at the end of the process. I know that the FCA can request more money from Parliament, and I assume that it will have to do so in order to carry out the additional functions that are being delegated to it as a result of all the SIs coming through.
The explanatory memorandum for the money market funds regulations states that HM Treasury will have
“the power to make delegated acts specifying quantitative and qualitative liquidity requirements on MMFs.”
I would appreciate it if the Minister could seek some divine intervention on this and let us know how those delegated acts will be introduced. Will SIs be introduced under the affirmative or negative resolution procedure, or will the Treasury simply be allowed to make its own regulations without any recourse to Parliament? It would be useful if Parliament were across this, given that it is an area that Parliament is not in the habit of dealing with, because it has been an EU area. I think that, in the event of no deal, Parliament would benefit from having some input into those requirements on MMFs.
The commencement provisions for both SIs state that they will take effect on “exit day.” Now, I understand that exit day is defined in the European Union (Withdrawal) Act, which sets out a definite date and time. I am told that the SIs that refer to “exit day” mean that date and time. However, the withdrawal Act also gives the Government the power to vary exit day. If the Government vary exit day, presumably the SIs would come into effect only on the day that they have decided is to be exit day.
I want to know what will happen if we approve these SIs. The process is as follows. If an SI is approved, it does not get Royal Assent—that is not something that happens to SIs. Instead, it basically sits in a pile of SIs that are waiting to be “made”, and they are “made” at a date and time of the Government’s choosing. I was unable to get any further information on that, other than that it is the Government who decide—is it the Cabinet Office or the Prime Minister?
When we were asked to approve these SIs, I genuinely thought that the first one was not to do with a no-deal Brexit, because nowhere in the explanatory memorandum could I find the words “no deal”. The second SI, however, is very clearly to do with no deal. We are being asked to approve the money market funds regulations, which the explanatory notes state will come into effect only if there is no deal, but there is nothing to stop the Government from making this SI, or indeed any other, at a time of their own choosing; it would then apply after exit day. The House of Commons is basically being asked to agree to all these SIs coming into force on exit day, and then the Government have carte blanche to make any of them whenever they desire.
The Minister and I were both a little confused about the provisions of the disclosure of information regulations, given that I thought they applied in any circumstance. I am not sure what will happen if there is a deal now, because I do not know how the disclosure of financial information will work, because we have not been provided with an SI that works in the event of a deal scenario—surely we should have been, because there would be deficiencies in EU law.
What happens in that event? How do the Government decide when to make these SIs? If there is a deal, will they suddenly rush through provisions? The House of Commons has so many SIs in front of it, and we are now only dealing with no-deal SIs. In the event of a deal, will we have a mad situation where the Government have to make edits to each of these SIs and bring them through the House again so that we can approve them, followed by some sort of procedure to put them in place?
There have been screw-ups of monumental proportions in relation to everything to do with Brexit. Specifically in terms of the SI process, we have not seen all the SIs for a no-deal scenario. Apparently we will not even see some of the SIs for a deal scenario until the Prime Minister manages to get something through the House, and who knows when that may be? Are we going to continue with this shambles? For people who are interested in House of Commons procedure, it is wonderful to see it not working. It is great to see the millions of places where House of Commons procedure is completely deficient, and it is particularly great to be able to discuss these SIs and raise those issues on the Floor of the House.
I understood that the disclosure regulations were for the event of any deal or no deal. If they are only for the event of no deal, what information will the Minister provide about that? What information will he provide about the powers of the FCA and what it will look like in future? How will he ensure that the FCA is adequately funded to fulfil its obligations? Lastly, these two SIs and all the other financial services SIs we have seen have not been adequately consulted on, and I would appreciate it if the Minister commented on the consultation process.
John Glen
I have listened carefully to the hon. Members for Oxford East (Anneliese Dodds) and for Aberdeen North (Kirsty Blackman) and my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake), and I will endeavour to respond substantively to their points as succinctly as I can.
Before I get into the detail, it is important to set the context. The Treasury’s role is to take through the House the statutory instruments, 53 of which relate to financial services, that would be needed in a no-deal scenario, as well as the in-flight files Bill. Those two activities constitute the Treasury’s necessary intervention to ensure that if a deal is not forthcoming—obviously, the Government’s expectation and what we are working towards is that one will be—we will have a functioning regulatory regime in place. These two SIs sit underneath the powers taken in the withdrawal Act, and they do not seek to change the legislative effect. They seek to onshore legislation that already operates through our membership of the EU.
Craig Tracey (North Warwickshire) (Con)
The Minister has talked a lot about the importance of financial services, and I completely agree with that. There is often a perception that financial services are all London-centric, but the insurance industry, for example, employs 300,000 people, and two thirds of those are around the UK. It is fair to say that getting this legislation right will protect all our constituents across the country.
John Glen
My hon. Friend is right: 63% of the 1.1 million jobs in financial services are outside London. It is important that we have this provision in a no-deal situation.
The hon. Member for Oxford East opened her remarks with concerns about the purpose of a debate on the Floor of the House. I am happy to have a debate on the Floor of the House or in Committee tomorrow morning, tomorrow afternoon, Wednesday morning or Wednesday afternoon, just as I was happy to have the debate last week on securitisation, which was also a business-as-usual SI.
A range of points have been raised, and I am happy to try to tackle them. The hon. Member for Oxford East talked about there being no policy explanation in the explanatory memorandum for the disclosure regulations. The explanatory memorandum clearly sets out the reasons for the amendments, which are essentially to make consistent the safeguards that apply to EEA and non-EEA regulators. She asked about the consolidated text not being available for the debate. It is not normal practice for the Government to provide consolidated text for secondary legislation debates, but I will look carefully at her remarks and write to her if I can give any more clarification.
