Freedom of Information Act 2000

Lord Tunnicliffe Excerpts

Tuesday 23rd July 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the noble Lord, Lord McNally, for securing this important debate. I fear that my words will very much echo his and I feel sorry for the Minister that he has so far had so little support. As we have heard, freedom of information requests are an essential safeguard in our system of government. They give the public the tools to hold the Government to account over the decisions they take and the way taxpayers’ money is spent. The Freedom of Information Act 2000 covers central government departments and the executive agencies and public bodies they sponsor. They typically receive around 8,000 to 9,000 freedom of information requests every quarter. That has risen from about 7,000 per quarter in 2010. The percentage of freedom of information requests that departments refuse to comply with in full has increased from around 40% in 2010 to 55% by the end of 2018.

As well as this, the Act covers Parliament, the Armed Forces, devolved Administrations, local authorities, the NHS, schools, universities and police forces. However, since the legislation was introduced, there has been an explosion of private-sector involvement in public functions. This has been driven by this Government’s ideological pursuit of privatisation and outsourcing. But companies which enter into such contracts are not subject to FOI requests and subsequently not subject to similar levels of accountability as others working in the public sector. The Information Commissioner's Office, which is tasked with the special monitoring of FOIs, said,

“The lines between public and private sector service delivery have blurred as local authorities enter joint ventures with private companies and some start to trade on for-profit and not-for-profit bases. However, this growing area of quasi-commercial activity is removed from public scrutiny offered by the FOIA”.


I am particularly concerned that large companies can achieve a quasi-monopoly position and end up bidding for contracts at a lower market value when they are up for renewal. The Public Accounts Committee found that between January 2016 and July 2018 government departments had to renegotiate over £120 million worth of contracts with the private sector to ensure public service delivery would continue because they were initially contracted out too cheaply. I believe this is slowly destroying the public sector and stops smaller companies being able to enter the market. With competitors squashed, costs are forced down and inferior labour conditions are introduced. Profits subsequently rise and, instead of being reinvested in public services, they fill the pockets of those running such companies and their owners. As the Freedom of Information Act 2000 does not cover such outsourcing and private/public sector contracts, I am unable to discover to what extent this is happening.

I am losing track of the number of failures of outsourcing which have come to light in the past few years. These have thrust the question of whether private companies should provide public services into the spotlight. We all know how the catastrophic collapse of Carillion highlighted the problems with the outsourcing business model. Its collapse in January 2018 directly impacted on 30 councils and 220 schools. But the list of failures does not stop there. In May the Government were forced to announce a U-turn to reverse their 2014 part-privatisation of probation, and in April they said that they would take HMP Birmingham permanently back into public ownership from G4S after appalling violence and an inspection report last August.

A similar experience can be found at the local level. Bedfordshire County Council’s contract with HBS for financial services, human resources and other services was ended early after major dissatisfaction with services. Barnet council had to pay thousands of pounds for emergency IT services after its regular provider went into administration.

I also highlight the failings of Capita and its botched recruitment contract with the Army. Recruitment is in free fall, with numbers standing at 75,880—well below the Government’s target of 82,000. Can the Minister explain why the Government continue to sign new contracts with companies—for example, the recent £525 million MoD contract which will privatise large parts of its fire and rescue service to Capita—despite these companies having failed to simply do their job? To put it simply: outsourcing as it stands is a broken business model.

Following these failures, the public have rightly lost confidence in the privatisation of our public services and the carve-up of the public realm for private profit. They are keen for outsourcers to be subject to the same law as the rest of government. However, current loopholes in the Freedom of Information Act, as well as in the Human Rights Act, are hindering any efforts to do so, and the Information Commissioner, Elizabeth Denham, has called for FoI laws to be extended to all public service suppliers. This would force companies running public services to answer to the public. Does the Minister agree that introducing more accountability can help restore some trust? Can the Minister confirm that the Government will follow the ICO’s advice and extend FoI requests to all public service suppliers?

Last Saturday, Labour announced that we would transform the legislative framework around outsourcing contacts by making them subject to the Human Rights Act and the FoI Act. We would legislate to ensure that local authorities review all service contracts when they expire and to create a presumption that service contracts will be brought back in-house and delivered by the public sector unless certain conditions and exemptions are met. We would also introduce a new set of minimum standards in contracts where outsourcing has to continue, including a fair wage clause, trade union recognition, supporting local labour and supply chains, annual gender pay audits and time-limited contracts. Will the Government be making a similar commitment? These changes will help bring accountability and public responsibility, as well as fairer working conditions, to a failed model which has been protected by this Government for too long.

It is clear that outsourcing and contracting out public functions to the private sector cannot continue without reform. The constant failures coming from major outsourcing firms cannot be allowed to continue. It is time to give the same tools to the public to hold private companies to similar standards as government departments when carrying out important public functions. Extending FoI requests is a key part of that but, overall, we also need to move away from an ideological desire to privatise first and ask questions later. However, I believe that will come only from a change of government.

Inflation

Lord Tunnicliffe Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I join other noble Lords in congratulating the noble Lord, Lord Forsyth, on securing this debate, on his committee’s report and on his speech, which he delivered in his usual clear and fairly concise manner. I find myself in a state of shock, praising him in such an effusive way. This is not normal, but we do not live in normal times. The two Tory candidates for the role of Prime Minister are in a bidding war to spend public money. They seem keen to overtake the Labour Party on the left. It will all end in tears, and one of the malign manifestations will be—yes—inflation.

The topic of the report is the measurement of inflation, an involved and important topic. It is one that particularly resonates with members of my generation, given the centrality of inflation to political debate and media coverage of the economy during the 1960s and 1970s. We are also, sadly, the generation that tends to have index-linked pensions. I have four, I think, but I have lost track of which is CPI and which is RPI.

The Economic Affairs Committee has done a valuable service in analysing a faulty methodology, concluding that the Office for National Statistics is failing in its statutory duty to provide accurate economic data. The old established measurement, the retail price index, is subject to much criticism in the report. It has, since 2010, showed a wide discrepancy from the consumer price index, with the gap between the two rising from 0.5% to around 0.8%.

This is of the greatest significance in modern times, as the Government have developed a habit of choosing to apply the lower CPI measure when spending money and the higher RPI measure when collecting it. As Martin Lewis, the founder of MoneySavingExpert.com, said:

“Where it costs us more, they use RPI. Where it costs the state, they use CPI. There is no logical justification, it does not make any sense whatsoever. It’s a very simple way of cooking the books”.


The report refers to this practice as inflation-shopping and calls for the use of a single measure of inflation in future.

As I do not want to repeat points made by many other noble Lords, let me briefly cover why that trend is so problematic. Many welfare benefits are subject to the four-year freeze, which we on these Benches continue to find deplorable. For those benefits uprated each year, such as those aimed at disabled people or carers, the increase is capped at the level of CPI. On the other hand, interest on student loans rises by up to RPI plus 3% each year. The House of Commons Library has estimated an additional cost to students of £16,000 over the lifetime of their loan.

Ministers allow regulated rail fares to rise by the rate of RPI each year, although average pay growth has tended to fall below that level in recent years. Meanwhile, the Office of Rail and Road has confirmed that it will transition to CPI for new connection contracts, as with access contracts. This is designed to lower train operators’ costs, but also to cut state subsidy. Alongside this change, the Secretary of State for Transport wrote to rail unions asking them to calculate wage increases by CPI. Despite warm words, there has been no specific pledge that savings will be passed on to commuters.

