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Public Bill Committees

Debated on Tuesday 17 November 2020

Environment Bill (Sixteenth sitting)

The Committee consisted of the following Members:

Chairs: † James Gray, Sir George Howarth

† Afolami, Bim (Hitchin and Harpenden) (Con)

† Anderson, Fleur (Putney) (Lab)

† Bhatti, Saqib (Meriden) (Con)

† Brock, Deidre (Edinburgh North and Leith) (SNP)

† Browne, Anthony (South Cambridgeshire) (Con)

† Crosbie, Virginia (Ynys Môn) (Con)

† Docherty, Leo (Aldershot) (Con)

† Furniss, Gill (Sheffield, Brightside and Hillsborough) (Lab)

† Graham, Richard (Gloucester) (Con)

† Jones, Fay (Brecon and Radnorshire) (Con)

† Jones, Ruth (Newport West) (Lab)

† Mackrory, Cherilyn (Truro and Falmouth) (Con)

† Moore, Robbie (Keighley) (Con)

† Pow, Rebecca (Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs)

Thomson, Richard (Gordon) (SNP)

† Whitehead, Dr Alan (Southampton, Test) (Lab)

† Zeichner, Daniel (Cambridge) (Lab)

Anwen Rees, Sarah Ioannou, Committee Clerks

† attended the Committee

Public Bill Committee

Tuesday 17 November 2020


[James Gray in the Chair]

Environment Bill

I welcome hon. Members back to line-by-line consideration of the Environment Bill. I particularly welcome the hon. Member for Ynys Môn, who joins our Committee for the first time.

Clause 75

Water resources management plans, drought plans and joint proposals

I beg to move amendment 9, in clause 75, page 66, line 11, leave out “may” and insert “must”.

We start this morning with an amendment relating to clause 75. It will not be a surprise to any member of the Committee. The suggestion is to replace the word “may” in the line under the heading “Plans and joint proposals: regulations about procedure”. Proposed new section 39F of the Water Industry Act 1991 states:

“The Minister may by regulations make provision about the procedure for preparing and publishing—

(a) a water resources management plan,

(b) a drought plan, and

(c) a joint proposal”.

It seems to the Opposition that it is very important that these things—a management plan, drought plan and joint proposal—are actually published and that provision is made about the procedure for publishing them. That is a central part of this clause.

As we have said in this Committee previously, no aspersions are cast in any direction concerning the present intentions of Ministers, but I remind the Committee that we are making legislation for a very long time and that there might conceivably be circumstances in which Ministers less well inclined towards the process light upon this clause and decide that it is not really so important that regulations are made, hence we think that the word “must” should be inserted in the Bill.

We have pointed on a number of occasions to the lack of “musts” in the Bill. I think that this is one of the more important ones and I hope that the Minister, even if she is not prepared to consider a number of the other “musts”, will have laid by a little store of sympathy for this “must” proposal, because it relates, as I think she would agree, to a very important feature of this clause.

I would like to add to the argument about the fact that this legislation will stand for a long time. Even the fact that clause 75 amends the Water Industry Act 1991 is a reminder to us of how long we expect this legislation to be in force and people to be acting on it accordingly. The Water Industry Act became law 29 years ago and we are still discussing it, and how we will amend it, now. Many years from now, we will still be discussing this legislation, and therefore it is so important to get it right. That is why a “must” instead of a “may” is very important, especially in this clause.

This amendment seeks especially to talk about regional plans. Currently, planning on a regional rather than a company-by-company basis is non-statutory, and so to put this on a statutory basis would be a gear change in terms of water resource management. I would welcome any moves to put regional plans on a statutory footing, but the Government have to be clearer on the circumstances in which the Secretary of State would use the powers and how adherence to the regional plans would be encouraged if it were not clearly set out here. The current drafting is too weak and does not give this clause the teeth that it needs.

By changing “may” to “must”, amendment 9 would tighten up the clause considerably and make it far more effective. It would require the Secretary of State to make provision setting out the procedure for preparing and publishing water resources management plans, drought plans and joint proposals. I would like the Minister, before rejecting the amendment and dismissing it as unnecessary, to answer the following questions. Under what circumstances would the Secretary of State expect to use the powers created by clause 75 to direct water companies to prepare and publish joint proposals—the regional plans? There is a concern that that will not become standard practice if it is not expected. If the powers are not used and regional water resources planning remains on a non-statutory footing—if it is just a “may”—how will the Secretary of State ensure that companies produce water resources management plans that are aligned with the regional plans?

In the absence of a commitment to using the powers created under clause 75 to direct regional planning, can the Minister assure us that the Secretary of State will direct the Department for Environment, Food and Rural Affairs to set out the need for company plans to align fully with regional plans in its strategic policy statement to Ofwat? Otherwise, many who are listening to and reading this debate will remain concerned that companies’ individual plans could deviate from regional plans, affecting our ability to provide sustainable water resources for society in the light of the worrying projections set out in the Environment Agency’s national framework for water resources.

I want to make a general philosophical point about “mays” and “musts”. We have been talking about this matter a lot over the past couple of weeks. Obviously, our end objectives are the same: we all want a Bill that strengthens environmental protection, and a strong and independent Office for Environmental Protection.

I realise that this clause is slightly different from earlier clauses, but I will make the generic point that when we say that something should be a “must” rather than a “may”, we are often prescribing what the OEP can do. I realise that this amendment is about Ministers, but if we accepted all the amendments on this point, the OEP would end up with a whole list of things that it must do, as prescribed by the Committee, and it would spend all its time ticking those boxes. We would take agency away from the OEP.

As a parent, if I go around telling my children, “You must do this, and you must do that,” they do not feel very independent. If I tell them that they have to be grown up and make their own decisions, they feel more empowered. Throughout this whole process—we have another couple of weeks to consider amendments—it is worth thinking about what being so directive towards the OEP would do to its agency and independence.

It is good to be back this week. I welcome the shadow Minister again, and the new member of our Committee, my hon. Friend the Member for Ynys Môn. I thank the hon. Member for Southampton, Test for the amendment. I understand that the intention is to give certainty that Ministers will make secondary legislation about the procedure for preparing and publishing water resources management plans, drought plans and joint proposals, but he is again playing on my sympathies over “may” and “must”. He will not be surprised that I am not going to relent on this one.

I think the hon. Member will agree that the explanation is quite clear. The duties under sections 37A and 39B of the Water Industry Act 1991, which we have already heard about, to prepare and maintain water resources management plans and drought plans remain on statutory undertakers; they are “must” duties on the Minister. This was raised by the hon. Member for Putney. The plans are already on a statutory footing, and the Minister’s power to make regulations about procedural matters, to which the amendment refers, does not remove those duties. Ministers fully understand that water undertakers need to know the procedural requirements for fulfilling their duties in good time.

I thank my hon. Friend the Member for South Cambridgeshire for the good points that he made about independence and his children. It is entirely appropriate to provide Ministers with flexibility on when and how this provision is given effect.

I come from a very dry region, which adjoins the constituency of the hon. Member for South Cambridgeshire. Some water companies, such as Anglian Water, are already working with other parts of the country, and there are regional plans coming into place. Does the Minister agree that it would be much better to give legal certainty by specifying that as the amendment suggests?

I thank the hon. Gentleman for that point, and lots of companies are already working towards that. We will talk later in more detail about how water companies will work holistically together to deal with the whole water landscape.

In the Bill, the Secretary of State has powers to direct future procedure under statutory legislation if he thinks, for example, that more attention needs to be given to what the hon. Gentleman suggests. There are existing powers in section 37B of the 1991 Act to make regulations for procedural requirements, and those are replaced by new section 39F. The existing powers have already been used by Ministers to make the Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005.

Water companies’ plans are revised every five years. The plans are prepared at different times within their own five-year cycles. When exercising these powers, Ministers in England therefore need to be flexible and mindful of when to introduce the new planning requirements, so as not to have unnecessary impacts on the preparation of water companies’ plans, many of which are under way. I therefore ask the hon. Gentleman to withdraw the amendment.

I think the Minister knows what my answer is going to be. The hon. Member for South Cambridgeshire made a fair point about what would happen if we put in every “must” in every place in the Bill, and how that might constrain the agencies that are responsible for carrying out its business, but that is not what the Opposition has done with our repeated suggestions for the inclusion of “mays” and “musts”.

We agree with the hon. Gentleman that it is not appropriate for an agency to be constrained in that way if, for example, it may decide to carry out an action relating to an investigation or look at the extent to which it ought to do certain things. In that case, it is not appropriate to use “must”, and “may” is perfectly appropriate. There are, however, other circumstances where it is clear that an agency, or indeed the Minister, ought to do something.

In his analysis, the hon. Member for South Cambridgeshire made reference to parents and children, and I would say that this is on the parents’ side. It is a “must” in the same way as a parent must not leave their child on a bare hillside for the evening to see whether they survive. That is the sort of “must” this is, rather than a stipulation that a parent or a child must do certain things. I would put the Minister in the role of the parent, as far as this process is concerned. If the Minister is, in a sense, the parent of these activities, the Minister ought to act like a good parent. If there is a suggestion in the Bill that the Minister “may” not, that should be recognised.

In answer to the Minister’s question, I will not press this amendment to a Division. I know that this is becoming a little formulaic, but the Minister may want to reflect on whether drafting amendments need to be made at certain places in the Bill, either now or at a future date, bearing in mind that this is not a spray-paint job as far as “mays” and “musts” are concerned. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment 130, in clause 75, page 66, line 22, at end insert

“including persons or bodies representing the interests of those likely to be affected.”

I will give the game away straight away by saying that this is a probing amendment, as I am sure the Minister will be pleased to learn, and we seek her comments on it. As my hon. Friend the Member for Putney said, the 1991 Act has been with us for a while. Does the Minister think that bodies that represent those who are likely to be affected by a water resources proposal or a drought plan should be included in the process of preparing and publishing regulations? There is a distinction to be made between the Government deciding to make a plan, and those who would be particularly affected by that plan—for example, the hon. Members who would be affected by a drought plan in Cambridgeshire—having input into the process. There is a relationship between a high-level plan and the reality of any changes on the ground, and it is important to have both perspectives.

That is the reason for this amendment, and the Minister may wish to comment on whether she agrees with the principle behind it, even if the wording is not quite right. I would particularly like to hear whether she is signed up to the idea that I have set out and, if so, whether there are other ways of ensuring that the drawing up of these plans and proposals is a two-way process.

I would like to unpack the amendment slightly more and highlight some areas that may be affected by the Government’s proposals. We would be very interested to hear from the Minister how this Bill will be enacted on the ground after it has progressed through both Houses.

Consultation is key during any planned preparation. The plans to clean up our water across the country are essential and, unless they are done correctly and with the full engagement of all the representative bodies, they will not work. If that happens, the current plateauing of environmental protection, which many people find very concerning, will continue.

The removal of section 37A(8) from the Water Industry Act 1991will remove a list of other bodies. The Act states:

“Before preparing its water resources management plan…the water undertaker shall consult”—

the use of the word “shall” is interesting. Following on from the comments of the hon. Member for South Cambridgeshire, I think that our job in this Bill is to say what is within the OEP’s remit, what must happen and what the OEP, with its flexibility, can decide should happen. We need to set that framework, and an essential part of that is engagement with all the right agencies. The proposed deletion will remove the Environment Agency; Natural Resources Wales; the Water Services Regulation Authority, or Ofwat; the Secretary of State; and any licensed water supplier, as listed in the 1991 Act. These bodies will not be included in this Bill unless we add the text of the amendment, which is, I think, very reasonable,

“including persons or bodies representing the interests of those likely to be affected”.

I do not think that that is overly restrictive, because it would give the OEP the ability to decide who those persons or bodies are. It does, though, say that they must be consulted. Has the Minister considered how to ensure that the new provisions on the preparation of plans by water undertakers will retain stakeholder engagement requirements? Does the Minister believe that the proposals are sufficient to ensure that the Environment Agency, in particular, is fully engaged in plan development? Its involvement is crucial to ensure a high level of environmental scrutiny of water resources options. That is essential for both the working of the Environment Agency and the effectiveness of any plans.

The Minister may suggest that this is dealt with through other requirements such as the customer challenge groups. However, those arrangements are typically extremely narrow and do not enable the wide engagement of the stakeholder that is necessary for the best plans—world-leading plans. Amendment 30 would ensure that consultation rights for stakeholders—

Thank you, Mr Gray. Amendment 130 would ensure that consultation rights for stakeholders could be created under such regulations and allow these provisions to include a requirement for

“persons or bodies representing the interests of those likely to be affected”

by a plan to be consulted during the plan preparation. This requirement should be included in the Bill to make it as clear as possible and to ensure that full consultation with stakeholders takes place, so that we have the best possible water resources management plans and the best likelihood of increasing water quality across the country.

I thank the shadow Minister for this amendment—a probing amendment, as he said. I understand the intention to ensure that those who are likely to be affected by water resource management plans, drought plans and joint proposals be consulted. The Government recognise that planning for water resources is strengthened by the involvement of a range of stakeholders, both individuals and representative organisations, in the development of the plans, as was outlined by the hon. Members who spoke.

The Government intend that stakeholders will be involved in the preparation and delivery of these plans in England. Clause 75 enables Ministers to set out in regulations which bodies are to be consulted on the preparation of plans. Under existing powers, Ministers have set out a long list of relevant consultees in the Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005. The Environment Agency’s national framework for water resources in England, which was published in March, already gives further clarity. It sets out how we expect water undertakers in England to engage with stakeholders to prepare their plans in future.

Reflecting on the comments from the hon. Member for Putney, I want to clarify that Ministers in England want to ensure that the process of developing these plans is open and transparent—more so than ever—through these changes and that stakeholders are involved at the right time, so that they can effectively collaborate on the plans. If we are to encourage this more holistic joint-working approach, that is really important.

While the current wording of “persons” is not defined in the Water Industry Act 1991, the Interpretation Act 1978, which applies here, defines “persons” as including

“a body of persons corporate or unincorporate”—

that is, a natural person or a legal person. It includes a partnership, which would include representative bodies. The meaning of “persons” is very broad and would include representative bodies, making the amendment unnecessary. I hope that provides clarity.

The changes introduced by clause 75 will help the plans to deliver cross-sector and mutually beneficial outcomes, which we all want for the wider water environment, as well to secure water supplies. I hope, therefore, that the hon. Member for Southampton, Test will see that his probing amendment is unnecessary. He was right to ask those questions, but I hope that I have answered them. I respectfully ask him to withdraw his amendment.

I have, as a result of this debate, begun to feel that this is less of a probing amendment than I initially thought. My hon. Friend the Member for Putney made an important point, which I neglected to include in my contribution. The Water Industry Act 1991 included these things. At that time, there were specifications about agencies and bodies that should be consulted and involved in the plans. That has all been swept away.

While the Minister makes the possibly important point about the phrase “persons to be consulted” in proposed new section 37F(3), that appears to be a rather feeble replacement for what was firmly in the previous piece of legislation. At the very least, I would like some assurance. The Minister says that the phrase “persons to be consulted” could be interpreted as persons in the collective. By a transfer of reasoning, we might therefore get to the Environment Agency and various other people in the end. I would like the Minister to actually shorten that course and say, “Yes, it will,” so far as the Bill is concerned.

The hon. Gentleman makes a good point, but just for clarity, we can make regulations to specify what persons or bodies must be consulted during the plan preparations, and we plan to use that power. I just wanted to get that on the record.

I think we may be getting there. When the Minister says, “we can make regulations”, is she saying that the Government will make regulations that effectively restore that arrangement, in terms of persons, by a regulatory route, as I was trying to tease out? It would be helpful if the Minister said that it is very likely that regulations will come about that include a better definition of persons, so that those bodies can effectively be brought back into the process in a way that the Bill seems to have neglected to do.

I will intervene one more time, just for clarity. As I said, we made the Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005, which demonstrates that we have already done something like what the hon. Gentleman asks for. I reiterate that we can make regulations to specify what persons or bodies must be consulted during plan preparations, and we plan to use that power.

I thank the Minister for that. That is 65% of the way there. On balance, I am happy to withdraw the amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: 47, in clause 75, page 67, line 20, leave out “the Assembly” and insert “Senedd Cymru”.

See Amendment 28.

Amendment 48, in clause 75, page 67, line 32, leave out “the Assembly” and insert “Senedd Cymru”.—(Rebecca Pow.)

See Amendment 28.

Clause 75, as amended, ordered to stand part of the Bill.

Clause 76

Drainage and sewerage management plans

I beg to move amendment 200, in clause 76, page 68, line 17, at end insert—

“(ca) the water quality and impact of the discharges of the undertaker’s drainage system and sewerage system,”.

This is a probing amendment, tabled in the name of my right hon. Friend the Member for Ludlow (Philip Dunne), myself and others. The last amendment I tabled proposed to change one word and add one letter to the Bill’s proposed environmental improvement plans. This probing amendment adds 16 words to a subsection on drainage and sewerage management plans. Both amendments have in common the shared interests of our environment and us as beneficiaries of that environment.

Amendment 200 focuses on drainage and sewerage management plans. It is an uncomfortable fact for us all that a huge amount of raw sewage is still discharged into our coasts and waterways—200,000 times in the last year, with 3,000 discharges in UK coastal waters between May and September—all of which threatens the quality of the water itself and water users. It is for that reason that 40,000 people signed a petition to end sewage pollution. My right hon. Friend the Member for Ludlow was motivated to initiate a private Member’s Bill, which will be heard in the House in due course, and to table this amendment to the Environment Bill.

Surely it is the aim of all of us to stop discharges into rivers, lakes and waterways, as well as into our sea, and to raise our current rating within Europe—although we are leaving the European Union, we are still a geographical part of Europe—from 25th out of 30 for coastal water quality. Only 16% of our waterways meet good ecological status.

Why does that matter for all of us, as users? Ultimately, there are health risks—gastroenteritis, ear, nose and throat illnesses, and apparently even, although I have not seen evidence, hepatitis and E. coli. Those of us who enjoy wild water swimming—in the River Wye, for example, on the Gloucestershire-Herefordshire border—will know that there are times when agricultural companies are pumping discharge into the water and damaging its quality and the experience, particularly for the young.

My hon. Friend is making an important point. Does he agree that we need a change in when water companies give notifications of sewage outlets, particularly around the coastline, such as in my constituency and around the Cornish coast? Currently, they do it only in what they call “bathing months”. With better equipment and better wetsuits, we now swim all the year round off the Cornish coast. We have no way of knowing—unless we know that these things happen after heavy rainfall—whether the water is safe to bathe in.

My hon. Friend makes a striking point. From a human perspective, Cornwall is probably the most used bit of coastline in our United Kingdom. The pressures are considerable and the point that she makes about more people swimming and surfing all year round is important. The restrictions should not just cover the traditional swimming months of May to September. I am sure the Minister will address that point.

