Leaving the EU: Central Counterparty Clearing

Debate between Kerry McCarthy and Chris Leslie

Thursday 1st November 2018 Commons Chamber

[Mr Leslie]

My hon. Friend rightly takes us to the more contemporary story about what is happening with these, because Brexit has put everything in limbo. Will these CCP operations be able to continue to service the vast majority of euro-denominated interest rate swaps or derivative products? The European Union had been developing new supervisory arrangements that would have included the UK. Brexit came along and of course those have all now been put into abeyance because the UK may be taken out of those jurisdictions. Time has ticked on and we are now five months, perhaps less, away from the moment of change, yet we still do not have any certainty about what will happen. However, we have heard various rumours.

Last week, the Governor of the Bank of England, Mark Carney, highlighted £41 trillion-worth of outstanding contracts that could be forcibly voided—that could fall out of legal certainty—if we do not get some sort of arrangement put in place. Earlier in the week, EU Commissioner and Vice-President Valdis Dombrovskis indicated that the EU might allow the UK CCPs after Brexit to operate on a temporary basis, with some strict conditionality. Of course we saw the report in The Times today that perhaps in the negotiations there was some sort of sense in which UK financial services companies, including these CCPs, would be able to operate on an equivalence basis, which is not as good as the arrangements we have, where we are around the table and able to make the rules on regulations. We would be a rule taker, but of course we may be allowed access to European markets—and, potentially, vice versa. The danger with that is that it is precarious and it could be switched off at a moment’s notice if policymakers fell out, for whatever reason.

As my hon. Friend has pointed out, today Commissioner Barnier poured a big old dose of cold water all over that, saying, “You should not believe everything you read in the paper.” He reiterated that it was really in the hands of the EU to decide whether equivalence continued. This would not be an ideal situation at all, and the risk is that we would need to see CCP clearing services develop rapidly in other jurisdictions in Europe. Of course the Americans will have their arrangements, but that could start to undermine the centrality of the UK. That would be a great pity, because the UK has expertise and a relatively good regulatory approach, working with our European colleagues.

So the main question I want to put to the Minister is: what is the Government’s attitude to the future, long-term, stable, permanent regulation environment? Are we going to align ourselves closely or in harmony with the EU regulatory framework for central counterparty clearing arrangements? If that is the case, it would be useful to know that that is British Government policy at this stage, because that might then enable something to be built on equivalence. We could possibly move to a position in which the UK still has a say in the regulatory arrangements.

In my view, the public should be given a chance to think again about this whole thing and, if they want, there should be a people’s vote so that the option to remain is still viable. Nothing has been decided that should prevent that from happening. If we are to leave the European Union, it would not be a good thing to do so and put all these things up in the air. We should not fragment the financial safety regulatory arrangements and potentially put businesses, jobs and livelihoods at risk.

[Kerry McCarthy (Bristol East) (Lab)]

I used to do this sort of thing for a living as a derivatives lawyer, although that is not something to which I own up very often these days. I was working in the City at the time of preparations for the millennium bug, and when the euro came in I was involved in cleaning up the mess after the Barings collapse. With the millennium bug in particular, people said afterwards that it was a big fuss about nothing and that it was totally alarmist and exaggerated for people to say that it was going to cause chaos. What they did not realise was how much work had to go on behind the scenes to make sure that that chaos did not happen. There is a real danger of complacency with situations like the current one, with people thinking that it will all sort itself out. Does my hon. Friend agree?

[Mr Leslie]

I do agree, and I do not think that the work is being done. Frankly, there should be more leadership. We are in a rudderless situation right now. We have a lot of regulators—the Bank of England, the European Securities and Markets Authority and others—but they are of course subservient to the political policy makers, and although I hope that those policy makers are apprised of these issues and know the scale, I am not that confident that they are or that it is high up their agenda. I am not sure that I have heard the Prime Minister talk about these issues, let alone the Chancellor of the Exchequer. Perhaps the Minister will be able to enlighten us on that.