These examples highlight that an acute aspect of the problem is the Chancellor’s considerable say in the use of different inflation measures. The UK Statistics Authority has admitted that there is a problem with the RPI but has not ordered a correction in the formula because doing so would impact on many UK Government bondholders.

Box 6 of the committee’s report provided a helpful summary of the clearly defined legal duties on the UK Statistics Authority. Section 7 of the Statistics and Registration Service Act 2007 outlines a public interest in the provision of quality official statistics. Section 21 requires the Chancellor to consent to any fundamental change in the inflation index that would be detrimental to gilt investors—something that the UKSI’s chairman did not believe would be forthcoming. However, both the Chief Secretary to the Treasury and the Chancellor said in their evidence that they would be happy to discuss any proposals for change. I put it to Ministers that the general interest in Section 7 should far outweigh the limited interest in Section 21 and that an appropriate response should be to correct the RPI measure incrementally.

The committee was critical of the UK Statistics Authority for its treatment of RPI as a legacy measure, given that it is still widely used, particularly in pay settlements. As the trade unions have outlined, RPI has long existed as the main reference point for pay negotiations. It has been estimated that a general shift to CPI would see the average worker’s salary fall by £350 per year. It would also have a significant impact on pensions.

In March 2018, the Department for Work and Pensions calculated that a switch to CPI on defined benefit pensions would result in,

“a £12,000 reduction in the value of pension income per affected member, on average over their lifetime”.

The Institute and Faculty of Actuaries believes that if a scheme were to change inflation indexes, a 65 year- old man who had been expecting pension increases in line with RPI could expect to receive aggregate lifetime pension payments about 10% to 15% lower.

Where do we go from here? The report notes that, in true “third way” style, the Government, the Bank of England and the UK Statistics Authority increasingly see CPIH, which includes owner-occupiers’ housing costs, as a preferred longer-term measure. However, the committee outlines how CPIH has faced problems since its introduction in 2013. It echoed the views of several witnesses, who raised concerns about the use of rental equivalence in CPIH and called for more work to be done before a single measure of inflation is identified and adopted.

It is clear that the Government are not yet in a position to fulfil the committee’s wish of selecting a single measure, but the proposed five-year timescale identified by the noble Lord, Lord Forsyth, and his colleagues appears sensible. Given the importance of inflation measures for the everyday costs of people up and down the country, I hope the Minister will be able to demonstrate that the Government now have a firmer grip on this issue than was suggested in their evidence to the committee.

--- Later in debate ---

[Lord Young of Cookham]

That goes to one recommendation directed at the UKSA. That issue will be addressed directly in the government response to the recommendations. I cannot give my noble friend an answer today; I hope that he understands why.

In introducing the debate, my noble friend wondered whether the Government discussing this issue with the UKSA somehow compromised the UKSA’s independence. It is perfectly legitimate for the Government to discuss matters with the UKSA without interfering with its independence in decision-making. We discuss a wide range of issues with it—as we should, given that the ONS is the producer of economic statistics. One can have that dialogue without encroaching in any way on the UKSA’s independence. The Government continue to discuss the relevant issues raised by the report; the Chancellor wrote to my noble friend last week, outlining that point. I stress to my noble friend, the noble Lord, Lord Sharkey, and other noble Lords that we are working hard to respond to the committee’s report as quickly as possible. We will communicate a date for this response in due course and will provide sufficient notice for the markets.

Let me move on to the central focus of the inquiry, namely the RPI. As the Government have stated before, we recognise that there are flaws in the way that RPI is measured and that, as a result, its rate of inflation is higher than that of other measures, such as the CPI and CPIH, which is the CPI including owner-occupiers’ housing costs.

The report from the committee is the latest in a series of reports on this intractable issue. I highlight this to stress how complex it is. In 2012, the then National Statistician launched a consultation on potential changes to the RPI following concerns about the increased wedge between RPI and CPI, which had been driven primarily by the 2010 change in the collection of clothing prices. There was then a considerable response, both on matters statistical and non-statistical, and in 2013 the then National Statistician responded, arguing that the RPI did not meet the highest standards expected for a national statistic. That answers the question of the noble Lord, Lord Lea, as to why it was regarded as discredited: the UKSA stripped the RPI of its national statistic status.

However, given its widespread use in the economy, the National Statistician argued that the RPI should remain unchanged. In 2015 a review into consumer price statistics, which had been led by Paul Johnson of the Institute for Fiscal Studies, was published. This also criticised the RPI and recommended that it should be classed as a legacy measure and that its use should be actively discouraged.

Let me explain the Government’s use of inflation statistics and highlight how they have not ignored the criticisms of RPI. Since 2010 the Government have reduced their use of RPI. They have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. More recently—this addresses the accusation of index shopping made by a number of noble Lords—in April 2018 the Government brought forward switching the indexation of business rates from RPI to CPI.

[Lord Tunnicliffe]

Did the Minister say that the state pension was linked to CPI? I thought it was triple-locked—I hope it is because I draw it.

[Lord Young of Cookham]

One of the locks is CPI.

[Lord Tunnicliffe]

My understanding of this part of my income is that it is the greater of CPI, RPI or, I think, 2.5%.

[Lord Young of Cookham]

We have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. If that is wrong, I am sure a signal will come from the far end of the Chamber to put it right before I sit down.

I was dealing with the issue of index shopping and said that in April last year we brought forward switching the indexation of business rates from RPI to CPI. This move is expected to save businesses almost £6 billion over the next five years—at, of course, a cost to the public purse.

At Budget 2018 we outlined our policy on inflation statistics. Specifically on RPI, the Government committed to not introducing new uses of RPI and to reduce its existing uses when and where practicable. I note that the report encourages the Government to move all uses to CPI. However, the matter of practicability is key and further moves away would be complex. It has not been clear in recent years which measure of inflation it would be appropriate to use, although that picture is now getting clearer.

One sizeable area where RPI is used is in the Government’s index-linked gilts—a number of noble Lords mentioned this, including my noble friend Lady Browning— which are indexed to RPI. The Government have no plans to stop issuing index-linked gilts indexed to RPI. As the demand for RPI-linked debt is vast in comparison to CPI, particularly from the pensions sector—the largest holder of gilts by sector—the taxpayer gets far better value for money issuing into this market. Until such time as we can be satisfied that there would be sufficient demand for a new debt instrument, and that it would deliver better value for money, we will continue to issue RPI-linked gilts.

As mentioned by the noble Lord, Lord Macpherson, demand for CPI-linked debt is growing. However, given that demand for RPI-linked debt is stronger, the Debt Management Office gets better value for money by continuing to meet this demand. However, in response to the noble Lord, Lord Macpherson, the issuance of new debt instruments is kept under review.

On the Government’s future use of inflation statistics, particularly in relation to CPIH, noble Lords have raised concerns over its suitability as a headline measure for the Government. Again, I pay tribute to the work of the ONS, led by John Pullinger. CPIH has undergone extensive development, choosing between different methodologies where necessary, and rigorous testing by the independent Office for National Statistics. This robust process has led to CPIH being approved as a national statistic, meaning that it is fully compliant with its code of practice for statistics. The Office for Statistics Regulation recommended to the board of the UKSA that CPIH be granted national statistic status, which is the highest kitemark of quality in our statistical system. Following this extensive development, at Budget 2018 the Government stated that their objective was for CPIH to become their headline measure over time.