Alongside a duty on water companies to ensure that untreated sewage is no longer pumped into the seas, the amendment would tackle a series of other actual and potential issues—for our water quality has implications across the whole ecological system, from plant life to fish stocks, as well as the health of the population. Our surface, coastal and ground waters suffer from significant pollution, as I have illustrated, and they also take that pollution into our seas and oceans. The Government have not made as much progress as we would have liked on meeting the targets established under the EU water framework directive, and the Bill is a step towards making significant improvements.

While diffuse pollution from agriculture, as I illustrated with the River Wye, accounts for 40% of river pollution, wastewater from sewage treatment accounts for almost as much, at 36% of river pollution.

As a Parliamentary Private Secretary, I am not always meant to speak, but my hon. Friend mentions the River Wye, which runs through my constituency. It would be remiss of me not to mention that there are many actors in this space. We cannot solely blame farmers in their entirety. The issue needs a whole supply chain response, because it is too important a problem to lay solely at the door of agriculture.

My hon. Friend makes a very good point. There will not be too much specific finger-pointing with the amendment, nor in the Bill in general. We have already referred to water companies. Agriculture, in the broadest sense, is a challenge along the river that she loves in her constituency so much. There are, of course, others who discharge pollution into our waterways. Everyone has to do their bit; that is why the amendment is so important.

Let us be clear that the drainage and wastewater management plans proposed under clause 76 are an excellent step forward. They seek to improve water company focus, and they send a clear message about improving the safe and environmentally responsible treatment of human effluent. However, there is an omission in the objectives. The amendment would therefore place the obligation on water companies, in their five-year plans, to consider the impact on water quality of the wastewater facilities for which they are responsible.

Sewage is estimated to account for 55% of the rivers that are failing to reach the good ecological status to which I referred. This can lead to pollutants such as organic material, which depletes the dissolved oxygen in the water, and other pollutants such as phosphorus, nitrates, ammonia, pathogens and man-made toxic chemicals entering the water environment.

We should acknowledge that water companies have made significant steps. The water company in my constituency, Severn Trent, has invested a huge amount in improvements. Overall, throughout the country, water companies have committed £4.5 billion between now and 2025 towards environmental improvements. Despite the significant investments already made and planned, the Government—that is, DEFRA—acknowledge that progress has flatlined. The chair of the Environment Agency, Emma Howard Boyd, recently stated that, against environmental standards, the performance of water companies deteriorated in 2018, and was not showing much sign of improvement in 2019. In fact, at the current rate of progress, it is estimated it could take over 200 years to reach the Government’s 25-year environment plan target of 75% of waters being close to their natural state. Therefore, we can all agree that there are opportunities for improvement.

With the interventions from my hon. Friends the Members for Truro and Falmouth and for Brecon and Radnorshire, I have referred to the importance of swimming—both so-called wild swimming and holiday swimming on the coast—and that is an important point.

The amendment would make a very simple change to the Bill. On page 68, in proposed new section 94A(3) to the 1991 Act, after the words,

“A drainage and sewerage plan must address”,

it would insert:

“the water quality and impact of the discharges of the undertaker’s drainage system and sewerage system”.

To be clear, in this context, “undertaker” is a sewerage undertaker, which is the word used for a sewerage company. When I first read it, I was rather confused, but it is the water quality and impact of the discharges of the sewerage company’s drainage system and sewerage system that this probing amendment attempts to improve.

The amendment has considerable support from non-governmental organisations, including Marinet, which has been fastidious in bombarding many Members’ inboxes with its support for the amendment. The amendment also has the support of the Conservative Environment Network, which includes some 70 MPs, many of whom support the private Member’s Bill of my right hon. Friend the Member for Ludlow, who would, had he been here, have made a much more persuasive and articulate case for this probing amendment. I hope they will not be unsatisfied with the key points I have highlighted today.

As it stands, the Bill has much to recommend it, but this particular omission is one that could be put right relatively straightforwardly. I therefore look forward to hearing the Government’s response.

The hon. Member for Gloucester has made a powerful speech in support of the amendment, covering many points that I would have raised had he not done so. The Opposition would have tabled an amendment on this subject had amendment 200 not appeared. We did not, because we saw that a substantial number of Members from both sides of the House had put their names to the amendment, which I think adds to its gravity. Frankly, we felt that if we had proposed a separate but similar amendment, it might have decreased the chances of this one being made, so we kept the position as it was. The one point I would disagree with the hon. Gentleman on is that the amendment should not be probing; it should be a serious attempt, with cross-party support, to get a provision into the Bill that will undoubtedly be to the benefit of the natural environment and its users as a result of changes in water companies’ activities.

I want to reinforce what the hon. Gentleman had to say about discharges of sewage and similar activities that have taken place over a number of years. He is right to state that there were more than 200,000 releases of raw sewage into rivers last year. That number slightly underestimates the actual effect of the releases, since some occurred over an extended period rather than being instant. We should think about why that happens.

These are not accidents; they are provisions within the operating arrangements for water companies which allow the occasional release of raw sewage into watercourses. All water companies have an emergency release provision in their operations. They have a system of stop valves that normally separate the sewage from the water, but if the system is so suffused with water at certain points—during a heavy storm, for example—that it cannot cope, those valves are effectively released; the two flows are then mingled. That is the point at which raw sewage may be released into watercourses.

Water companies say that, generally speaking, the dilution of the sewage is such that it does not make a great deal of difference, particularly in heavy storms and similar conditions. That is partly overthrown by the fact that discharges sometimes take place over a substantial period and are not simply brief discharges into rivers at the height of a crisis like a storm. I do not think that anybody would say that in periods of severe crisis for a water company, those sorts of provisions should be removed, but that provision far exceeds what we might expect.

The discharge of spills came to an incredible 1.53 million hours across the nine English water companies last year. As I mentioned, a lot of the spills are not brief. The water companies could introduce procedures that would ensure that they were brief by improving how they separate out water and sewage, and ensuring that those flows can be combined only in the most critical circumstances. It is evident from what we know about those discharges that that is not the case. This is being used as a safety valve by water companies in many instances, rather than as an emergency, last-stop procedure. It is certainly within the companies’ ability to ensure that those safety valves become last-gasp emergency procedures just by improving their procedures to ensure that arrangements for the separation of water are maintained to a higher standard.

As a shadow Minister, I would say that, wouldn’t I? However, it is perhaps not surprising, given that this concern is shared pretty much across the House, that other people have said much the same thing. For example, I believe the Minister met chief executives of the 15 water companies in September, at which point she called on them to take further action to protect the environment, reduce leakage and safeguard water supply. She said that

“we discussed a number of issues I feel strongly about, including storm overflows, and how we can work together to see much more ambitious improvements. This country’s green recovery from coronavirus can only happen if water companies step up and play their part.”

I could not have put it better, and the Minister indeed put it very well.

The hon. Member for Gloucester, who made an excellent contribution, reminded us that the amendment is supported, and was substantially crafted, by the Chair of the Environmental Audit Committee, the right hon. Member for Ludlow. Other hon. Members pointed out the concerns on this issue in their constituencies and why action needs to be taken. The entire Opposition think that this is a good idea and wish to pursue it, and of course the Minister has made admirable comments on how water companies need to step up their activity, particularly on storm overflows, to get things organised.

Basically, what is there not to like about the amendment, and why can it not just be instantly put into the Bill? It will not detract from anything; it will simply add a layer of urgency to something that we all think needs to be done, which surely is what Bills should be about. They should frame action in such a way that entreaties and suggestions are added to by a piece of legislation that says, “Go and do this over a period of time.”

We not think that this should be seen as a probing amendment. That is a very minor disagreement between the Opposition and the hon. Member for Gloucester, who I appreciate may have suggested that it should be deemed a probing amendment out of sensibility for his own side’s manoeuvrability, shall we say, on this issue. In his heart, I think, he would be absolutely behind the idea that it ought to go in the Bill straight away. I sense that very strongly from the vibrations that are coming across the room.

I hope that on this occasion the Minister can oblige us all and simply say, “Yes, this is a really good piece of work. It ought to be in the Bill.” I do not expect her to say, “Sorry we didn’t put it in the Bill in the first place,” but I expect her to say that we will proceed, either now with the present formulation, or on Report if a slightly different formulation is needed.

I thank my hon. Friend the Member for Gloucester for the amendment and for painting such a charming picture of wild swimming in the River Wye, which I should think is quite chilly. I must also refer to my right hon. Friend the Member for Ludlow, who has done so much work on this. As my hon. Friend knows, I have met colleagues several times to discuss this very important issue. He quoted some, frankly, fairly ghastly statistics, as did the hon. Member for Southampton, Test. My hon. Friend is right that this matters and he knows, as does our right hon. Friend, that I take it extremely seriously. I think the hon. Gentleman knows that too.

The issue of river health and the impact of sewer overflows is a priority for me. One of my hats is Water Minister. I vowed that I must do something about that while I am in this role, and I am determined to take action. It has been overlooked for far too long. I have discussed that with my officials at great length. I will not say that they thanked me for it all the time, but it is a priority that I believe we have to get right.

I assure my hon. Friend the Member for Gloucester that controlled sewage discharge to watercourses from sewage treatment works are tightly regulated by the Environment Agency using powers under the environmental permitting regulations, so we obviously already have that in place. I want to be clear that when we were designing the current provisions in the Environment Bill on drainage and sewerage management plans, in clause 76, it was a prime objective to tackle the discharge of sewage into our waterways better.

Clause 76 specifically requires that each sewerage undertaker must prepare a drainage and sewerage management plan. [Interruption.] Yes, there is a “must”—that got a cheer! The clause also specifically requires that a drainage and sewerage management plan “must” address relevant environmental “risks”—those two words are very important—and how they are to be mitigated. That will include sewer overflows and their impact on water quality.

Although I understand the intention for specific references to address sewer discharges and water quality, it is entirely appropriate in this case to provide a broad definition in primary legislation of relevant environmental risks. The provision needs to stand the test of time and be fit for the environmental challenges of tomorrow, not just of today. I can say unequivocally and can confirm that I and any future DEFRA Ministers will also have a failsafe power to make directions to specify any other matters that a plan must address. In simple terms, that will ensure that if a plan or plans are not adequate, the Government can take swift action. I will not hesitate to use that power to direct companies if I am not satisfied with their performance to address sewer discharges and water quality. They should consider themselves on notice; in the meeting that was referred to by the hon. Member for Southampton, Test, I pretty much gave that message. I am not messing about.

The Minister is making a powerful point. The Opposition have no problem at all with how diligent she is and how conscientiously she does her job. I am just wondering how she would feel if a successor—obviously in many years’ time—was not quite as diligent. We need to know that the safeguards are in the Bill. We want them enshrined in primary legislation. If the Minister is so keen on the power and so committed to it, what is the problem with putting it in the Bill?

I thank the hon. Lady for reiterating my commitment. We believe the measures and steps that are here will ensure that that does happen—the sewerage and drainage management plans will come into use and the idea of that will become normal—but there will be an opportunity for a DEFRA Minister to have a failsafe power to make directions to specify any other matters. We also have the Environment Agency keeping abreast of all this. We even have the OEP, at the end of the day. We have so many checks and balances in the Bill that once we get the system going, it should be failsafe.

The Minister has reiterated her own commitment, which none of us doubts. None the less, as the chair of the Environment Agency has said, despite all the various checks and balances, progress has not been as strong as any of us would have liked. Here is the opportunity to insert the words about

“the water quality and impact of the discharges of the undertaker’s drainage system and sewerage system”.

Even if the Minister believes that the Bill has enough “musts” and enough powers for the Minister to direct, the explanatory notes are not that clear, saying simply that

“The sewerage undertaker is required to set out in the plan what it intends to do to maintain an effective system of sewerage and drainage, and when those actions are likely to be taken”,

then adding, rather vaguely:

“Should other factors become relevant”.

Does the Minister not agree that there is a real opportunity to specify, at least in the explanatory notes, that the water quality and impact of sewerage overflow must be addressed?

My hon. Friend is doing absolutely the right thing in checking up on the issues. I have been doing that myself, in fairness. He mentions the EA. As he said, Emma Howard Boyd, the chair, made it clear that much more is expected of water companies, which includes developing, publishing and implementing specific plans by the end of this year, to reduce pollution incidents. The Environment Agency is on the case. Following my meeting, the Secretary of State is meeting with water companies again very shortly. I repeat that “relevant environmental risks” will include sewer overflows and water quality; I said that just now and I hope my hon. Friend the Member for Gloucester was listening. Once that has been established as a risk, it would be very hard for anyone to argue in the future that it was not a risk. That addresses the point made by the hon. Member for Newport West, and I reiterate that point.

The Minister talks about checks and balances, but I am sure she will know that, as far as the checks and balances relating to storm overflows are concerned, more than 60 discharges a year should trigger an investigation by the Environment Agency. Those storm overflows have been released hundreds of times per year by each water company. The Environment Agency relies on water companies to self-monitor their discharges, so the check and balance does not work as well as it should. Does the Minister think that arrangement is sufficient to keep those discharges under control?

I thank the hon. Member for raising that important point; I just want to talk a little bit about the Environment Agency. They are actually part-way through a programme to improve the management of storm overflows. Event duration monitoring gadgets are being installed on the vast majority of combined inland and coastal sewer overflows, and will provide data for the duration and frequency of storm spills by 2025. Approximately 13,000 of the 15,000 overflows will receive this event duration monitoring, so it will make a difference—I am convinced of that. We do, however, accept that there is a great deal more to do.

Let me clarify how important I think the issue is; we do not want to sit around waiting, but to get on and do something about it. In addition to the Environment Bill and the ongoing discussions around making it as strong as possible, I have set up a new storm overflows taskforce to make rapid progress in addressing the volumes of sewage discharge into our rivers. This has been done at speed and very recently, when all of this “stuff”, as they call it, came to my attention. I would like to thank everyone involved for moving so fast on this. I will set a long-term goal on the storm overflows for sewerage undertakers, which I will talk about in more detail later, but the work on that needs to start now. The taskforce is developing actions that will increase water company investment to tackle storm overflows in order to accelerate our progress.

The water companies operate in a tightly constrained regulatory framework, always having to balance bills, investment and shareholder returns. What impact does the Minister think her welcome initiative will have on that, and will she be directing them as to either what they do not do instead, or where that investment should come from?

I thank the hon. Member for Cambridge for that, and of course he makes a really important point. All those things will be in the mix for consideration. The storm overflow taskforce has been set up between the EA, DEFRA, Ofwat, the Consumer Council for Water, Blueprint for Water and Water UK. These are all things they are well aware of and will be discussing, and they will be the ones setting out clear proposals to address the volumes of sewage discharge into our rivers. They are working on that now, at speed, and I anticipate we will have a good idea of their list of actions by spring. The hon. Member might say that that is a long time away, but we are already in November; it is actually only a in few months’ time. I anticipate that this will be really beneficial and really helpful.

The whole thinking behind the taskforce’s action list is to increase the amount of sewage processed at treatment plants, for example through building additional sewage storage capacity, which I think my hon. Friend the Member for Gloucester might be pleased to hear, and separate surface water connections for the combined sewerage network.

I want to thank my hon. Friend the Member for Truro and Falmouth for her input; I have met her and others from Cornwall over the issue of surfers, as well as Surfers against Sewage, who do great work highlighting the issues. As I said, the taskforce is looking to all issues to do with water quality and sewerage overflows, which will include bathing water. We are looking into that.

I also want to thank my hon. Friend the Member for Brecon and Radnorshire, who makes a good point—always standing up for her farmers, in that great farming country she is in—and she is absolutely right. We cannot lay all of this at the door of the farmers. There are many causes and they all have to be looked at and tackled, but that is not to say that there is not work to be done with farmers—I believe they know that. Through our new environmental land management scheme, there will be opportunities to work with farmers to reduce pollution. That is coming down the tracks as well and will also help with the whole water pollution issue.

You will be pleased to hear, Chair, that I am going to wind up. I want explicitly to confirm that I expect a key outcome from the taskforce and our new statutory drainage and water management plans will be a sizeable reduction in uncontrolled discharges from sewerage assets such as storm overflows. I thank my hon. Friend the Member for Gloucester again and ask him to please pass on my thanks to my right hon. Friend the Member for Ludlow and others. He is trying to intervene.

I am very grateful that the Minister has announced this storm overflow taskforce, which is an interesting new group. Taskforces come and go and they have occasionally been used in the past—surely not by this Government—as a sort of alternative to action. One thing that would make us all have greater confidence in the Bill being able to deliver the change that the Minister and all of us wish to see, if she is unwilling, at this stage, to amend clause 76 with the words the amendment suggests, would be if she would consider amending the explanatory notes. At the moment, the relevant sentence reads:

“Any relevant risks to the environment and mitigation measures should be recorded in the plan.”

The Minister could, if she wished, insert “any relevant risk to the environment and mitigation measures, including water quality and the impact of sewerage overflow.”

Thank you, Chair. I thought my hon. Friend would try and sneak in a final go. I do not blame him for that.

Thank you, Mr Gray.

On that note, I hear what my hon. Friend the Member for Gloucester says about the explanatory notes but I want to reiterate what I said earlier: relevant environmental risks will include sewer overflows and water quality. Once that has been established as a risk, it will be very hard for anyone to argue that it is not a future risk. I shall leave it there.

I thank my hon. Friend the Member for Gloucester, my right hon. Friend the Member for Ludlow and other Members for all their work, particularly in raising awareness of this issue. I hope, on the strength of the assurance that I have given today, that my hon. Friend will kindly consider withdrawing his amendment.

This has been a helpful discussion, with Members contributing from all sides. The hon. Member for Southampton, Test is even able to detect vibrations from across the room, which perhaps none of the rest of us has been able to do. As for the key issue in the proposed amendment, my right hon. Friend the Member for Ludlow put it very well in a note to me where he said, “This amendment would require water companies, their regulators and overseeing Ministers to have regard to continuous improvement through these admirable five-yearly plans to ensure our rivers can gradually recover from their polluted state to once again become clear and clean for our children and grandchildren to enjoy.” Members on both sides have highlighted how, in their constituencies, that is relevant.

The Minister has tried to reassure us that that is exactly her own objective. I have no reason to doubt that, as she has confirmed it several times. However, it seems to me that were I to withdraw the probing amendment, it would be on the basis of the words she used, which were that the relevant risks would include water quality and the impact of sewerage overflow. It is great that the Minister has made that statement, but we need to see that in the explanatory notes. If she can give an indication that she would consider that on Report, I would be happy on that basis to withdraw the amendment.

I thank my hon. Friend for his passionate words. I am happy to consider making it clearer in the explanatory notes.

I am very grateful to the Minister for making a significant step to recognising the strength of feeling on this, and I beg to ask leave to withdraw the amendment.

Amendments made: 49, in clause 76, page 69, line 25, leave out “the Assembly” and insert “Senedd Cymru”.

See Amendment 28.

