Inflation

Lord Sharkey Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Sharkey (LD)]

My Lords, I was until today a member of the committee that produced this report. I record my thanks to the noble Lord, Lord Forsyth, for his wise and tolerant chairmanship, and also join him in thanking our clerk, our committee assistant and in particular the departing policy analyst, Ben McNamee.

Inflation may be—although I doubt it after listening to this debate—a simple concept. However, as this debate has demonstrated and as the committee very soon learned, measuring it is a far from simple exercise. Discussion of what these measures should be and of their relative merits can quite quickly become highly technical and apparently abstract, but what we agree inflation to be obviously has an enormous impact in the real world. That is why it is important to try to maintain some common-sense understanding of what is going on. Decisions made about how to measure inflation should be widely accessible to scrutiny and debate, not just confined to a priestly caste of economists, bankers and statisticians. Our report tried to help with that, and I will focus on just a couple of the major issues we discussed.

The first is whether the RPI is irretrievably flawed and should be abandoned, as the UKSA and the ONS had decided. As we have heard, the committee thought not. We acknowledged, as had the UKSA and the ONS, that the index was clearly flawed as a result of an untested and underplanned methodological change introduced by the ONS in 2010. I should say in passing that I was very surprised by the apparently casual way in which this change was implemented, and even more surprised that there was not an early attempt to rectify an obvious mistake. After all, the impact of the change was more or less immediately obvious. In December 2009, the RPI was about half a percentage point higher than the CPI, and in December 2010 it was nearly 0.9 percentage points higher. Nowadays, the RPI continues to run between 0.8 and one percentage point above the CPI.

This matters not only because it is the wrong number but because this wrong number has very significant real-world consequences. It has been a gift, as we have heard, to the holders of RPI index-linked bonds—a gift of around £1 billion in extra interest every year—and it has punished those people whose payments are linked to the RPI. Annual rail fare increases and the interest on student loans are examples of this.

You might reasonably have thought that it would be obvious that the mistake in calculating RPI should be fixed, but listening to the arguments for and against repairing the index was at times like listening to a theological dispute between medieval schoolmen. One of our colleagues, who is no longer in his place—the noble Lord, Lord Lamont—compared the whole thing unfavourably to listening to the arguments in the Council of Trent.

It seemed clear to us that some of the technical arguments, about the use of the Carli formula, for example, had been going on for a very long time and were unresolved—and perhaps even unresolvable. However, it seemed that the arguments in favour of repair carried significantly more weight than those against. This was in part because the arguments against seemed based very largely on a misreading by the ONS of its statutory duty and on its reluctance to take into account the widespread and continued use of the RPI.

The noble Lord, Lord Forsyth, explained our collective view of the ongoing misinterpretation by the ONS of its statutory duties under the Statistics and Registration Service Act 2007, and I will not repeat his arguments. However, I will say that the UKSA/ONS position on this strikes me as simultaneously cowardly and ludicrous. In essence, the ONS is saying that it will not ask the Bank for permission to repair the RPI because it thinks, correctly, that the Bank would have to ask the Chancellor and that he would say no. The Chancellor himself dealt with that when he gave evidence to us, as the noble Lord, Lord Forsyth, recounted. We believe that the ONS has a legal duty to ask for authority to repair, and we strongly believe that, when asked, the Chancellor should agree.

The second major issue we focused on was whether there was a need for multiple indices to measure consumer price inflation. We thought not. Some witnesses, including the UKSA and the RSS, defended the practice. Others, including the Bank of England, saw the case for a single index. They felt that it was not obvious why two were needed and that having multiple indices caused confusion and was counterproductive. In addition, of course, the existence of two indices has allowed the Government to indulge in the rather disgraceful game of index shopping, using the lower CPI for payments out and the higher RPI for receipts in. This is, at the very least, inconsistent and incoherent, as well as obviously unfair and, unfortunately, widespread. I am glad to see that the Government have made some moves towards fairness and consistency and we encourage them to go further and faster. In fact, I urge the Government to move as quickly as possible towards the use of a single consumer price index. As we recommended in our report, we believe that the Government should eventually choose between a repaired RPI and the updated CPI.

As the noble Lord, Lord Forsyth, explained, there has been no formal response to our report, which was published six months ago. The National Statistician, who retired yesterday, without a proper successor in place, said in March that UKSA would respond in April—and it did, on 30 April, as did the Treasury on the same day. They both said that this was an important issue which required further consideration—in the same words—and that they would respond,

“as soon as it is practicable to do so”.

Not “in due course”, “shortly” or “soon”, which are the usual qualifications, but an entirely unexplained new kind of delay: as soon as it is “practicable” to do so. Can I ask the Minister—well, perhaps not. I wanted to ask what this means. What is making a response impracticable? How long is this impracticability expected to last? We currently have no idea when we might expect the usual formal written response.

So, in the absence of a response, and while the UKSA and the Treasury are considering how to respond, could I ask the Minister a couple of questions? First, does the Minister agree that the ONS has a legal duty to request the repair of RPI? The Minister will know that the Chief Secretary to the Treasury, talking of the proposal to repair RPI, told the committee:

“I am suggesting it is the role of the ONS to put forward that proposal”.


My second question, therefore, is: in light of this, what can be done to avoid this damaging and faintly ridiculous impasse caused by Sir David Norgrove’s assertion that he can read the Chancellor’s mind?

Small and Medium-sized Enterprises: Mistreatment

Lord Sharkey Excerpts

Thursday 27th June 2019 Lords Chamber

[Lord Sharkey (LD)]

My Lords, the report we are considering has already attracted a lot of comment—all of it unfavourable. The chair of the TSC said:

“This long overdue report will offer no solace to those who suffered from the disgraceful actions of RBS’s GRG”.


Kevin Hollinrake, co-chair of the APPG on Fair Business Banking, said that the report is a,

“complete whitewash and another demonstrable failure of the regulator to perform its role”.

The SME Alliance said that it was deeply disappointed with the regulator. The Times of Friday 14 June said that the report was,

“a masterful study in pointlessness”,

an insult to victims, and that it demonstrated a,

“sloppiness that underlines the paucity of the FCA’s investigation”.

Last Friday’s Financial Times was also critical. It said that the,

“report into the GRG scandal at Royal Bank of Scotland, which found that nobody was to blame, is a scandal in itself”.

None of this criticism is surprising or ill-founded. The whole sorry history of the GRG and RBS is littered with failures. The first failure was within the GRG. My noble friend Lady Bowles listed these failures and their dreadful consequences. The second failure was within RBS, and extends to board level. Promontory, talking about the issues of malpractice and mistreatment, says explicitly that,

“we view these issues as part of an intentional and coordinated strategy … to focus on GRG’s commercial objective and to place inadequate weight on the interests of its SME customers”.

Promontory explicitly implicates the bank itself—RBS—in these failings. It concludes:

“It is clear that the bank was aware, at least in part, of some of these failures but, it would appear, chose not to prioritise action to overcome them”.


In other words, the GRG was systematically ripping off some of its vulnerable customers and the bank knew this but did not intervene.

This is a gross failure of responsibility on the part of RBS, or at least very clear evidence of complete incompetence—and it gets worse. From April 2009, RBS had adopted a group-wide policy on the FCA’s treating customers fairly principle. This applied to GRG. Promontory notes:

“Despite this, we did not see how GRG management would have been able to satisfy itself that the TCF had been properly implemented and embedded in GRG. In our view, it was not”.


Presumably, either RBS was aware of the failure and did nothing, or it was unaware of it. Either way, there are surely grounds for resignations or sackings.

The third failure is therefore that of the regulator, the FCA. I say this with some reluctance. I have been an admirer of Andrew Bailey and believe that the FCA has become a significantly improved regulator under his leadership, but this belief has been tested of late, what with the LCF and the Neil Woodford affairs on top of the GRG debacle. Now we have the FCA’s report on the GRG affair, which reads as a rather desperate attempt at exculpation. It is clear that the FCA has acted late, reluctantly, defensively and very weakly. I agree with Kevin Hollinrake that the report is a whitewash. It is also an evasion of responsibility. The FCA report fails to discover—or declines to name if it has discovered— those in the GRG in RBS responsible for the malpractice and mistreatment of SMEs and the breaching of the TCF principle.

It is clear, on the one hand, that terrible things happened and, on the other, that nobody was named, punished or sanctioned. Then there is the question of the fit and proper test. The FCA report states on fitness and propriety:

“While those directly affected might think the conduct of senior management was deficient in GRG, we do not believe we would have reasonable prospects of bringing successful prohibition proceedings against any member of senior management”.