The Government have not, however, set a date for CPIH to become their headline measure of inflation. This is because CPIH is a relatively new measure—a number of noble Lords touched on the issue of housing. CPIH has only recently been certified a national statistic, and it was only late last year that an updated historical back series was published, extending the series. With this back series in hand, work is now ongoing to understand its properties compared to CPI and RPI. The Government will regularly update Parliament on their progress towards using CPIH and, of course, on its broader strategy on inflation statistics.

Perhaps I may touch on some of the issues raised in the debate. The noble Lord, Lord Tunnicliffe, raised the benefits freeze. The decision to freeze most working-age benefits from 2016-17 was one of a number of difficult decisions that the coalition Government took to put the public finances back on track. We have no plans to repeat the freeze and we expect working-age benefits to rise with inflation from April next year.

The noble Lord, Lord Tunnicliffe, mentioned Sections 7 and 21 of the Statistics and Registration Service Act. Other noble Lords also mentioned the issue—the noble Lord, Lord Turnbull, in particular. We recognise the committee’s view on this and the Government will respond to the report in due course and on that specific recommendation. Changes to RPI are a matter for the independent UK Statistics Authority and the Office for National Statistics. That is a response to the suggestion that RPI could be incrementally corrected.

In conclusion, I recognise that I have not been able to go as far as noble Lords would have wished. The Government note that this report covers complex and wide-ranging issues, and makes a number of serious and sober recommendations to both the Government and the UKSA. Given the extensive use of RPI in the economy, the complex nature of some of those uses and their interactions, and, most importantly, the effect on people and the economy, the Government believe that it is necessary to take time to consider the committee’s report carefully before responding.

The Government recognise that RPI is a flawed statistic, and stress that they have not avoided acting on the issue. They recognise that further work must be done, but note that further moves away from RPI are complex. Further, the necessary work to prepare for CPIH is yet to be completed. I say to the noble Lord, Lord Sharkey, that the Government will respond as soon as practicable to noble Lords’ report and are working extremely hard so to do.

Finally, I will convey to the Chancellor the sense of frustration expressed by my noble friend Lord Forsyth and others about the time it has taken to respond to the report. I will personally relay that message.

National Insurance Contributions (Termination Awards and Sporting Testimonials) Bill

Lord Tunnicliffe Excerpts

2nd reading (Hansard): House of Lords
Wednesday 26th June 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, before I begin, I should like to thank the Minister and his team for the briefings they have held on this Bill. Early engagement is always useful, particularly when dealing with technical taxation measures. In particular, his team’s and his own thoroughness is such that I do not expect to have to bring forward any probing amendments; the concept of the Bill has been battered into my brain sufficiently.

Second Reading is normally a time for us to come together and debate the lofty ambitions of the Government of the day. Clearly, the role of your Lordships’ House is somewhat constrained when it comes to matters of finance. However, noble Lords ordinarily enjoy the opportunity to make speeches on wide-ranging aspects of the UK economy. But as has become conventional in these somewhat unconventional times, Ministers have found themselves scrambling for any legislation that can bulk out the timetable and survive a fractured House of Commons. So, having dealt with the fate of 19 individual animals—as important as they are—just last week, your Lordships’ House now finds itself discussing the mirroring of current income tax arrangements for termination awards and proceeds from sporting testimonials for national insurance purposes.

I understand from those who follow such things that I achieved notoriety in the stand-up routine of the Times journalist Matt Chorley when I used his catchphrase, “This is not normal”, in a debate in February. However, we find ourselves in the longest parliamentary Session by sitting days since the English Civil War while the Government scrape the barrel for things to do. This truly is not normal. We on these Benches would prefer to be dealing with more pressing tax matters. That includes taking action to crack down on the tax avoidance and evasion that prevents much-needed extra spending on public services.

Nevertheless, while the Bill before us lacks ambition, we must diligently carry out our work and consider the implications of these changes to the tax code. The genesis of the Bill was a wide-ranging review by the Office of Tax Simplification in 2013. The first set of recommendations, to make relevant payments subject to income tax, were legislated for several years ago. Now, as the Minister explained, we are legislating to levy class 1A employers’ NICs charges on the same payments. While the OTS has a noble aim, the matters under consideration today provide a reminder of why tax is often anything but simple.

On termination payments, we have concerns that the introduction of additional employer NICs may act as a disincentive to responsible employers who want to top up statutory redundancy payments in recognition of an employee’s contribution to the firm. I am grateful to Treasury officials who have listened to this concern in meetings and I accept their argument that the number of cases is likely to be small. However, I hope that the Minister can provide reassurance that the Government will reflect on this point when reviewing the impact of the legislation in due course.

While the definition of a termination payment is beyond the scope of the Bill, as helpfully laid out in a letter from the Minister on 24 June, I hope consideration will be given to how future tax changes can encourage employers to properly look after those employees whom they have to let go.

I would be grateful if the Minister could clarify how different forms of termination payment, whether below or above the £30,000 threshold, are treated for the purposes of determining eligibility for, and the calculation of, social security benefits such as universal credit.

In a meeting with the Minister and his officials, we also discussed the potential for errors to be made when the new regime takes effect in 2020. I was reassured that responsibility for any miscalculations will lie ultimately with the employer and that individuals will not be pursued by HMRC to recoup any sum from which the correct deduction has not been made. I would be grateful if the Minister could put this on the record and confirm that this differs from the situation with regard to income tax, whereby shortfalls in tax due can be recouped in the usual way.

Turning to sporting testimonials, I understand that the Minister will provide further clarity on the types of event to which the Bill extends; that is, providing a plain English explanation of “non-contractual, non-customary”. The policy note on GOV.UK notes that the impact of this change is “negligible”. It notes that around 220 testimonial committees are established each year, but that only a small number will be impacted by the measure. It further acknowledges that there will be a cost and additional administrative burden for testimonial committees as a result of the policy change. Given that the Exchequer will gain little, I return to my previous observation that tax simplification, while desirable, should not be prioritised over other, more fundamental issues in the tax system or wider UK economy.

A concern raised by my colleagues in the Commons related to the Bill’s impact on charitable donations arising from testimonials. A number of sports men and women who are financially secure choose to use their testimonial to support charities, including their own foundations. However, introducing a new NICs charge will reduce the funds passed on to those organisations. Can the Minister clarify what guidance will be made available to committees to ensure that charitable donations resulting from testimonials are treated in a tax-efficient manner? As in the case of redundancy payments, it would be a shame if an unintended consequence of this measure was to introduce additional barriers to what we all recognise as generous and responsible behaviour.

Finally, as the Bill progressed through the Commons, my colleagues probed what steps the Treasury will take to review its impact. We may choose to pursue this as the Bill progresses here, particularly in relation to my concerns about charities. We look forward to continuing our engagement with the Minister and his officials, and hope that the Government will take appropriate steps to address the concerns raised. I also note that the more interesting elements of the Bill, frankly, sit in the income tax legislation to which it cross-refers. Therefore, it would be inappropriate for this House to address the fundamental concept of the Bill, which is to use the essence of the tax legislation as the basis on which it functions. We are not likely to pursue any amendments to that end.

Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019

Lord Tunnicliffe Excerpts

Tuesday 7th May 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I am so glad I did not have to write the content of this SI; it was hard enough trying to work one’s way through it when simply reading it. It is obviously the result of a combination of “Oops!” and communication with customers. I see absolutely no reason to oppose it. If anything, this underscores the complexity of trying to make arrangements for dealing with a no-deal scenario. I hope we never have to use it, because we would run into more “Oops!” if we ever found ourselves in that situation. I hope the Treasury is going ahead with a mapping exercise to try to link this all together, because how anybody who functions in the industry can ever work their way through all this is completely beyond me. Frankly, if you ever needed an argument for remaining, it seems that this alone provides it.

[Lord Tunnicliffe (Lab)]

My Lords, this is one of many no-deal SIs on which I have been forced to represent Her Majesty’s Opposition from the Front Bench—a pretty unattractive pastime. The principal reason for this is the fact that most of these SIs amend an SI that amends an SI that amends an Act that is many years old, which makes it fundamentally difficult to understand them. When one has put all the intellectual effort into understanding the so-called no-deal SI, one then discovers that the actual substance of the SI is frequently merely technical or consequential.

I found that this SI, and particularly its Explanatory Memorandum, really won the prize for being the most difficult to understand yet. In my frustration, I thought I would find out to what standard an Explanatory Memorandum should be created. I had the inspiration to go along to the Secondary Legislation Scrutiny Committee offices to seek guidance. I was once on that committee when it had a much grander title, the Merits Committee, and the staff there were always helpful and competent. I asked, “What is the guidance on the creation of SIs?” They said there were two pieces of guidance: that given by the committee itself and the Government’s guidance, which—for reasons I do not understand—is actually issued by the National Archives. The guidance from the committee itself is some 17 pages long. The latest version is from July 2016. Its objectives are caught in one particular paragraph:

“The purpose of the EM is to provide members of Parliament and the public with a plain English, free-standing, explanation of the effect of the instrument and why it is necessary. It is not meant for lawyers, but to help people who may know nothing about the subject quickly to gain an understanding of the SI’s intent and purpose. Legal explanations of the changes are already given in the Explanatory Note which form part of the actual instrument”.


The latest government guidance from the National Archives, the fifth edition on statutory instruments, dated 27 November, states at paragraph 2.9.2:

“The purpose of an EM is to provide the public with an easy-to-understand explanation of the legislation’s intent and purpose—why the legislation is necessary. Avoid repeating content you have included in the Explanatory Note. Your explanation should be concise but comprehensive, and should not generally exceed four to six pages. Use plain English and avoid … jargon”.


I put it to noble Lords that this document fails.

I then turned to the EM itself, which at paragraph 15.2 states:

“Katie Fisher, Deputy Director for Financial Services EU Exit Domestic Preparation at HM Treasury, can confirm that this Explanatory Memorandum meets the required standard”.


She is wrong. It does not.

However, in my frustration, I rang the number given at paragraph 15.1 to try to understand a little more and my conversation resulted in an email from Richard Lowe-Lauri. At long last, after much toil, I feel that I do largely understand the Explanatory Memorandum, as prompted and helped by that useful email. What did I find? I found at the end of this exciting process that the issues tackled in this SI are technical, consequential or merely corrective. Therefore, I have nothing to object to, except for one very minor question about paragraph 2.4, the last sentence, which happens to be about five lines long. It states:

“It also inserts provisions into other temporary regimes, allowing EEA financial services firms to continue to service existing contracts with their UK customers post-exit, and mitigating risks faced by UK firms using services provided by non-UK central counterparties and trade repositories”.


I could not find anywhere how and what the risks were that we were mitigating and how they were being mitigated. Otherwise, I have no objection to the SI.

[Lord Young of Cookham]

My Lords, I am grateful to both noble Lords who have taken part in this debate. I agree with the noble Baroness, Lady Kramer. I do not want a no-deal scenario any more than she does. The Explanatory Memorandum at paragraph 7.2 explains all that we are doing to move away from no deal by seeking a,

“deep and special future partnership with the EU … greater in scope and ambition than any such agreement before and”,

that encompasses “financial services”.

[Lord Tunnicliffe]

On that point, the Minister should realise that that paragraph has been repeated 65 times, so we all know it well.

[Lord Young of Cookham]

That is why I knew exactly where to find it. I am sure that the noble Lord had no difficulty with that particular paragraph as he has had an opportunity to reflect on it many times. But I am grateful to the noble Baroness, Lady Kramer, for her broad support for the SI before us.

I note from the noble Lord, Lord Tunnicliffe, that we have tested his patience. He made that abundantly clear and he has awarded the wooden spoon to this particular Explanatory Memorandum. If he ever wants a different job, perhaps he could be recruited to draft Explanatory Memorandums for the Government. He clearly has high standards, and he is capable of turning the documents in front of him into something which he understands, which is a valuable skill.

I shall deal with the specific point he raised about paragraph 2.4 of the Explanatory Memorandum. The Financial Service Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 inserted provisions into the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018; I hope the noble Lord is still with me. These amendments established a run-off regime for central counterparties, allowing UK firms time to wind down relevant contracts and business with non-UK CCPs in an orderly manner. They also established a run-off regime for trade repositories giving UK firms time to make alternative arrangements with another registered or recognised TR to satisfy the reporting obligations set out in the European Market Infrastructure Regulation—EMIR. In a nutshell, without these run-off provisions, UK firms would face cliff-edge risks, and that is the risk that we seek to mitigate, including disruption to services from non-UK CCPs and TRs introducing operational, legal and stability risks. I hope I have dealt with that point.

On the noble Lord’s valid final point—that an Explanatory Memorandum should be a stand-alone document which is readily understood—the Treasury has endeavoured to ensure that all its Explanatory Memoranda provide a full and clear explanation of how and why each exit instrument laid under the Act is intended to operate, so that we can scrutinise the legislation as effectively as possible. However, in the light of his comments, we will have another look at this Explanatory Memorandum and consider whether the document should be revised and relaid to ensure that its explanations are as clear as possible.

Securitisation (Amendment) (EU Exit) Regulations 2019

Lord Tunnicliffe Excerpts

Monday 25th February 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I will focus briefly on the second of the two statutory instruments. I need help from the Minister, because I am struggling to understand the consequences of this, and I am looking specifically at STS recognition. The Minister will understand that achieving classification as an STS is advantageous because it is very likely to lead to preferential capital treatment. That is very important to banking institutions, which obviously want to keep their capital requirements as low as possible. At the moment, to qualify for STS classification, all the parties to an STS securitisation have to be located within the EU. If I understand the change that flows from this statutory instrument, if we were to leave without a deal, the regime we would move into says that in the UK an STS can be recognised provided that just one of the relevant players is located in the EU—most likely the sponsor. I raise this issue because it sounds as though securitisations in the EU and in all third countries now become available for classification as an STS.

I raise that concern because we are all very aware that the United States has gone back to its old tricks in mortgage lending, and asset-backed paper, backed by US mortgages, is once more beginning to raise some fairly significant issues of concern. We have been protected from that to some degree by the STS regime, which requires that all relevant players are within the EU. If I understand this correctly, that protection is now removed, and since third countries can now get STS classification and therefore preferential capital treatment, we increase the risk or the attraction quite possibly—or rather, quite likely—to UK institutions to once again start playing in that environment of US mortgage-backed securities, where we already know there is incipient trouble; I hope it is genuinely incipient, but some people are using much stronger language than that. I would therefore like the Minister to explain that.