Amendment 50, in clause 76, page 69, line 37, leave out “the Assembly” and insert “Senedd Cymru”.—(Rebecca Pow)

See Amendment 28.

I beg to move amendment 199, in clause 76, page 70, line 4, leave out “may” and insert “must”.

When a minister chooses to make a drainage and sewerage management plan, this amendment obliges them to consult on it.

Yes, this is another amendment. By the way, I thought that last bit was really exciting. I am sorry that hon. Members did not vote our way on amendment 200 this morning, but I appreciate the effort that everyone put it to make it almost get there.

Amendment 199 relates to the amendments to the Water Industry Act 1991. This is about how regulations “may” make provision about consultation, which is a particularly weak “may”. I would have thought that consultation is an essential element of the process. In particular, we are talking about consultation to be carried out by sewerage undertakers—that is, water companies—who are required by regulation to make provision about the person to be consulted, the frequency and timing of the consultation and the publication of statements.

There is a pretty tight requirement on water companies to be clear about what their provision is, except they do not have to do it. That seems to me to be a suggestion that holds the entire subsection. There is quite a fierce thing in this subsection about consultation. This is a good thing. It covers not just consultation, but who it should be carried out by—the sewerage undertakers—as well as instructions on who should be consulted and so on. It is all spoiled by the “may” at the beginning of the sentence. I think this is another important “must”, which ought to go into the Bill. Again, I will not push the amendment to a Division, but I hope the Minister will take careful note of our strong feelings on the issue and will put it in the box of reconsiderations for when she gets around to deciding whether there should be drafting amendments to the Bill in the future.

I welcome the Minister’s earlier comments about taking action on sewage pollution, of which this is an additional part. I welcome the aims of the clause, and I believe it is vital that a strategic approach is taken to waste water management. However, I have a couple of issues with it that I would like to point out.

Sewage pollution is a very important issue for constituents across the country, including in my constituency of Putney, next to the beautiful River Thames, where we are extremely concerned about it. Some 39 million tonnes of sewage is dumped into the River Thames every year, with an estimated 50 epic dumps of pollution. The Tideway project is making great headway—it is making amazing progress, and I commend it. It will result in a real difference being made. However, there are still extreme concerns. One is about the use of the term “sewerage” in the clause, whereas the industry would prefer to use the term “wastewater”. Wastewater is a much larger section of domestic, industrial, commercial and agricultural production, of which sewerage is only a small subsection.

I slightly digress from the amendment—

Which I should not do. I acknowledge that, but I would welcome the Minister’s comments on that.

Clause 76 amends the Water Industry Act 1991 by adding new section 94C. There are a whole rash of “mays”, and we have chosen modestly, and I think correctly, to identify one that should be a “must”. It is in new section 94C(3), which, again, talks about consultation on plans. We have talked about that previously, and it is absolutely vital for ensuring that those plans work and that they tackle the 39 million tonnes of sewage going into the River Thames and the similar incidences across the country. The Bill places obligations on water companies only for something they are already doing; it does not reflect the scale of the challenge from climate change or the fact that drainage is universally recognised to be a shared responsibility with other organisations that are also responsible for managing service water.

Water UK is concerned that, as written, clause 76 will exclude significant bodies that are involved in drainage and will eliminate much of the potential benefits that customers, society and the environment could otherwise gain. It is a fundamental feature of drainage and wastewater planning that water companies cannot do this in isolation, because drainage is shared with other risk management authorities, as defined in the Flood and Water Management Act 2010. For example, large numbers of drainage assets are not under the ownership of water companies, the management of which needs to be integrated into the drainage and wastewater management plans. That has been recognised by the National Infrastructure Commission in its recommendation that water companies and local authorities should work together to publish joint plans to manage surface water flood risk by 2020. Ensuring that such consultation is done as a “must” rather than a “may”, which is the aim behind the amendment, is absolutely essential.

As a minimum, all flood risk management authorities should have a duty to co-operate in the production of drainage and wastewater management plans. There should be the ability to require other flood risk management authorities to provide the information needed for the production of such plans. Clause 76 would ensure that that would happen as a directive to the OEP, which is needed to ensure that we have the best sewerage management plans and wastewater management plans that we can.

I thank the hon. Member for Southampton, Test for the amendment. It is amazing that we have managed to get him excited—for me, that is a massive milestone in the Bill’s passage. I hope he does not mind my saying that.

I understand that the intention behind the amendment is to give certainty that Ministers will pass secondary legislation about the consultations to be carried out by sewerage undertakers on their drainage and sewerage management plans. Under proposed new section 94A of the Water Industry Act 1991, sewerage undertakers will have a duty to prepare drainage and sewerage management plans. Ministers understand that sewerage undertakers need to know the procedural requirements for fulfilling their duties in good time. Ministers require flexibility on when and how the provision is given effect so that procedural requirements for plans remain proportionate and current.

The UK Government intend to use the delegated powers for drainage and sewage management plans in a similar way to the approach used for water resources management planning, to which I referred earlier. The Water Resources Management Plan Regulations 2007 and the Drought Plan Regulations 2005 were made in that way. The existing powers have been used as needed. Those are good examples of dealing with procedural matters such as around the consultation to be carried out.

The hon. Member for Putney touched on the term, “sewerage system”. I want to pinpoint that it is defined in the Water Industry Act 1991 in a way that covers all relevant aspects of waste water. She also spoke about the Thames. I have been down the Thames Tideway—a huge channel down which one can go—and it is a fantastic project that will make a difference to the Thames river water.

Sewerage undertakers are currently developing the first tranche of plans on a non-statutory basis to a five-year cycle. Ministers in England, when exercising the powers, will therefore be mindful of when to introduce the procedural requirements so as not to cause unnecessary disruption—lots of them are in the middle of those, and a great deal of work has gone on—to the development of sewerage undertaker plans. On those grounds, I ask the hon. Member for Southampton, Test to withdraw his amendment.

I thank the Minister for what she has said. She has gone some way towards assuring us on this matter, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment 131, in clause 76, page 70, line 6, at end insert

“including persons or bodies representing the interests of those likely to be affected”.

This amendment is very similar to amendment 130. It adds the same wording to the end of this clause to ensure that persons or bodies representing the interests of those likely to be affected are included. We have effectively discussed this, so I am not very excited about this amendment. [Hon. Members: “Shame!”] By the way, I ought to assure the Minister that, although I am probably among the least excitable Members of this House, I do get excited about quite a few things; I draw a distinction between those two uses of language.

I think that the Minister will probably respond to this amendment in the same way that she did when we tabled a similar amendment to the end of a previous clause, so I do not think that we need detain ourselves very long, other than to say that we still think that such an amendment is a good idea.

I thank the hon. Member for the amendment and his brevity. Clause 76 enables Ministers to set out in regulations which bodies are to be consulted on the preparation of drainage and sewerage management plans—a process that will be strengthened by the involvement of a range of stakeholders. We intend to make those regulations in England to include those persons or bodies representing the interests of those likely to be affected, including representative bodies such as the Consumer Council for Water.

I went into some detail about the meaning of the word “persons” previously, so I refer the hon. Member to that. As I also mentioned, this was done in a similar way when the existing water resources management regulatory making powers were used by Ministers in making the Water Resources Management Plan Regulations 2007. The regulations set out a long list of persons to be consulted by undertakers. I hope, therefore, that he will see that the amendment is unnecessary, and I respectfully ask him to kindly withdraw it.

In the light of that answer, which I had anticipated, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: 51, in clause 76, page 70, line 38, leave out “the Assembly” and insert “Senedd Cymru”.

Amendment 52, in clause 76, page 71, line 6, leave out “the Assembly” and insert “Senedd Cymru”. —(Rebecca Pow.)

See Amendment 28.

Question proposed, That the clause, as amended, stand part of the Bill.

I will not detain the Committee at great length on this particular clause stand part debate, because I just want to raise an issue that somewhat puzzles me about the wording of the clause.

The Minister alluded to the source of my puzzlement a moment ago in her response to the previous debate. As hon. Members can see, the title of the clause is

“Drainage and sewerage management plans”.

The clause refers repeatedly to such plans, but what we should be talking about are not Drainage and sewerage management plans but drainage and waste water management plans.

Some hon. Members may think there is not much of a distinction, but there is quite a substantial distinction, in that sewerage and waste water are not the same things. Waste water includes all the sources of waste water coming into a particular riverine or estuarial area, which may have a number of sources that are not sewerage-based. Therefore, the definition of these plans as drainage and sewerage management plans narrows what they might consist of—not only that, but the definition narrows who might be involved in these particular plans. It narrows it down to water companies, whereas a number of other companies are indeed involved in waste water management and properly ought to be within those plans, to make a comprehensive arrangement as far as waste water is concerned. What is a further source of puzzlement is that the Department and industry have actually worked on such plans for many years, and they are called drainage and waste water management plans.

The Minister may say, as she did a moment ago, that in the Water Industry Act 1991 the words “drainage and sewerage management” effectively mean a wider issue as far as waste water is concerned, but of course the wording in clause 76 is not what was in the 1991 Act but is actually an amendment to that Act. It would have been easily possible, as far as the construction of the Bill is concerned, to include the words “sewerage and waste water management” in the Bill, with no cost to anybody—no additional amendments; nothing—whereas the less than adequate wording in the 1991 Act has been retained for the purpose of these amendments.

I wondered why that was the case. Is it an omission or is it deliberate?  Other than the rather obscure reference to the 1991 Act, why does not the Bill state what plans the Department has and what the plans should consist of if they are properly to take account of what “waste water” defines and accommodates?

How quickly, in the space of 10 minutes, we have gone from excitement to puzzlement. I hope I can, however, assuage some of the puzzlement.

Clause 76 amends the Water Industry Act 1991 to place drainage and sewerage management plans on a statutory footing to match the status of water resource management plans. The provisions are modelled closely on the existing approach to water resource management plans.

I shall deal with the interesting point about the distinction between sewerage and waste water. The clause amends the 1991 Act, which defines the term “sewerage system” in a way that covers all relevant aspects of waste water, so we have used that wording. This includes facilities to empty public sewers and other facilities such as waste water treatment works and pumping stations.

The term “waste water” is not defined in the 1991 Act. The statutory name is not intended to dictate what the water industry chooses to call the plans as part of its daily operations; it might have some other casual term for it. Drainage and sewerage planning is the only key planning process without a formal statutory status in the water sector. Placing plans on a statutory basis will ensure a more robust planning and investment process to meet future needs, including housing.

Statutory plans will also allow waste water network capacity to be fully assessed and encourage sewerage companies to develop collaborative solutions with local authorities and others who have responsibility for parts of the drainage system. They should also sit with planning for population and economic growth and therefore help to deliver improved resilience in sewerage and drainage sources over the long term.

There is strong cross-sectoral support for the measure. When we consulted publicly on making plans statutory, over three quarters of respondents supported the proposal. The statutory production of the plans will clearly demonstrate how a sewerage undertaker intends to fulfil its duty under the Act to provide, improve and extend the public sewerage system to ensure that its area is effectively drained. A statutory plan will help to set out the actions needed to address the risks that some assess that might pose to the environment or customers.

I think the Minister should accept that I am one of the least puzzled Members of the House, but I do admit to puzzlement sometimes. On this occasion, my puzzlement has not been assuaged. The Minister is talking about how good these plans could be, but that does not take us much further in terms of why the wording is as it is when it would have been so easy to put it right when the Bill was introduced. I take on board the Minister’s assurances that, in practice, the word “sewerage” can be used by reference back to the bits of the 1991 Act that have not been amended by this legislation to expand its remit, but it would have been easier to get it right first time round, but I shall not pursue this. It can go into the Minister’s box of things to think about should she wish to clarify this part of the Bill any further.

Question put and agreed to.

Clause 76, as amended, accordingly ordered to stand part of the Bill.

Clauses 77 and 78 ordered to stand part of the Bill.

Schedule 13 agreed to.

Clause 79 ordered to stand part of the Bill.

Clause 80

Water abstraction: no compensation for certain licence modifications

I beg to move amendment 132, in clause 80, page 78, line 1, leave out “2028” and insert “2021”

With this it will be convenient to discuss the following:

Amendment 133, in clause 80, page 78, line 34, leave out “2028” and insert “2021”.

Amendment 134, in clause 80, page 79, line 7, leave out “2028” and insert “2021”.

These amendments all make the same point about there being no compensation for certain licence modifications in water abstraction. Should licences be modified as a result of environmental considerations, especially with the uprating of environmental legislation, water companies and other organisations will have to undertake additional actions to ensure that their licences are adhered to, but they will not receive compensation for those modifications. That is all well and good, except when those licences come to be revoked or varied, in pursuit of a direction under a section of the Water Act.

The no compensation clause comes in on 1 January 2028, so it could be argued that that gives the water undertakings a reasonable period to adjust to the changes, but it may have the reverse effect of what is intended. If companies were to make changes that might need to be undertaken before 2028, they would get compensation. I am not sure whether the clause requires a period of notice for changes caused by increased environmental protection—it is reasonable to give water companies time to adapt—or is it a device that allows water companies to get some money for environmental changes that they should be doing anyway, if they do them before 2028? It is a pretty long run-in for changes. I ask the Minister—and this goes for all these amendments, because they all seek to change the date from 2028 to 2021—whether she thinks that the 2028 date is satisfactory in terms of a run-in for the water companies to make their changes.

If they make the necessary changes before 2028, would they be protected from a legal requirement to enter into and discuss compensation? I would suggest that that is less than satisfactory. The Minister faces a choice this morning on which way she jumps; or perhaps, with great dexterity, she could jump in both directions.

Not only is there potential confusion about the precise intention of this clause, but the 2028 date itself seems to be excessively generous by any measure. If the Minister is not able to at least give us an indication that that date might be considered for foreshortening, we may wish to divide the Committee.

I would like to speak in support of the concerns raised by my hon. Friend the shadow Minister about the long deadlines of this Bill, which would be rectified by amendments 132, 133 and 134.

Clause 80 amends the Water Resources Act 1991 to improve the way in which the abstraction is managed. This additional Environment Agency power, to act on licensing that causes environmental harm, is welcome. However, the timescale proposed in the Bill is too long, as the changes will apply to licenses revoked or varied on or after January 2028. With compensation remaining payable on any license changes opposed by the agency before that time, budgetary constraints will significantly limit its scope to act, which cannot be the aim of this Bill.

The current timescale does not appear to fully grasp the severity and immediacy of the problems facing UK waterways and the poor performance of water companies to date. Four out of nine companies assessed by the Environment Agency require improvement. We cannot wait until 2028 to start revoking licenses and take action, when there is clearly systemic underperformance in the water industry.

Moreover, water companies in England were responsible for their worst ever levels of environmental pollution in the five years up to 2019, leading to condemnation from Ministers and the Environment Agency. In the agency’s annual assessment of the nine privatised water and sewage companies, its chair, Emma Howard Boyd, said that their performance continued to be unacceptable.

Unsustainable abstraction can do serious environmental damage, particularly by changing the natural flow regime. This results in lower flows and reduced water levels which, in turn, may limit ecological health and result in changes and reductions of river flows and groundwater levels. This is about far more than just hosepipe bans.

The Government’s own analysis has shown that 5% of surface water bodies and 15% of groundwater bodies are at risk from increasing water use by current license holders, which could damage the environment. With the Environment Agency recently warning that in 25 years, England’s water supply may no longer meet demand, we will have to clamp down on over-abstraction now. Before becoming an MP, I worked for the aid agency WaterAid, where I saw the result of over-abstraction and how damaging that was for communities around the world. We do not want to face that here.

Abstracters are unlikely to give up these abstraction rights voluntarily and forfeit potential compensation payments. This means that over-abstracted rivers and groundwater-dependent habitats will continue to suffer for at least another eight years under the clauses of this Bill, putting threatened habitats and public water supplies at risk. Further clarification could then ensure that the new date would not impose unrealistic time pressures on water abstractors. 

Variations to licences could then be made, setting out a reasonable compliance period for changes to be put in place before the abstractor would be in breach of the new conditions. That would give fair notice to abstractors, which I understand is a concern for the Minister and is the original purpose of the 2028 date, while also enabling swift action on the mounting environmental harm caused by damaging abstraction. It would put environmental risks in the driving seat, not the concerns of water companies, which is what the Bill does at the moment.

Does the Minister agree that without bringing forward the date from which environmentally damaging abstraction licences could be amended without compensation, we are unlikely to achieve the existing Government targets for the health of the water environment, which require us to bring our waters into good status by 2027 at the latest? Bringing the date forward to 2021 will allow action to be taken within the final cycle of the river basin management plans for 2021 to 2027, and allow us to reduce abstraction damage in line with Government targets set under the water environmental regulations of 2017. The dates need to add up.

In its report, “Water supply and demand management”, published in July, the Public Accounts Committee advised:

“The Environment Agency should write…within three months setting out clear objectives, and its planned mitigation actions and associated timescales for eliminating environmental damage from over-abstraction”.

The Committee wants immediate action and we should, too. Has the Environment Agency yet been able to outline how it will eliminate the environmental damage in line with statutory deadlines, given that this power will not come into effect until after those deadlines have passed?

I support these amendments, in order to put the Government’s own targets in line with each other and make sure that we take action against over-abstraction as urgently as necessary.

The hon. Member for Putney has highlighted why we need to control water abstraction, which is why these clauses are so important. The Government would strongly prefer that solutions are found at a local level between abstractors and the Environment Agency, before these new powers are utilised. A lot of work is already going on to look at abstraction licences, to find different ways of working and to reduce quantities of water abstraction. Indeed, the Government’s 2017 abstraction plan sets out the Government’s commitment and actions to protect our water environment, and it is already beginning to have some effect. Since 2014, a total of 31 billion litres of water has been returned to the environment, and a further 456 billion litres has been recovered from unused or underused licences.

The implementation date of 2028 will afford the Environment Agency the time to engage directly with abstractors to resolve situations without the need to use these powers. That is one of the main pieces of work in progress, as I have outlined. It will also allow time for a catchment-based approach to water resources, to produce solutions. There is a lot of catchment-based work going on. Opportunities will come through the new environment and land management scheme and its systems of new environmental management, where farmers and catchments work together, which is crucial in a holistic approach to the water landscape.

Finally, the date allows time for the transfer of abstraction licensing into the new environmental permitting regime. The powers are more of a big stick, but we are hoping that these other things will swing into place before they have to be used.

Does the Minister agree that 2028 is a long time into the future? By then, small water bodies and wetland habitats, which are an essential but unnecessarily overlooked part of our water environment, may be lost. Something that has already gone cannot be brought back. The year 2028 is far too far into the future and we do not want things to be lost in the meantime.

I thank the hon. Lady for her intervention, but I hope she realises, as I have just outlined, that we are taking action now. The Environment Agency is already working on reducing abstraction with these licence holders in many cases, and that work must carry on at pace.