That is not only weak but unevidenced. It is either false or, if true, a perfectly clear illustration of the gulf between ordinary, common-sense language and its interpretation by the FCA. The proven persistence, scale and damage of GRG’s malpractice must surely be evidence that those responsible are absolutely not fit and proper persons in any reasonable sense of the words. If the FCA persists in its refusal to use its fit and proper person powers, the Government should ask it to rethink the whole regime. Does the Minister agree?

Perhaps the most worrying aspect of the FCA’s report is on page 73, where it discusses what, had the SM&CR been in place, it could have done about GRG. It reaches the feeble conclusion:

“We cannot say whether we would have been able to bring successful cases against RBS senior management had the SM&CR been in force”.


What does this say about the effectiveness of the SM&CR? Does it mean that the equivalent of GRG’s malpractices, if carried on now, could not lead to the punishment of individuals? What is the Government’s view on that?

This has been a sorry tale of malpractice. There has been wrongdoing but no consequences for the wrongdoers. There has been some compensation for victims, but not nearly enough. There is no clarity about whether our regulatory regime could have prevented this malpractice or could in future prevent such malpractice. There are questions as to whether the fit and proper test is in itself fit for purpose.

Promontory recommended that the FCA should work with the Government to extend the protections available to SME customers. Is that in fact happening and, if so, what progress has been made? Finally, does the Minister agree with the chairman of the Treasury Select Committee, who said that the FCA’s ruling showed that the regulators should be given powers to regulate commercial lending:

“Otherwise, scandalous events such as those at GRG could recur”?

Breathing Space Scheme: Consultation Response

Lord Sharkey Excerpts

Wednesday 19th June 2019 Lords Chamber

[Lord Stevenson of Balmacara (Lab)]

My Lords, I declare my previous interest as a former chair of StepChange, the debt charity. I thank the Minister for repeating this Statement, and I am very happy to hear what he had to say. I have campaigned for both these changes in policy for a number of years, and it is astonishing to hear them being announced today. What on earth will I do with my time?

The Minister will recall the discussions we had during the passage of the Financial Guidance and Claims Bill when he was the co-pilot, as he described it. We worked closely with the Government to try to get a breathing space scheme into scope. We did not succeed then, and the worry was that although these two measures were in the Conservative Party manifesto, they might, like so many other good and necessary policies in recent years, fall under the Brexit behemoth, but here we are. I welcome the excellent progress made on this issue.

I was interested to hear that the Minister making the announcement in the other place revealed that this is an issue close to his heart. I think everyone who has seen at first hand the hardship that problem debt can cause realises that it places a heavy burden on households and can lead to family breakdown, stress and mental health issues. It was good to hear the Government accept that it is wrong to assume that overindebtedness is simply a product of feckless people taking out too much credit. Many hard-working families struggle to meet essential bills and can end up owing money to multiple creditors in the public and private sectors. My experience in StepChange was that the majority of the 500,000 or so people who contacted the charity each year had successfully managed their finances for many years before illness or another unexpected factor tipped them into unmanageable debt, which they desperately wanted to repay.

With this announcement today, the Government have taken a significant step which will do a huge amount to encourage people to seek the free professional advice they need timeously when problem debt occurs. The combination of the breathing space and the statutory debt recovery scheme will support those who have the capacity to repay their debts but lack the knowledge and expertise to deal with their multiple creditors. It will allow them to do so in a way that will repay much more to creditors and in a shorter time. This system has worked for many years in Scotland, and it is good to see that pioneering approach being extended to England and Wales, and hopefully to Northern Ireland in due course.

The detail of the government response has only just gone up on the website and there is a lot to take in, but I would like to make a few points. I worry that the breathing space period of 60 days may not be long enough in practice, and I am sure that this will be something we will need to come back to, but I think the best thing is to begin with that length and review it in the light of experience. It is good that the protections include the freezing of further default interest, charges and enforcement action once somebody has taken the first step of seeking debt advice. We are delighted that government debt will be included in both schemes. In particular, this should give some protection to many people against the rather aggressive action that is sometimes taken by bailiffs collecting council tax arrears.

The introduction of a special version of the breathing space for people experiencing a mental health crisis is most welcome. It is good that there is not going to be a public register, with all that that might bring in terms of unsolicited approaches to those on it from unscrupulous third parties. I think the Government have taken the right decision about a private register. We are sad that we will not see the breathing space scheme until 2020 and will not see the statutory debt management recovery scheme until 2021 or later, but I hope that HMT will do what it can to expedite both schemes. We certainly stand ready to help if that is required.

I have some reservations about the suggested level of the statutory fair share element in the SDRP. The current scheme agreed with large creditors is much higher than the 9% suggested in the Treasury’s response. However, I am aware that there is a broader discussion on comprehensive debt advice funding being worked on by the new Money and Pensions Service.

I will conclude by discussing two other issues. Unmanageable personal debt is a by-product of many factors, but most are linked to the health of the economy. Lack of affordable credit, slow wage growth, growth in zero-hours contracts and changes brought in by the gig economy all play a part. In addition, it is incontestable that the introduction of universal credit is causing strain and stress here. While this new policy is welcome—and it is—other issues need to be addressed. Does the Minister agree?

Finally, while it is true that the Government have acted to correct abuses in the consumer credit market, high-interest loans are still being made to people who cannot afford to repay them. Banks are not averse to making punitive charges for temporary overdrafts. Guarantor loans are a current concern, and it is a matter of considerable regret that the Government have not taken action to outlaw logbook loans. In relation to the latter, will the Minister agree to meet me to discuss how we might progress the Law Commission draft Bill on goods mortgages, which would inter alia have the effect of repealing the Victorian legislation that gives rise to these bans?

[Lord Sharkey (LD)]

My Lords, I thank the Minister for repeating the Statement. We on these Benches very much welcome the introduction of the breathing space and the statutory debt repayment schemes, although we do have a few questions about execution.

To debtors, this reform may seem to have been quite a long time coming: I can recall discussions in Parliament in 2015, as well as outside long before that. The proposal was, of course, included in the Conservative Party’s 2017 manifesto. Many people and organisations have played a part in getting us to this stage. I particularly want to mention StepChange and the noble Lord, Lord Stevenson of Balmacara. The critical point in getting the Government to do something arose during the passage through this House of what is now the Financial Guidance and Claims Act 2018. The amendment to the Bill by the noble Lord, Lord Stevenson, about breathing space now appears as Section 6 of the Act. This section encouraged and enabled the Government to do what they have announced today.

Turning to the schemes themselves, we are pleased that the Government have in most cases followed the advice they were given in the consultation—which seemed to be a model of its kind, unlike some of the other consultations that the Minister and I have had to discuss in this Chamber. We believe that the eligibility criteria for the breathing space scheme are broadly right, although we have doubts about the restriction to only once in 12 months. We encourage the Government to think again about this and—as they say they are minded to—to include provision for joint debts to qualify for inclusion in the scheme.

We are also happy to see that local and central government debts are to be included in the new scheme and very pleased to see the inclusion of small sole-trader debts, which we think is a vital element. We especially welcome the unlimited extension and repeated entry to the scheme for those in mental health crisis.

The Government’s very helpful consultation and policy response paper does qualify the inclusion of universal credit advances and third-party deductions from universal credit. The document is very vague about the timing of their eventual inclusion. I ask the Minister to give the House a little more detail and encourage him to speed up the process of including these two elements.

When it comes to which ongoing bills should be paid during the breathing space, I think that the Government have it about right in giving debt advice agencies the discretion over whether to remove people who do not keep up specified ongoing payments from the scheme.

Debt and debt repayment continue to be severe problems for millions of people in this country. As the Minister noted, the Money and Pensions Service has estimated that around 9 million people are overburdened with debt. We also now know that real incomes have started to fall again.

The Government’s proposals are a significant step forward in addressing problem debt, and we welcome them. However, we are disappointed with the timetable for the introduction of these measures. Early 2021 seems a very long way off—probably an intolerably long way off if you have unmanageable debt. All the Government’s proposed measures can be introduced by SI. Parliament is not currently overpressed with business. Why can we not use some of that time to bring forward the implementation date?