I shall come to an eventual conclusion by explaining why there might be a number of problems. Firms are currently discussing a lot of contracts that are not yet cleared. If we do not have the option of central counterparty clearing—in particular from the European side in respect of whether they can access London—what stability risks will be generated in those scenarios? Will we lose liquidity? If we do, will we see costs going up for businesses? When costs go up for businesses, will they be passed on to customers? That would have a drag effect on the worldwide economy.

The issue for those contracts that are already cleared—that are already in existence—is whether they will still be extant after 29 March, because if a whole load of existing contracts are in place, whether in Europe or wherever, many will have clauses that require notice to be given if their legal validity is due to expire. It could be six months or nine months, but we are now certainly coming into the period in which the holders of those contracts will have to start to give notice and to say, “We are not certain that these existing financial contracts will be viable or in place, because of the risk of falling into legal no man’s land after 29 March.” There is a clear and present risk to the stability not just of our economy or Europe’s economy, but of the worldwide economy. Although this can seem a very dry topic, everybody should stay focused on the hundreds of trillions of pounds-worth of value that might have an effect on the wider economy.

Will the Minister say what we are going to do to come to a swift conclusion—certainly within the next few weeks—on this issue? I know that the UK has made an offer to the EU to allow temporary access to UK firms. The question is obviously whether that is going to be reciprocal, but if we are to offer that, are we going to legislate for it and put that guarantee into law? That could be done right now. I really want to find out the Treasury’s plan. Do we know that the Government care and are taking an interest in the stability of the UK and EU economies, and in businesses, jobs and the livelihoods of all our constituents, who will undoubtedly be affected by this issue?

European Union (Withdrawal) Bill

Debate between Kerry McCarthy and Chris Leslie

Report stage: First Day: House of Commons
Tuesday 16th January 2018 Commons Chamber

[Mr Leslie]

Treaties are reformed every time there are adaptations to them, whether it is Maastricht, Nice or Lisbon. The body of European rules and regulations is adapted and reformed all the time. It is all part of working together in co-operation. Sometimes we get our way on particular issues; sometimes we have to continue to argue our case. That is the nature of pooling some of our rules and sharing sovereignty in some respects with our wider neighbours. That is the nature of agriculture and of the environment in which we live.

[Kerry McCarthy]

It is an absolute fallacy to suggest that this Government have been dying to ban live animal exports and that it is only the EU that has held them back. I think it was Germany and the Netherlands that tried in the past few years to put a limit of eight hours, transit time on live exports. The UK went along to those negotiations and argued against those proposals. This is definitely a question of political will.

[Mr Leslie]

My hon. Friend absolutely nails the point and brings it home. She knows a great deal more about such issues than I do. The Government of the day do have a say on the rules and can sometimes effect reforms or block them.

Taxation (Cross-border Trade) Bill

Debate between Kerry McCarthy and Chris Leslie

2nd reading: House of Commons
Monday 8th January 2018 Commons Chamber

[Mr Leslie]

Oh, that’s right—he is not here anymore. I vaguely remember who the Prime Minister was at the time.

The ballot paper text is a matter of record for all to see. It asked whether we should remain in or leave the European Union, but it did not go into the details, because in a parliamentary democracy those sorts of details are naturally left to us. This is on our shoulders. We are accountable to our constituents for interpreting that referendum result and putting it into effect, always with an eye on protecting their best interests. That is our job—it is what we are elected to do.

Government Members may think that it is in their best interests to leave the customs union, but that was not on the ballot paper. I disagree with them. I do not think that leaving the customs union is in our best interests, and certainly not those of my constituents. We are talking about a potential impact on half the goods traded by the United Kingdom, as half our goods trade goes to the European Union. These are not inconsiderable issues. Some 2.5 million lorry journeys a year through Dover might be affected. Whole businesses have set up “just in time” business models, down to a matter of minutes, for how goods and components will be sourced throughout supply chains and how inventories will be sourced from across the whole European continent, but they now face being upended not only by the potential duties imposed by the Bill, but by other, non-tariff barriers including bureaucracy, additional form-filling, registrations and inspections. Goods coming in might have to go to one side, both at the port of departure and at the port of entry, to be checked for sanitary and phytosanitary compliance. There are all sorts of inhibitors to the free flow of goods. I and other Opposition Members are talking about free trade. That is what we should be standing up for, which is why this is an incredibly important issue.