The other issue on which I had a question was under exposures to national promotional banks. At the moment, national promotional banks located in the EU, again, are eligible to be provided with preferential treatment. It would therefore encourage a financial institution to invest in those national promotional institutions because if it lends to them, it faces a lower capital requirement. What is the situation that will fall out of the picture, according to the Explanatory Memorandum? It seems to be KfW, which is the German state-owned development bank. A UK investor who is lending money to KfW would no longer get that preference as it calculated its required capital ratios.

To me, this is the equivalent of “have gun, shoot foot”. KfW is a major player in funding small businesses in the UK. It has sat alongside the European Investment Fund and the European Investment Bank in putting significant blocs of long-term patient capital into large-scale infrastructure in the UK. I know that we have the British Investment Bank, but it is minuscule compared to the EIB, the EIF and KfW, and nothing I have heard from government suggests a scale-up to anywhere like the same dimensions. Why, then, would we, in a situation like this, try to discourage KfW from looking at opportunities to put its money into projects in the UK, and especially into that much-needed arena of small business? I find it slightly perverse but that is one of the things that this SI apparently intends to achieve. As I said, I am very fond of the British Investment Bank but, boy, does it have a long way to go before it can possibly replace those other institutions. Surely we should be encouraging KFW—we cannot do anything about the EIF or the EIB because of European rules—to keep it as a player.

[Lord Tunnicliffe (Lab)]

My Lords, I studied these two SIs with great care and could not object to their general direction. I even managed to think of three penetrating questions, which the Minister unfortunately answered in his opening statement, so I shall not repeat them. I thank the noble Lords, Lord Sharkey and Lord Deben, for their contribution. The noble Lord, Lord Deben, was concerned about the FCA costs. To some extent, that does not worry me nearly as much is whether there are competent resources. I worry whether there are enough people who want to work in a regulatory atmosphere who have enough competence to take this mess called falling out of the EU, fit it all altogether and discharge all their responsibilities. I can only just bring myself to ask this as a question, because I know that the Minister has a standard answer.

Building on the comments made earlier, the facts of life are that this is a dreadful deal. There is nothing wrong with the instrument, but if you are going to get into a dreadful situation, there are dreadful consequences. Although the Minister may say, as I am sure he will, that the issue of reciprocity is not nearly as bad as we all make out because the other side will want to do reciprocal deals, my experience of negotiation is that it is not that straightforward. They hold the cards, and if reciprocal agreements are made, good, but I fear that they will be somewhat one-sided.

[Lord Young of Cookham]

I am grateful to all noble Lords who have taken part in this debate and I shall try to deal with the issues that have been raised. A common theme is the issue of reciprocity, first raised by the noble Lord, Lord Sharkey, and touched on by the noble Lord, Lord Tunnicliffe, and my noble friend Lord Deben. As a matter of EU law, it is for the EU to decide who gets access to data held in the EU and we cannot in the SIs tell the EU what to do. However, we hope that it will take steps to protect financial stability—the consequences would be serious if it did not—and the Government are working to avoid a no-deal exit.

In the meantime, we are taking steps to minimise the disruption for the UK, and there have been some helpful indications on the issue of reciprocity. We welcome the announcements that the EU and some individual member states have made to date, which indicate that they would take steps to mitigate some of the risks. The Commission has taken a positive step in legislating to give the UK temporary equivalence for CCPs in a no-deal scenario, and the ESMA announced last week that all three UK CCPs will be recognised, mitigating a key no-deal risk to stability. Certain other member states, such as Germany and Sweden, have also announced various contingency measures. We stand ready to intensify our engagement, engage in bilateral discussion wherever possible and co-operate with EU institutions on preparedness for all scenarios, because it is in our mutual interest to lessen the risk of disruption to households and businesses in both the UK and the EU.

My noble friend Lord Deben asked a question which I think he has asked before about the resources of the FCA. Each time a Minister has said that these are very small incremental obligations, he has asked: what happens if you add them all up? It is a good question. Under the EU securitisation regulation which has applied from January this year, the PRA and the FCA already carry out most of the functions conferred on them by this SI. The main responsibilities transferring to the FCA relate to the authorisation and supervision of a small number of trade repositories and the publication of STS notifications on its website. We do not honestly think that this will create a significant burden for the FCA, which has specialist expertise in place and has made extensive preparations, including training supervisors, in anticipation of the implementation of the EU securitisation regulation and the onshoring of its requirements.

Uncertificated Securities (Amendment and EU Exit) Regulations 2019

Lord Tunnicliffe Excerpts

Monday 25th February 2019 Lords Chamber

I want to raise this issue with the Minister because if you talk to any regulator and ask where the next financial crash will occur, they will all tell you in a whisper, “Well, it could be in one of the CCPs”.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing these two SIs. I particularly thank the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. They were off the point but, nevertheless, they hit an important issue. Legislation, particularly financial services regulation, is impossible to understand because of its constant revision and the failure to have a process for regular consolidation. There are two problems: the sheer understanding of it and, because of its complexity, one cannot see whether there are interrelationships between the various activities that are being regulated, such that you end up with a systemic catastrophe.

Before the financial crisis many people—I assume genuinely—believed from the way in which the markets were structured that they were robust. In practice, they turned out to be far from robust. I particularly note the concern of the noble Baroness, Lady Kramer, about CCPs—we debated them several months ago, which probably means about a year ago—and, once again, although they seem to be institutions to reduce risk, there is a worrying possibility that they may concentrate risk.

Turning to the statutory instruments, the first seems to tidy up regulations to be compatible with the introduction of the CSDR and the subsuming of the uncertificated securities regulations role. It does that in the same way as most of these SIs by a series of regulations which touch on referencing, transfer, transition and information. I have two small points on these regulations. I have to concede that I rarely get beyond the Explanatory Memorandum but I study that with some care. On Page 4, paragraph 7.4 has unnumbered bullet points; the fourth states:

“Creating transitional provisions, to ensure that operators of systems that were approved as operators under the USR prior to 30 March 2017 can continue to operate under the current version of the USR, pending their authorisation as a CSD under the CSDR regime”.


Why was 30 March 2017 chosen? Most of these transitional things are on exit day and I can see no logic in 30 March. How long does this transitional waiver last before they must receive authorisation as a CSD under the CSDR regime?

At the bottom of the page is the eighth unnumbered bullet point. I think the Minister touched on this point. In the middle it says:

“This is necessary in connection with the Bank of England’s role after exit under the SCDR regime, which will include recognising and supervising CSDs in third countries”.


I have some difficulty grasping what,

“recognising and supervising CSDs in third countries”,

means. Does this mean that this law is extraterritorial? I am not sure I have got the word right, but I am sure the Minister has a sense of what I am concerned about. Or does it simply relate to their rules in so far as how they operate in this country?

The second statutory instrument seems to be picking up the usual format of references, transfers, information and so on. I was looking for transition. Most of these SIs provide for passive transition—that is people, institutions and entities doing certain things after exit day carry on for a period to allow them to register and adjust—but, unusually, this one does not. As the noble Lord pointed out, to operate in the UK one has to become a recognised overseas investment exchange. The FCA document on that published on 14 September and updated on 30 January 2019 states:

“The Treasury is not planning to put in place a temporary recognition procedure for EEA market operators in the event the UK leaves the EU without a deal and without entering an implementation period”.