[Lord Young of Cookham]

I thank both noble Lords for their generous welcome to the announcement, in particular the noble Lord, Lord Stevenson. I remember the forceful case he made during the passage of the Financial Guidance and Claims Bill, drawing on his experience in StepChange, which drew on research showing that schemes such as this stop people getting into a cycle of debt and end up with the creditors getting more than they would, had such a scheme not been available. As the noble Lord, Lord Sharkey, said, his amendments to the Bill enable us to make progress. As he said, I was a co-pilot with my noble friend Lord Freud on the Bill—the two intellectuals Freud and Young took that Bill through the House.

I take the point from the noble Lord, Lord Stevenson, about 60 days possibly being not long enough. He will know that that is more than the six weeks pledged in our manifesto and more than the six weeks available in Scotland. We believe we have that right. I agree entirely with what he said about the Insolvency Service’s register being private and not public. I take his point, which was also made by the noble Lord, Lord Sharkey, about trying to speed things up.

I take the point that the 9% top slice that the agencies will get is less than the 13% currently available, but by contrast this is guaranteed in a way the 13% might not be. Also, we believe it will be on a much broader base. Of course we will keep the revenue stream under regular review, but we think we have it about right.

On loans, the FCA has announced a tough new package of measures on high-cost credit. It has the powers to introduce caps, but perhaps I can make more inquiries about that specific point. I have no hesitation in agreeing to a meeting with the noble Lord, Lord Stevenson, which I welcome. Perhaps it would make sense to involve the Economic Secretary to the Treasury, who has prime policy responsibility for the subject matter.

I am grateful to the noble Lord, Lord Sharkey, for his welcome of the scheme. The once-only ability to go into the breathing space does not apply to those with mental health problems. We wanted the first time to have a sustainable, long-term solution to the debt problems and there was an anxiety about the possibility of abuse if people could go on applying. We will look at that. He has a valid point about joint debts. Likewise, often a small trader’s personal finances are inextricably involved with the business. It makes sense to have eligibility for small traders up to the VAT limit.

On universal credit, any overpayments will be stopped immediately, although there is an IT issue that prevents the same process being applied to other payments. Perhaps I could write to the noble Lord, but the objective is to address those IT problems as soon as possible.

Finally, the noble Lord mentioned the timetable. This was raised in the other place. He might have followed the exchanges. The Economic Secretary said that he had had discussions with his officials to try to drive the timetable through as quickly as possible. There are some IT issues about making sure the public sector interface with the Insolvency Service can react to people entering and leaving the breathing space. We want to get it right, but I will certainly tell the Economic Secretary that both noble Lords expressed anxiety about the timetable and asked whether it could possibly be accelerated.

Banks: Cash Withdrawals

Lord Sharkey Excerpts

Tuesday 11th June 2019 Lords Chamber

[Lord Young of Cookham]

My noble friend is quite right; they are used not just for cash withdrawals but often for deposits or balance queries. I very much hope that banks respond to my noble friend’s suggestion that if they have to close the last branch in a town or village, they ensure that they leave behind a free-to-use ATM that will replace at least some of the facilities that it used to provide.

[Lord Sharkey (LD)]

My Lords, at the end of March there were 924 deprived areas without access to free-to-use ATMs, and this was a 12-month high. On 1 April LINK promised to address the problem by increasing payments to operators. It also said that if that did not fix the problem in two months, it could directly commission free-to-use ATMs in these deprived areas. The two months are up. Have the increased payments worked? Has LINK commissioned any free-to-use machines in these 924 deprived areas?

[Lord Young of Cookham]

The noble Lord is quite correct that LINK is directly commissioning ATMs in areas that do not have one but need one. If he has a particular area in mind that needs an ATM but does not have one, I am sure he will let LINK know. The company has tried to ensure the viability of free-to-use ATMs in deprived areas by increasing the transaction fee that the ATM owner gets to £2.75 per transaction, against the standard fee of 25.9p. LINK’s policy is that where it has to shrink the estate, it does so by removing ATMs that are close to another one—73% are within five minutes’ walk of another one—but maintaining free-to-use ATMs in remote or deprived areas.

Money Market Funds (Amendment) (EU Exit) Regulations 2019

Lord Sharkey Excerpts

Monday 25th February 2019 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, I will speak on behalf of my noble friend. 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 SIs under the EU withdrawal Act to deliver this, and a number of debates on these SIs have already been undertaken here and in another place.

This SI is part of this programme, and has been debated and approved by the other place. The SI will fix deficiencies in UK law on regulations for money market funds to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs laid under the EU 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 European regulation on money market funds relates to their establishment, management and marketing. These funds invest in highly liquid instruments—such as Treasury bonds—and provide a short-term, stable cash management function to charities, local government, businesses and other financial institutions. They are predominately used by investors as an alternative to bank deposits. The regulations were introduced as 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. This is achieved by having further rules on prudential requirements, governance and transparency for operators of money market funds.

Money market funds are structured as either an undertaking for collective investment in transferable securities or alternative investment funds. Consequently, they are required to comply with regulations that apply to UCITS or alternative investment funds. The regimes for UCITS and AIF 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 2019, which were made on Wednesday 20 February.

First, this draft instrument removes references to the European Union which are no longer appropriate, and to EU legislation which will not form part of retained EU law. These references will be replaced, to refer to the UK and to relevant domestic and retained EU legislation. Secondly, in line with the general approach taken in other instruments, this SI will transfer functions within the remit of EU authorities to UK institutions. All functions exercised by the European Commission will be transferred to the Treasury. These relate to creating rules on standards for money market funds, such as their liquidity and quantification of credit risk.

All functions exercised by the European Securities and Markets Authority will be transferred to the FCA. The FCA will become responsible for technical standards on how funds should stress test their funds, and for two operational powers to establish a register and reporting templates for money market funds. The FCA, as the UK’s regulator for investment funds and the current national competent authority for money market funds, has extensive experience in the asset management sector and is therefore the most appropriate domestic institution to take on these functions from ESMA.

As previously stated, money market funds must be structured and regulated as UCITS or AIFs. This instrument makes provision to ensure that EU money market funds are able to use the temporary marketing permissions regime, which lasts for three years, as legislated for in the regulations for collective investment schemes and alternative investment fund managers. Following an assessment by the FCA and submitting a Written Ministerial Statement to both Houses, the Treasury will be able to extend this by a maximum of 12 months at a time. The temporary marketing permissions regime will allow for EEA money market funds which are currently marketed into the UK, and any subsequent money market fund structured as a UCITS sub-fund, to be able to continue to market into the UK as an MMF for up to three years after exit day.

This 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, additional amendments maintain the eligibility for EEA MMFs with temporary permissions to continue to market in the UK at the end of the temporary marketing permissions regime period, if they gain the required permissions to market as a third-country fund under existing UK domestic frameworks.

Money market funds structured as UCITS will be required to gain authorisation under Section 272 of the FSMA, while for those structured as AIFs, their managers will need to notify under the national private placement regime.

The UK currently has a very small domestic market of money market funds, so these provisions address the cliff-edge risks that could arise as a consequence of defaulting to a UK-only market. This will ensure that UK investors can continue to access their investments and to have a choice of money market funds to use for cash management.

The Treasury has worked closely with the FCA in drafting this instrument. It has also engaged the financial services industry. This has included engagement with the Institutional Money Market Funds Association, which is the main industry body for money market funds. The House should be aware of remarks by its secretary-general, Jane Lowe, who stated:

“We believe the current draft SIs deal adequately with current EU legislation and consider that the dialogue between HM Treasury and industry was helpful to identify and iron out issues that arose”.


On 21 November, the Treasury published the instrument in draft along with an explanatory policy note to maximise transparency to Parliament and industry.

To summarise, the Government believe that this SI is needed both to ensure that the regulatory regime for money market funds and their operators works effectively, if the UK leaves the EU without a deal or an implementation period, and to ensure continuity for the UK investors they serve. I hope that noble Lords will join me in supporting this instrument. I beg to move.

[Lord Sharkey (LD)]

My Lords, I was grateful for the clarity of the Explanatory Memorandum and the impact assessment for this SI. I understand that the changes are necessary for the proper continuation in business of UK MMFs in a no-deal scenario. I also understand the importance of the temporary marketing permissions regime in allowing continued UK access for existing EEA MMFs, and I note the £250 billion of UK investment in these funds.

I also note that, as set out in paragraph 157 of the consolidated impact assessment,

“this SI transfers the European Commission powers to make delegated acts and implementing acts to HM Treasury, as a power to make regulations”.

