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

Jonathan Reynolds Excerpts

Wednesday 24th October 2018 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It is a pleasure to see you in the Chair, Mr Austin. This Committee marks the 13th time I have done a Delegated Legislation Committee for the Opposition in my role as a shadow Treasury Minister. In that time, I have seen Committees on issues of varying significance and impact. The Minister and I have done everything from the post-financial crisis regulatory regime to formally dissolving the British Potato Council, but I do not think anyone would deny that the piece of legislation before us today is on a completely different scale because of its importance and the issues of substance that it covers.

As is well known, the Government took a decision to undertake the bulk of the legislative preparation for our EU withdrawal through secondary legislation. As an Opposition, we have voiced our concerns about that on many occasions because of the transfer of power to the Executive that it entails. I very much appreciate the work that has been done by the Minister and his staff in the civil service to brief us on the process, but it is unquestionable that, in a normal environment, changes such as this should be dealt with through primary legislation, given the scrutiny that that would bring. The sheer number of Treasury regulations and the speed with which they have to come forward is deeply concerning in respect of holding the Government fully accountable. As the Opposition, we commit to making every effort to do that, but it is undoubtedly a constitutionally unprecedented and tremendously resource-intensive task, and it leaves room for error.

It is disappointing that we have reached the stage where such contingency measures for a no deal scenario must be laid before the Committee. The UK is very close to our EU exit date, and financial services firms need certainty about the shape of things to come, which has been sorely lacking. As a result, financial institutions have already begun to enact their own contingency provisions such as moving subsidiaries and assets to the EU. They began that process many months ago.

I repeat my thanks to the Minister and his staff for taking the time to ensure that we have as much clarity as possible on what the measures mean, but the extent of the regulations paints a bleak picture, most notably with the consequential amendments, which show what we will be giving up if the negotiations do not progress, including co-operation with the EU on the implementation of sanctions and asset-freezing.

I begin by asking for the Minister’s reassurance about the presence of such clauses and their intended use. We have taken it on trust that the regulations simply provide for a functional statute book in the event of no deal, but in the interests of ensuring full transparency, will the Minister confirm that for the record? We would be failing in our duties if we were not to get that on the record.

Moving from the principle to the substance of the regulations, I want to ask the Minister specific questions about the potential temporary permissions regime and how it would operate. Given that the TPR would underpin the full regime for passporting financial services into the UK, it is a possible fundamental building block of our future regulatory regime. Will he make clear to the Committee what the Government’s current negotiating objective is in relation to the passporting rights for EU financial services firms given that it is the backstop contingency measure? What is the ideal scenario? How will legislative provision be made for it?

Adding to the democratic deficit in the process, elements of the draft legislation seem to bestow significant discretionary powers on the regulators—both the FCA and the PRA. Regulation 6(6)(a) appears to give the FCA and the PRA powers to set landing slots of any length and any notice period for which an EEA firm passporting into the UK must apply for full UK authorisation. Should those landing slots have a minimum duration so that financial institutions are given a minimum notice period before being required to submit an application? In practice, such applications can take weeks or months to prepare and firms will need as much time as possible.

It appears that regulation 6(7) extends the period for which the regulators are able to delay a decision on whether to grant UK authorisation from the current six to 12 months to three years from exit day. That seems disproportionate and unfair to companies, which will endure a long period of uncertainty about whether they will be granted UK authorisation. Will the Minister clarify the reasons for that? We recognise that increased regulatory workload is likely to increase approval times, but surely they should be closer to the current timescale—perhaps they should increase from six months to nine, or from 12 months to 15. Clearly, there must be no outstanding applications awaiting approval at the end of the three-year transition period.

The Opposition argue that regulation 6(8) should include a minimum notice period to tell firms that their UK authorisation has been declined. A refusal will necessitate the winding down of operations and may present a risk of disruption to customers. It is essential that a firm’s withdrawal from the market is as orderly as possible. Firms need time to prepare. Obviously, that has to include a three-year cut-off at the end of the transition period.

Finally, the Opposition suggest regulation 19 should be looked at again. That regulation would give the FCA and the PRA powers to enforce the requirements of a passporting EEA firm’s home state regulator on that firm. However, that creates new practical issues related to the ability of UK regulators to act on an extraterritorial basis. We suggest that alternatives could be looked at. It was suggested to me that co-operation agreements could be set up with local EEA regulators for relevant member states so they retain enforcement powers for breaches, but I am mindful that Ministers and the regulators will have discussed other options. I am interested to hear the Minister’s view about whether it is possible to reconsider regulation 19 with other types of remedial measure.

Those issues show the scope and complexity of what we are dealing with. I am aware that we are under significant time pressure, both with exit day looming and given the volume of secondary legislation that must be passed in the coming months. However, for the sake of one of the UK’s most important economic sectors, we must not let that stand in the way of proper scrutiny and consideration.

--- Later in debate ---

[John Glen]

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

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

[Jonathan Reynolds]

I think the Minister is saying that the Government’s objective is still for mutual regulatory recognition for—essentially without the existence of the passporting regime—similar arrangements to those we have now after we leave. I think most people would acknowledge that that is quite a difficult thing to propose without negotiating a new relationship with Europe that would include such things as being part of a new customs union, as the Labour party has proposed.

Is it not possible that, if the Government agree what we might call the Chequers package—a common rule book on goods—even though a deal might be agreed we should still be using the measures we shall agree today? Even though a deal of some sort was agreed, because it did not cover the financial services sector, we would still be using the regulations that are before the Committee.

[John Glen]

Of course, the outcome of the negotiations will determine what we do. If we get a deal, clearly the implementation period will take effect. We would then have to look at what new legislation was optimal, from a financial services point of view, to keep us competitive; but such decisions have to be deferred until we get to that point.

I do not want to detain the Committee unduly, but there were other points I wanted to address. On the point about the FCA and the PRA powers to enforce home regulator powers or breaches, it is not an extra-territorial measure, but it has effect in the UK only. It merely preserves requirements imposed by an EU regulator so that the EU regulator does not have to impose such requirements itself. Once in the regime, the UK regulators will be able to disapply the requirements if they choose.

I think I have probably addressed all the points that were made. I am grateful for the number of points that have been fed to me from my left. I do not think that I have addressed all the scenarios to the satisfaction of the hon. Member for Edinburgh South, and I acknowledge his dissatisfaction. All I can say is that the Government are fully committed to delivering the best possible deal on financial services. I visited Edinburgh over the summer recess and I acknowledge the importance of financial services to the hon. Gentleman’s constituency, and to jobs throughout the country. We hope that we shall not need provision for a no-deal scenario, but it is appropriate that we make provision for it today.

Question put and agreed to.

Resolved,

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