The hon. Lady asked about the reliance on secondary legislation. As I said, the central objective of the SIs is to provide legislative continuity as far as possible for firms, and the withdrawal Act does not allow policy changes beyond what is necessary to ensure that legislation is operable on day one of leaving the EU. I note the areas where she alleges that there is that effect. I will look carefully at that and give her more clarification if I can, as I have always done in our debates in Committee.
The SIs are subject to the usual scrutiny provided by the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee. Additionally, in the case of financial services SIs, the Treasury has taken the step of publishing drafts of the legislation in advance of laying, to maximise transparency about the provisions and ensure that stakeholders are aware of the changes. I note the hon. Lady’s comments about the EY report, and I also recall the remarks of the deputy governor of the Bank of England, Sam Woods, with respect to contingency arrangements made by firms in the City. That is broadly being played out at the moment. It is an uncomfortable process, which is why it is imperative for us to get the deal that is the Government’s policy, although it is right that we make these arrangements in case that does not happen.
The hon. Members for Oxford East and for Aberdeen North asked about the impact assessment of the disclosure regulations. The legislation on the disclosure of confidential information primarily relates to how the UK, EEA and third country authorities disclose confidential information with one another. There is nothing in these regulations that will require firms to change how they do business.
The definition of money market funds has been updated to reflect that, in a no-deal scenario, only those funds that have been authorised under this UK regulation at this point may use the strict designation of money market funds—the hon. Member for Oxford East rightly explained the genesis of it—and to allow those funds that are permitted through the temporary permissions regime to use that designation.
The hon. Members for Oxford East and for Aberdeen North also asked about the FCA’s resourcing. For the House’s edification, the FCA has a total of 158 full-time employees working on Brexit; that number increased from 28 in March last year. The hon. Member for Oxford East asked about Gibraltar. The SI dealing with Gibraltar has been laid and will be debated in due course.
I have addressed a number of the common themes raised by the hon. Members for Oxford East and for Aberdeen North. I will now briefly turn to the comments from my hon. Friend the Member for Thirsk and Malton. He used the debate to rehearse some of his normal themes about bank regulation. I always listen carefully to what he says. We had a conversation last week, and I will write to him on the matter he raised and reflect carefully on his comments.
These SIs are required to ensure safe disclosure of confidential information in the event that the UK leaves the EU without an agreement, that the regulation of money market funds continues and that the legislation functions appropriately if the UK leaves the EU without a deal. The approach taken in these SIs aligns with other SIs that we have laid and will ensure a smooth transition, to reflect the UK’s new position outside the EU. I hope that Members across the House will join me in supporting them in the Lobby.
Question put.
Santander Closures and Local Communities
John Glen Excerpts(7 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
May I say what a pleasure it is to serve under your chairmanship, Mr Rosindell? I commend the hon. Member for Glasgow East (David Linden) for securing this debate and the 28 colleagues across the House who have made speeches or interventions in what has been a thorough examination of this important issue. As well as a Minister I am a constituency MP, and I recognise the pressure on us when our constituents are not happy with decisions.
Since taking up the position of Economic Secretary last January, I have become well acquainted with branch closures. They can be very difficult for the communities affected and, as we have seen this afternoon, they arouse strong passions across the House. I have taken time to speak with affected customers and businesses, including on my visit to Scotland last August, in order to really understand the concerns. I frequently raise this topic in my regular meetings with banks and the Financial Conduct Authority.
I will seek to address the points made by the hon. Member for Glasgow East and others across the Chamber. He referenced his community in Parkhead and the issues of staff, the impact assessment, the limitations of the relationship with the post office network that many Members have mentioned, and access to cash, which falls under the Treasury’s remit, although the Exchequer Secretary is responsible for that.
Closing a branch is never an easy decision, but it is one that banks take based on their assessment of current and future branch usage and customer behaviour. It is an assessment that they, as commercial businesses, are better placed to make than Government. That is why the Government do not intervene in individual branch closure decisions. However, the Government should not abdicate responsibility for some of the issues that arise.
Catherine West
In his reply to a written question by my hon. Friend the Member for Ellesmere Port and Neston (Justin Madders), the Minister said:
“the Treasury does not collect data relating to bank branch closures or related job losses.”
Does he believe that is an adequate Government response to 1,200 job losses and the closure of 40% of bank branches? Does the Minister believe that the Treasury should collect that kind of data?
John Glen
As I was going to respond to the hon. Member for Ynys Môn (Albert Owen), who also raised that point about bank branch closure figures, the FCA, which is the regulator responsible for regulating banks, did some analysis of branch closures as part of its “Strategic Review of Retail Banking Business Models” published in December last year. The full research can be found in an annex to the review. The analysis looks at the number and pattern of closures, how they affect urban and rural areas, the age of the customer, the level of deprivation and income levels. It is a thorough analysis across multiple banks and it very much informs Government policy.
Neil Parish
How much do the Government ask the banks to co-operate with one another, so that there is some sort of service from whichever bank denomination it might be? At the moment, they are just closing and there does not seem to be any pattern to help our constituents who want to receive financial services.
John Glen
My hon. Friend’s intervention picks up on the point made by my hon. Friend the Member for Angus (Kirstene Hair) and others about hubs. The hon. Member for Ceredigion (Ben Lake) raised it to, and I think in his maiden speech he talked about the need to bring banks together. There is no regulatory bar to that and it might be a model that banks will wish to reflect on. As has been pointed out, representatives from Santander are in earshot—that may be a model they wish to take forward.
Jonathan Reynolds
I am very grateful. The idea of banks collaborating and having hubs that would be the joint front end of their back-office functions comes up time and again, but it has not happened. There is no work being done to deliver that. Surely, there are issues to do with competition law, regulatory compliance and liability for mis-selling that simply make it quite unlikely. That is why a serious alternative is required.
John Glen
I respect the concern that the hon. Gentleman has raised and I will respond to it.