This refers, I think, to Regulation 18 of the SI, which states:

“Any power to make regulations conferred on the Treasury by this Regulation is exercisable by statutory instrument … Such regulations may … (a) contain incidental, supplemental, consequential and transitional provision; and (b) make different provision for different purposes”.


It also states that such regulations will all follow the negative procedure. I was not sure of the purpose of the phrase,

“make different provision for different purposes”,

or to what extent it extends the Treasury’s latitude in drawing up these SIs. I would be grateful if the Minister could explain why this additional power is necessary and whether its scope is as unlimited as it might seem at first sight. I would also be grateful if the Minister could explain the use of the negative procedure for the SIs generated by the power. Is there not a case for using the affirmative procedure to allow Parliament more rigorous scrutiny in this obviously critical area of our financial services industry?

[Baroness Kramer (LD)]

My Lords, like my colleagues on these Benches, I support this statutory instrument. It is necessary: to put it in technical terms, British investors in money market funds would be in a right pickle if we did not pass it, because, as the Minister has said, the domestic market is tiny.

However, I want to raise an issue which is repeated in many of the other statutory instruments before us. Paragraph 2.8 of the Explanatory Memorandum states:

“When the UK is no longer a member of the EU single market for financial services, it would not be appropriate for UK authorities to be obliged to share information or cooperate with the EU on a unilateral basis, with no guarantee of reciprocity”.


I understand the emotional tag behind all this, but there is a wise old saying which goes: “An eye for an eye and we all go blind”. The 2008 financial crash and many of the other problems that we have had have come through fragmentation of regulation and the lack of information transfer between regulators in different locations and countries. I really do not understand why we are not seeking to do everything in our power to make sure that information flows continue. A money market fund that is being regulated by the FCA under the new statute following any kind of no deal might well be in the same family as other such funds being marketed in the EU 27. Therefore, something that flags up an issue or concern with one may well reflect through to the other, because it could be core to the administration and deep within the overarching family. Will the Minister explain the consequences of putting up any kind of barrier to existing information transfer and what risks we might be taking on? I am exceedingly concerned about fragmentation.

--- Later in debate ---

[Lord Young of Cookham]

I am grateful to all noble Lords who have taken part in this short debate and hope that there is no substantive objection to the powers which are proposed in this statutory instrument. I will try to deal with the questions that were raised by noble Lords.

The noble Lord, Lord Sharkey, asked why there is an additional power to make regulations. The power to make delegated regulations simply transfers to the Treasury the power in the EU regulation, which lies with the Commission, to make technical standards such as specifying credit quality assessment criteria. As these are basically technical standards, we believe that the negative procedure is appropriate. I may stand to be corrected, but I do not think that any of the committees that scrutinise legislation in this House have suggested otherwise.

Both the noble Baroness, Lady Kramer, and the noble Lord, Lord Adonis, raised the question of removing the legal obligation to share information. I understand the concern, but I want to reassure both of them that this will not preclude UK supervisors from sharing information with EU authorities where necessary. I take the point that it is important that there is a good cross-flow of information between the UK and regulators in the EU, and there is already a good domestic framework for co-operation on information sharing with countries outside. We already have that, and the legislation allows for that. If you look at the Financial Services and Markets Act 2000 and the associate secondary legislation, all the necessary powers already exist for co-operation and information sharing with countries outside the UK, which will of course include the EU when we leave.

The noble Lord, Lord Adonis, asked about the impact assessment. The costs include a one-off cost for firms examining and understanding the instrument, estimated at £7,200, which will be shared between the 21 funds regulated under the MMFR in the UK.

Finally, the noble Lord, Lord Tunnicliffe, raised the point about reciprocity—I am sorry that he has had another bad day getting on top of these SIs. Of course, we cannot legislate here to make EU countries reciprocate what we are doing to them, but a series of bilateral discussions is under way to ensure that, in the unlikely event of no deal, essential relationships are preserved. I hope that I have answered all the issues raised by noble Lords.

[Lord Sharkey]

Before the Minister sits down, I may have expressed myself badly when talking about the negative instruments. The instrument we are discussing gives the Treasury the power subsequently to make other statutory instruments—that is partly what it does—and my question was about why all those subsequent negative instruments should come under the negative procedure. The Minister responded by talking about the sifting committees, but those committees will not get sight of those because of course they do not yet exist, and when they do, the sifting committees almost certainly will not. So that does not quite address the question I was hoping to put.

I was also not entirely certain about the answer to the point about making,

“different provision for different purposes”.

I am not quite sure I understood exactly what scope that gave the Treasury in drawing up a statutory instrument. However, if the Minister chooses to write to explain, I would be grateful.

[Lord Young of Cookham]

The Minister might indeed prefer to write. I think that it simply transfers existing powers which rest with the Commission to the Treasury, without changing the fundamentals.

On the sifting committee, I think that I am right in saying that wherever the sifting committee has recommended that statutory instruments under the EU withdrawal Act should be affirmative rather negative, the Government have agreed. I hope that that provides some reassurance to the noble Lord.

Uncertificated Securities (Amendment and EU Exit) Regulations 2019

Lord Sharkey Excerpts

Monday 25th February 2019 Lords Chamber

In summary, the Government believe that the proposed legislation is necessary to ensure the smooth functioning of financial markets in the UK if the UK leaves the EU without a deal or an implementation period. In the case of the USR SI, relevant parts are needed in any scenario to ensure the effective functioning of the CSDR. I hope that noble Lords will join me in supporting these regulations, and I beg to move.

[Lord Sharkey (LD)]

My Lords, I accept that the two regulations in this group are closely linked and I have only one question and one comment. The question relates to the waivers that the Treasury may issue under the terms of the investment exchanges, CCPs and CSDs SI. Paragraph 117 of the impact assessment to this SI explains that, if the Treasury makes an equivalence decision on a third country jurisdiction and the Bank has recognised a third country CSD, this will mean that the third country CSD will be subject to Part 18 of FSMA. As the Minister has said, this will give the Bank the power to make rules requiring information about events specified in those rules and to require the third country CSD to give written notice to a regulator of a change to its own rules or guidance.

The Bank could also require a third-country CSD to give reports on the CSD services it provides in the UK and related statistical information. As the Minister said, the Bank may also inspect any branch of a third country CSD in the UK. There is also the rather threatening addition, “enforceable by injunction”. All of this seems eminently sensible. However, the impact assessment includes a provision which qualifies the use of these powers. It means that, for instance,

“the Bank may waive the above rules in respect of a third country CSD where it is satisfied that compliance with those rules would be unduly burdensome and the waiver would not result in undue risk”.

I take it that this waiver power is intended primarily to help the continued co-operation of CSDs within the EEA. My question is whether, if the Bank does make such waivers, they be will in the public domain and whether the Bank will explain the reasons for supposing the rules to be unduly burdensome and for supposing that exercising the waiver will not result in undue risk—whatever “undue” may mean in this context.

My comment has to do with paragraph 10 of the EM to this instrument. The paragraph explains in some detail, and with the appropriate references, the outcome of the consultation on the implementation of the CSDR. This was extremely helpful, and it illustrates a key difference between consultation and engagement. Noble Lords will know that many of the Brexit SIs laid by the Treasury have not been consulted on. The Explanatory Memorandums say when this is the case, and frequently follow this by noting that there has instead been extensive engagement with stakeholders. But in no case that I can recall have the EMs given any detail about the questions that arose in these engagements, the no doubt various views expressed by stakeholders or any modifications that may have been made to the draft as a result of these engagements. By contrast, as the current EM demonstrates, consultation gives a clearer, well-defined, comprehensive outcome and even demonstrates how government thinking has been changed. In this case, the three respondents were obviously very persuasive.

Engagement with no detail is a very unsatisfactory substitute for consultation. I realise that it is now too late to conduct consultations on the no-deal Brexit SIs that are before us and on those that will come before us. I think that we have only one more Treasury SI to consider—or at least very few. I ask the Government in general to be much more informative about engagement. I ask them to consider providing in the Explanatory Memorandums at least a list of stakeholders engaged with and a summary of what issues were raised by the Government and the stakeholders, what opinions were expressed and what changes were made as a result of these engagements.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interest, as in the register, as a director of London Stock Exchange plc. I am glad that we are debating these two instruments together, because they seem to go together and to form a continuum. Indeed, in some ways it is rather strange. The first says that it would not be appropriate to give the Bank of England powers pre Brexit, but then in the second the powers are being given to the Bank of England. That arises largely because the uncertified securities regulations are largely about transposing EU legislation under the European Communities Act.