[Kerry McCarthy (Bristol East) (Lab)]

I draw attention to my entry in the Register of Members’ Financial Interests. This is not just about goods being physically sold in other European countries. Musicians who tour Europe face real uncertainty about whether their instruments and merchandise, whose sales a lot of bands rely on, will be viewed as imports into those countries. There is a lot of uncertainty about what will actually be classed as a good crossing a border.

European Union (Withdrawal) Bill

Debate between Kerry McCarthy and Chris Leslie

Committee: 3rd sitting: House of Commons
Tuesday 21st November 2017 Commons Chamber

[Mr Leslie]

I want to make a little more progress, if I may, because I need to reference a number of other amendments.

I hope this is not the case, but it seems to me that the Prime Minister, worried that hard-line Eurosceptics and Brexiteers on her Benches are champing and nipping at her heels, had to throw them a bone. There was a need to give them something, and therefore the charter of fundamental rights was the scalp she felt she had to throw in the direction of some, but not all, Conservative Members. I hope that is not the case, because significant protections on data, on children’s rights and on public health—even the protections that the Secretary of State for Exiting the European Union himself has used—are rights and privileges that we should jealously guard. It is our job in this Parliament to stand up and point out when the Executive are potentially trying to erode many of those rights. I hope we can keep the charter or, at the very least, have a report on its effect.

Amendment 62 also addresses changes in rights. This is not a pure copy-and-paste exercise, and the amendment seeks to preserve something known as the Francovich rule in our legal system. Essentially, it is a fundamental principle of any democracy that Governments should not be above the law. In EU law, the principle is made real by the Francovich rule, which was established by case law that provides citizens with tools to recover damages when their Government fall short of legal obligations. In this case, again, the Government are trying to do away with those protections, and I tabled the amendment—other hon. Members have tabled similar amendments—to probe the Government and to find out what will be the effect of removing the Francovich protection.

[Kerry McCarthy (Bristol East) (Lab)]

The recent prosecutions of the Government under clean air laws, for example, might not have been possible if the Francovich duty were not enshrined in law. The result of the Bill, as drafted, is that, the day before Brexit, people will have the right to claim damages from the Government for the harm they suffer, but there is a danger they will not have that right the day after Brexit.

[Mr Leslie]

My hon. Friend makes the point well. We can all imagine circumstances in which the Government could be in part responsible for failures to comply with various legal obligations—as she says, it might well include failure to comply with air quality directives—and those who suffer harm as a consequence of those Government failures may no longer have the right of redress. Those rights exist not only in environmental legislation but in, for instance, equal opportunities legislation. I can foresee circumstances in which a same-sex couple seek retroactively to claim their right to pension arrangements that might not have existed in the past so that they can accrue their pension rights, but they would not have redress to do so under the proposed arrangements.

The other big one is competition law, which relies very much on the right to challenge the Government, particularly on procurement arrangements. Companies that say they did not get a contract for such and such a reason may well feel that it was partly because they were unfairly treated by Government. Under the Francovich arrangements we have protections so that contracts can be let fairly, be it for house building, transport infrastructure or anything else we can name. A number of protections need safeguarding there.

Perhaps the biggest one that has not been addressed by Ministers and where Francovich may still be required is the protection of the rights of EU nationals after Brexit. A number of EU nationals will continue to reside in the UK after Brexit, but what will happen if their residency rights or definitions change, if their children are affected by changes of arrangements with the Government, or if rights to claim various tax reliefs or other things change in an unfair way for them, as EU nationals? There should be some level of redress against malfeasance by Government in that respect, so at the very least we need to hear from Ministers a better justification for the deletion of this Francovich protection.