Before I get into the detail into what I am trying to do as the Minister with responsibility in this area, I want to reflect on some of the facts of changing banking practices. More of us choose to bank online or on an app, but the point made by the hon. Member for Central Ayrshire (Dr Whitford) about a mixed appetite for banking services is important, as is the intergenerational point. Between 2011 and 2016, branch usage declined by 42% whereas mobile banking usage increased 354% between 2012 and 2017. Cash was used in 61% of payments in 2007, but it is projected that by 2027—in just eight years—it will go down to 16%. There is a significant and rapid change.
Dr Whitford
I must highlight that 2027 is eight years away. We are talking about elderly people now.
John Glen
I was laying out the statistics to show the rapidity of the direction of change. On the point made by the hon. Member for Stalybridge and Hyde (Jonathan Reynolds), we must look at alternative provision. I recognise the point made by the hon. Member for Plymouth, Sutton and Devonport (Luke Pollard) about South West Mutual. I will meet Tony Greenham, the executive director of South West Mutual, on 26 February, to discuss regional mutual banking in the era of expansion of alternatives. I will attend the Annual Conference of the Association of British Credit Unions Limited on Saturday 9 March, to look at how to expand the role of credit unions. When I visited Glasgow I met the 1st Class Credit Union and saw its appetite to develop new delivery models. I recognise it is an area we must invest in.
The hon. Member for Plymouth, Sutton and Devonport made the point about learning from overseas; I recognise that is important, too. That is why the Chancellor’s Budget of 29 October included pilots for interest-free loans. We looked at the way credit unions function so they can be given more freedom to develop an alternative presence and range of services. At a micro level, that will sometimes be a relevant alternative to provide for communities in difficulties.
Luke Pollard
It is really good news that the Minister will meet South West Mutual. It is important that credit unions and new regional co-operative banks are seen not just as a nice periphery exercise in corporate social responsibility, but as a genuine mainstream alternative to financial services, and they need to be structured as such in Government policy.
David Linden
I am grateful that the Minister is talking about credit unions. The only major job I have done other than being a politician was to work in a credit union. On Monday I have a meeting with a local credit union that is pretty much on the brink of bankruptcy. Part of that is because of a lack of succession planning in the credit union movement and a culture issue about governance. If the Minister is so keen on working with credit unions, what practical support will the UK Government provide, specifically for governance and succession planning issues that challenge them? It will not be just that credit union in my constituency.
John Glen
I am anxious not to make my response completely about credit unions, but the 146 credit unions that exist have a whole range of governance models and levels of confidence about the future. I do not think it is my role to dictate how they change, but I am trying to find a model—there are many in Northern Ireland, as the hon. Member for Strangford (Jim Shannon) will know—that can be used as a viable alternative.
I want to move on and make a little progress if I may. I said I would respond to the hon. Member for Barrow and Furness (John Woodcock).
John Glen
I hope the hon. Gentleman will forgive me, but I want to focus on the thoughtful point made by the hon. Member for Barrow and Furness. He referred to his time as an adviser in the Department for Work and Pensions, and to joined-up Government and the Post Office card. It is true that universal credit will have to be paid into bank accounts, but basic bank accounts, which do not involve any fees, are available. Those a viable and accessible alternative. I am happy to take up any further points he wants to make about that, and to learn from his experience in government.
John Woodcock
It would be useful to understand why universal credit is not being made available for payment into Post Office card accounts, but I wanted to intervene on another issue relating to the Post Office. The Minister said the Treasury has a policy on access to cash. One of the big issues with Santander going from Ulverston and, I imagine, other areas is that the cash machine will go as well. We have a post office without a cash machine. That will really damage Ulverston, which is a fabulous market town. On festival days, there are huge queues at the existing cash machine. Can the Government direct the Post Office to increase its cash machines in such areas?
John Glen
I am very happy to look into that. On access to cash machines, as I mentioned in the Adjournment debate last Thursday, we set up the payment systems regulator, which is responsible for overseeing payment systems. The regulator is closely monitoring the situation with LINK and the commitments it has made to maintain the spread of ATMs across the UK. I recognise that the pressure on that network is growing. However, I need to reflect on the relationship with the Post Office rather than trying to answer the hon. Gentleman’s question now.
I am going to make some progress, because I need to leave time for the hon. Member for Glasgow East to respond. Given unparalleled consumer change, the banks have adapted to keep competitive, including by taking some of the decisions we have discussed. That has meant investing unprecedented amounts in digital development, financial capability and tailored support for vulnerable consumers so banking is more personalised, on-demand and flexible, which many people expect in the modern world.
Let me address the impact on the franchising of Crown post offices, which a number of Members raised. Prior to finalising its plans for franchising, the Post Office runs local consultations to engage the local community and help shape its plans. That is in line with its code of practice and has been agreed with Citizens Advice. Indeed, Citizens Advice reported that the Post Office’s consultation process is increasingly effective, with improvements agreed in most cases, demonstrating its willingness to listen to the community.
The Government acknowledge that the post office plays an important part in the lives of customers, and accessibility of post office services is a key Government priority. That is why we have set specific access criteria, requiring 99% of the UK population to be within 3 miles of their nearest post office. Despite the point made by the hon. Member for Heywood and Middleton (Liz McInnes) that legislation does not impose a specific requirement for Post Office Ltd to undertake an equality impact assessment, the Post Office considers the impact of proposed changes to the network on its customers, and the Post Office and all its franchise partners, including WHSmith, are subject to all relevant accessibility legislation.
Liz McInnes
I just want to raise the issue of disabled access, which would be covered by an impact assessment.
John Glen
I will take that matter away and respond to the hon. Lady by letter.
The Government recognise that there are people who are struggling to adapt to new ways of banking or just prefer to carry out their banking in a more traditional way, over the counter. Members made powerful representations on behalf of constituents who find the closure of their local branch an inconvenience at best and a severe obstacle to their daily business at worst, so I want to take the time to reassure them that there is support available to minimise the impact and disruption of those changes.