I too was interested in the consultation done in 2015 and noted that there seemed to be variably one, two or three comments on various sections. That certainly determined me to step up my rate of response to consultations. The report says that changes have been made, but it leaves you having to compare the before and after. All that was getting a bit too much on a sunny Sunday, as the noble Lord, Lord Tunnicliffe, said. What struck me particularly was the explanation on page 6 of the Explanatory Memorandum to the uncertified securities regulations, which said that,

“the Treasury is taking a proportionate approach to implementing Article 49(1)”.

Given that they are regulations, and you cannot change what is in the regulation done by the EU, I am curious as to what this more proportionate approach entails. Does it imply that the first draft had been gold-plated in some way? What was in and has been taken out? I did not find a great deal of guidance in the documents.

My next comment is a very general one. In both of these statutory instruments, and in particular in the second one dealing with exchanges and so forth, there is a large number of changes to the Financial Services and Markets Act. As we have discussed at some length before, that is not up to date on legislation.gov.uk— although, of course, it does give you a list of the things you might want to go and explore, to see if you can work out what an up-to-date version might be, or you may be thrust into the hands of one of the commercial organisations that will do that for you. However, by the time we have ploughed through all 60 statutory instruments that we are told we have to deal with, and then whatever other number we may get regarding corrections and re-workings—some of which are coming along now—FSMA will be even more incomprehensible on the legislation website, and so too will be any sensible comparison of how EU legislation has been retained with regard to the EU originals.

That might be relevant. If we are ever trying to argue for equivalence, the first thing we will be asked to do is to show it. Page 3 of the Explanatory Memorandum for the investment exchanges SI names six other SIs involved in the onshoring of the Securities Financing Transactions Regulation—so one regulation goes to seven SIs, each of which further redistributes powers and requirements over a range of other instruments. As I have said, we are also getting into second-order corrections and additions, with further SIs winging their way through the system.

It is not my idea of a lawful democracy for laws to be so obscure and inaccessible. It is actually quite a mockery to make a fuss about the accessibility and clarity of wording in individual documents while it remains impossible to find out their cumulative effect. I have long been shocked at this unwholesome situation, but Brexit is making it far worse. What is the Treasury going to do about it? Clearly, check tables have to be used in the Treasury. I am coming to the view that we are reaching a stage at which Parliament should refuse to amend law that is not available in an up-to-date format. At the very least, could the Treasury share the various schedules that point out what has been put where, so that those of us who are expected to scrutinise this do not have to spend an awful lot of time getting frustrated as we try to work out the true current state of the law? If we cannot do it, and we are responsible for it, how is the ordinary citizen supposed to know what is the law, when ignorance is no defence?

Securitisation (Amendment) (EU Exit) Regulations 2019

Lord Sharkey Excerpts

Monday 25th February 2019 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, on behalf of my noble friend Lord Bates, I beg to move that the House approves the Securitisation (Amendment) (EU Exit) Regulations 2019. As this instrument is grouped, I will also speak to the Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019.

As with the instrument debated earlier, these SIs are part of the programme of legislation under the European Union (Withdrawal) Act that aims 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. These SIs will fix deficiencies in EU law on securitisation and securities financing transactions to ensure that they can continue to operate effectively after the UK leaves the EU.

The Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019 concern securities financing transactions, or SFTs. Broadly speaking, SFTs are transactions where securities such as equities are used to borrow cash or vice versa. A common type of SFT is a repo, or repurchase transaction, in which one party sells an asset to another at one price and commits to repurchase the asset from the other party at a different price on a later date. SFTs were not regulated before 2015 and there were major concerns around their effects on the economy, especially given the experience during the financial crisis where repurchase transactions were associated with increases in leverage, while exacerbating boom and bust cycles in the economy. After the Financial Stability Board identified significant risks associated with these instruments, the EU securities financing transactions regulation introduced a framework under which details of SFTs must be reported to trade repositories. Trade repositories are effectively databases for reporting transactions. Under the regulation, this information must then be disclosed to investors and national regulators are required to act where they identify risky practices by firms.

The Securitisation (Amendment) (EU Exit) Regulations 2019 concern securitisation: the practice of pooling financial assets such as loans into financial instruments called securities, which can then be sold to investors. Securitisation allows banks to transfer some of the risk associated with the assets they hold to investors. This frees up regulatory capital to facilitate further lending. Securitisations can themselves be used to finance business activities and reduce the concentration of financial stability risks. To respond to concerns around the opaqueness and complexity of securitisation programmes, the EU adopted the securitisation regulation, which is based on international standards agreed by the Basel Committee on Banking Supervision. The EU securitisation regulation simplifies and consolidates a patchwork of earlier rules, and introduces the concept of a securitisation that is “simple, transparent and standardised”, also referred to as an STS securitisation, whose use is to be incentivised.

Both regulations are therefore crucial to protecting financial stability while ensuring that the benefits of these instruments to firms and the wider economy remain available. They will be transferred to the UK statute book by operation of the EU withdrawal Act on exit day, but in a no-deal scenario the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework, so this legislation would no longer be operative. These SIs make the necessary amendments to ensure that the provisions continue to work properly in a no-deal scenario.

The transparency of securities financing transactions and of reuse regulations amend, first, the treatment of EEA branches of financial services firms in the UK so that after the UK leaves the EU, EEA branches operating in the UK must report their transactions to a UK trade repository. This means that EEA branches will be treated in the same way as other third-country branches operating in the UK, which is consistent with the approach adopted under other financial services SIs laid under the EU withdrawal Act.

Secondly, this SI amends the list of entities that will have access to data on securities financing transactions reported to UK trade repositories. EU bodies are removed, making the list UK-specific, to reflect the UK’s status as a third country outside the EU in a no-deal scenario. This does not, however, preclude UK entities from co-operating with EU entities in future.

Finally, this SI transfers the European Securities and Markets Authority’s responsibilities relating to the requirements for the registration of trade repositories to the FCA, and amends these rules so they continue to work in a domestic context. This is appropriate given the FCA’s current role in supervising and regulating securities financing transactions.

It is worth mentioning that one of the main provisions of the securities financing transactions regulation cannot be domesticated at this stage, due to limitations in the powers under the European Union (Withdrawal) Act. This provision is the requirement on firms to report details of SFTs to trade repositories. Depending on the type of institution concerned, this requirement does not apply until 12 to 21 months after the publication of relevant regulatory technical standards by the EU. However, these have not yet been published and the requirement could therefore not be included in this SI, as it is not, in the wording of that Act,

“operative immediately before exit day”.

The Government have introduced separate legislation, in the form of the Financial Services (Implementation of Legislation) Bill, to enable us to make sure that this requirement applies in a domestic context in due course.

Turning to the draft Securitisation (Amendment) (EU Exit) Regulations 2019, this SI amends, first, the geographical scope of the EU regulation under which, currently, all parties involved in an STS transaction must be located in the EU. The SI amends this to allow UK counterparties to continue to participate in cross-border STS securitisations where some of the parties are located in third countries, expanding the current scope. This approach is appropriate because most securitisations are structured across borders, and it ensures that third countries are treated equally in the event of a no-deal scenario. For the UK securitisation markets to have maximum depth and liquidity while being subject to the same strict requirements introduced by the regulation, it was important not to constrain the UK market by requiring all parties to be located in the UK. None the less, this SI requires at least one of the parties to a securitisation to be located in the UK. The overall effect of this change in scope is to support liquidity in domestic securitisation markets, while ensuring that UK supervisors retain effective oversight of the securitisation as a whole.

Secondly, this SI introduces a transitional regime for the recognition of EU STS securitisations in the UK during a two-year period after the UK leaves the EU. This ensures that UK investors can continue to participate in the EU market for STS securitisations for that limited period. Any STS recognised by the EU during this two-year period will continue to be recognised in the UK until its maturity. This ensures that UK firms will continue to have access to a major market for STS securitisations.

The draft SI also clarifies the definition of “sponsor” in the securitisation regulation to ensure that where a sponsor wishes to delegate day-to-day portfolio management to a third party, that third party can be located anywhere in the world—not just in the EU. The regulation currently limits the location of the delegated firm to the EU. The EU Commission has acknowledged that this is an unintended consequence and is currently seeking to resolve the issue itself.