I also want to be clear—the hon. Member for Putney touched on this—that these measures do not apply to water company abstraction licences. Following the Water Act 2014, water companies are not eligible for compensation for any revocation variation of their abstraction licences, so it is not the water companies we are actually talking about, but the other abstractors of water.

The Bill measures complement the progress that is already being made, widening the circumstances in which the EA can take action against unsustainable abstraction without the liability to pay compensation, because that can be somewhat debilitating. It can do this where it is necessary to protect the environment from damage, including our internationally important chalk streams, which are a priority for me, and which I am doing a great deal of work on, because that whole habitat and environment is something we need to look after. The Environment Agency will also be able to vary a licence that has excess headroom without the payment of compensation. However, this action should not be taken prematurely.

Water abstraction is also vital to the economy—that has to be remembered—for example, to generate power, run industries, grow food, and to be used by all our farmers. Meanwhile, access to clean, safe and secure water supplies is fundamental to society, so actions we are taking now and these new future measures will enable us to balance these competing demands on our precious water resources. It is a fine balance.

I trust that hon. Members now understand the context for selection of the implementation date, and the ongoing action being taken by Government to ensure that changes to ensure sustainable abstraction are already being implemented. I therefore ask the hon. Member for Southampton, Test to withdraw his amendment.

I would have thought that if measures to sort out sustainable abstraction were already being taken, that would be a compelling argument for bringing the date forward from 2028. It is, after all, a longer period than the second world war. I am not convinced by the Minister’s arguments, and on the basis of that date we would like to pursue a Division.

Question put, That the amendment be made.

Amendment proposed: 133, in clause 80, page 78, line 34, leave out “2028” and insert “2021”.—(Dr Whitehead.)

Question put, That the amendment be made.

Question negatived.

Amendment proposed: 134, in clause 80, page 79, line 7, leave out “2028” and insert “2021”.—(Dr Whitehead.)

Question put, That the amendment be made.

Question negatived.

Clause 80 ordered to stand part of the Bill.

Clause 81

Water quality: powers of Secretary of State

I beg to move amendment 135, in clause 81, page 80, line 28, leave out subsection (9) and insert—

“(9) Regulations under this section are subject to the super- affirmative resolution procedure.

(10) In this subsection, ‘super-affirmative resolution procedure’ has the same meaning as it does in Section 18 of the Legislative and Regulatory Reform Act 2006.”

I will not detain the Committee for long. Our amendment suggests that instead of regulations under this section being subject to the negative procedure, they should be subject to the super-affirmative procedure. There is a real difference between the two because, as hon. Members will know, the negative procedure for secondary legislation requires merely that the legislation be laid before the House, and if no one objects to it within 21 days, it automatically becomes law. The affirmative procedure, on the other hand, means that under normal circumstances, the House is entitled to a debate on the legislation, in which the Minister is required to take part, at least to air the reasons behind the introduction of the regulations.

The affirmative procedure is potentially an important protection for Parliament to hear properly what is happening with secondary legislation. The super-affirmative procedure guarantees a 90-minute maximum debate on a piece of secondary legislation, and that is the procedure that we would prefer for this clause. We will not press the amendment to a vote, but we would be grateful if the Minister reflected briefly on why she thinks the negative procedure is the right way to go.

Although there is some justification for a power to make technical updates to regulations, as my hon. Friend the shadow Minister has set out, the clause could provide a licence for the Secretary of State to weaken, via secondary legislation, the standards of our waters, and their chemical status in particular. Secondary legislation has caused a huge amount of division between the Opposition and the Government, as we have asked that much more of it be put into primary legislation. If there is more secondary legislation, and “may” does not become “must”, it is really important that it is debated under the super-affirmative procedure.

That is particularly worrying in the light of Sir James Bevan’s speech, which suggested possible reform of the way in which the status of our water is considered. What is behind that suggestion? The last thing we need now is a regression of water quality standards. According to data released by the Environment Agency last month, not a single lake or river in England that has been recently tested has achieved a good chemical status. We are experiencing a five-year high for environmental pollution by the water industry.

Stakeholder concerns about the unmitigated power in the clause would be unlikely to evaporate if there were a commitment to non-regression of environmental standards. Given the public support for environmental protection, which I am sure the Committee will acknowledge, why are the Government reluctant to provide assurances and to agree to the amendment? That goes to the heart of many of the issues at the centre of the Bill. Time and again, we have heard assurances of non-regression, but the Government have so far avoided every single opportunity to put those promises into statute. That persistent refusal makes us all highly suspicious.

At the heart of the water framework directive is the principle that the water environment is a system and that all its parts need to be in good working order for it to operate effectively. That principle remains true. The clarity of the one in, one out rule should not be abandoned, and any weakening of chemical standards would be a backward step in the light of growing public concern about water pollution and the new data showing the extent of water quality failures across England.

I urge the Committee to support the amendment, which goes some way towards addressing that significant risk, and would ensure that any changes to water quality regulations would be subject not to the negative procedure, as the Bill currently states, but to the super-affirmative procedure—as a new MP, I had to go and look it up and have learned a lot about it—as defined in section 18 of the Legislative and Regulatory Reform Act 2006. That would give stakeholders the right to input into any water quality regulation changes, including UKTAG, the UK technical advisory group that currently advises on standards—

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.

Financial Services Bill (First sitting)

The Committee consisted of the following Members:

Chairs: †Philip Davies, Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

† Cates, Miriam (Penistone and Stocksbridge) (Con)

† Creasy, Stella (Walthamstow) (Lab/Co-op)

† Davies, Gareth (Grantham and Stamford) (Con)

† Eagle, Ms Angela (Wallasey) (Lab)

Flynn, Stephen (Aberdeen South) (SNP)

† Glen, John (Economic Secretary to the Treasury)

† Jones, Andrew (Harrogate and Knaresborough) (Con)

† McFadden, Mr Pat (Wolverhampton South East) (Lab)

† Marson, Julie (Hertford and Stortford) (Con)

† Millar, Robin (Aberconwy) (Con)

† Oppong-Asare, Abena (Erith and Thamesmead) (Lab)

† Richardson, Angela (Guildford) (Con)

† Rutley, David (Lord Commissioner of Her Majestys Treasury)

† Smith, Jeff (Manchester, Withington) (Lab)

† Thewliss, Alison (Glasgow Central) (SNP)

† Williams, Craig (Montgomeryshire) (Con)

Kevin Maddison, Nicholas Taylor, Committee Clerks

† attended the Committee


Victoria Saporta, Director of Prudential Policy, Prudential Regulation Authority

Sheldon Mills, Interim Executive Director of Strategy and Competition, Financial Conduct Authority

Edwin Schooling Latter, Head of Markets Policy, Financial Conduct Authority

Simon Hills, Director, Prudential Regulation, UK Finance

Daniel Chichocki, Director, LIBOR transition, UK Finance

Paul Richards, Managing Director, Head of Market Practice and Regulatory Policy, International Capital Markets Association

Public Bill Committee

Tuesday 17 November 2020

[Philip Davies in the Chair]

Financial Services Bill

Before we begin, I have a few preliminary announcements: please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Can I emphasise the importance of social distancing? Spaces available to Members are clearly marked. As you can see, not all Members can fit around the horseshoe. Will Members sitting at the side of the Room or in the Public Gallery please use the standing microphone if they wish to ask a question?

Today we will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication, and then a motion to allow us to deliberate in private on our questions before the oral session begins. In view of the time available, I hope we can take these matters without debate. I call the Minister to move the programme motion standing in his name, which was discussed yesterday by the Programming Sub-Committee for this Bill.



(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 17 November) meet—

(a) at 2.00 pm on Tuesday 17 November;

(b) at 11.30 am and 2.00 pm on Thursday 19 November;

(c) at 9.25 am and 2.00 pm on Tuesday 24 November;

(d) at 11.30 am and 2.00 pm on Thursday 26 November;

(e) at 9.25 am and 2.00 pm on Tuesday 1 December;

(f) at 11.30 am and 2.00 pm on Thursday 3 December;

(2) the Committee shall hear oral evidence in accordance with the following table:





Tuesday 17 November

Until no later than 10.25 am

Prudential Regulation Authority; Financial Conduct Authority

Tuesday 17 November

Until no later than 10.55 am

UK Finance

Tuesday 17 November

Until no later than 11.25 am

International Capital Market Association

Tuesday 17 November

Until no later than 2.45 pm

The Investment Association

Tuesday 17 November

Until no later than 3.30 pm

TheCityUK; City of London Corporation

Tuesday 17 November

Until no later than 4.00 pm

The Association for Financial Markets in Europe

Tuesday 17 November

Until no later than 4.30 pm

The British Private Equity and Venture Capital Association

Tuesday 17 November

Until no later than 5.00 pm

StepChange Debt Charity

Thursday 19 November

Until no later than 12.15 pm

Spotlight on Corruption

Thursday 19 November

Until no later than 2.45 pm

The Association of British Insurers

Thursday 19 November

Until no later than 3.30 pm

Transparency International

Thursday 19 November

Until no later than 4.15 pm

The Finance Innovation Lab; Positive Money

Thursday 19 November

Until no later than 5.00 pm

Hon Albert Isola MP, Minister for Digital, Financial Services and Public Utilities, Her Majesty’s Government of Gibraltar

(3) proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedule 1; Clause 2; Schedule 2; Clauses 3 to 5; Schedule 3; Clauses 6 and 7; Schedule 4; Clauses 8 to 21; Schedule 5; Clause 22; Schedules 6 to 8; Clauses 23 and 24; Schedule 9; Clauses 25 to 27; Schedule 10; Clause 28; Schedule 11; Clauses 29 to 44; new Clauses; new Schedules; remaining proceedings on the Bill;

(4) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 3 December.—(John Glen.)


That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(John Glen.)

Copies of written evidence that the Committee receives will be made available in the Committee Room. I call the Minister to move the motion about deliberating in private.


That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(John Glen.)

The Committee deliberated in private.

Examination of Witnesses

Victoria Saporta, Sheldon Mills and Edwin Schooling Latter gave evidence.

Q We now resume our public sitting. We will hear evidence from Victoria Saporta from the Prudential Regulation Authority and Sheldon Mills and Edward Schooling Latter from the Financial Conduct Authority, all remotely. Before calling the first Member to ask a question, I remind Members that all questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion that the Committee agreed. We have until 10.25 am, at which point I must cut off this session. Do any members of the Committee wish to declare any relevant interests in connection with the Bill? No. In which case I call the first witnesses. Could you please introduce yourselves for the record?

Victoria Saporta: Good morning everyone, and good morning, Chair. I am Vicky Saporta, executive director for prudential policy in the PRA within the Bank of England.

Sheldon Mills: Good morning. I am Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority.

Edwin Schooling Latter: Good morning all. I am Edwin Schooling Latter, director of markets and wholesale policy at the Financial Conduct Authority.

Q It is good to have you before us for this first session. I have a question for each of you, but I will start with Vicky. Obviously there is a strong working relationship between the regulators and the Treasury. It would be really helpful if you could explain how your organisations worked with the Treasury on the preparation of the Bill.

Victoria Saporta: Thank you for the question, Mr Glen. Yes, we worked closely together, as you would expect for a Bill that proposes to revoke elements of the acquis and give the regulators specific powers. Ultimately, of course, it is for the Government to introduce the Bill and for Parliament to take it forward. However, the working relationship was very close, and because of that we are content with the content of the Bill and the proposed measures.

Q Shall I move to Sheldon? One of the themes that has already come out in early observations is around the commitment, or not, to maintain our highest international standards. I just ask you to make any observations about that, in terms of that commitment and how you will ensure that that continues.

Sheldon Mills: We have had close interaction with you and your officials throughout the drafting of this Bill, and also the preparations for a new UK financial regulatory system, as we move to exit from the EU. We think it is important that there is an agile and confident UK financial services regulatory system, which will support the UK financial services industry and, importantly, also protect consumers and ensure market stability. We feel that the Bill is a good first step in that direction, to enable us to play our role in those goals and objectives for the UK financial services industry.

Q Thank you, Sheldon. If I could move to Edwin, one of the 17 measures in the Bill deals with the wind-down of the LIBOR benchmark, which is an incredibly complex process by which we are giving the FCA power. Could you explain to the Committee how you see the FCA executing the power and using it in practice?

Edwin Schooling Latter: Yes, of course. Committee members will be aware that LIBOR is a benchmark that has had a troubled past. It is also a benchmark that probably does not suit the needs of its users as well as some alternatives; but it is very deeply embedded in the financial system, so while we think it is the right thing to move towards the end of LIBOR and its replacement with better alternatives, we need to be able to do that in an orderly way. The provisions in front of you contain some important measures to enhance the FCA’s powers to manage an orderly wind-down—for example, to identify the point at which the benchmark is no longer sustainable and to take measures to ensure that its publication ceases in the least disruptive way possible for the many hundreds of thousands of contract holders who have mortgages or more complex financial instruments that reference the benchmark in some way.

Q Thank you. I would like to begin with you, Vicky. The Bill goes through a process of onshoring a number of EU directives that are concerned with financial services. Can you tell us conceptually whether there is a difference between the way the UK regulators tend to go about their business or think about these things, compared with the way the various EU directives have been drawn up, debated and discussed in the EU institutions until now?

Victoria Saporta: Yes, I am happy to do so. The way the EU tends to function in terms of regulations—particularly banking regulations, which are part of the provisions of the Bill that relate to the PRA—tends to be quite unique relative to other non-EU regulators. Essentially the Commission proposes very technical regulations, which in banking are often agreed by technocrats in the Basel environment—in the Basel committee—and then these are debated in the European Parliament and the Council of Ministers, and become directly-applicable law. The reason for that way of doing it relates to the single market, so that every EU member state has exactly the same regulations. As I said, that is very unique. Every other member of the Basel committee, for example—all the G20 jurisdictions with the exception of Switzerland, which is another federal democracy—would have its regulators applying these technical rules that they have themselves negotiated internationally.

Pre the treaty of Lisbon and before the single market rulebook, this was the way that regulation was done in the UK through the Financial Services and Markets Act 2000. Primary legislation set out the objectives, framework and constraints through which regulators would operate and the regulators would then go about implementing the rules for the purpose, so that they could achieve the objectives that Parliament would have set for them.

Traditionally, UK regulators have done that in the prudential sphere, which is my current sphere. To preserve safety and soundness and contribute to financial stability, the PRA currently has a secondary objective of facilitating competition, but with the remit that the Government give them and always with an eye to preserving responsible openness and dynamism.

Q If you are a bank that wants to lobby about the rules or a trade body representing financial institutions, do you think there is any advantage in your lobbying in one of these systems or the other—the more rule-based one or the more flexible one that you have outlined? Which is the more open to lobbying?

Victoria Saporta: There is a considerable body of empirical research that suggests that regulatory independence is strongly correlated with stronger financial stability. Particularly in the banking system, there are lower losses under stress. One of the reasons for that is because regulators—at least in theory, but I happen to believe from my experience that that is the practice—potentially have longer horizons than Governments, and therefore regulatory independence tends to be more robust to such lobbying in the longer term, subject, of course, to accountability and objectives set by Parliament.

Q Thank you. Sheldon, I want to ask you about the accountability framework in the Bill. It asks you and the PRA to take account of various things. In going about your work in the FCA of regulating conduct, products and so on that financial bodies distribute, what account is taken of wider Government objectives? I am thinking most obviously of things such as the net zero commitment and the legislation that has been passed for that. Do you consider those things or do you say: “Look, our day job is the fairness and stability of financial products and it’s somebody else’s job to worry about that”?

Sheldon Mills: It is a good question. The starting point is our statutory objectives. We set our priorities for the year and also over three years on the basis of our statutory objectives, which are consumer protection, competition and market integrity. We then work out whether, serving those objectives, certain types of activities will help protect consumers, and help us ensure market integrity or further competition.

If you take the example of net zero, it is quite clear, regardless of where Government’s ambitions are in relation to net zero, that the move towards net zero forms a part of the issues that we face globally in terms of climate change. Those are risks in the economy and therefore impact the firms that we regulate and in turn may impact the consumers that we seek to protect. In a sense, we have little choice but to consider and be cognisant of Government’s aims in relation to net zero, because if we are not thinking about those climate risks and challenges, which our firms face, we would not be doing our job and serving our statutory objectives.

Quite often, you find that the aims of Government are merely looking at some of the risks that are impacting markets, impacting the firms, and therefore it is right and proper that we have work in relation to those areas, and we do have work in relation to net zero and climate change.

Q Thank you very much. My final question is to Mr Latter. In the onshoring of all these EU directives, where do you see, if you like, the main opportunities not to do things that the directives currently mandate us to do? Where are the divergence opportunities for the UK financial services sector?

Edwin Schooling Latter: In answering that question, I think that an important starting point is to recognise that the UK regulators, including the FCA, played a very large role in designing a lot of that EU regulatory framework. So the overall picture is definitely one where we support the nature of that framework and the provisions within it. There are a few areas where compromises to span 28 countries perhaps do not suit as well as they might the particular circumstances of UK markets. I think that there are some areas, for example in the MiFID regime, where we could look at an approach that was better calibrated to the UK’s capital market infrastructure, but areas where we would diverge are the exception rather than the rule.

Q I have a couple of questions, first to the FCA. Can you explain a wee bit more why you feel that you need a change in primary legislation in order to remove companies from your register?

Sheldon Mills: We have an obligation under FSMA such that all authorised firms will sit on our financial services register, and that allows a sense of public transparency as to who is authorised and what they are authorised to do. As the Committee may or may not know, we regulate tens of thousands of firms, upwards of 60,000 firms, so the register is quite large. The current rules allow firms that are authorised on the register to maintain their registration even though their activities are, in effect, dormant and they are not actually carrying out certain financial services. We need to give them rights to be heard in order to remove them from the register, and that takes time. Therefore, having a different regime, whereby we can give notice to firms that their removal might be pending unless they prove to us that they are active, is going to be a much more efficient and effective way of operating the register. This is important because harms are occasioned by the presence on the register of dorman firms. There is the activity of cloning, whereby firms use dormant names on the register to practise certain fraudulent and scam activity, which is a significant problem that we are seeking to tackle. We are committed, of course, to removing people from the register as swiftly as possible, but the provisions in the Bill will really help to accelerate that for us.

Q Thank you. Is there a reason why you cannot just remove them now? Is that more a resourcing issue than a legality issue?

Sheldon Mills: It is not a resourcing issue as such. The process that one needs to go through in order to remove somebody from the register is time and resource-intensive and requires quite a lot of back and forth to execute, so this will be a more efficient process, which still respects the right of the person on the register to explain to us that they are using their licence or authorisation, but which will allow us to move forward a bit more quickly.

Q I think that you referred to 60,000 firms. What proportion of that 60,000 would you expect to remove from the register by using this process?

Sheldon Mills: I will need to come back to you on that.