I recognise the points made by the hon. Member for Ealing Central and Acton (Dr Huq), the hon. Member for Argyll and Bute (Brendan O’Hara) and others about the access to banking standard, which I mentioned in a previous debate. The access to banking standard is an important tool for ensuring that customers feel informed and supported when a branch closes, and all major high street banks are subject to it. It is my view that Santander adhered to the letter and the spirit of the standard when providing support to customers. I cannot account for every individual branch, but I am sure Members will be able to take that up with Santander, who were here to hear their representations.
I recognise that it is important that the standard is adhered to in both letter and spirit, and that support is given, but the Post Office’s commercial agreement with 28 high street banks and building societies enables 99% of personal banking customers and 95% of small business banking customers to carry out their everyday banking at one of the Post Office’s 11,500 branches, which provide an excellent alternative to a bank branch. Everyday essential banking services, such as cash withdrawals and deposits, cheque deposits and balance checking, are all available in every Post Office branch, including those located in retail facilities. Since 2010, the Government have invested close to £2 billion in the Post Office, and we have provided an additional £370 million from April last year until March 2021 to ensure the network can continue to modernise and maintain suitable coverage across the UK. That has meant post office numbers have been at their most stable in decades.
This issue is not just about individual customers; it is about businesses, too. Santander has long had an arrangement with the Post Office for its business customers, who currently cannot deposit cash at a Santander branch and must use the post office instead. Indeed, a third of SMEs visit post offices every week, highlighting the Post Office’s value for business banking. The Government believe that too few customers know about those excellent services, so, at my predecessor’s request, UK Finance and the Post Office worked together to launch an action plan to raise awareness of Post Office banking services. I encourage every Member to support their local post office and make their constituents aware of those banking services.
I also hear Members’ concern about the depletion of the high street. That is why, in the last Budget, the Government introduced a £675 million future high streets fund—not another review but a fund—that seeks to make high streets and town centres fit for the future. Alongside that, we are helping smaller retailers by cutting their business rates by a third for two years from April 2019.
I am conscious of the time, so I thank all Members for taking the time to speak in the debate on behalf of their constituents and local communities. I fully respect the fact that bank branch closures are a symptom of wider changes in our economy. It is important that, in response to those changes, we strike the right balance between promoting a dynamic and competitive financial services sector and ensuring that customers are treated fairly. I take my responsibility for supporting the development of alternatives to banks across the United Kingdom very seriously.
Securitisation Regulations 2018
John Glen Excerpts(7 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
As part of our obligations while the UK remains a member of the EU, it is our responsibility to ensure that domestic law is compatible with EU legislation. That includes this statutory instrument, which will, as the hon. Member for Oxford East (Anneliese Dodds) said, ensure that the EU securitisation regulation is effective and enforceable in the UK. It is not an EU-exit statutory instrument through which functions are transferred from an EU authority to domestic authorities. The instrument that does that—the Securitisation (Amendment) (EU Exit) Regulations 2019—was laid on 23 January and will be debated in due course.
It might be helpful if I gave the House some background information. The securitisation market’s slow recovery after the financial crisis reflects concerns among investors and prudential supervisors about risks associated with the securitisation process itself. The EU responded by proposing in 2015 legislative measures to promote a transparent and liquid market for securitisation. There were 120 responses to the 2015 consultation that gave rise to the regulations, which evolved over two years of EU discussions. They were then scrutinised in Parliament and were approved by the House of Lords scrutiny Committees in July 2017 and by the House of Commons European Scrutiny Committee in February 2017.
Kirsty Blackman (Aberdeen North) (SNP)
The Minister mentioned the number of consultation responses; were they from throughout the EU or just from companies and organisations in the UK?
John Glen
I am not certain, but I would imagine they were from the UK. It was an extensive consultation that led to the evolution of the regulations, which were then scrutinised at different intervals by the Lords and Commons Committees before their final approval in 2017.
The UK voted in favour of the package of reforms in 2017 because it ensures high standards of process, legal certainty and comparability through a greater degree of standardisation of products. The new rules bear no relation to the securitisation of sub-prime mortgages created in the US that contributed so significantly to the financial crisis. Along with other legislation, including on the overhaul of the credit ratings agencies and more stringent rules for mortgage and credit granting, the proposals build on the lessons learned from the financial crisis by improving regulation and oversight, and they implement standards introduced by the international supervisory community.
The EU regulation, which the instrument we are debating implements, is derived from the new international standards set by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. These two bodies worked to create a new framework of high-quality securitisations to introduce the degree of assurance around the information on securitisation that was necessary in the markets. Their work seeks to restore an important funding channel for the EU economy while making the market less risky and supporting financial stability.
At a time when bank lending is constrained, securitisation can boost credit and growth. It can help to free up banks’ balance sheets so that they can lend to households and businesses. The good functioning of and access to securitisation as a funding tool allows investors to diversify their investments and supports the real economy. It is for that purpose that effectively supervised securitisation is actively supported by the prudential authorities, including the Bank of England, which supported the EU initiative as playing
“an essential role in de-stigmatising European securitisation, helping the market to develop on a sustainable track”.
Let me turn now to the securitisation regulations. Although the EU rules themselves were agreed in 2017, the statutory instrument under consideration concerns empowering the regulators to effectively supervise the new securitisation rules that came into force at the start of the year. As the industry has prepared itself for the new regime, the Government are obliged to ensure that the new framework is operable. In essence, this SI simply gives effect to the directly applicable EU securitisation regulation and ensures that it is effective and enforceable in the UK.
The supervisory, investigative and sanctioning powers that this instrument delegates to the relevant competent authorities give effect to the EU framework. The hon. Lady mentioned the resourcing of the Financial Conduct Authority and the Bank of England. Both have been instrumental in the development of these regulations and are primed and ready to take on responsibility for them. The instrument fulfils the necessary obligations of the EU regulation in designating roles to the domestic regulators and provides them with the powers that they require to effectively supervise the market.