Finally, this SI transfers several functions currently carried out by the European supervisory authorities to the Financial Conduct Authority and the Prudential Regulation Authority. Most importantly, the SI transfers responsibilities relating to the authorisation and supervision of trade repositories and the publication of STS notifications to the Financial Conduct Authority. This is appropriate given the FCA’s considerable experience in supervising securitisations. The Treasury has been working closely with the Prudential Regulation Authority and the Financial Conduct Authority in drafting these instruments. It has also engaged the financial services industry on these SIs, and will continue to do so going forward. On 19 December the Treasury published both instruments in draft, along with explanatory policy notes to maximise transparency to Parliament and industry; prior to publication, it also shared drafts with industry for technical analysis. The Treasury has incorporated this feedback into the final draft of the SIs.

In summary, the Government believe that the proposed legislation is necessary to ensure that the UK has workable regimes regulating securitisations and securities financing transactions, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting the regulations. I beg to move.

[Lord Sharkey (LD)]

My Lords, I have only one brief question, which is to do with the transparency SI. I accept that we should approve both the SIs before us, but I regret that there has been no consultation on either instrument. As I remarked earlier, the engagement noted in both EMs is not a satisfactory substitute. However, I was happy to hear the Minister’s response to my suggestion of a more informative account of engagement becoming part of future EMs.

Reading the EM and the impact assessment for the transparency SI highlights one issue: the usual question of reciprocity. The EM for the transparency SI makes it clear that the Treasury can decide which third-country entities can access data on SFTs held in UK trade repositories. I assume that this provision means that all EEA entities currently with access will be allowed continued access. But what about the other way round? As things stand, if we crash out of the EU with no deal, will the UK still have access to data held in the three EEA trade repositories? If not, would it have significant implications for our financial services industry? Have the Government made any estimate of what the consequences of non-reciprocity might be? What assurance have the Government had from the EU, if any, that the UK would be allowed continued access after 29 March?

[Lord Deben (Con)]

My Lords, in the absence of the noble Earl, Lord Kinnoull, I want to declare my interest as chairman of PIMFA, the organisation representing wealth managers and independent financial advisers, and to say to my noble friend that these are two very important SIs which we have to have—there is no doubt about that. This is a branch of our financial industry which was not, as my noble friend said, properly cared for. It did not have the transparency which it needed and it now does. Very sensibly, that was done over the whole European Union, because that is the area over which much of this—not all of it—is served.

It is crucial that we get reciprocity; it would be a serious blow to the industry if we did not. My noble friend reminded us with such elegance that this measure is here only should we crash out of the European Union. Every day, we recognise what a nonsense that would be and how unaware of the facts those who seem to want it really are, but we should not miss the opportunity of reminding the House of this fact.

My noble friend mentioned that all these powers will go largely to the Financial Conduct Authority but that some will go to the Prudential Regulation Authority. Yet again, we have a series of jobs being given to people without any price on them. I am sure that my noble friend will say what he has said on other occasions, which is that the authorities concerned are perfectly aware that they are able to cover this within their current budgets. I am beginning to wonder whether their budgets are not too generous, because they appear to be able to cover so many things without any extra costs. I merely say to my noble friend that it is becoming difficult for the House to recognise how this can be. If those authorities manage to get by for a relatively short period, I have no doubt that they will then ask the industry to pay the cost thereafter.

Again, it is perfectly reasonable to say that the industry is paying the cost towards the European Union at the moment and it will be in much the same place if we bring this to a British system. I have two things to say about that. First, I would rather like to know what that place is, because we do not seem to be told. Secondly, the industry is not in the same place. At present, it is paying towards a system which gives it access to the whole of the European Union. We are now suggesting that it should pay for one which will only give it access to itself. It would have been valuable to see what the difference in cost was there.

Subordinate Legislation: Transparency and Accountability

Lord Sharkey Excerpts

Thursday 21st February 2019 Lords Chamber

[Lord Sharkey (LD)]

My Lords, we see too many skeleton Bills. The Healthcare (International Arrangements) Bill is the latest example and one of the very worst. These Bills force us to use secondary legislation scrutiny procedures for what should properly be in primary legislation and subject to amendment. Then there is the flood of Brexit SIs, many laid without proper impact assessments or consultations. We debate but we cannot amend and we are unwilling to reject. We have in fact rejected only seven SIs in the last half-century and this does not lend itself to effective scrutiny. Does the Minister agree that we need a thorough review, both of the use of skeleton Bills and of our procedures for dealing with SIs?

[Lord Young of Cookham]

The noble Lord’s question goes slightly broader than the narrow Question about statutory instruments’ transparency and accountability. On his first point, it is a matter for the DPRRC to draw attention to primary legislation where, in its view, too many powers are being subjected to subordinate legislation. The House, as it knows, can amend legislation as it goes through, and the Government have indeed amended legislation in many cases where the House has expressed the view that too much has been delegated. The particular Bill the noble Lord refers to is being debated later today. On his other question, about a wholesale review of statutory instruments, that goes slightly broader than this Question and at the end of the day it is a matter for the House and not the Government whether it wants to change the way it scrutinises legislation.

Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Lord Sharkey Excerpts

Monday 4th February 2019 Grand Committee

[Lord Young of Cookham (Con)]

My Lords, as this instrument has been grouped, I will speak also to the Financial Markets and Insolvency Amendment and Transitional Provision (EU Exit) Regulations 2019.

As with the instruments we have just debated, these two instruments are also part of the same legislative programme 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.

Turning to the substance of the over-the-counter derivatives, central counterparties and trade repositories SI, many noble Lords will be familiar with the European market infrastructure regulation known as EMIR, which the EU implemented in 2012. It is Europe’s implementation of the G20 Pittsburgh commitment in 2009 to regulate over-the-counter derivative markets in the aftermath of the financial crisis, reduce risk and increase transparency in derivative markets. It should be noted that EMIR, and the financial markets and insolvency SI which we will come on to in a moment, concern activities that mainly take place on financial markets. EMIR imposes requirements on firms that enter into any form of derivative contract and establish common organisational, conduct-of-business and prudential standards for trade repositories and central counterparties. Central counterparties, for example, stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. They guarantee the terms of a trade, even if one party defaults on the agreement, thereby reducing counterparty risk.

This SI addresses deficiencies within EMIR and related UK legislation to ensure that after the UK has left the EU an effective legal supervisory and regulatory framework for over-the-counter derivatives, central counterparties and trade repositories remains. This instrument is the last of three key SIs that fix deficiencies in EMIR, and it follows two SIs which have already been debated in your Lordships’ House and which have subsequently been made: the central counterparties SI and the trade repositories SI.

Firstly, the SI continues key requirements of EMIR that include the clearing obligation, which requires firms to clear certain types of derivative contracts at a CCP, the reporting obligation, which requires firms and CCPs to report derivative trades to a registered or recognised trade repository, and margin requirements, which compel firms to put forward money to cover the costs associated with trades. In order to have a framework in place to facilitate these requirements the relevant functions are transferred from the European Commission to the Treasury, and from the European Securities and Markets Authority—ESMA—to the UK regulators, namely the Financial Conduct Authority or FCA, the Prudential Regulatory Authority, known as the PRA, and the Bank of England.

Secondly, the power of granting equivalence decisions for non-UK trade repositories is transferred from the European Commission to the Treasury and functions for recognising non-UK trade repositories are transferred from ESMA to the FCA. The SI also transfers powers from the Commission to the Treasury with regard to equivalence decisions on over-the-counter derivative requirements and whether non-UK markets are recognised for the purpose of trading exchange-traded derivatives.

Thirdly, a temporary intragroup exemption regime provides continuity by ensuring that exemptions from EMIR requirements for intragroup transactions will continue after exit day. The regime will last three years from exit day to allow time for consideration of an equivalence decision by the Treasury and for the FCA to determine a permanent exemption. This period can be extended by the Treasury if necessary. Under the MiFID II legislation, there is an exemption from clearing and margining for certain energy derivative contracts, and this exemption is maintained by this instrument. Finally, EU processes which will become redundant are removed and replaced with equivalent UK processes.

I turn now to the financial markets and insolvency SI. This instrument, broadly speaking, concerns insolvency-related protections that are provided to systems and central banks under the EU settlement finality directive, or SFD. Systems are financial market infrastructure, such as central counterparties, central security depositories and payment systems, which provide essential services and functions relied upon by the financial services sector.

Currently, if an EEA-based system is designated under the SFD and receives funds or securities from a system user—for example, a UK bank—those funds or securities cannot be clawed back in the event of the UK bank being subject to insolvency proceedings. Importantly, this framework also benefits system users, who could receive services on less favourable terms, or not at all, if the EEA system were not protected from UK insolvency law. In certain cases, membership of a system is contingent on these protections. Designation is therefore important as it facilitates the smooth functioning of, and confidence in, financial markets.