Q Okay, thank you. Let me move on to other issues, about capacity. It is a huge amount of regulation coming back to the UK. Do you feel at the moment that you have sufficient capacity to deal with this, given the huge amount of responsibility that you are taking on, in addition to the pandemic and everything else that is happening?

Sheldon Mills: We can always do with more resources—that is a common refrain of regulators. Naturally, we will have to reorder our priorities in order to ensure that we are able to take on the onshored rules, to provide them with the right level of attention and make the right decisions. They will fall into two categories. Some we will be able to accept quite quickly and onshore reasonably easily, but others will have areas where we will rightly need to work through how they sit within the specifics of the UK market in a post-Brexit world, and they may take a little more time. All of them will require some form of consultation with the public, so that will take some time. I feel, however, that we have the expertise, experience and knowledge that certainly help us to have the head start on onshoring.

Q On the risk of a cliff edge, Nausicaa Delfas of the FCA said that financial services face a cliff-edge situation in January. She raised particular issues with derivatives trading, the transfer of personal data and offering services to customers in the UK. Are there any improvements that could be made to the Bill in order to smooth that transition and make that process a bit simpler and easier?

Sheldon Mills: I do not think so. What Ms Delfas was referring to is the need for firms to ensure that they are making efforts to be ready for transition. We have worked with firms and the Prudential Regulation Authority to ensure that firms are ready for transition. When we describe a “cliff edge”, what one is describing is the need to ensure that we are prepared for what we know is coming. We are working closely with firms and putting the right sort of pressure on them to be ready for that point.

Q Mr Mills, I wonder whether you could say a little more about the resource implications of the Bill. An awful lot of our financial services regulation—well, all of it—used to go on in the European Union, but now that is ending and all these complex and technical issues are being onshored. That must be the cause of a huge amount of extra technical work for the FCA, and in fact for the PRA. Is the FCA getting any extra resources? Are you trying to import all the people who used to live in Brussels back into the FCA?

Sheldon Mills: As I said, we have a significant amount of expertise in the United Kingdom. The reason we have that expertise is that—I have to be careful how I put this—much of the financial services legislation that has come about in the EU, the UK has fully participated in, often leading on the legislation. If we take the investment firms prudential regime, which is in the Bill, our colleagues at the FCA were leaders in that space, setting the pace and direction in the EU. So I think we have the expertise and the experience.

When I think about resources, there are areas where we will need to consider hiring more people, in particular the area of prudential expertise—that is a specific area within the FCA where we will need to hire. We will need to consider our resourcing carefully, as more parts of the acquis are onshored, but currently, where we stand, we think we are capable of moving around our resources in order to meet the demands.

The impact that it could have is of course the speed at which we are able to turn to the different pieces of legislation. If the ask was to do everything on day one, there would be an impact on resources; if we have a sensible framework and approach, I think we can manage.

Q Mr Mills, I am glad you think you can manage but, given that this onshoring is happening, we have already seen the beginnings of some quite fierce competition—if I may put it in a non-technical way—to nick some of the financial services that we have in this country and to take them abroad. We have already seen quite a competitive and non-co-operative environment develop, seeing who can get what when we are outside the European Union. That is an entirely new form of activity that somehow you have to take account of, and that has not had to be taken account of in the past.

Are you sure that will not cause your resources to be stretched in a way that you had not anticipated? For example, if we have to approve new ways of doing things, onshore all these things and get new systems up and running, those who might wish to carry on can just shift to the internal market and carry on doing things, without having to wait for all the consultations that you and your colleagues will be doing to try to re-establish a UK-based regulatory system.

Sheldon Mills: The starting point is that the foundations of the system are clear to all financial services markets in the UK, so there will not be a gap that means organisations will not know the type of regulatory system that they expect when they are authorised a licence to operate in the UK. We will ensure that that is maintained and is clear throughout the transition and into the future.

On what I think you are referring to as the competitive regulatory system that we might enter into, I can assure you that we are engaged internationally through all international bodies. We play leadership roles in the ESB, the Financial Stability Board and all sorts of international bodies in financial services. Therefore, we are key actors in regulatory systems and the latest approaches to regulation across the world, and that will also support our being a sensible regulatory environment in which firms wish to operate. We are clearly engaged with negotiations and discussions with the European Securities and Markets Authority in relation to a range of regulatory activity, so I am confident that we will not have any significant gaps or issues that would cause issues for the UK financial services industry or for those who wish to come and play an active role in that industry.

Q Thank you. It appears that the EU will not be in a position to offer us any equivalence, or to certify any of the things that we are doing as equivalent, until at least the middle of next year. There are noises that we will be diverging in some of the areas that we are re-onshoring. You said that would be the exception rather than the rule. Can you give us a bit more information on how divergence will work? I am concerned that the Bill has its Committee stage this side of the transition, and then its Report stage the other side of the transition, when we might be in a different situation. Are you planning for there to be big importations of new stuff into the Bill at the last minute?

Sheldon Mills: The Bill is a matter for Government to take through Parliament. The important thing for us, as regulators, is that the Bill provides us with sufficient flexibility to meet the needs that we face as we move through the transition and into the future. In a sense, the Bill is silent on whether we are divergent or equivalent. Equivalence is a policy matter for Government, as opposed to a matter for us. All we need is sufficient flexibility to ensure that we have an appropriate regulatory system, depending on how Government policy emerges in relation to equivalence.

Q Just to make that clear, you are basically saying that you are neutral on the amount of divergence or equivalence, and that you can cope with whatever is thrown at you?

Sheldon Mills: Neutral is too strong a word. My point of view is that we are interested in what I would call outcomes-based regulation. Equivalence can be done in one of two ways within the bounds of equivalence: it can be done line by line and letter by letter, or it can be done on the basis of seeking to meet equivalence objectives within an outcomes-based regulatory system. We are moving towards the position of the latter. Overall, equivalence is a matter for Government.

Q Finally—I am conscious that I have put questions only to you, but I am sure colleagues will put questions to other witnesses—you were saying at the beginning that part of what the FCA has to do is protect financial services in this country and create a good environment for them, as well as protect consumers and ensure market stability. There is only so much bandwidth, so will all the work relating to onshoring compromise consumer protection?

Sheldon Mills: I do not think so at all. To give an example, it may look like it would take an army of 50 or 60 people to do the work of the investment firms prudential regime, but in reality it takes around 10 people to do that work. These are significant specialists in the technical architecture of designing prudential regulation. We would not ordinarily use those people in our consumer protection work, and they have different skills and are involved in different activities. I do not think that we will be any less vociferous in protecting consumers. During the crisis, those who watched us saw that we were at the forefront of ensuring that we tried to provide relief to consumers during the pandemic. We will continue in that vein. As the FCA’s conduct regulator, I am committed to ensuring that the consumer is at the heart of everything we do.

Q Thank you for taking the time to speak to us. I know that you are in favour of the Bill, as it will give you greater agility and flexibility to deal with things. Going back to some of the comments you made earlier about the consultation process, in which you were clearly fully engaged, one of the things I want to find out relates to the consultation discussions, and obviously you have more responsibilities. Will you shed some light on what came out of those discussions in terms of making sure that there is effective accountability and oversight in relation to the additional powers that you are likely to be given?

Sheldon Mills: I will go first and then pass over to Vicky. It is useful to start with our current accountability, because the Bill and future regulatory frameworks being consulted on by the Government deal with that issue. We wish to be accountable. As an independent regulator, an important part of our process is for us to have public accountability. We serve the public and ultimately are scrutinised by Parliament. Our main form of scrutiny is that of the Treasury Select Committee, but we attend many other Committees. Explaining our activity to Parliament is an important part of our work. Below that, within the Financial Services and Markets Act for the FCA specifically, are our statutory panels. They are there to scrutinise our work in a much closer engagement with the organisation. Then we have the consumer panel, the practitioner panel and the small business practitioner panel, as well as the advisory panel on markets and listings. They are able to make public their views, and—believe me—they do very often make public their views on our activity. In addition to that, we will consult on our policies when we do policy-making work ourselves, as do other public authorities. We will also provide access to non-confidential information and data so that all interested parties can make their views known to us.

We also evaluate our work to ensure that it meets its intended outcomes. We already have an existing accountability framework that would sit well with the additional rule-making powers we may get through the Bill and as we move forward with the proposed reform to the financial services regulatory regime. The future regulatory framework is out for consultation, so I will not say much in relation to it, but we of course acknowledge that there may need to be adjustments to the accountability framework to accord with the additional powers that we are getting. We look forward to seeing the responses to the Government’s consultation in relation to that.

Q Just for clarification, during the consultation period there was no analysis looking, in terms of the additional powers, at how the accountabilities need to be changed. My understanding, from what you have just told me, is that it is very much reliant on the processes you think you have got already, which I have concerns about, if I am honest, because the current processes do not appear to take into consideration the additional powers.

Sheldon Mills: As I said, we acknowledge that we will be getting additional powers and there may need to be changes to that accountability framework. Within the Bill, you see the foundational approaches in terms of how things may change. Within each of the specific policy areas, if we take the investment firms prudential regime review, there are certain “have regards” obligations that we will need to take account of in that regime. I think that is a sensible approach to take as you bring in onshored regulation. There are specific needs that Parliament considers it is appropriate for us to consider for that onshored regulation. Then, that “have regards” mechanism of pointing that out to us and us being accountable for meeting those “have regards” in accordance with our statutory objectives is a sensible approach and adds an additional layer of accountability and scrutiny for us.

There are other mechanisms within the future regulatory framework, which is out for consultation. Again, I do not have a strong view on them. I recognise that we are getting more rule-making powers and we may need to have more strengthening of the accountability framework.

Q I put the same question to the other witnesses.

Victoria Saporta: To response to your question directly, yes, from the very beginning we had discussions with Treasury colleagues about how, within the narrow confines of this Financial Services Bill—I can talk about the related but quite distinct issue of the future regulatory framework—we could be more accountable, given that the Bill effectively gives the Government powers to revoke particular narrow areas of what will become, on 1 January, primary legislation, and then asks the regulators to fill in those particular gaps. The Government were keen that the process should be part of an enhanced accountability framework.

As Sheldon has said, within the confines of this Bill, the enhanced accountability framework applies to the updating of the rulebook to take into account the new Basel III provisions and the investment firms regulation, and three new “have regards” regulatory principles, which are set out in the relevant schedule and refer to us having to take regard of relevant standards recommended by the Basel Committee on Banking Supervision. That applies obviously to the PRA. We need to take the likely effect of the rules on the UK’s relative standing as a place for internationally active credit institutions and investment firms to carry on activities. Also, we need to take into account the likely effect of the rules on the ability of firms to continue to provide finance to households and businesses. This is an enhanced accountability framework, and the Bill also obliges us to publish how we have taken into account these “have regards”.

Those measures are within the proposals in the Bill to enhance our accountability publicly. There is the separate issue of the consultation that the Government are currently doing on how the future regulatory framework will look, what the enhanced accountability provisions within that are and how they should apply. I would not want to pre-empt that consultation but, clearly, the Government are interested and are trying to look at ways of keeping our feet to the fire, and that is absolutely appropriate.

Q My questions are for the FCA. In terms of the impact of the Bill on the end consumer and the end user of financial services, what impact assessment has the FCA done on the potential regulatory cost and how that might affect the consumer? We hear a lot from financial services firms about the cost to them, not only of regulations, but also of the fees that they have to pay to the FCA. What business plan and cost assessment has the FCA done on the impact that the measures and the responsibilities in the Bill will have on the industry, which will then be passed on to the consumer, or will it be a reduction in cost?

Sheldon Mills: We have not undertaken a cost-benefit assessment of the Bill. That would be a matter for the Government. We have considered, as we discussed in response to earlier questions, the impact on resources within the FCA. Our current intention is to keep that within our current financial envelope, so we are not predicting at this stage an increase in fees or levies to take account of the Bill. That is all I can say at this stage.

In terms of the impact of the Bill and the onshored legislation, when we review the regulations on the investment firms prudential regime and so on, we will do a cost-benefit analysis of the rules and regulations that we are proposing at that stage. At this stage, we will not be doing that—that would be a matter for the Government, not for us.

In terms of the impact on consumers more generally, as I said, there are aspects of the Bill that are very consumer enhancing. I do not think they came up very much on Second Reading, but the provisions in relation to breathing space will be very helpful for consumers facing issues around statutory debts, which we are interested in as a financial regulator. The issues in relation to the register will be extremely helpful for us in terms of tackling fraud and scams. There are many elements of the Bill that are helpful. It is complicated, but the investment firms prudential regime is also consumer enhancing; currently, the capital requirements facing investment firms are those for the systemically important banks, and they are not fit for purpose. This regime will help us have a capital and prudential regime that is fit for investment firms. So there are a whole host of aspects of the Bill that are supportive of consumer interests and will not necessarily increase costs in a way that will be inimical to their interests.

Q The FCA has not prepared anything specific demonstrating that—it is a hunch based on what is in the Bill—but has it done any cost-benefit analysis of the breathing space measures that you mentioned?

Sheldon Mills: All these measures are Government proposals, so the cost-benefit analysis that is required will be carried out by the Government and not by us. Once the Bill has been passed, in whatever form—we are bringing forward rules and regulations—we will undertake a cost-benefit analysis. I am giving an indicative view, as opposed to one based on a cost-benefit analysis that we are not required to carry out at this stage.

Q I should like to explore what you have said, particularly about how the Bill will benefit consumers—after all, we are all concerned about the regulation of financial services markets. You set out your interest in the debt respite scheme. We all agree that that is very welcome, but debt prevention is an ultimate aim. How do all three of you think that this way of regulation will help businesses and households with debt prevention?

Sheldon Mills: It is a broader question than the Bill, but I will answer by giving our approach to debt.

As a regulator, our approach is not to have a policy on whether people should be able to access credit, but we are concerned about the impact on people of firms providing credit. We want firms to be able to provide credit in a way that treats individuals fairly, takes account of their needs and circumstances and, in particular, supports vulnerable customers if they are in debt.

We work closely with debt charities. Some of the issues that we are seeing, which we all face and of which the FCA is cognisant, include the accumulation of debt among certain parts of the population, which is why it is important that rules and processes are in place to support people with debt management and why a breathing space policy forms an important part of that. I think that answers your question, but you might have more specific questions.

Q I do, but I should like to hear about one of the roles that the FCA has tacked on to the Financial Services Act 2012—investigating regulatory failure. The Bill is about how we address that regulatory regime and the things to which you have regard under that regime. Your colleagues might have a view on whether explicitly having regard to whether a product or a firm is likely to cause debt—unsustainable, unaffordable debt—should be built into the new regulatory regime, given some of the investigations that have, or have not, taken place over the past couple of years.

Sheldon Mills: I think it is for Government to decide whether we should have that “have regard” regime, but there are current rules that firms should take account of the needs of customers. If customers are clearly displaying signals that they are taking on debt that is not affordable—and, in that sense, is not sustainable—firms should have in place mechanisms to ensure that they do not provide further credit or loans to them. There are rules in place on unaffordable lending.

It is for Government to decide whether we have “have regards”, but I do not think that we necessarily need them. I agree that there are issues with debt throughout society that we need to tackle, but I believe we have the right rules in place to ensure that firms make appropriate lending decisions.

Q Perhaps I can come at that question from another angle, because the FCA has been performing this role for several years now. Are there any examples of where the Financial Ombudsman Service has stepped in? I am thinking particularly of the high-cost credit industry, where a lack of proactive regulation in the past could be addressed by having stronger, robust, and clearer direction from us that we wish to see the FCA intervene to protect consumers from unaffordable debt, and to have regard to firms that may be promoting unaffordable debt.

Sheldon Mills: You will have seen that we have done a significant amount of work in relation to high-cost credit and unaffordable lending. We have put caps in relation to forms of high-cost credit; we have tackled payday loan operators; we have a business priority that relates to consumer credit; we have introduced a review, which our former interim CEO, Chris Woolard, is undertaking in relation to aspects of unsecured consumer credit. We are extremely proactive in this area, and the overall system—in terms of the regulatory system—works well. The fact that consumers are able to go to the Financial Ombudsman Service, where they have had certain issues and the service is therefore enabled to give redress to those customers, is an important part of the system. However, I would not want you to think that that we are not proactively seeking to tackle the issues in this area.

Q A final question to you and colleagues. With that in mind, in moments where there has not been as strong an intervention and early in the process of new products coming to the UK, could you tell us a little bit about what you see coming ahead? We are all very aware of FinTech coming to these shores, and you will be dealing with an awful lot of legislation, as my colleagues pointed out, that you will be onshoring. When you do your horizon scanning—this is a question to all three witnesses—are there any particular products or markets that we should be aware of when thinking about how this legislation will be applied in the coming, say, five years?

Sheldon Mills: I will let my colleagues go first, then I will come in.

Edwin Schooling Latter: Let me raise one area where work is under way. FinTech was mentioned, but the area of crypto-assets has been popular in some quarters. That is an example of an area where we have taken a very proactive approach to putting limitations on where those can be marketed to retail investors who may not fully understand the difficulties of valuing those, the risks attached to them, or the possibilities that they would lose all of their money the more speculative end of that product range.

Sheldon Mills: I would agree with Edwin. The main area which we will see in relation not just to financial services, but to any product, is the continued development of digital means both of accessing and of providing products and services. Our approach to that is twofold: one approach is to encourage innovation. These products and services can bring efficiency and lower cost, and they can bring different levels of access for consumers, including vulnerable consumers. However, while doing that, we ensure we are clear on the ethics and consumer protection aspects of these new forms of products and services. Those are some of the areas where we will see future opportunities and challenges within the financial services system.

Q Do you regret, then, not moving more quickly on the buy now, pay later industry, because that is not regulated by the FCA at the moment, yet that is exactly an industry which we all now recognise is causing consumer detriment to people on low incomes?

Sheldon Mills: With respect, I cannot regret not acting on something which I do not regulate. However, what we are doing is looking at that area through the form of this review. As you know, and as is implicit in your question, that does sit outside our specific regulation.

Victoria, I think you were about to say something.

Victoria Saporta: Sorry, I am conscious of the time. I have basically one comment to make in our particular area. I agree very much with Sheldon on digitalisation and with Edwin on crypto. Another particular area that we are looking at—

Order. I am afraid that brings us to the end of the time allocated for this session. I thank our witnesses on behalf of the Committee for their evidence.

Examination of Witnesses

Simon Hills and Daniel Cichocki gave evidence.

We will now hear from Simon Hills and Daniel Cichocki from UK Finance, who are joining the sitting remotely. Can you introduce yourselves for the record?

Daniel Cichocki: Good morning, Chair. I am Daniel Cichocki. I am the London inter-bank offered rate transition director at UK Finance and, as such, am focused on the benchmark elements of the Bill.

Simon Hills: Good morning. I am Simon Hills. I lead the prudential policy work at UK Finance, so my particular area of expertise is the prudential regulation of banks.