Why did the Treasury exceptionally make that decision with this SI? Clearly it is important. Later under “How to make an application” the document states: “Market operators should contact”—then there is an email address,

“as soon as possible to make us aware of their plans in relation to any arrangements they intend to maintain in the UK”.

There is a sense that the FCA is worried about whether it has enough time to sort these things out.

[Lord Young of Cookham]

I am grateful to all noble Lords who have taken part in this debate and, again, I notice that there is no fundamental objection to the purpose of the two SIs. I shall try to deal with the issues that were raised.

On equivalence, the noble Lord, Lord Sharkey, asked about the Bank of England’s powers to recognise CSDs from overseas countries and, particularly, whether the waivers were intended primarily for EEA CSDs. These waiver provisions are in fact an existing feature of the FSMA, so they are not introduced primarily to assist the EEA CSDs, although of course they will welcome having them at their disposal. The waivers are subject to statutory conditions and are published. I hope that that answers the noble Lord’s point.

The noble Lord also raised a very good point about the distinction between engagement and consultation, expressing the hope that the results of engagement might be made public in the same way that the results of consultation are. As he recognised, we are reaching the end of the road on Treasury SIs, but it is a valid point that we could take on board if in future we decided not to go down the statutory consultation road but instead to go down the engagement road. It would be useful to bear in mind that we could do a little more to explain in what respect the engagement resulted in changes to the draft SI.

The noble Lord also asked whether we could clarify the nature of the consultation on the USRs. In December 2015, the Treasury published the consultation on implementing the EU CSDR. It closed in 2016 and it was then decided to implement it in stages: first, the Central Securities Depositories Regulations 2014; and, secondly, the Central Securities Depositories Regulations 2017. This is the third SI. We engaged with industry by sharing a draft of it on 24 October 2018 and we published a draft on 17 January this year.

The noble Baroness, Lady Kramer, raised a valid point about information sharing. Simply removing the legal obligation to share information does not necessarily mean that there will be any change in the quantity or quality of information that is subsequently shared. It would not be appropriate for the FCA to be obliged to follow the existing information-sharing arrangements with the EU authorities where there is no guarantee of reciprocity, or to be obliged to match suspensions—another feature that I mentioned. However, it will be able to co-operate with relevant EU authorities on a discretionary basis to share information, as it currently does with non-EEA countries. Therefore, the FCA will still be required to publish decisions—for example, when it suspends or removes a financial instrument from trading at a venue that falls under its jurisdiction—in a manner that it considers appropriate, and that information will then be available to the ESMA.

The noble Baroness also asked about requirements for the Bank of England to co-operate with other authorities when it does not have to do so now. The Bank of England will have a general duty, rather than a specific obligation, to co-operate with other authorities. That is introduced so that the Bank of England is subject to a duty under the FSMA to co-operate with other bodies that undertake similar functions in connection with the Bank’s functions.

The noble Baroness, Lady Bowles, asked whether the USR drafting had changed and whether the first draft was gold-plated. The Treasury has sought to take a proportionate approach to ensuring that issuers can exercise their rights under Article 49 of the CSDR. It was considered appropriate, first, to remove any provisions that were subject to both the USR and the CSDR, and, secondly, to remove those provisions in the USR that were incompatible with the Article 49 right. The current version is less extensive than the one published in 2015, while achieving those aims.

The noble Baroness, Lady Bowles, also asked about the accessibility of FSMA amendments. I know that this is a subject that she has raised before. If one looks at Schedule 5 to the EU withdrawal Act, it sets out that the Queen’s printer—as part of the National Archives—must make arrangements for the publication of “relevant instruments”, including regulations, decisions and tertiary legislation. These instruments will form the retained EU law from exit day and the National Archives is working to ensure that they are visible and accessible to ensure legal certainty and clarity post exit.

All pieces of EU legislation, as well as treaties, international agreements and case law, are currently being archived and will be made available to the public at the appropriate time. The noble Baroness may remember that on 19 April last year, during the passage of the EUWA, my noble friend Lady Goldie wrote to her setting out more detail about how the public would be able to access this EU law and the features that would be in place to ensure legal certainty and clarity post exit; a copy was deposited in the Libraries.

The noble Lord, Lord Tunnicliffe, asked about CSDs. I think it means CSDs from, rather than in, third countries, but I will write to him to confirm that. He asked also why there is no transitional passporting regime—such as the TPR that we have introduced in other parts of the post-Brexit scenario—for EEA market operators. The reason there is no temporary recognition for EEA market operators is that we have an already long-established and well-understood domestic regime for overseas exchanges. EEA market operators which currently make use of passport rights may wish to apply under this regime to become a recognised overseas investment exchange—ROIE. The FCA published a direction on 14 September clarifying how an EEA market operator can make an application to become an ROIE.

The noble Lord also asked about supervising third-country CSDs. Recognition is the process by which the Bank of England allows third-country CSDs to offer CSD services to the UK; supervising third-country CSDs refers to the Bank of England’s ongoing regulatory supervision to make sure the CSD continues to comply with its obligations.

The noble Baroness, Lady Kramer, raised a point about CCPs—an important point, which she has raised in earlier discussions. She is worried about the stability of CCPs and their possible vulnerability to total collapse. She will know that the current structure was put in place post the 2008 crash precisely to protect against the scenario that she outlined. CCPs are financial market infrastructures that take on counterparty credit risk between parties to a transaction. They do this by sitting between trades, as a seller to every buyer and a buyer to every seller. If the noble Baroness agrees, perhaps I could write to her in slightly more detail, setting out why we feel that the present position is robust and why we believe that the scenario she referred to may be unlikely to come about.

Finally, the noble Lord, Lord Tunnicliffe, asked about the transition provision for operators in uncertificated securities. Part of the SI is backward-looking to what has already happened and part is forward-looking. The 2017 reference is to operators approved under the USR 2001 prior to 30 March 2015, which will benefit from a transitional provision under this SI. These operators will retain such approval until they become recognised as a CSD for CSDR and FSMA purposes. I apologise for the acronyms; perhaps I could write to the noble Lord, Lord Tunnicliffe, explaining all this without using them.

[Lord Tunnicliffe]

That would be good. Perhaps the Minister could copy the letter to everybody who has taken part in the debate.

[Lord Young of Cookham]

Yes, I generously accept the suggestion made by the noble Lord, and I beg to move.

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

Lord Tunnicliffe Excerpts

Monday 25th February 2019 Lords Chamber

[Lord Adonis (Lab)]

The noble Baroness had made an important point. We surely have an interest in giving unilateral assurances on transfer of information, because we have such a big interest in the health of our own financial services industry. Anything which ensures that dodgy practice is exposed and information exchanged in respect of it is in our interests, even if—by a complete failure of our negotiating capacity, which unfortunately the Government are guilty of the whole time at the moment—we do not get any reciprocal rights in respect of these transfers of information. The noble Baroness’s question is very well made.

I have a question about the impact assessment. On page 17, it says that the familiarisation costs in respect of this instrument are estimated at £340 per firm and that the total cost is £7,200. Do I deduce from that that only 21 firms are affected, or is there an error and it should really read £7.2 million or something? That seems to be a point of some importance.