In order to become a designated system, a system must be approved by its designating authority—the Bank of England, in the case of the UK. The Bank then informs ESMA, which places it on the EU register of designated systems. The SFD provides similar protections to central bank functions across the EEA. Collateral received by an EEA central bank in accordance with its functions, such as emergency lending, cannot be clawed back if the relevant counterparty to the central bank is subject to insolvency proceedings.

The relevant EU laws—the SFD and the financial collateral arrangements directive—are implemented in the UK via the Financial Markets and Insolvency (Settlement Finality) Regulations 1999, the Companies Act 1989, the Financial Collateral Arrangements (No. 2) Regulations 2003 and the Banking Act 2009. Should the UK leave the EU without a deal or an implementation period, there will be no framework for the UK to recognise systems designated in EU member states, which in turn may risk continuity of services from those designated systems for UK firms.

This SI therefore establishes two main measures to mitigate these risks and ensure that settlement finality protections continue to operate effectively following the UK’s withdrawal. First, this SI establishes a UK framework for designating any non-UK system, while maintaining existing designations for systems that were designated by the Bank of England before exit day. To do this, the Bank of England’s powers to designate, and charge fees to, UK systems will be expanded to non-EEA systems, such that they can be designated under UK law. Moreover, the Bank will be able to grant protections to non-UK central banks, including EEA central banks, which already receive protections under the SFD. This will help maintain the effect of the current framework, providing continuity to UK firms accessing systems and central banks, while assisting UK firms in accessing the global market.

Secondly, the SI establishes a temporary designation regime. This provides temporary designation for a period of three years to existing designated EEA systems that intend to be designated under the UK’s framework. The purpose of temporary designation is to allow time for designation applications to be processed by the Bank of England while ensuring continuity of access for UK firms to relevant EEA systems immediately after exit day. The SI also gives the Treasury the power to extend this regime should more time be required to consider these applications.

The Treasury has been working very closely with the regulators in the drafting of the instruments. It has also engaged the financial services industry on these SIs and will continue to do so going forward. The Treasury published these instruments in draft alongside Explanatory Notes to maximise transparency to Parliament, industry and the public. That took place on 22 October and 31 October 2018 respectively for the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019. Furthermore, the Treasury published the impact assessment that accompanies these SIs, providing further transparency regarding the reasons behind, and foreseen impacts of, these proposals.

The Government believe that the proposed legislation is necessary to ensure the smooth functioning of financial markets in the UK if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting the regulations. I beg to move.

[Lord Sharkey (LD)]

My Lords, as the Minister noted, the first SI—dealing with OTC derivatives, CCPs and trade repositories—was published in draft on 22 October last year. The second, dealing with financial markets and insolvency, was published in draft on 31 October last year. The impact assessments for these SIs are contained in a consolidated batch of nine HMT impact assessments, which themselves rely occasionally on references to IAs for other SIs. That batch was published on 29 January, three months after the publication of the drafts and two working days before we were scheduled to debate them. Even one working day beforehand, last Friday morning, the IAs were not available in the Printed Paper Office. Can the Minister explain the very late appearance of the SIs and why the PPO did not have copies by Friday? Can he reconcile this late publication of IAs with giving Parliament proper time for scrutiny? Can he assure the Committee that future Treasury IAs will be published in good time and lodged with the PPO?

The consolidated IAs contain a headline assessment of cost and benefits. As to costs, there are three headings: “Total Transition”, “Average Annual” and “Total Cost”. In each case, the IA estimates the costs as “Unknown: likely significant”. This is unsatisfactory and raises the question of whether HMT understands the role that IAs play in parliamentary scrutiny. It is of no help that the consolidated IA reckons the benefits to be “significant” but declines to attempt to quantify them. In the remaining 52 pages of the impact assessment there is no real detailed examination or quantification of likely costs and benefits, apart from a reading time-based estimate and a passing reference to the trade repositories SI where costs are estimated, apparently, at £500,000 per TR. I say “apparently” because there is a typo in the cost reference for these TRs, so it is not clear whether the figure is meant to be £50,000 or £500,000. Perhaps the Minister can clear that up. I think that it would help the Committee in its scrutiny of future Treasury SIs if consolidation was avoided and we returned to individual impact assessments in proper form for each SI.

Turning to each SI, I found it quite hard in parts to follow the EM for the OTC derivatives, CCPs and TRs SI. I would be grateful for some clarification from the Minister. In paragraph 6.1, the EM notes that the SI revokes two pieces of delegated legislation. Will the Minister expand on what these are and why they are being revoked? The EM does not say why—or if it does, I could not find it. In paragraph 7.7, the EM explains that:

“As a general principle, the UK would need to default to treating EU Member States largely as it does other third countries, although there are cases where a different approach would be needed including to provide for a smooth transition to the new circumstances”.


The EM does not explain what these cases may be or what the different approach might be. Will the Minister tell the Committee what these cases are, or may be, and what different approaches will be needed, and why?

Paragraph 7.12 of the EM states:

“Where the Commission has taken equivalence decisions for third countries before exit day, these will be incorporated into UK law and will continue to apply to the UK’s regulatory and supervisory relationship with those third countries—with the exception of those taken under Article 25 EMIR as set out in the CCP Regulations”.


Will the Minister explain what these exceptions are and why they exist?

In paragraph 7.16, the EM notes that the SI introduces a power that allows the FCA to suspend the reporting obligation for up to one year, with the agreement of HM Treasury, where there is no registered UK TR available. Surely the Treasury must know how likely this is and who it will affect. Again, the EM and the impact assessment do not help—or at least did not help me. Will the Minister say how likely this suspension is, who it will affect and what its consequences and impact might be?

I turn briefly to the second instrument, the financial markets and insolvency regulations, which is, by comparison, a model of clarity and straightforwardness. My only question relates to paragraph 1.76 of the impact assessment, which explains that the relevant EEA systems will be required to notify the Bank of England, before exit day, to enter the regime. What happens if they do not? What risks does this generate, and what procedures are in place to mitigate them?

I realise that I have asked quite a few quite detailed questions, and if the Minister prefers to respond in writing I would be happy, as long as we have the answers before the SIs reach the Chamber. I emphasise that I feel strongly that the consolidation of IAs makes proper parliamentary scrutiny significantly more difficult, and the very late production of IAs, as in this case, really does not help.

[Lord Tunnicliffe (Lab)]

My Lords, there is much that I would support in the intervention by the noble Lord, Lord Sharkey. I particularly like the way he sneaked in the fact that he got to page 41 of the IA.

The first instrument is on an area that I knew little about before I read it. With that limitation, it seems generally to make sense. It is clear about the transfer of functions, who will be responsible for equivalence decisions and information exchange—data comes over with a discretionary relationship. It is clear that the object of the exercise—at least this is how I read the Explanatory Memorandum—is to retain the discipline of EMIR. In view of its importance, I was surprised that a UK name for EMIR was not created, as was done in a previous SI, so that we would all know what we were talking about, given that the E in EMIR stands for European.

Going a little way into the detail, as the noble Lord pointed out, paragraph 7.16 allows a reporting obligation to be suspended for one year. From what I understand of the overall regime that this is part of, its very essence is open reporting of transactions. That is what the G20 came up with to create this regime. Will the Minister give us some feel for what risks are being taken by Part 2 of the instrument, which creates an opportunity for reporting to be suspended for up to one year? It also has what seems a fairly reasonable exemption for intragroup activity. It is a classic three years, plus however often the Treasury wants to extend it. It also has an exemption for energy derivative contracts up to 3 January 2021, but I could not see where that date came from; perhaps it is something to do with an international agreement.

--- Later in debate ---

[Lord Young of Cookham]

I plead guilty as charged. As I said a moment ago, we recognise the importance of parliamentary scrutiny. We will try to do better and make sure that the relevant impact assessments are available in time.

[Lord Sharkey]

I asked about the absence of the impact assessments from the Printed Paper Office. That is the route by which most of our colleagues get the information. They were transmitted electronically to some noble Lords on 29 January, but they were not available in printed form until this morning. That seems a very odd lapse.

[Lord Young of Cookham]

Again, I take that seriously. Would the noble Lord allow me to make some inquiries within the machinery of government in this House to find out what exactly went wrong there? I understand that they were delivered to the Printed Paper Office on Friday.