I remind colleagues that we have until 10.55 am for this session, so it is much shorter than the previous one. I hope that colleagues will be mindful of that.

Q Simon, I want to focus on your responsibilities with respect to the Basel rules and the expertise of the regulator. Can you set out the competence that you have within your organisation to do this, and could you comment on the suitability of the UK to implement its own approach to the Basel framework, perhaps with reference to what happens in other jurisdictions to give the Committee a sense of how we fit alongside international comparisons?

Simon Hills: It is important to recognise that the Prudential Regulation Authority has been a strong supporter of Basel 3.1. It has been very influential in the way it was finalised, and I think that it is committed to implementing the Basel 3.1 framework in an internationally aligned way. That is important for our members, particularly if they are internationally active, because they want a coherent and harmonised regime across the world. If you are a UK bank operating in the UK, North America, Europe and Asia, you want one version of Basel 3.1 and you want it to be implemented in a coherent way. If not, and if there are different approaches to regulatory reporting, to how credit risk is assessed and to liquidity requirements, you have to implement a number of different versions of Basel 3.1, which will be more difficult.

In terms of UK Finance’s competence in, if you like, holding the PRA to account, we have a wide range of members for whom Basel 3.1 implementation is very important. I am pleased to say that I have good working relationships with Vicky and her colleagues at the PRA.

Q I am conscious of time, so I will allow others to come in, but I wish to ask Daniel about the work that you are doing on LIBOR. This is an incredibly complex area with lots of challenges, and the key issue is around the wind-down of the benchmark and the move to deal with the tough legacy contracts. Could you comment on what the Bill achieves with respect to that, whether there are any alternatives to it, and what the implications would be if we did not do what we are planning to do in the Bill?

Daniel Cichocki: Certainly, the issues with the lack of sustainability of the LIBOR benchmark are very well documented, and it is important, as the Financial Stability Board has acknowledged at an international level, that we move away from LIBOR on a smooth and timely basis. It is also very important, certainly from an industry perspective, that as a result of moving away from LIBOR on to more robust reference rates, customers who have contracts referencing LIBOR are not inadvertently affected by that transition.

What this Bill seeks to do—and we are very supportive of its provisions—is to make sure there is a safety net in the form of powers being granted to the FCA, to ensure that those contracts that cannot be migrated on an active basis before LIBOR ceases have a solution so that the customer has a clear outcome for the contracts beyond LIBOR cessation.

These powers are important because before 2017, and the acknowledgement that LIBOR would cease, many contracts did not have clear, robust terminology setting out what would happen if LIBOR ceased. They may include terminology addressing if LIBOR should be unavailable for a day or two, and that might be the reference point those contracts would take. In that instance, without these powers, we may have seen customers falling back on to the last available LIBOR rate to the point of cessation, essentially becoming a fixed-term contract. We may have seen customers falling back on to cost of funds, which would create very diverse and disadvantageous outcomes for them. Equally, we would have seen fairly significant levels of contractual disputes beyond the end of 2021. These powers, in preventing all those negative outcomes for both customers and market integrity, are absolutely critical as part of the transition.

Q Thank you both for coming along this morning, virtually. Could I begin with you, Simon, and ask about onshoring and divergence? The Bill onshores significant bodies of EU legislation and directives. From the point of view of UK Finance, where would you like to see the Government and regulators diverge from that body of EU law in the future?

Simon Hills: I am not sure that we would want the UK Government and authorities to diverge significantly, if at all, from other standards. We are not sure yet what Europe will do in respect of Basel 3.1. We do not expect draft legislation from the Commission until around Easter next year. That said, from the way in which the Commission has implemented previous iterations of Basel, I would expect it to stick quite closely to that Basel 3.1 framework, for the same reasons I have mentioned: international coherence and harmonisation, and easing the comparison of different banks and jurisdictions.

Q We have had the Chancellor’s announcement on equivalence from the UK end of the telescope last week. Do you think there is a relationship between the degree of divergence we pursue in the future from the EU rulebook and equivalence decisions from the other end of the telescope, that is, by the EU or EU member states to UK companies selling into their markets?

Simon Hill: Yes, I think there is likely to be work to be done there. Of course, one of the accountabilities the Financial Services Bill gives the PRA is to take financial services equivalence and international competitiveness into account, and, importantly, the banks’ ability to continue to provide finance to UK businesses and consumers on a sustainable basis. I think we will all want to understand how different regulators around the world—not just in Europe—look at the PRA’s implementation when it gets down to those technical standards, which is why it is important for both Parliament and UK Finance to make sure there is no inappropriate deviation from international standards. I can assure you that if UK Finance members see that there is, we will speak up about it.

Q May I ask you, Daniel, a question about LIBOR to fill in a small gap in the knowledge of those of us who have not followed every twist and turn of this? The measure became a scandal because it was being manipulated for the benefit of the traders who were submitting information. That information was based sometimes not on actual trades but on their estimates of what trades would cost. What changes have been made to the administration of LIBOR in recent years to stop those things?

Daniel Cichocki: It is absolutely right to acknowledge the issues with conduct around LIBOR in the past and the reforms that have taken place to make sure that those things are prevented. That includes the FCA oversight of the LIBOR benchmark, the introduction of the benchmark regulations at a European Union level, and transcribed into UK law, and broader reforms since the financial crisis, including the senior managers regime to ensure that the issues with LIBOR are not repeated. As the Committee will be aware, the fundamental reason why it is important to move away from LIBOR is that the underlying markets on which the rate is based have largely dried up. Therefore it is right to move us on to robust reference rates based on markets that are highly liquid and not reliant on expert judgment.

Simon Hills: It is important to remember that individuals in banks who are responsible for benchmark submission and administration are classified as so-called certified persons under the senior manager certification regime and they have to be certified as fit and proper every year by their firm. If they are not certified as fit and proper, they will lose their job and will find it very difficult to find a role in financial services again.

Q One more for you, Daniel. As things stand with LIBOR today, is it still possible for traders to submit information based on their estimates of what trades would cost rather than actual trades that have taken place?

Daniel Cichocki: LIBOR as it is formed today includes both elements of actual transactions and expert judgments of firms. These expert judgments, as a result of the issues in the past, are subject to those very high levels of governance control that I have talked about being introduced as a result of the benchmark regulation—absolutely appropriate as a result of the issues with LIBOR in the past. The underlying reason why we need to move away from it is that we want to be internationally on rates that do not require that expert judgment.

Q Are there any further measures that you expected to see, or would have liked to see, in the Bill?

Simon Hills: Shall I go first and talk about the prudential regulation of banks? The Financial Services Bill achieves what it sets out to do: to implement a coherent version of Basel 3.1 in the UK. It is quite important to our members that we do Basel 3.1 the same in all the major financial centres in which firms operate. If a firm that is regulated by the UK operates in a different host country and the host country says, “That UK firm operating on our patch is supervised by the PRA and the PRA has introduced a watered-down version of Basel 3.1”, then they would add extra supervisory levels to bring it back up to the Basel 3.1 standard. That leads to a bifurcated approach with different regulatory standards in different countries, which makes life very difficult. A coherent approach, which is what the Bill seeks to achieve, is what we and our members want.

Q So when the EU makes its regulations, and it goes ahead with what is in its interests, essentially you would want us to mirror the EU wherever possible?

Simon Hills: We would not want to see wholesale deviation from Basel 3.1. Of course, Europe itself may choose to deviate from Basel 3.1, and that is a matter for its legislative process. I would not want to see the UK deviate from the agreed framework for Basel 3.1.

Q Are there any international competitors that you think have struck the correct balance with a regulation that you would want to see us take on here?

Simon Hills: I think there is a difference of approach in some G7 countries. Some perhaps apply a graduated or targeted approach to regulation. Canada, Japan and the US apply different iterations of the Basel standards to different sorts of firm. A large, internationally active bank would face the full gamut of Basel 3.1 in all its glorious granularity—in my view, that is right and proper—but a smaller, less systemic bank might face a different approach.

Of course, Basel 3.1 is applied by Europe—and that is what we are bound by at the moment—to all banks, not just those internationally active banks that are the target of Basel 3.1. The EU took the decision back, I think, in 1992—before even I got involved in this space—to apply the Basel III framework to all banks, from the smallest local Sparkasse in Germany to the largest, internationally-active bank.

I feel we must ask ourselves whether that is right; should there not be a risk-adjusted approach to safety and soundness? A sub-regional building society operating in the UK, for instance, has a vanishingly small probability of bringing the whole financial services system crashing down if it fails. Is it right to ask that firm to comply with all aspects of Basel 3.1? Maybe not.

Q That is useful, thank you. Can you give any particular examples of how far you think divergence could go before you risk withdrawing equivalence?

Simon Hills: We don’t know yet how Europe will determine equivalence. I hope that our colleagues in the EU will look at our implementation of Basel 3.1, compare it with their own implementation and ask themselves the question, “Does this achieve what Basel 3.1 is seeking to achieve?” If they do, I hope there will be a form of equivalence—however we term it in the future—determination.

Q I was wondering, Daniel, whether there are any dangers in the move away from LIBOR. Obviously, we know about the dangers of staying with it, but are there things that keep you awake at night about the transition?

Daniel Cichocki: As the Committee can imagine, from an industry perspective, we are absolutely focused on ensuring that the transition away from LIBOR—which is the right thing to do—is done in a way that treats customers fairly and consistently.

There is an awful lot of work being done at both an international and domestic level to agree standardised approaches to transition, where possible, but also to ensure that there are clear expectations from our regulators—here in the UK, it is the Financial Conduct Authority—about how that transition should be done.

Lots of work has been done and lots of work remains to be done, and, as you can imagine, we are speaking very frequently to the regulators here in the UK, and also working through the national working group to ensure that customers are transitioned on a fair and transparent basis.

Q Obviously, LIBOR is a benchmark. Any benchmark is a sign of some of the profit that can be made on a transaction. If there are differences of approach or changes, there are areas where customers can be fleeced or left out of pocket without, in some ways, even realising it because of the very technical nature of these kinds of transactions. To what extent do you have a consumer protection voice helping you with these changes? Do you think that the protections for consumers who may be disadvantaged during this transition are strong enough?

Daniel Cichocki: We are one voice from the perspective of the banking and finance industries, but it is important also to recognise that, within the overall national working group in the UK, there are voices that, rightly and properly, represent the end users of LIBOR, be they corporates themselves or the representatives of corporates. Although those voices are important in our national transition working group, it is equally important to address the concern that you articulate, which is absolutely right: the guidance that the FCA has provided to all firms that are transitioning their customers that the process should not be used to move customers on to inferior terms or rates that would be expected to be higher than LIBOR would have been. After speaking to our members in the industry, that message from the UK conduct authority has been heard loudly and clearly. All of us who are focused on moving away from LIBOR are acutely aware of the history of the benchmark and committed to ensuring that we move away from it in the right way and in a manner that treats customers fairly.

Q Obviously we will be keeping an eye on that as it happens.

Mr Hills, the industry has been lobbying the Government, Parliament and regulators to design regulations that will make UK firms more internationally competitive. Indeed, all of us in the room would share the aim of protecting our financial services industry. Do you think that the Bill achieves that?

Simon Hills: Yes, I think it does. The important thing is that the Bill achieves that by setting expectations of how the Basel 3.1 framework is implemented in an internationally coherent way. The PRA has to think about not only international competitiveness, but financial services equivalence, and the Bill achieves that.

Q So you are not too worried about divergence because you do not think there will be very much of it.

Simon Hills: I do not think that it is in the interests of the UK financial services industry and banks to introduce a divergent regime. We are talking about the importance of the City, and we want people to bring their money to the City for the right reasons, not the wrong ones. UK Finance members are certain that it is in no one’s interest to diverge from internationally agreed frameworks because that creates the risk that we bring in the wrong sort of people.

If there are no further questions, I thank the witnesses for their evidence.

Examination of Witness

Paul Richards gave evidence.

Q We will now hear from Paul Richards from the International Capital Market Association, who is here in person. I remind colleagues that we have until 11.25 am for this session. Paul, would you please introduce yourself for the record?

Paul Richards: I am Paul Richards. I am a managing director at ICMA, which is the international bond market association. I am here to give evidence on the transition from LIBOR. I am involved in the transition from LIBOR to SONIA—the sterling overnight index average—because I chair the bond market sub-group, which consists of issuers, banks, investors and four major law firms. We work closely with the FCA and the Bank of England. If you will permit me, I shall make a short introductory statement.

I hope to be able to give you a bond market perspective on the Bill but, for the market as a whole, we are all trying to move away from LIBOR to risk-free rates while minimising the risk of market disruption and litigation. The Bill is welcome and very important for the bond market because it will give the FCA extra powers to deal with tough legacy LIBOR contracts and wind them down in an orderly manner.

There are three main points on which it would be very helpful if the Committee was willing to strengthen the Bill. First, the Bill needs to provide continuity of contract between the current definition of LIBOR and the new definition of LIBOR for legacy transactions once LIBOR is prohibited for new transactions. Legacy contracts referencing LIBOR under the current method of defining LIBOR need to be read as references to LIBOR under the new definition as determined by the FCA, so that there will be continuity there—this is sometimes called a deeming provision. This will reinforce the message that LIBOR will continue to appear on the same screen page, and it should also help to remove uncertainty and minimise the risk of a legal challenge on the basis that the current definition of LIBOR and the new definition are not the same and one party or another is worse off.

This is particularly a risk in the bond market in cases where LIBOR is specifically defined in legacy bond contracts in terms of its current definition. Continuity of contract or deeming provision like this was used when the euro was launched in 1999, and it worked well. Clearly, it would need to be drafted with the help of the Treasury and it would probably need to be drafted in terms of an article 23A benchmark in the way that the Bill is looked at. That is the first point.

The second and related point on which I hope the Committee will help is that the provision of the continuity of contract under the Bill needs to be accompanied by a safe harbour against the risk of litigation. This would provide that the parties to contracts would not be able to sue each other as a result of the change in the definition of LIBOR, and it would allow them to make conforming changes to bond market documentation.

The third point on which I hope the Committee will help is that the safe harbour and contract continuity provisions in the Bill need to be drawn as widely as possible, to protect any entity that uses the new definition of LIBOR for legacy transactions in place of the current definition of LIBOR. This would need to cover not just supervised entities in the Bill, but non-supervised entities, as the range of institutions involved in the international bond market is very wide.

Finally, I would like to draw your attention to two other points where there are significant legal risks under the Bill. One is that there needs to be equal treatment between legacy LIBOR bonds when the new definition of LIBOR takes over from the current definition, so that some legacy bonds are not preferred to others and there is no discrimination between them; otherwise, legal problems may arise. This would be a matter for the FCA under the Bill.

The other point is that there needs to be alignment internationally between the Bill and the similar legislation that is being introduced in the US and the EU, so that the rate used for legacy dollar bonds under English law and legacy dollar bonds under New York law is the same. Thank you, Mr Davies. I would be very happy to do my best to answer your questions.

Q Thank you, Paul. The Committee will be very aware of the breadth and depth of your experience in this domain. You have gone into three quite specific issues. Could you set out, at a higher level, the LIBOR challenges that you think this Bill does not deal with, and where you think it is going to be defective? Obviously, a lot of work has been done with regulators to get to this point and we have had evidence previously about the nature of this change and the more general desire for it. Perhaps you could contextualise the specific issues you talked about with respect to continuity and the other matters you raised.

Paul Richards: Thank you, Minister. First, as I mentioned, we welcome the Bill. The only question is: can it be improved to minimise disruption and litigation? The essential point is that, in the bond market, we have moved to SONIA as the risk-free rate, and new issues have been in SONIA for over two years now. That is the first step in the process.

The second step in the process is that we actively convert as many bonds as we can from legacy LIBOR to SONIA. We are making some progress there, but the third point is that we will still have tough legacy contracts that cannot be converted, either because they are too difficult to convert or because there are too many to convert by the end of 2021. In those circumstances, the provisions in the Bill are extremely helpful, because they provide for an orderly wind-down of tough legacy contracts. From that perspective, the Bill is very helpful. My questions relate to when the current definition of LIBOR is replaced by a new definition. Will there be contract continuity and a safe harbour to minimise the risk of disruption in the market and litigation?

Q Thank you for appearing before us, Mr Richards. Can you set out for us, in as simple terms as possible, the difference between how prices are set under SONIA and how they were traditionally set under LIBOR?

Paul Richards: LIBOR was set by a panel of banks. As the market no longer uses the underlying information that it used to use for banks, it has now changed, or will change, with the admission of SONIA, to a different definition. SONIA is essentially an overnight rate. It is a robust rate, because it is used widely in the market, whereas LIBOR is no longer used in the market as it was 30 or 40 years ago. That is one difference. A second difference is that LIBOR is a term rate—it is expressed over one month, three months or six months—whereas the liquidity in the SONIA rate is focused on the overnight market, which is therefore a much more representative selection and does not require expert judgment, unlike LIBOR.

A third point, perhaps, is that it is not just a UK proposal to replace LIBOR with risk-free rates in SONIA. A similar change is taking place globally. In the US, USD LIBOR is being replaced by the secured overnight financing rate, which has a similar sort of construction, and the situation is similar around the world. Those are the main reasons for the change.

Q Can I just focus on the point about expert judgments? That is quite a polite term for some of things that happened with LIBOR. They were not really expert judgments in some cases, were they? They were effectively deals between different traders to put in submissions at particular prices, to the individual advantage of the traders, based on the trades that they were doing. To what degree is SONIA insulated against that kind of manipulation?

Paul Richards: As you say, LIBOR depended on expert judgment in many cases, because the market was no longer using LIBOR in the way it had been constructed. With SONIA, it is a much more liquid market and there is no need for expert judgment at all. That is one of the reasons why it is being preferred as the replacement for sterling LIBOR, and similarly around the world in other currencies.

Q Can I take you back to the second point you made about the danger of litigation? We might all agree that moving away from LIBOR is a good thing, partly because we do not want to see a benchmark manipulated in the way that LIBOR was. However, as a consumer, I might have agreed trades or contracts based on a particular price set by LIBOR. What is the situation with potential litigation from a consumer who says, “You’re telling me that SONIA is a more honest benchmark because it’s based on actual trades and actual prices in market transactions, but now I’m being told that instead of paying x%, I will be paying x% plus y%”? What does the Bill say about that kind of situation at the moment, and what would you like it to say?

Paul Richards: A significant difference between LIBOR and SONIA is what is called the credit adjustment spread, which takes account of the difference between LIBOR and SONIA. In the consumer market, the proposals are, at a general level, to treat customers fairly. In the wholesale market, the aim is to have continuity of contracts between the old definition of LIBOR and the new definition that will be used for legacy transactions. This will be determined under the Bill by the FCA. It is not specified how it will determine it. There are market assumptions about that, but it is not decided yet how they will determine it. It is thought that it will consult the market before making a decision, but the end result will be that the rate that arises under the new definition of LIBOR will take over from the old definition of LIBOR, and there will be continuity of contracts between them. If that is emphasised in the Bill, that will give legal protection for all those involved, which is one of the main reasons for providing it. It needs to be accompanied by a safe harbour provision, which would protect all the different market participants involved. I would like to be able to tell you that this will eliminate the risk of litigation, but I cannot tell you that. What I can tell you is that it will minimise the risk of disruption and litigation that might otherwise occur because of the huge volume and value of transactions.