To summarise, the Government believe that this instrument is needed to ensure that the new securitisation regulatory regime works effectively. This will support a sound and transparent securitisation market in the UK, bringing real benefits to investment, jobs and growth while enhancing long-term financial stability. The whole purpose of the EU regulation is to address the challenges of the past and to ensure that mistakes prior to the financial crisis in respect of securitisation are not repeated by keeping the measures simple in form and more transparent. The proposal to revoke the instrument would only endanger that and disrupt the market as supervisors would not be able to enforce infringements to the rules that seek to better regulate the market.
The hon. Lady raised a number of points. I have clarified that this measure is not related to a no-deal situation. A point was made about the amendment to primary legislation and the fact that criminal offences already on the statute book will be affected. Although the EU regulation is directly applicable, the Securitisation Regulations 2018 make changes to UK law to ensure that EU regulations are fully effective and enforceable in the UK. The power under section 2(2) of the European Communities Act 1972 makes it possible to give effect in national law to measures in EU law by secondary or delegated legislation such as statutory instruments. Importantly, such secondary legislation can amend an Act of Parliament—section 2(4)—as the delegated legislative power includes the power to make such provisions as might be made by an Act of Parliament. So the instrument applies and modifies certain provisions of the Financial Services and Markets Act 2000 and other UK legislation both to create the new supervisory, investigative and sanctioning powers required by the EU regulation and to ensure that UK legislation is compatible with EU regulation, including applying and/or modifying necessary offences pursuant to sections 398 and 177 of the 2000 Act. This instrument allows an approach consistent with existing enforcement regimes elsewhere in the sector and with other financial services implementing SIs.
The hon. Lady referred to preferential treatment of capital for banks and risk retention and needing to have skin in the game. These rules are derived directly from international standards, which are set by the Basel Committee on Banking Supervision and by the International Organisation of Securities Commissions. There is no attempt to develop some bespoke UK regime. These measures are completely consistent, which has been acknowledged during the significant scrutiny process to which they have already been subject. The hon. Lady also mentioned the CMA. The CMA was not designated as it does not have a role to play under the EU regulation.
I think that I have dealt with the points that have been raised. These are straightforward regulations that give effect to the directly applicable EU securitisation regulation. When Sub-Committee A of the Secondary Legislation Scrutiny Committee looked at these regulations on 17 December, it cleared them without comment. This is an attempt to update the regulations appropriately to give more confidence in the markets. I hope that the House will join together in support of the continued application of this instrument, and to oppose the motion to revoke it.
Madam Deputy Speaker
I beg your pardon. If the Minister would like to respond, and it is the wish of the House that he should do so, he may.
John Glen
Thank you, Madam Deputy Speaker. I feel it is appropriate for me to respond to the remarks of the hon. Members for Enfield, Southgate (Bambos Charalambous) and for Aberdeen North (Kirsty Blackman).
The Treasury has not undertaken a formal consultation on this SI, as the changes to domestic legislation required are minor, and the enforcement approach taken is in line with existing enforcement regimes in the financial services sector. We have worked closely with the FCA and the PRA throughout.
The hon. Member for Aberdeen North made some remarks about the resourcing of the FCA. It has additional resources through the onshoring programme, but this SI has nothing to do with that. This is a business-as-usual SI that would have happened anyway. There was certainly no attempt to slip it in amidst all the others that were taken through Committee. It was a consequence of these regulations being taken through the scrutiny process. I can confirm that there were 120 responses from across the EU as a whole in 2015 to the Commission’s proposals, which were then iterated over the two years before they were approved.
I agree with much of what the hon. Member for Enfield, Southgate said about the aspirations of the regulations underlying this SI. This will bring in more stringent underwriting criteria for mortgage and credit granting. It will overhaul the supervision of credit rating agencies. We have updated international standards on the amount of capital that banks need to hold against securitisations. It responds directly to the work of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. The process of consultation that led to the regulations being agreed in this House and through the Commission has lasted two years, from 2015 to 2017, and this SI is simply implementing them.
In conclusion, I believe that the securitisation regulations will enable the FCA and the PRA to supervise the new framework for securitisations agreed in the EU, which introduces stricter standards and makes securitisations simpler and more transparent.
Kirsty Blackman
On the point about the powers of the FCA and the changes that are being made to it—I am not suggesting that he is trying to slip out this particular one, but there do seem to have been various changes along the way—is it likely that the Government will come forward with something explaining how they expect the FCA to look in future and how we will get to that point?
John Glen
There are two or three things going on. There are 53 financial services SIs going through Committee in connection with no-deal preparations, which is certainly an additional burden on the FCA, and it has had the resources for that. The hon Lady asked about the Government’s holistic view of the role of the FCA. It is subject to a periodic review, having been formed under the legislation of five or six years ago, and that will happen in due course. We hope there will be more financial services legislation in future Sessions.
This instrument is necessary to enable the regulations to take effect. I hope that the House has found this afternoon’s debate on this matter informative and will be able to join me in opposing the motion.
Anneliese Dodds
If I may, I will start my remarks with a brief observation. Far too often in this House, I have heard hon. Members suggest that the financial crisis was somehow the result of the then Government’s policies. I am very pleased to have heard the opposite from the Minister today. In fact, it was the correct interpretation of what precipitated the global financial crisis, which did indeed, as he intimated, begin with the sub-prime mortgage collapses in the United States and then spread through the financial system, particularly through the use of complex financial instruments.
Anneliese Dodds
I am very happy for the Minister to agree with what I am saying.
John Glen
I am very happy to draw the hon. Lady’s attention to the fact that the default rate for triple A rated bonds in the EU was 0.6%, while in the US it was 16%. The key point that the Conservatives have always wished to stress is that the spending profile from 2002 and 2007 massively compounded the difficulties we found ourselves in.