[Lord Tunnicliffe (Lab)]

My Lords, I feel the need, once again, to express my repeated objection to being here. We are here to discuss no-deal statutory instruments: I believe the Government are being irresponsible in not ruling out a no-deal outcome. A no-deal outcome would be serious in every area of life, particularly in its economic impact and in its security impact. I also believe that it is possible that we may fall into a no-deal scenario by what could be described as “by accident”. Accordingly, I will continue with my duty of scrutinising the SIs. The problem with this is that, when you come in on a Monday morning and people ask if you enjoyed the weather yesterday, you have to say: “What weather?” There was no weather for me; I was busy studying these five SIs. What made that even more irritating is that I failed to find any serious problems with them.

I have to admire the noble Lord, Lord Sharkey, for delving into the instruments themselves. I always find that pretty close to impossible, because of their habit of amending previous SIs that amend previous SIs that amend previous Acts. I will listen to the Minister’s answer with interest. I also join the noble Baroness, Lady Kramer, in her concern at the tone of the Explanatory Memorandum on the matter of information. I know that the Minister will say that it is just turning it from an obligation to an option. I am sure that is what the words say, but I hope that if we get into the extraordinarily unfortunate situation of leaving with no deal, the appropriate regulatory authorities in the United Kingdom go out of their way to co-operate with regulators in the European Union. These SIs—this one and quite a number of the others—touch on the core issues which caused the 2008-09 crisis, and overall the SIs we are looking at are sensible in making these markets safer.

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018

Lord Tunnicliffe Excerpts

Thursday 7th February 2019 Lords Chamber

[Lord Young of Cookham]

That the draft Regulations laid before the House on 29 November, 6 December and 13 December 2018 be approved.

Relevant document: 11th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A). Considered in Grand Committee on 23 January

[Lord Tunnicliffe (Lab)]

May I just refer back to our previous exchange on this matter? When we last discussed credit rating agencies, I asked what would happen if there was a deal and I got a somewhat amorphous answer. Can the Minister be clearer than he was in his original answer on this point? I have asked this question in every SI debate that I have attended and I have received a slightly different answer from each Minister concerned, so it would be good to know whether the Government have a unified position on this.

Looking at the Explanatory Memorandum, which was discussed in Grand Committee, there is the registration process and the three bullet points. The first two points were that there would be a conversion regime with automatic registration, and that the registration regime would be available to new legal entities. The third, however, which nobody seemed able to understand, was that the automatic certification process would enable certified CRAs established outside the EU to notify the FCA of their intention to extend the certifications to the UK. Like the conversion regime, these notifications must be made before exit day. The Minister’s answer, which I checked in Hansard, was again a little woolly.

Finally, there is the whole issue of how the law relates to the staff of credit rating agencies. We have improved the control of financial services and banks by having a senior management regime. I understand that that regime does not extend to credit rating agencies. The Minister went on to say that other regulations do, but I believe that those other regulations have the same sort of weak reservations that were there in 2008 and allowed the shambles in the money market. It seems somewhat deficient, because what happened in that period, as we know, and the reason nobody was prosecuted, is that everyone said, “It’s not me, guv”. There was not a clear single point of responsibility for the various exceptions to be made.

[Lord Young of Cookham (Con)]

I am grateful to the noble Lord, who has maintained his reputation for holding the Government to account on statutory instruments. I understand exactly why he sought to raise these issues. He referred to my comment that we would “switch off” the SIs in the event of a deal. It is a phrase that appears in some of the briefing for Ministers, so I hope it was not the wrong thing to say. To help the noble Lord, I will set out in more detail the process of switching off.

As we set out in the White Paper on the EU withdrawal agreement Bill, that Bill will amend the European Union (Withdrawal) Act 2018 so that the conversion of EU law into retained EU law takes place at the end of the implementation period instead of on exit day. While the UK remains subject to EU law, and before the conversion of EU law into UK retained law, there is no requirement for most instruments relating to our exit from the EU to be enforced. I come to the question the noble Lord asked: the intention, therefore, is that the EU withdrawal agreement Bill will contain provision to delay all relevant SIs—including these—that enter into force on exit day until the end of the implementation period. The Bill will also ensure that Ministers can revoke or amend the SIs as appropriate so that they deal effectively with any deficiencies arising from the end of the implementation period. Some provisions may remain in effect, such as powers that allow us to prepare for the end of the implementation period.

The noble Lord raised two other issues in the Moses Room on 23 January. One question was on the process of CRAs registering before exit day. The CRA SI includes an automatic conversion regime for UK-based CRAs with an existing ESMA registration, and a temporary registration regime, or TRR, for CRAs establishing a new legal entity in the UK. To enter the conversion regime, a CRA will simply need to notify the FCA 20 days prior to exit day. A CRA that meets the criteria will enter the TRR if it has submitted an advanced application that has not yet been determined to the FCA prior to exit day. Basically, these regimes will help to ensure there are no gaps between the UK leaving the EU and UK-based CRAs not being registered with the FCA. The FCA will be provided with powers to start the preparatory work for registering UK CRAs prior to exit day.

The third issue the noble Lord raised is another that he touched on in his intervention in the Moses Room. He asked about the senior management structure of credit rating agencies and whether individuals could be held responsible. As I said then, it is a good question. The senior managers and certification regime does not currently apply to credit rating agencies. One of the reasons is that they do not actually handle customers’ money, which banks and other agencies do. Regulation 22 of the SI applies Section 400 of the FSMA, which provides that if an offence committed was,

“with the consent or connivance of an officer”,

of the body corporate, or due to neglect on its part, the individual as well as the corporate is guilty of an offence.

[Lord Tunnicliffe]

Part of that answer jarred a little with me then and jars now on repetition—the part that says it is because they do not handle customers’ money. Looking back at the disaster of 2008, one has to recognise that the credit rating agencies were a substantial part of that disaster. The fact they were giving very high ratings to essentially junk stock was one of the issues that compounded the crisis. As a minimum, I would be grateful if the Minister would take this issue back to the Treasury and recognise that it might be an unfortunate hole in the legislation.

[Lord Young of Cookham]

I understand why the noble Lord is pressing me on this. As I said, the senior managers and certification regime does not currently apply to credit rating agencies. The noble Lord makes a good point; I hope he is now satisfied with some of the answers I have given. In answer to his last intervention, although the regime does not currently apply to CRAs, we will of course take his suggestion on board and see whether in future that might be amended. I beg to move.

[Lord Tunnicliffe]

I thank the noble Lord for his courteous replies and his help.

Motions agreed.

Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019

Lord Tunnicliffe Excerpts

Monday 4th February 2019 Grand Committee

[Baroness Kramer]

I find that very helpful and I thank the Minister for saying that.

[Lord Tunnicliffe (Lab)]

I thank the Minister for introducing this statutory instrument but I repeat my concern that we are considering such instruments at all. I and my party feel that the Government should have given a commitment that we would not have a no-deal exit; day by day, there is growing evidence that such an exit will be disastrous for our country. I will say no more on that but try to process these SIs on their merits against—how shall I put it?—the strict limitation that we are assuming a no-deal situation and recognising that things have to be done to achieve that.

The Treasury, I assume to be consistent, has reproduced the same eight paragraphs in all the Explanatory Memorandums. Paragraph 7.4, which I will repeat, says:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation”.