Q So how would this safe harbour provision that you are advancing work? Why is it needed beyond the FCA acting to ensure continuity for legacy contracts, as is I think is already envisaged in the Bill?

Paul Richards: They are both needed, I think. The FCA’s judgment about treating customers fairly relates primarily to consumers. The protection that a safe harbour would provide, so that parties would not sue each other as a result of the change from the old definition to the new definition, is essentially designed for the international markets. So they are both needed. The FCA is already making statements about treating customers fairly, but the Bill should include both the continuity of contracts provision and a safe harbour protection to accompany that. The broader the safe harbour protection is drafted in the Bill—the Treasury, I am sure, could help on this—the better and more effective it will be in minimising disruption and the risk of litigation.

Q Have you already made these arguments to the Treasury only to be rebuffed, or is this the first chance you have had to make them because the Bill was published only a few weeks ago?

Paul Richards: These are points that law firms that work in the City are acutely aware of from their previous experience. The law firms have been looking at what needs to be done to ensure that there is continuity of contract and a safe harbour protection. Of course, I hope that the Treasury will take account of that, as your Committee will take account of it before reaching a final conclusion. We should do everything we can to minimise the risk of market disruption and litigation, within the context of the overriding point, which is that we do need to move away from LIBOR to risk-free rates. That is, of course, what we have done, with new issues in the bond markets and with the conversion of legacy contracts from LIBOR to SONIA. We have a tough legacy problem for the future, which needs to be dealt with. The Bill helps to deal with that.

Q I have some follow-up questions. You mentioned how the FCA will determine these things. Do you feel that that needs to be set out quite explicitly in the Bill—how the FCA will make those determinations around benchmarking and LIBOR contracts?

Paul Richards: Sorry, I did not quite catch the last point.

You mentioned the uncertainty of how the FCA makes decisions around LIBOR contracts and benchmarking. Do you feel that needs to be set out more explicitly in the Bill so that you can know what to anticipate?

Paul Richards: I think it would be helpful for the Bill, specifically, to make provision for continuity of contracts—the deeming provision—and also for protection against litigation through a safe harbour, to be drafted as broadly as possible. That is not because the move away from LIBOR is not something that we should do—on the contrary, it is something we must do and we have made great progress in doing it already—but because, to deal with the tough legacy contracts in the Bill, we have to make sure that the new definition and the old definition are treated in the market as the same.

Q Okay, that is useful. I have been looking through some of the lawyers’ statements and I would be grateful if you could clarify something for me, as this is not an area of expertise for me but it is for you. You mentioned article 23A benchmarks, and something else I read mentioned the types of contracts that would fall within the article 23C exceptions. Can you tell me a wee bit more about what that would mean?

Paul Richards: I think that we are talking about 23A benchmarks in general in the Bill. What I have been talking about is specifically relevant to LIBOR. When the Treasury looks, as I hope it will, at whether anything is needed to advise you to strengthen the Bill, it might need to draft that in terms of benchmarks in general and not just LIBOR in particular.

Q Thank you. You talked about the costs of litigation and the impact that that would have. What is the extent of these legacy LIBOR contracts—their value, their number and the cost that that litigation might entail?

Paul Richards: In the bond markets, we have to convert legacy contracts bond by bond, so it is the number of the bonds that is important, not just their value. In the sterling bond market, we think we have about 520 different legacy bond contracts, or 780 if you include the different tranches of securitisations. We have converted just over 20 of those so far in the market, but we know that we will not be able to convert all of them because some are too difficult to convert and there are too many to convert.

The FCA has an international role and English law applies in dollars as well as in sterling, so we need to take account of dollar legacy bond contracts under English law. In terms of number, we understand that there are more than 3,000 of those. In terms of value in bonds, we think we have around 110 billion in sterling outstanding.

The critical point for us in the bond market is that we need to convert them bond by bond. You will notice that that is different from the derivatives market, where there is a multilateral protocol that enables the market to do everything at once, which is currently in course. We cannot do that in the bond market.

Q And the potential cost of litigation?

Paul Richards: It is impossible to estimate the cost of litigation. The great thing is to avoid it wherever you can, and the Bill presents an opportunity to minimise the risk of it.

Q Do the provisions of continuity and safe harbour apply in America as it converts away from LIBOR? Are the things that you are asking the Committee to consider putting in the Bill happening in other jurisdictions?

Paul Richards: In the US, the alternative reference rates committee, which is the group equivalent to the sterling risk-free reference rates working group, has proposed legislation that is not identical to the UK’s but has the same effect, and so the concepts of continuity of contract and protection through safe harbours in the UK context will be recognised, we think, internationally as well.

Of course, we are not dealing here just with the proposals under New York law. We are having to look more generally. The EU has a proposal for legislation as well. It is important to recognise that the FCA has an international role, because the FCA is the regulator of the administrator of LIBOR, so what the FCA, through this Committee, decides in the UK will have an international impact.

Q Okay. You did not answer the question from my right hon. Friend the Member for Wolverhampton South East earlier about whether you had asked the Government for this and they had said, “No, the FCA can do it; we’re not putting it on the face of the Bill,” and so you have come here to make the argument again, or whether it is work that you are in the process of doing and you have got to the stage where you want to make these proposals, as the Bill has arrived. Have the Government considered this and said no, or is it something that you have just proposed?

Paul Richards: No, I hope that the Government will consider this and say yes. I hope that that will happen, but it needs to be looked at in the context of the Bill as a great help to the market. It needs to be looked at in this context: can anything be done to strengthen the wholesale market?

Q I understand your point about how those things would calm things down in the changeover, but why do you not trust the FCA to do this? Why does it have to be in the Bill?

Paul Richards: The FCA has great powers under the Bill and I am sure that it will exercise them wisely, but we are dealing here with law internationally, and anything that can be done to strengthen that—and the Bill has the capacity to do that—will be helpful. I hope that it will also be helpful to the FCA.

If there are no further questions from Members, I thank the witness for his evidence. That brings us to the end of our morning sitting. The Committee will meet again at 2 pm in the same room to take further evidence.

Ordered, That further consideration be now adjourned. —(David Rutley.)

Adjourned till this day at Two o’clock.

Financial Services Bill (Second sitting)

The Committee consisted of the following Members:

Chairs: Philip Davies, †Dr Rupa Huq

† Baldwin, Harriett (West Worcestershire) (Con)

† Cates, Miriam (Penistone and Stocksbridge) (Con)

† Creasy, Stella (Walthamstow) (Lab/Co-op)

† Davies, Gareth (Grantham and Stamford) (Con)

† Eagle, Ms Angela (Wallasey) (Lab)

† Flynn, Stephen (Aberdeen South) (SNP)

† Glen, John (Economic Secretary to the Treasury)

† Jones, Andrew (Harrogate and Knaresborough) (Con)

† McFadden, Mr Pat (Wolverhampton South East) (Lab)

† Marson, Julie (Hertford and Stortford) (Con)

† Millar, Robin (Aberconwy) (Con)

† Oppong-Asare, Abena (Erith and Thamesmead) (Lab)

† Richardson, Angela (Guildford) (Con)

† Rutley, David (Lord Commissioner of Her Majestys Treasury)

† Smith, Jeff (Manchester, Withington) (Lab)

† Thewliss, Alison (Glasgow Central) (SNP)

† Williams, Craig (Montgomeryshire) (Con)

Kevin Maddison; Nicholas Taylor, Committee Clerks

† attended the Committee


Chris Cummings, Chief Executive, Investment Association

Emma Reynolds, Managing Director, Public Affairs, Policy and Research, TheCityUK

Catherine McGuinness, Deputy, and Chair of the Policy and Resources Committee, City of London Corporation

Adam Farkas, CEO, Association for Financial Markets in Europe

Constance Usherwood, Prudential Director, Association for Financial Markets in Europe

Gurpreet Manku, Deputy Director General, British Private Equity and Venture Capital Association

Peter Tutton, Head of Policy, StepChange

Public Bill Committee

Tuesday 17 November 2020


[Dr Rupa Huq in the Chair]

Financial Services Bill

The Committee deliberated in private.

Examination of Witness

Chris Cummings gave evidence.

I remind members of the Committee sitting on this side of the room, or in the Public Gallery, to use the standing mikes when posing their questions. Our first witness this afternoon is Chris Cummings from the Investment Association. Mr Cummings, welcome.

Chris Cummings: It is a pleasure to be here. Thank you for your time.

We have until 2.45 for this session. Mr Cummings, can you first of all introduce yourself for the record?

Chris Cummings: Good afternoon. My name is Chris Cummings. I am chief executive of the Investment Association, the representative body for UK-based fund managers, an industry now of some £8.5 trillion pounds, based here in the UK. Our products and services are used by three quarters of UK households, and we are deeply grateful for the opportunity to give evidence to your Bill session this afternoon.

Q57 Chris, it is good to see you. Thank you very much for addressing the Committee. Obviously, the Bill has a large number of measures, some of which will be of more interest to your members than others. I think it would be useful for the Committee if you could set out the significance to consumers of introducing a more proportionate regime for overseas funds to access the UK based on equivalence, and why it is important for consumers to be able to access funds based outside the UK. Perhaps you could tell us what your members feel about that measure and whether you have any reservations about it.

Chris Cummings: Thank you for the opportunity to speak to one of the most central parts of the Bill. May I take a moment to congratulate you and your team on introducing the Bill? It provides much-needed reassurance to my industry, so thank you for that.

The industry is very pleased to see the overseas funds regime introduced as part of the Bill. Around 9,000 funds are currently available to UK investors as a result of the current regime. The reason we feel it is in the interests of UK savers and investors to have access to such a variety of funds is that it brings to the market not only choice but much-needed competition. It means that individual investors have greater choice and an ability to tailor their portfolio in a way that makes sense to them and reflects their risk profile. It is really the foundation of why the UK is the pre-eminent fund centre, not just in Europe, but globally. As the Minister knows, the UK has long enjoyed a reputation for being an attractive centre for fund management. That is built on the ability of UK investors to access an innovative and ever-adapting fund market.

We support this measure in the Bill wholeheartedly. At the moment, as the Minister knows, we manage around 37% of Europe’s assets, which is enabled through measures such as this. It is important for UK savers and investors; having such a variety of funds goes to the heart of having such a sophisticated savings environment in the UK.

It is important to note that if there was a cliff edge—if UK investors were not able to access these funds—that would constrict consumer choice. In trying to replicate something akin to what we have at the moment, we would bring a heavy burden of extra costs on to the industry and greater bureaucracy. It would reduce significantly the number of funds to which UK investors could have access. That is why we believe that the overseas fund regime is material.

It is worth contrasting that with what we see at the moment. In order to help navigate these turbulent waters through the Brexit period, I was delighted that the Government heard our calls to introduce a temporary permissions regime with the Financial Conduct Authority. I am pleased to note that the Bill extends the period from three to five years for that requirement, which is very good. It also allows us to tackle two particular issues wrapped up in the overseas funds regime.

First, there is a review of section 272, which is the current structure by which a fund sponsor or investment management company would seek to have their fund recognised by the FCA—our regulator here in the UK. Section 272 is okay, but it is rather cumbersome. It does not stand up well compared to international comparators. It is a rather lengthy form, which takes a while to complete and gives the FCA a six-month period to look at approving that particular fund.

The proposals in the Bill take us to a completely different level, where the FCA is able to look at fund structures across the piece rather than at each individual fund. We feel that is a big step forward. While section 272 could be reviewed and reformed, there is a different category of opportunity presented by the Bill and that is why our industry is so keen to see the Bill come forward and have the overseas fund regime baked into it as a measure that goes ahead. I will pause there in case there are comments before I move on to comment on equivalence, as you were kind enough to mention.

Q It would probably be worth talking about equivalence. I am keen at this point to get an explanation of the measure for the Committee. I am sure others will want to probe some of the weaknesses or disadvantages that they may perceive.

Chris Cummings: Currently, we enjoy unfettered marketing right across the whole of Europe and the EEA. Post Brexit, naturally, that will come to an end. The way that the regulatory authorities assess whether a particular fund is suitable is to judge the equivalence of the regime of the sponsoring organisation or where the organisation is based. Having that judgment of equivalence has been one of our industry’s clear calls throughout the Brexit process.

We were pleased that the Chancellor took a step forward in recognising and granting equivalence to a limited measure in the House of Commons in his statement last week. We think that was absolutely in the right direction. We have been unstinting in our calls for the European Commission and our European regulator, the European Securities and Markets Authority, to respond to those in kind and move forward so that the equivalence determination could have been made by now and be working. We were sorely disappointed that in June ESMA decided not only not to make a decision on equivalence, but to defer it for a period of time until after the IFR comes into effect.

We feel that that was a missed opportunity to settle the fact that the UK and the EU would be equivalent, which we currently are, having adopted, rather in full vigour, the European rules under which our industry labours. We are hopeful that continuing industry efforts to encourage ESMA and the European Commission to recognise the UK as equivalent will come through, but we are more than pleased with the steps that the Chancellor announced and the comments that are carried forward in the Bill. At the moment, we see that as a first step, but we look forward to greater work being done on this in the months and years ahead.

Q Chris, good afternoon and thanks for giving evidence today. I want to continue to ask about the same things.

The Bill does lots of different things, but I would like to mention two. First, it onshores or incorporates a significant body of EU law through different directives into UK law and gives the governance of those to the UK regulators. Secondly, it sets up this overseas fund regime, by which it grants equivalence on a country-by-country basis. It says that the Treasury will make these equivalence decisions as well. The Chancellor announced the direction of travel last Monday.

How do you see the relationship between these two different parts of the Bill? In theory, in future, having onshored the body of EU law and the directives, we are now at liberty to depart from them if we so choose. Do you see a relationship between that debate around divergence and the degree of divergence that the UK decides to opt for and the equivalence decision that we now need from the rest of the EU?

Chris Cummings: It is worth reflecting on the good work that has been done so far in trying to bring the different regimes together and match equivalence. Looking to the future, there is a strong argument for the UK to continue to bolster its presence in the international standard-setting fora, whether that is the Financial Stability Board, the International Organisation of Securities Commissions, Basel, and so on. Our authorities can continue to play a very strong role in arguing for what our industry would prefer, which is global and international standards.

We continually push for international standards as a global industry because that allows us to operate with reduced bureaucracy and by taking costs out of the organisation so we can really focus on looking after client needs. The UK has an outstanding track record of having its policymakers and regulators taken seriously in those international fora, because of the scale of the market that we have in the UK and the sophistication of our capital market in particular. At that level, if we can push for international standards in an international environment, that reduces some of the potential friction between the EU and the UK or other jurisdictions about where divergence may or may not be happening. That is the first thing we would like to stress—the international nature.

Secondly, something that has become part of the discussion in terms of the future relationship of the UK and the EU, and which our industry thoroughly supports, is a much clearer focus on outcomes and outcome-based regulation. It is noticeable that across the EEA there are different approaches in different European jurisdictions, all of which have been judged equivalent so far. Recognising that different jurisdictions will walk up to the same issue from different directions, yet seeking to achieve the same thing, that is the material part.

The third area I would just point to, if I may, is the depth of relationship between the UK authorities and those across the EU, not just in ESMA, our European regulator, but in the national domestic regulatory authorities. It is still absolutely the case that the UK policy-making apparatus—the UK regulatory bodies—is seen to have considerable expertise to offer. So just because we start in different places, it does not mean that we should not see the UK taking a little leadership and the EU tacking towards us in terms of lessons learned because of the sophistication of the market that we can offer. That was one of the reasons why we in the IA, among many other organisations, through the Brexit process was keen to press for a regulator to regulate a dialogue, which could be technically oriented, focused on bringing market and regulatory understanding to bear and making sure that there was a no-surprises, keeping-markets-open focus through the process that we have been through.

So I do not see equivalence and divergence as axiomatically pulling in different directions. I think what we will undoubtedly see is a period where the definition of equivalence needs to be—we need to have a thoughtful discussion, actually, about the substance of equivalence, moving away from its ephemeral nature and the fact that it can be granted or dismissed within a 30-day notice period. We need to have a much more joined-up and mature discussion about how two major markets can keep on doing business together, particularly in investment management when, as I mentioned earlier, 37% of Europe’s assets are managed here in the UK and when, for certain member states, whether it is the Dutch pensions industry or something else, the quality of investment management conducted here in the UK is seen as a prized asset and something that they want to learn from and continue to enjoy the benefit of.

Q What would be the practical implications for UK-based investment companies— your members—if we stayed where we are now, with the UK having granted equivalence recognition to EU-based companies but not having a reciprocal recognition in return?

Chris Cummings: We have been helping our members prepare for all shades of Brexit outcome over the last four years. Firms have taken the decisions that inevitably they would take, so they have set up extra offices, they have recruited further staff, they have gained the necessary permissions and licences from the national competence authorities. At the moment, even with, perhaps, no deal or a rather thin deal, we are as well prepared for that outcome as it is possible to be. We are giving much more thought to the companies that we invest in—everything from life sciences to technology, to transport and infrastructure, to make sure that those companies are well prepared for the Brexit outcomes, but from our industry’s point of view, recognising the equivalence decisions that have been made today, we are set as fair as any industry can be. I am trying not to over-promise, but suggesting to you that the industry has thought long and hard about potential outcomes, and we are as prepared as we can be for immediate issues.

Q Thanks. Can I slightly switch subjects now, to ask you about packaged retail investment and insurance-based products? The Bill removes the requirement for performance scenarios on PRIIPs. Could you just set out for us, in as simple terms as possible, what is wrong with these performance scenarios, and why there is a desire to remove them? If they are removed, what kind of information should be provided to consumers to help them make as informed an investment choice as people can?

Chris Cummings: Thank you for the question. You have touched on such an important issue for our industry. Through the consultation on PRIIPs we highlighted to EU policy makers and regulators, to our own Financial Conduct Authority and others, the dangers that we saw in the PRIIPs key information document, the PRIIPs KID. Because of how the methodology for PRIIPs was created—taking a rather avant-garde view of the calculation basis—it meant that we could have negative transaction costs. Somebody could trade in the market and it would not only not cost them any money; they could actually lose money by making a trade. That led to some perverse outcomes that were pro-cyclical in the presentation of the information they gave.