Reinsurance (Acts of Terrorism) Act 1993
John Glen Excerpts(7 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
In a written statement on 22 March 2018 [HCWS579], I informed Parliament that the Government intended to amend the Reinsurance (Acts of Terrorism) Act 1993 to enable the Government’s agreement with Pool Re, the terrorism reinsurer, to be expanded to include business interruption losses that are not contingent on damage to commercial property. This was achieved with Royal Assent of the Counter-Terrorism and Border Security Act on 12 February 2019. This demonstrates the Government’s commitment to ensuring that businesses can continue to secure insurance against the financial costs of terror attacks, and that Pool Re can maintain its position as an example world-leading partnership between Government and the insurance sector.
[HCWS1329]
Draft Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019
John Glen Excerpts(7 years, 1 month ago)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019.
May I say what a pleasure it is to serve under your chairmanship, Sir Edward? As the Committee will be aware, the Treasury has been undertaking a programme of legislation under the European Union (Withdrawal) Act 2018 to ensure that if the UK leaves the EU without a deal or an implementation period there will continue to be a functioning legislative and regulatory regime for financial services in the UK. This statutory instrument is an important part of that programme. It will address deficiencies related to the EU’s equivalence framework for financial services once the UK is no longer an EU member state, and will make provision for elements of the UK’s stand-alone equivalence framework in a scenario where the UK leaves the EU without an agreement.
Many members of the Committee will be familiar with the EU’s framework for equivalence. The EU’s internal market for financial services works by harmonising prudential regulation and supervisory standards. Common rules aim to provide adequate consumer protection and financial stability, so that financial services can safely be sold across borders within the EU. For the same reasons, the EU also harmonises to some extent the rules permitting financial services firms outside the EU to sell to consumers in the EU. EU legislation allows the European Commission to determine that a country outside the EU, often termed a third country, has a regulatory and supervisory regime in a particular area of financial services that is equivalent to the corresponding EU regime.
Equivalence provisions exist in several areas of EU financial services legislation. The ability to grant equivalence is a key component of financial services regulation and supports cross-border activity. Equivalence decisions can reduce or eliminate overlaps in regulatory and supervisory requirements, thus decreasing the regulatory burdens on firms. Some equivalence decisions can also provide improved prudential treatment or facilitate the exchange of services and products. This can lead to increased competition, which has benefits for firms and consumers, while protecting consumers and financial stability in the EU from risks associated with buying financial services from outside the EU.
Before making an equivalence decision, the Commission will undertake an assessment of the third country’s regulatory and supervisory regime. The Commission may also ask the European supervisory authorities—ESAs—for technical advice to support its assessment. As an EU member state, any equivalence decisions made by the Commission currently have effect in the UK. After exit, the Commission’s current decisions will be retained EU law and will continue to permit third country firms to be treated as they are now.
In a no-deal scenario, the UK will be outside the European economic area and no longer part of the EU’s equivalence framework for financial services. The UK will become a third country to the EU. We need to amend retained EU law to reflect that new relationship. The Government place significant importance on the need to have a functioning stand-alone equivalence regime, which will support our future relationships with the EU and other financial centres with which we want to build stronger partnerships.
Members of the Committee will be aware that other Treasury SIs that have completed their passage in Parliament have already transferred equivalence responsibilities from the Commission to the Treasury and functions from the ESAs to the UK financial regulators in a no-deal scenario. While maintaining the same substantive criteria that the EU currently uses to judge equivalence, this SI will help to complete the UK’s framework and ensure that the UK has a stand-alone regime.
The instrument does three main things to support the development for a stand-alone UK equivalence framework in the event of a no-deal exit. First, it corrects deficiencies in existing equivalence decisions made by the Commission, which will be transferred to the UK’s statue book as retained EU law on exit day. An example of this deficiency fix is replacing references to “the Union” with references to “the United Kingdom”, to reflect the UK’s new position outside the EU. Fixing those decisions is important to minimise disruption for some firms with business in equivalent countries and for some overseas firms that currently rely on them. This will help to avoid disruption to the UK’s relationship with non-EU countries.
Secondly, the instrument replaces the functions given to the ESAs with functions for the UK financial services regulators. When undertaking new equivalence assessments, the Treasury may obtain technical advice from the UK financial services regulators—the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England. The SI also creates an obligation on the Treasury and the UK regulators to enter into a memorandum of understanding that sets out in more detail the operational processes to support equivalence assessments.
Thirdly, the SI creates a temporary power for Ministers to make equivalence and exemption decisions for EU and EEA member states by direction for some specified equivalence regimes listed in the SI. That is separate from and in addition to the permanent arrangements for making equivalence decisions after exit, which require a negative resolution instrument in Parliament. The temporary power is needed to prepare for the particular circumstances we would face if the UK left the EU without a deal. As an EU member state the UK has not previously needed powers to determine whether the EU is equivalent, but in a no-deal scenario it will be important for the Treasury to have powers to make such decisions in time for exit day, to respond quickly and effectively to any risks to the financial system and to avoid disruption for firms and markets.
Let us be clear: in such a situation, the UK would need to be nimble and able to act quickly to find the EU equivalent to the UK and support market functioning. Having an effective and time-limited power puts us in the optimum position to work with the European Commission to find each other’s regimes equivalent, which would be the most sensible outcome to protect cross-border economic activity and avoid disruption, although, failing that, equivalence decisions by the UK of the EU should not be assumed.
To illustrate why the powers are required, I point out to the Committee that the Commission has published several draft legal acts granting exemptions to UK bodies in a no-deal scenario. That shows our shared view that some equivalence decisions are important to have in place for day one of exit. The power is intended to be used to mitigate risks around exit and would expire 12 months after exit day; thereafter, any future equivalence decisions for the EU and EEA member states would need to be made by regulations subject to the negative procedure, as they would for all other foreign countries. To ensure transparent use of the temporary power, the SI obliges Ministers to lay any direction before Parliament and to publish it.