Financial Guidance and Claims Bill [HL]

Lord Sharkey Excerpts

Committee: 4th sitting (Hansard): House of Lords
Wednesday 13th September 2017 Lords Chamber

Moved by

[Lord Sharkey]

72: After Clause 17, insert the following new Clause—
“Ban on unsolicited direct approaches by, on behalf of, or for the benefit of, companies carrying out claims management services
The FCA must, within the period of six months beginning with the day on which this Act comes into force, introduce a ban on unsolicited direct approaches to members of the public carried out by whatever means, including digital, by, on behalf of, or for the benefit of, companies carrying out claims management services.”

[Lord Sharkey (LD)]

My Lords, as I mentioned on day 2 of Committee, there has been an enormous increase in the number of cold calls—180% in the last 10 months. There are now 2.6 million cold calls every month, which is an absolutely enormous number. No noble Lord disagreed when I described cold calling as an “omnipresent menace”. It turns out that the menace is even more omnipresent than I had thought. It has even reached the Bank of England. I have the transcript of a cold call received by one of the Bank’s regional offices. The bank official answers the phone and says, “Bank of England, hello”, the cold caller says, “Hello, can I speak to the business owner?”. The official asks, “Of the Bank of England?”, the cold caller says, “Yes”. The official says, “No”. The cold caller says, “Well, do you want to sell the business?”. The official says, “What, the Bank of England?”, the cold caller says, “Yes”. The official says, “No”. The cold caller then says, “Oh all right, bye bye”. Not all cold calls are as harmless as that turned out to be.

The Bill acknowledges and tries to remedy some of the problems with the claims management companies and the associated cold calling. We believe that the transfer of regulatory authority to the FCA is a very desirable move, as is the transfer of the complaints procedure from the Legal Ombudsman to the Financial Ombudsman Service. The impact assessment to the Bill lists some of the problems with the CMCs that will be addressed by these regulatory changes. It notes that, in 2014-15:

“23% … of all CMCs faced some sort of regulatory intervention”.


In addition to what were rule breaches, an independent review identified poor practices among many CMCs. One example of poor practice was poor value for money services offered by the CMCs. The impact assessment noted that evidence from the FOS showed that CMCs do not in practice achieve higher-value redress settlements than consumers complaining directly. The second example was the misrepresentation of services offered to consumers and a reliance on nuisance tactics, such as unsolicited calls or texts. A third example was the progression of speculative and/or fraudulent claims by CMCs. That last point is developed in the report of the Insurance Fraud Taskforce of January last year. The report says that,

“unscrupulous CMCs … play a role in encouraging fraudulent claims. As well as causing a social nuisance through their reliance on cold calls, also known as ‘claims farming’, CMCs have been reported to pressurise otherwise honest people to exaggerate or make up claims”.

This is all pretty unsavoury and the Government are to be congratulated on doing something about CMC practices in this Bill.

The impact assessment also lists the expected benefits brought by the measures in the Bill to consumers. It notes about cold calling that:

“Consumers are expected to benefit from reduced demand from CMCs for leads sourced through nuisance calls and text messages”,


but it does not estimate the reduction and clearly does not expect the cold calling problem to vanish. The question is whether this expected reduction will be significant and whether third-party claims farmers will really be affected by the regulatory changes.

But there is a better question than that: why should we tolerate CMC cold calling at all? After all, we do not allow it for mortgages, and the Government have promised to ban it for pensions. Banning cold calling has been debated many times in this House. On every occasion there has been universal dissatisfaction with the practice and, I believe, a universal desire to put an end to it. Cold calling not only is a profound social nuisance but also does real damage. Whiplash claims are an obvious case in point—I have lost count of the number of times that I have been called by someone saying that I was entitled to recompense because I may have been in a car accident. But speculative and fraudulent whiplash claims are reducing, largely because of the welcome provisions in the civil liabilities Bill. It looks as though one consequence of this is that CMC activity has moved in bulk to holiday sickness claims. The UK travel industry has seen a huge and dramatic increase in claims for food poisoning, essentially. As the noble Lord, Lord Hunt, has already explained, these claims have risen 500% since 2013 and they show a 600% increase year-on-year for 2016 alone. Such claims now represent over 90% of all personal injury claims.

ABTA is aware of the dubious marketing tactics used by CMCs. As we have already been told, they include UK holidaymakers being approached by CMC reps in their resorts and at ports of arrival back in the United Kingdom. Then, of course, there is cold calling. All this adds up to a major problem. This is not just damaging the travel industry, although it is doing that; it is also persuading people to commit fraud on a massive scale. As I have mentioned, we have reached the point where more than 90% of all personal injury claims are for alleged food poisoning. ABTA is campaigning for a ban on cold calling on behalf of, or for the eventual benefit of, CMCs. That is no wonder. The situation is clearly out of control. It again raises the question of why on earth we allow cold calling to go on. Here is our opportunity to ban it for CMCs. That is what our amendment sets out to do. It simply says that the FCA must, within six months of this Act coming into force,

“introduce a ban on unsolicited direct approaches to members of the public carried out by whatever means, including digital, by, on behalf of, or for the benefit of, companies carrying out claims management services”.

--- Later in debate ---

[The Earl of Lytton (CB)]

My Lords, I would not normally deign to interpose in this debate but, having listened to a number of the arguments that have been put forward, I feel compelled to voice my support, but with a word of warning.

I was looking at my private emails and found that since half-past two this afternoon I have had four spurious emails from an outfit called Metro Bank, with which I have no business, telling me about the suspicious activity on my account and suggesting that I might like to click on a link. The fact that such messages usually contain spelling mistakes and start off “Dear Customer” without any other personal identifying information, and the fact of the sheer number of these repeated emails, probably tells its own story, but never mind. The reason I raise that is because in my experience—along with that of probably everybody in this House who has received on their mobile phone something to do with PPI or a personal accident—I frequently get messages that tell me my claim has been settled in the sum of £4,275.80, or something like that, and ask me to click on a link so they can process the claim. I have had no such incident and made no such claim; the process is led by a completely bogus and fraudulent promise of something for nothing.

In my experience, these things are increasingly moving from a posse of anonymous, but still identifiable, 0800 telephone numbers of one sort or another to people’s mobile numbers and landlines. In particular, the mobile numbers may well be a pay-as-you-go account: completely anonymous and possibly passed on in a pub, complete with its ticket. Nobody can track down where these things are coming from. So, if somebody makes a cold call from a pay-as-you-go mobile phone, and having made contact then pass that live contact back to a claims management company of perhaps no great repute and even less good intent, is that still a cold call? If not, then straightaway the whole process of what these amendments are designed to deal with is bypassed. I would like to make sure it is not.

[Lord Sharkey]

Could I try to provide a little clarity, perhaps even a partial answer? The amendment is worded so that cold calls, or the result of them, cannot be used for the benefit of claims management companies. It is not just about the cold call itself—information cannot be passed on in a way that benefits CMCs.

[The Earl of Lytton]

My Lords, I am grateful for that. The nub of what I am getting at is whether we have a problem with enforcing that. These people are clever and devious and will basically stop at nothing because it is a free bet—they seem to be able to weave their way in and out of our virtual world of technology to con people and mislead them. I would be absolutely in favour of anything that can reliably prevent that happening. That was the only point I really wished to make.

--- Later in debate ---

[Baroness Buscombe]

I thank my noble friend for his further response.

To respond to my noble friend Lord Trenchard’s question about whether SMS, email and letters are all cold calling, this is an important point and I confirm that we differentiate between them. Cold calling is the solicitation of business from potential customers who have had no prior contact with the salesperson conducting the call, while unsolicited direct marketing is communication by any means, including email and text, of marketing and advertising material. We genuinely believe that the existing measures I have set out, alongside the new FCA regime, should help tackle CMCs conducting unsolicited direct marketing. I know there is a very strong feeling across the Committee, and we take this on board, but, for the reasons I have set out, the Government do not believe that the amendment is necessary. I hope that the noble Lord will withdraw his amendment.

[Lord Sharkey]

I am extremely grateful for the support of all noble Lords who have spoken. I am especially grateful to the noble Lord, Lord Deben, for his forceful reminder—several times—that this kind of cold calling activity should have no place in our society. It is not necessary, it is damaging, it lures otherwise honest people into crime and it is morally repugnant. Thinking about what the Minister said, I feel that she was right at the beginning: she did disappoint the House.