It is against that test that I spent my time studying the Explanatory Memorandum. It seems to do all the right things: it creates a new name; it says that passporting dies; and it goes on to offer a temporary permission regime. This regime may last for up to three years, or three years and 12 months, or three years and 24 months, or perhaps for ever. One has to view the SI in the light of that regime.

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

Lord Tunnicliffe Excerpts

Monday 4th February 2019 Grand Committee

[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 ---

[Baroness Kramer (LD)]

This is quite an important question. At the moment, LCH is the dominant clearing house globally and it is certainly the dominant player for any euro-denominated transactions. There is a shift under way to take some of this activity to Paris. The real question for a lot of the UK players is whether they have to relocate part of their operation to Paris to be able to play in both parts of what will become a much more fragmented European clearing system. That matters a lot for terms of compression and deciding what levels of margin companies have to keep. The reciprocal play matters. Today, the Bank of England and ESMA signed an MoU on how they will regulate these central counterparties. I do not know whether, or to what extent, that is the context. Am I being clear? No, I am being confusing.

[Lord Tunnicliffe]

No, that is very good. It might turn my casual question into quite a substantial one.

I notice that all the Treasury SIs that the Committee has discussed say that there will be no consolidation and no guidance. I do not know how we can carry on like this. I have found it absolutely impossible to understand the overall scene that these SIs relate to. The scrutiny that one is able to give is therefore entirely dependent on the Explanatory Memorandums. As a generality, these assume quite significant previous knowledge and it is an uphill battle to get a feel for these SIs and to give them the appropriate scrutiny.

[Lord Young of Cookham]

My Lords, I am grateful to all noble Lords who have taken part. I detected no objection to the basic premises on which these SIs are based. I will sweep up some of the points raised in earlier debates that are also relevant to this one.

The noble Lord, Lord Tunnicliffe, asked about the FCA’s resources to cope with the new responsibilities being imposed on it. We are confident that the FCA is making adequate preparation and is effectively resourced ahead of March this year. In its 2018-19 business plan, a significant proportion of its resources are already focused on the forthcoming exit, including arrangements to implement any necessary changes. It has increased its staff numbers in response to increases in the scope of its regulatory activity, including EU withdrawal. It will publish its 2019-20 plan this spring, setting out its planned work for the coming year. As I said in response to an earlier SI, the chief executive of the FCA, Andrew Bailey, has said he expects to hold FCA fees steady for a year or two, assuming there is an implementation period. If there is not, it can increase its fees should it need to do so in the event of no deal.

The noble Lord, Lord Sharkey, asked about the impact assessment being published late. This issue was raised in another place and was dealt with by my ministerial colleague John Glen. We do recognise the importance of making impact assessments available for parliamentary scrutiny. We find ourselves in a unique situation. While we have tried to ensure that these impact assessments are published before debates, this has not always been possible. We acknowledge that some firms will incur costs as a result of these SIs but, as the noble Baroness, Lady Kramer, said in an earlier debate, the situation for these businesses would be much worse in the absence of this legislation. As a whole, these SIs will reduce costs to business in a no-deal scenario as without them the legislation would be defective. In response to the points raised by both noble Lords and the noble Baroness, we have agreed to undertake further analysis of these SIs in the event that we leave the EU without a deal and they come into effect.

The noble Lord, Lord Sharkey, asked whether we could have independent assessments for SIs. I understand that, but there are some complex interdependencies between some of the SIs. Also, the work that the regulators are undertaking cannot always be neatly pigeonholed between the SIs. Given that, it has not been possible to fully quantify the impact of the individual SIs at this stage. However, this is something that Miles Celic, the chief executive of TheCityUK, noted in a letter to the RPC in November. As I said a moment ago, we are committed to undertaking further analysis of the impact of these instruments at an appropriate point, should they come into effect, either in the event of leaving without a deal—

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[Lord Tunnicliffe]

We hear that explanation and I have great sympathy for the civil servants involved with this task. However, will the Minister at least have the grace to admit that it was entirely in the Government’s hands to decide when to start this process? If they had started it earlier we would not be in this mess now. We have had impact assessment after impact assessment delivered after we have approved the instrument. That is not satisfactory and I doubt whether the Treasury will be able to catch up.

[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.

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[Lord Young of Cookham]

We need a post-mortem on this, which I will authorise.

In response to the question put by the noble Lord, Lord Sharkey, regarding the numbers on the impact assessment, and how they relate to trade repositories, I say that there are eight trade repositories operating in the EEA that are in scope of familiarisation costs. The impact assessment confirmed that we anticipate that the IT costs for those TRs will be approximately £10,000 to £15,000 per TR—although this cost is also dependent on the size of the TR—and, for firms that will need to update their systems, £5,000 per firm. Costs to the FCA associated with supervising the trade repositories, as well as new IT systems to connect to trade repositories, would be approximately £500,000 per trade repository, although this cost is also dependent on their size. The impact assessment also acknowledged that there may be other costs associated with trade repositories connecting to the Bank of England.

I think it was the noble Lord, Lord Tunnicliffe, and it may have also been the noble Lord, Lord Sharkey, who asked about the FCA’s power to suspend the need to report if there were no trade repositories. That is most unlikely. There are a number of trade repositories in the UK and there are arrangements in the legislation to passport them so they carry on. There are also arrangements for relatively speedily authorising any new TRs. It was slightly odd that a city such as the City of London did not have any TRs, so we think it most unlikely that the FCA will utilise its power to suspend reporting obligations against that background.

In the earlier debate, the noble Baroness, Lady Kramer, asked me whether the EU was considering reciprocity to UK funds in a no-deal scenario. The EU has not done the same for UK funds passporting into the EU, but many UK asset management firms operate EU fund ranges, and they have welcomed the creation of the temporary marketing permission regime, which enables them to market them into the UK.

I was asked what happens to an EEA system that does not notify the Bank of England of entering the TDR. Such a system will not enter the temporary designation regime and it will therefore not have recognition for UK insolvency law purposes. A notification is not an onerous requirement; the Bank of England provided details of this last autumn. The noble Lord, Lord Tunnicliffe, pointed out that under Section 8 we cannot create any new criminal offences, or, I think, create new taxes or new public authorities, and I am confident that nothing in the SIs goes against that restraint.

[Lord Tunnicliffe]

The appropriate paragraph does say that you are substituting one set of criminal offences with another. I can find it and read it if you like; it is a real question. I think the answer is in the word “relevant”.

[Lord Young of Cookham]

The noble Lord asked a good question: is the creation of a criminal offence consistent with the withdrawal Act? Section 8 outlaws the creation of a relevant criminal offence. This is defined in Section 20 of the Act as an offence with a possible prison term of more than two years. The criminal offence in this SI is not caught by that definition, so it is permitted.

Following an intervention from the noble Baroness, Lady Kramer, I was asked about unilaterally recognising EEA systems as central banks with no EU-wide reciprocal action. Extending settlement finality protections unilaterally reduces the risk that UK firms will be refused access to EEA financial market infrastructures, known as systems, and central banks once the UK leaves the EU. It also reduces the legal uncertainty and settlement risk these systems and central banks would face regarding UK law without such protections, so it ensures that the UK remains an attractive place to do business in a global context and supports broader financial stability.

I am conscious that I might not have answered all the penetrating questions from the noble Lord, Lord Sharkey, or some others that have been raised. If I have not, I will write to noble Lords, I hope with an authoritative reply.