The Treasury, as is customary with all these SIs, has worked closely with the Bank of England, the PRA and the FCA in the drafting of this instrument. It has also engaged the financial services industry on this SI and will continue to do so. The regulators and key industry stakeholders have expressed support for the provisions in the instrument as necessary to mitigate disruption and provide legal certainty about the UK’s equivalence system.
The Government believe that the proposed legislation is necessary to ensure that the UK has a clearly defined and operable equivalence framework in a no-deal scenario. The powers it contains are necessary to ensure that the Treasury and UK regulators are able to respond if the UK leaves the EU without a deal or an implementation period. I hope colleagues will join me in supporting the regulations, which I commend to the Committee.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their observations. I will first attend to the general points about readiness and the intention of the Government, which is clearly to secure a deal.
I assure hon. Members, as I have on previous occasions, that there is no secret agenda in the Treasury to grab power. The SI is about contingency arrangements for the unwelcome outcome of no deal. We take this responsibility very seriously. An impact assessment was published on 7 February stating that there will be no new operational requirements for firms owing to the draft instrument.
I will now seek to address the specific points raised by Opposition Front-Bench Members. The hon. Member for Stalybridge and Hyde asked, in essence, why we need these extraordinary powers to grant EU and EEA equivalence on exit day. It is important to stress that this temporary power is intended only to mitigate cliff-edge risks and to support UK market activity and the continuity of cross-border business. The power is time limited; it will expire 12 months after exit day, which was determined following engagement with the industry and regulators. Thereafter, any further equivalence decisions regarding the EU and EEA will need to be made by regulations via the negative procedure.
The hon. Gentleman asked about the resources in the Treasury. The Treasury has been preparing to take on these additional functions and is well equipped, given its existing responsibility for financial services policy. We have worked closely with the FCA and the PRA during the development of the draft instrument, and we are confident that we are well placed to make future equivalence decisions.
The hon. Gentleman asked about the appropriateness of the Treasury making equivalence decisions, rather than the regulators. Under the EU’s equivalence framework, the European Commission is responsible for making jurisdiction-level equivalence decisions. The European supervisory authorities are responsible for providing technical assessments to the Commission when requested and for making firm-level recognition decisions on third country firms. Our approach will ensure that there is a functioning equivalence framework in the UK after exit that mirrors the current split in responsibilities between the Commission and the ESAs, with the Commission’s function transferring to the Treasury and the ESAs’ functions transferring to the relevant regulatory authorities. That is consistent with what we have done in the other SIs.
The hon. Gentleman asked whether a central register of equivalence decisions will be created. All decisions will be laid in Parliament and published on gov.uk, so they will be publicly available. There are no plans at this point to have a central register, but the process is intended to be completely transparent.
The hon. Member for Glasgow Central asked whether Parliament would be consulted on a decision to revoke equivalence. In the future, equivalence decisions will be made and revoked by regulations subject to the negative procedure. This is a well-established procedure that allows Parliament to scrutinise proposed secondary legislation and to object if it has concerns, including about any decision to revoke an equivalence decision.
The hon. Lady asked about good will towards the EU and what will be the best decision. Clearly, we share a common heritage; the United Kingdom as a whole, including the excellent financial services located in Glasgow and Edinburgh, has contributed richly to the development of the EU regulations. We will obviously start from a common starting point. However, decisions around equivalence will be matters for both sides to come to terms with, and we will seek to do the best thing for the UK financial services industry in whatever prevailing conditions exist. We cannot anticipate that degree of co-operation, so we cannot make decisions proactively, as we might wish to do had we a deal and an implementation period, which would allow us to work such things out—as we intend.
Alison Thewliss
I understand what the Minister is saying, but surely it is in our interest—ours and the EU’s—if we want to continue to interact as we do now, to do things in a similar way.
John Glen
Absolutely it is, but what we cannot do until we have a deal is to determine what no deal would look like. It is therefore appropriate for me, as the Minister responsible for the UK financial services industry, to seek to reserve those powers, as the Commission is doing now—largely.
The hon. Lady caught me out, as she has often done before, when she asked about the number of people working on equivalence at the regulators. All I can say is that the Treasury is confident that the regulators have in place the resources to meet that function and they have devoted significant time to preparing for changes. I do not have a specific figure, but I am confident in their overall provisioning for that programme of work. I draw attention to schedule 1, which sets out the files in question.
The statutory instrument is needed to ensure that the UK has a clearly defined equivalence framework once outside the EU and is able to support the continuity of cross-border business in any scenario, and that the legislation functions appropriately if the UK leaves the EU without a deal or an implementation period. That is not our intention, but I am confident that, given the engagement we have had with the regulators and the industry, the SI is required. I hope that the Committee has found our sitting informative and will now support the draft regulations.
Question put and agreed to.
Financial Services (Implementation of Legislation) Bill [Lords]
John Glen ExcerptsMonday 11th February 2019
(7 years, 1 month ago)
Commons ChamberRead Full debate Financial Services (Implementation of Legislation) Bill [HL] 2017-19 View all Financial Services (Implementation of Legislation) Bill [HL] 2017-19 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 143-R-I Marshalled list for Report (PDF) - (25 Jan 2019)
The Economic Secretary to the Treasury (John Glen)
I thank all Members for their contributions to the debate. As my right hon. Friend the Financial Secretary to the Treasury set out earlier, the Government do not want a no-deal scenario, but our job as a responsible Government is to prepare for all possible outcomes, including reaching 29 March without a deal. The Bill forms an important part of those preparations. In a no-deal scenario, it would ensure that we could maintain the UK’s reputation as a global leader and that the competitiveness of our financial services industry would be maintained. The UK has in many cases played a leading role in shaping these proposals over a number of years, and they will bring benefits to UK consumers and businesses once they have been implemented. I want to talk about the four or five themes that have been raised in the debate, after which I will address the points made by the hon. Member for Wakefield (Mary Creagh).