Let me give you an example by reflecting back on a new fund that has had just two or three years’ experience. Imagine if, over the course of its life, that fund had had a very strong performance; it had done very well over a three or four year period. Because of the pro-cyclicality of how it had to report performance scenarios—looking to the future—it would have to present a potential investor with scenarios that were entirely positive and that generated levels of return that nobody in the industry would seriously put in front of a retail investor to suggest that this was what they could actually get. They were being forced to do it because of the methodology—the calculation basis—which reflected only that, if you had a few good years of performance, your fund would continue to have good years of performance. Similarly, if your fund had had a few bad years of performance, all you could project was that that bad performance would just continue and continue. That was because of the calculation basis and the way that the rules were written.

As an industry, we kept drawing this issue to the attention of the policy-making community in order to say that, if nothing else, when it comes to disclosure and investment, we have managed to convey the central message that past performance is no guarantee of future performance. Please let us keep on reminding people that past performance is no guarantee of future performance. Sadly, that requirement was taken away. The new calculation basis was introduced, which led to the industry ultimately being forced by its regulator to produce this pro-cyclical—and deeply misleading, in our view—information.

We continued to lobby against the wider introduction of the PRIIPs KID, arguing first that it should not be introduced. Secondly, having lost that argument and seen that that it was introduced only to closed-ended funds, we argued that it should be kept there until the wider implications were seen and not extended into the world of undertakings for the collective investment in transferable securities, because of the scale of UCITS and how many millions of people across the UK and Europe rely on them.

We were genuinely heartened when the Treasury announced that, post Brexit, it would be undertaking a review of the PRIIPs KID. What we hope to see, actually, is a wider-scale review of disclosure, whereby we can start from a different position. Given the technologically advanced world that we are living in today—the greater use of mobile phones, applications and computers, and just understanding that people engage with financial services in a very different way—could we have a rounder discussion about how we can do the thing that we want to do as an industry? We want to have a more engaged client base and to help them understand the different funds that are available and the different risk profiles of those funds, so that they can invest with more confidence, and certainly with more clarity about likely outcomes, rather than having to give false performance scenarios that simply nobody trusted in the industry.

Q I have a couple of questions on equivalence. Equivalence is a bit of a point in time. How far do you feel that the limits of equivalence could go? How much change would happen before that was withdrawn?

Chris Cummings: I think this is a “two ends of the telescope” question, if you pardon the analogy. We tend to think a lot about the UK changing rules and changing approaches, and there are one or two examples of that in the Bill—we have just mentioned PRIIPs KID. There always seems to be a sense that it would be the UK moving away from the central European view of regulation. Of course, that need not be the case. There are a number of regulatory reviews that are timetabled to be considered by the European Commission. There is the alternative investment fund managers directive. There is the review of PRIIPs and so on. Looking two or three years out, there are quite a few opportunities where, actually, the UK may stay still because the rules work in practice and it could be the European Commission that is drifting away from the central scenario that we are in today. That is perhaps almost inevitable, looking 10 years out; there are bound to be changes to the regulatory architecture and the regulatory regime, because the UK will need to modernise its approach to regulation, and not only here and across Europe, but more globally, every economy is thinking about growth-oriented policies as a result of the covid crisis.

That is why, for us, we approach the discussion around equivalence very much from a point of view of saying, “Okay, even if the words on the page change, how can we make sure that the bandwidth is agreed by all sides, so that minor degrees of divergence from equivalence are not the straw that breaks the camel’s back?” That is why I come back to the point I was making just a moment ago about having a regulator to regulate a dialogue—a set, established forum where the FCA and the Prudential Regulation Authority can meet the European Securities and Markets Authority and the European Central Bank and so on, in order that information can be shared, regulatory approaches can be discussed and data can be shared as well, on a “no suprises” policy, so that we can make sure that in the UK and Europe there is a commonality of view, or a commonality of outcome certainly, that is being laboured towards.

I am confident that that would make sure that any discussions on equivalence are structurally much more sound and that we remove the political overlay. Across the industry, there is a concern that equivalence could be used as a political process rather than a regulatory one, which perhaps does not really lead to an outcome that is in the interests of savers and investors.

Every time a new rule is introduced that is different in the European Union from the UK, that adds costs to the industry, because we have to navigate our way through two sets of rules, which might not contradict, but simply do not join up. There are different reporting deadlines for data and so on. That is why we would really like to make sure we move to an outcome-based approach, rather than to a prescriptive, words on the page, exact phraseology, which will simply prove a headache for all.

Q That is a good point about equivalence working on both sides; even though we have got off the bus, we might need to try to catch up with the bus to make sure we are still going in broadly the same direction. In your earlier answer, you mentioned other jurisdictions having more experience, having dealt with this for longer. Are there any particular examples that you feel would be useful, which the UK could learn lessons from?

Chris Cummings: Our friends in Switzerland have been navigating these waters for a period of time. The Investment Association continues to cultivate deeper relationships with our Swiss opposite number to see how it has mapped the terrain. We should make sure that we learn the lessons from how the US and the EU have negotiated when it has come to major directives. We have had a few instances where either the US was trying to apply its rules extraterritorially, into the EU, or where the EU sought to apply its standards and approaches outside the EU.

A really noticeable one was around costs of research. The EU, as part of the MiFID approach, suggested that all research had to be paid for. Investment managers had to pay for research produced by investment banks; in effect, we had to hand over cash. In the US, those payments were illegal. So the two regulatory regimes, both trying to protect consumer interests, found themselves at loggerheads.

Through industry intervention and working very closely with the regulatory authorities in the UK and in Europe and the SEC in the US, we were able to come up with a reasonably uncomfortable but workable compromise that has lasted over three years now, which gets reviewed on an ad hoc basis, but which allows both markets to function, even though the rules do not align. It is that kind of approach that makes you think, well, it works but it is sub-optimal. It feels ephemeral and, from an industry point of view, it is something else that is a distraction from the work of looking after our clients and investors. That is why we think that an openness and transparency around regulatory initiatives and regulatory thinking will help cement relationships into the future.

Q Thank you. That is useful. Is there anything else that you expected to see in the Bill or that you would like to see in the Bill?

Chris Cummings: Actually, I think the Bill is a rather comprehensive document. I would defer to others who may have different opinions, but from the investment management industry, there is a good discussion about the overseas fund regime, which was essential for us; the future of passporting; a review of section 272, which we felt very strongly about; and of course equivalence. If anything, it goes towards what is most essential for our industry, which is protecting the delegation of portfolio management, because our industry in the UK is underpinned by an ability to manage the clients’ investments—yes, from the UK, but across Europe and much more internationally. Ensuring that ability to protect and preserve delegation is simply mission critical for the investment management industry, which is one of the few UK growth success stories that we have seen really expand over the past decade.

Q Thank you. Lastly, are you clear enough on what happens for existing investors if equivalence is withdrawn?

Chris Cummings: This is a matter that we have been working on very closely with our regulator, the FCA, and talking to Treasury about. It is part of the reason why, in firms’ preparations for—forgive the terminology—a no-deal or a hard-deal Brexit, the industry had to do the thing that we exist to do, which is look after our clients. So that has led to more substance, regulatorily speaking, being established in other jurisdictions, particularly in Luxembourg and Ireland, which have traditionally been the places where most investment management back-office work has been done, with the UK, of course, being the centre for fund management and the actual investment aspect of the industry.

Q Thank you, Chair. Thank you for coming to speak to us. There are four audit firms and one of the allegations is that they are very close to each other and cosy with big companies. What are your thoughts on that? In the Bill, it is not very clear that that has been addressed.

Chris Cummings: I am terribly sorry. I was having an IT glitch and I missed your question. I do apologise. Can I ask you please to repeat the question?

Q The four audit firms: there are concerns that they are very cosy with each other and are very close with the big companies. The Bill does not essentially address that kind of issue. It does not seem very clear to me. Do you have any thoughts on how that could be addressed in the Bill to strengthen it so that there is better transparency and the relationship is less cosy?

Chris Cummings: Thank you for the question. We take the very strong view that we, as investors, rely entirely on public information. The quality of information produced by management is pivotal to the investment decisions that we make as investors. That has led to the point now where the investment management industry has a stake in more than a third of the FTSE. We think long and hard about investing in any particular company, listed or unlisted, and that is why we believe that it is the investor who is the client of the audit. A company pays for the audit, but it is the investment community that is the client of the audit. That is why we are so outspoken in pushing for better quality audits, and ensuring that the chairs of the audit committee take their responsibilities towards their investors seriously.

We absolutely worry about too close a relationship between an auditor and the company that they are auditing. That is why we feel that audits should be reviewed and we are constantly striving to have a more competitive ecosystem in the audit world, so you raise a very good point. If I may, I will offer to review that section of the Bill in more detail, and if we see anything that strikes us as being too weak or in need of strengthening, I will write to you with our proposals on that very quickly.

Q I want to follow up on that, because I recently read your comments about a new audit regulator in the Financial Times. The proposals gave me the impression that you felt that it would be able to ensure better reporting, and essentially hold the governance authority accountable to Parliament. Are you able to explain further about that?

Chris Cummings: Indeed. The audit profession has been through three major reviews recently. We entirely support the proposals to bring ARGA into existence. The work the FRC has been doing to prepare for the transition to ARGA has been commendable, but we need to go one step further and actually encourage policy makers to ensure that ARGA is brought into being as quickly as possible. Personally, I have been impressed by the new head of the FRC’s ability to convene and cajole the audit companies to exercise some soft power, to encourage them to improve the quality of audit. Still, it is not the same as having that statutorily recognised independent regulator, and we encourage this Committee—and other parliamentarians —to push for the establishment of ARGA as soon as possible.

I call Gareth Davies. Gareth, I think you will have to move to the microphone over there.

Q First, Mr Cummings, thank you for your comments about the extended permissions and the overseas regime, which I would agree with. However, can I specifically ask about these 9,000 funds? My understanding is that around 75% of all EU-domiciled funds are a SICAV vehicle, and I have two questions on that. First, what is your assessment of the demand level from UK investors for the SICAV vehicle, given that typically, historically, they have been much more expensive than the UK-domiciled equivalent? Secondly, can you explain more about the complementary nature of these funds to our market, specifically as relates to money market funds?

Chris Cummings: You are right in saying around 75% are UCITS. UCITS have become a global brand. It is a high watermark, at least currently, in an investor-centric investment vehicle, and rightly recognised by jurisdictions across Europe and internationally. In thinking about how the UK develops its own UK fund regime, which is some work that the IA has put forward to the Treasury and the FCA, we have taken the UCITS regime as our benchmark to think about how it can be expanded upon; how can it be modernised given the experience with UCITS over the last few years.

One of the core issues that the industry takes very seriously is better governance of funds. That is one of the reasons why we supported our regulator, the Financial Conduct Authority, in stipulating that, at fund level—not at company level—there must be an independent, non-executive director who asks the big questions about governance of the fund, and ensures that there is a clear value for money assessment at least annually, to drive down costs for investors and to ensure that investors are getting a better deal out of those funds. In terms of modernisation, we think that a great deal is already happening in the industry, with more to come.

Although money market funds are used by some retail investors, they are seen more as a capital markets instrument. Given their brevity, they tend to attract a lot of overnight money. Their particular structures are perhaps for more sophisticated professional and institutional investors. They are a useful counter, but really for us UCITS are the gold standard at the moment. We are naturally keen to extend the UCITS regime, especially post Brexit.

That is why we brought forward our own proposals for a long-term asset fund, which we think will not only modernise the UK fund regime but draw together some of the more interesting parts from other fund regimes. It has the benefits of an open-ended fund, and some of the advantages of a closed-ended fund, with an extra layer of governance. It will allow UK savers and investors, institutional as well as retail, to invest more in infrastructure, taking a longer-term view, and in what traditionally have been higher-growth companies—technology companies, life sciences, biotech and so on—taking a much longer-term perspective. We think that the long-term asset fund will be a great complement to the existing UK and European fund family.

Does anyone else on the Committee wish to catch my eye in the remaining four minutes? In that case, thank you very much, Mr Cummings, for your evidence.

Examination of Witnesses

Emma Reynolds and Catherine McGuinness gave evidence.

We move on to our second panel of the afternoon, and the fifth in total. We have Emma Reynolds, formerly of this parish, now at TheCityUK, and Catherine McGuinness from the City of London Corporation. We have until 3.30 pm for this panel, and I will pull the plug if it goes over. Emma and Catherine, could you first introduce yourselves for the record, please?

Emma Reynolds: I am Emma Reynolds from TheCityUK. We represent the UK-based financial and related professional services industry, which employs 2.3 million people, two thirds of whom are based outside London. We are the largest taxpayer, biggest net exporting industry and contribute over 10% of the UK’s total economic output.

Catherine McGuinness: I am Catherine McGuinness, policy chair at the City of London Corporation. We are the local authority for the square mile. In addition, we work very closely with the UK’s financial and professional services sector, which carries our name even though, as Emma says, it is a UK-wide sector.

Q Emma, I will come to you first. Obviously, TheCityUK represents, as you said, a range of institutions and firms. It would be helpful for the Committee if you could set the context by summarising the industry’s reaction to the Bill, and try to give us the widest possible view of the industry’s reaction to the measures in it and what the consequences would be if we did not pass it. Afterwards, I will come to Catherine separately.

Emma Reynolds: Thank you, Mr Glen. We support the measures in the Bill, and both the overarching and the stated objectives. It is absolutely right that the UK Government are onshoring the regulations. There are obviously other measures within the Bill that are extraneous to that, which we support. The Bill is a welcome first step, but we look forward to working with the Government to develop an overall strategy for the financial services sector that could pull all the different strands together, building on what the Chancellor said last week, which was very welcome.

Q Would you like to spell out where you think anything is missing from the Bill? The second part of your answer seems to suggest that there is a lack of an overall strategy. Is that what you are seeking to say? Obviously this has been contextualised as a first step, as we get towards the end of the transition period. I have indicated, as the Minister, that there will be subsequent legislation in future Sessions. Would you like to set out in more detail where you think there are specific gaps at this point?

Emma Reynolds: It is a very welcome first step. All I would say is that we, as an industry, have a broader agenda about our industry’s long-term competitiveness going forward. I would not have expected to see that in this Bill. We had a very good relationship with Government, particularly with the Treasury, but some of the other issues that we are concerned about relate more to other Departments, whether it is access to skills and talent from abroad or green finance or other issues that are not in the Bill. It is a welcome first step.

Q May I turn to Catherine? Thank you for giving evidence. One of the issues that has come up generally is an apprehensiveness about the capacity of the regulators in terms of their technical expertise to implement detailed rules such as the Basel rules. I have been fortunate enough to have been a Minister for a while and I recognise the complexity of the dynamic between the Treasury and the regulators. There is an intimate relationship, but could you give us a view on how you see the role of the regulators in the context of this Bill? Do you see any risk that they are being asked to do something that stretches them beyond what they should normally be able to do? Could you give the Committee a sense of that responsibility and how well placed they are to do what we have asked them to do?

Catherine McGuinness: Thank you for inviting me to give evidence. I cannot answer on the technical ability of the regulators in detail, other than to say that, in our experience, they are very capable of adapting and innovating. Indeed, we heard last week at Mansion House from both the Financial Conduct Authority and the Prudential Regulation Authority about their plans. Obviously, the regulators will be gaining significant powers under the Bill. It is important that we look at how those powers are scrutinised, including by Parliament.

On that front, the International Regulatory Strategy Group, which both TheCityUK and the City Corporation support, has suggested that parliamentary scrutiny be strengthened and reordered, and that the role of the Treasury Committee be complemented by setting up a joint Select Committee on financial regulation to look in detail at specific pieces of financial services regulation. That would be important to strengthen scrutiny, as we hand more responsibility to the regulators. It would also be useful––and the IRSG has recommended it––to increase the transparency of decision making by both the Treasury and the regulators, and to improve scrutiny. I am not sure if I have fully answered your question.

Q You are referring to the response of both yourselves and TheCityUK to the consultation on the future regulatory framework, separate and additional to the Bill?

Catherine McGuinness: indicated assent.

Q Good afternoon, Emma and Catherine. It is very nice to see both of you. Emma, I want to come to you first. You are the fifth panel to appear and there is beginning to be a pattern to the questions that we have asked. I feel that I have asked this of a few people.

The Bill does lots of different things but two big things are that it transposes, or onshores, lots of different parts of EU regulation from many different directives. It gives powers to the UK regulators to govern all that. In doing that, as we come to the end of the transition process, there is greater freedom for either the Treasury or the regulators to diverge from that body of EU law. The Bill does that, but it also has this overseas markets vision, which is granting equivalence on a country-by-country basis, to the 9,000 funds that are domiciled overseas but which operate in the UK. I want to talk a bit about these two different parts of the Bill. Starting with you, Emma, what do you think your members’ attitude is to onshoring this body of EU law? Do they broadly regard it as something that they would like to stick with or are there areas that they would quite quickly want to diverge from and, if so, what would be the most prominent areas?

Emma Reynolds: We were delighted that the Government took the unilateral decision last week to grant the EU equivalence in a number of different areas. We are still hopeful that the EU might follow suit. We have been calling for a technical outcome-based approach to equivalence for some time now. Within that, you could have different rules but the same outcomes. Even if there are pinch points around Solvency II—only some elements of Solvency II—you could have different rules in the UK that achieve the same objective.

From now until 1 January, we will remain technically equivalent. Inevitably, over time, there will be some changes in regulation, both on our side in the UK and in the EU. The EU is currently reviewing some of its own directives, MiFID being a case in point, but there are others too. We do not want to see divergence for divergence’s sake. We would like to encourage a strong dialogue between regulators in the UK and the EU. There already is that dialogue, but we would like to see a framework for that plan. If you are a member of ours who trades across borders, you want similar or the same rules.

Q You referred to the equivalence decision announced by the Chancellor last week. That is one end of the telescope; the other end is hoping—I am sure the Chancellor hopes, too—that this is reciprocated. Do you see a relationship between the degree of divergence, which may occur and the decision-making process from the other end of the telescope on equivalence for UK firms trying to sell into EU markets? In other words, Mr Barnier talks a lot about the level playing field, but if it looks like we are departing from a level financial playing field, will that impact on those equivalence decisions you hope for?

Emma Reynolds: We are still hopeful that the EU might take a similar decision to what we saw last week. We would not like to see divergence for divergence’s sake. There is no immediate appetite for great divergence from EU rules from our members. Does that answer your question?

Q Yes. Catherine, can I turn to you on the question of regulators? This gives a huge amount of new powers to the regulators. I have a two-part question. One, do you think they can handle it? Two, returning to what you said about a new Select Committee on financial services regulation—or whatever the exact title was—do you think that is an important part of a new accountability regime for the regulators, given the enhanced powers that the Bill gives them?

Catherine McGuinness: First of all, I do think the regulators can handle this, but I think it is important that we look at the right degree of scrutiny. Yes, when we speak to practitioners with the International Regulatory Strategy Group, it is their view that a joint Select Committee on financial regulation, which could look in detail at pieces of financial services regulation, would be a useful way of enhancing and embodying that scrutiny.