Mr John Baron (Basildon and Billericay) (Con)
I refer the House to my entry in the Register of Members’ Financial Interests. The Economic Secretary to the Treasury will be aware of our exchanges in Committee regarding EU regulations as they relate to key information documents and how KIDs are adversely affecting the assessment of investment trusts. The trade bodies oppose them, including the Association of Investment Companies, which has suggested that the investors’ response to them should be to “Burn before reading”. Can the Minister report back on his deliberations with the Financial Conduct Authority, which has been rather slow out of the blocks? Ultimately, it is the Government’s responsibility to get this right.
John Glen
I am happy to respond to my hon. Friend’s intervention. I acknowledge his expertise in this area and his excellent article in the Investors Chronicle this week. I would point out that, just last summer, the FCA issued a call for input and sought industry views on the next steps for packaged retail investment and insurance products—PRIIPs. That consultation closed on 28 September and the FCA is reviewing the responses carefully. It will publish a statement in the first quarter of this year. When I next see the chief executive of the FCA, I will challenge him on that publication date.
Let me turn to the substantive thrust of the concerns raised in the debate. The first relates to the desirability of no deal. As I have said, we do not want a no-deal scenario, but we need to be responsible and to plan for all eventualities. Our priority remains getting approval for the deal that we have negotiated with our European partners, which will deliver on the democratic choice of the British people.
Turning to the other preparations, we have now laid 50 statutory instruments before Parliament. The allegation from the hon. Members for Oxford East (Anneliese Dodds) and for Stalybridge and Hyde (Jonathan Reynolds) was that there had been no coherence to the Government’s work, but as the hon. Lady will know, we will have had 53 statutory instruments. We have more debates tomorrow and on Wednesday, and I think several more next week. We are addressing the deficiencies in all the major EU files and the relevant domestic legislation. This will ensure that we have a functioning financial services regime at the point where we leave the EU in a no-deal scenario. Our aim throughout this work has been consistently to minimise disruption for firms and their customers and to provide a smooth transition when we leave the EU.
The hon. Member for Glasgow Central (Alison Thewliss) made a point about the breadth of the power in this legislation. We have worked hard to ensure that this is a clearly defined power and that changes cannot be made such that the implemented files depart in a major way from the original legislation. However, the Government will retain some flexibility to make adjustments to take account of the UK’s new position outside the European Union. The amendments proposed by the Government require the Treasury to publish draft SIs at least one month in advance of laying, as well as a report detailing where there have been omissions and changes and giving the justification for those changes. We believe that the report will allow parliamentarians to scrutinise the changes before the SIs are laid. If the UK were forced to take on EU legislation either in whole or not at all, it is likely that we would be able to domesticate very few of these files in good time, so even the positive aspects of the reforms would be delayed. This is a pragmatic measure to deal with the reality of a very undesirable situation, and our approach has been endorsed by the industry, with which we have engaged in the preparation of the Bill.
Alison Thewliss
The Minister talks in his letter about how things are deemed to be beneficial for the UK, but he and I will have very different opinions on what would be beneficial for the UK, or indeed on whether Scotland should be part of the UK, so how can he say that that is not a policy decision?
John Glen
We are talking about a no-deal scenario, which we cannot fully anticipate or set out in legislation. However, there would be a full discussion and additional legislation in those circumstances.
For the benefit of the House, I want to clarify the industry engagement that has been undertaken on this Bill. The Treasury engaged with industry ahead of the introduction of the Bill, and the financial services industry has been expecting many of the files for some time. For example, the industry will be generally supportive of the changes that will be implemented with the European market infrastructure regulation regulatory fitness and performance programme—EMIR REFIT—file, which introduces changes to regulations for clearing and reporting requirements, to make them more proportionate and to provide further clarifications. We have been engaging to deliver what the industry expects.
With respect to accepting EU laws after exit, the Bill is not about accepting such laws wholesale. We will be able to implement only those pieces of legislation that are beneficial to the UK, because we will be able to choose the files, or specific provisions within those files, that we are going to implement. For those files that we have already agreed at EU level but not yet implemented, we will be able to fix deficiencies similar to what was done in relation to the European Union (Withdrawal) Act 2018. For those files on which negotiations will be ongoing at the point of exit, we will be able to make some adjustments to them to take account of the fact that we will not be around the negotiating table when they will be finalised.
Moving on to the model for financial services regulation more generally, the Government of course recognise that this legislation should apply only for an interim period while we consider a sustainable, longer-term approach that balances the need to ensure appropriate parliamentary oversight of financial services legislation after leaving the EU with the need to maintain the flexibility and competitiveness of our regulatory regime. That is why the model in the Bill would apply only for a temporary, non-extendable two-year period post exit, specifically in a no-deal scenario, and to specified EU files only. The Government will take forward our approach for a sustainable long-term model in due course.
Turning to the points made by the hon. Member for Wakefield, the UK has publicly led on the development of sustainable finance, as she set out, and the Government are committed to the sustainable finance agenda and are a leader in green finance. That is why we have included these files in the Bill. We recognise that the files form part of the EU’s response to the Paris climate change agreement and the UN sustainable development goals. The Government support the aims of the files and do not consider them harmful to industry at their current stage of development. As such, we were pleased to add them to the schedule to the Bill, and we thank the noble Lords who recommended their inclusion.
I stress again that this legislation involves a temporary measure, with the delegated power limited by a two-year sunset clause and subject to the affirmative procedure in each and every instance of its use. Following constructive engagement in the other place, the Bill is clearer about the power contained within it and has much stronger reporting requirements than at its introduction.
I thank all right hon. and hon. Members for their contributions to this debate. I am sure that we can agree on the importance of continuing to support the UK’s world-leading financial services industry in any future scenario. I look forward to discussing the Bill further in Committee, and I commend it to the House.
Question put, That the Bill be now read a Second time.
Closure of Santander Banks
John Glen Excerpts(7 years, 1 month 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(7 years, 1 month 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]