Wednesday 17 October 2018
Third Parties (Rights Against Insurers) Act 2010 (Consequential Amendment of Companies Act 2006) Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Third Parties (Rights Against Insurers) Act 2010 (Consequential Amendment of Companies Act 2006) Regulations 2018.
My Lords, the Third Parties (Rights Against Insurers) Act 2010 (Consequential Amendment of Companies Act 2006) Regulations 2018 will make amendments to the Companies Act 2006. The amendments are consequential to the changes in the law introduced by the Third Parties (Rights Against Insurers) Act 2010. They are necessary because of the effect of the interaction of the Third Parties (Rights Against Insurers) Act 2010, the Third Parties (Rights against Insurers) Regulations 2016, and the Companies Act 2006 on the ability of insurers to exercise their rights of recourse against other parties liable for the same loss.
I will make clear that the draft regulations are concerned only with the ability of one insurer to obtain money from someone else, typically another insurer, where the first insurer has already paid out an award of damages. They do not affect the rights of personal injury claimants.
The Third Parties (Rights against Insurers) Act 2010 simplified and modernised the previous law and procedure by which victims could obtain compensation for wrongs done to them by insolvent wrongdoers. Most importantly, the 2010 Act allowed claimants to take legal proceedings directly against the insurer of the insolvent wrongdoer, rather than having to establish the wrongdoer’s liability in separate legal proceedings.
Wrongdoers which are dissolved companies were brought within the scope of the 2010 Act by the addition in the Third Parties (Rights against Insurers) Regulations 2016 of new Section 6A. This also meant that claimants no longer had to spend time and money restoring the company to the register of companies simply for the purpose of suing it, establishing its liability and thereby gaining access to its insurer.
The creation of this direct remedy against the insurer affects the insurer’s rights of subrogation in respect of their ability to recover payments of contribution from other wrongdoers and their insurers potentially liable for the same loss. Subrogation is a common law concept allowing a person who pays out a claim to “stand in the shoes” of the payee as regards other rights of action the payee had in relation to the claim. An insurer who pays damages to the claimant is therefore subrogated to the rights of the insured in relation to the claim.
Importantly in this context, as a result of the 2010 Act claimants no longer have to restore companies to the register. As a result, the current six-year time limit imposed on the restoration of dissolved companies, other than in relation to personal injury claims, will bite on insurers who are directly sued under the 2010 Act. This is because a claim for subrogation is not a personal injury claim.
The effect is particularly acute in personal injury claims for exposure to asbestos, where Section 3 of the Compensation Act 2006 makes any defendant liable for the whole of the loss to the claimant, irrespective of whether others might also have caused the injury and might also have an obligation of contribution.
Damages in these and other personal injury cases are usually paid by the defendant’s insurer. As a result of the payment the insurer is subrogated to the rights of the defendant against other parties liable for the same loss. However, a right to subrogation can be exercised only if the company to be sued exists. A dissolved company clearly does not, and a company that has been dissolved for more than six years cannot currently be restored to existence.
The changes to the law introduced by the 2010 Act, which removed the need for a claimant to restore a company, have therefore had the indirect consequence in personal injury cases that the insurer has to restore the dissolved company to be able to exercise rights of subrogation, but cannot do so if the six-year limit has been exceeded. A right to be subrogated to a claim for contribution against such a company has therefore been made inoperable, with the consequence that one insurer will have to bear the whole loss. This was not the intention of the 2010 Act.
The draft regulations cure this problem by allowing an application to restore a company under Section 1030(1) of the Companies Act 2006 outside the six-year time limit for the purpose of an insurer bringing proceedings against a third party, typically another insurer, in the name of that company in respect of that company’s liability for damages for personal injury. This change ensures that the same subrogation result is produced for direct claims against insurers under the new Section 6A of the 2010 Act as is already produced for indirect claims where the person who suffered the loss claims against the insured wrongdoer and the insurer pays for the loss. In other words, this solution restores insurers’ rights of subrogation without prejudicing any third party. We submit that it is a fair and sensible way to resolve the problem inadvertently caused by the 2016 regulations. I beg to move.
My Lords, try as I might, I can find absolutely nothing wrong with the regulations. I have tried very hard to do so and failed completely. It is perhaps worth noting that it is unfortunate that this problem arose in the first place; presumably the original drafting ought to have anticipated and dealt with it. However, it is being corrected, although somewhat belatedly. What are the consequences, if any, for cases that have already gone through the process? It is presumably too late to apply the present terms to cases that have already concluded. Will there be litigation to go back over cases that have already been determined?
I am obliged to the noble Lord for his efforts in trying to find some flaw in the regulations. I am relieved that he was not able to do so. I do not see how the problem of prior claims could arise, because we would be within the six-year time limit for restoring a company to the register with regard to past claims. I do not understand there to be an issue over that; a problem is not anticipated. As far as future claims are concerned, it is entirely proper that we should be able to accommodate these matters. In these circumstances, I commend the regulations to the Committee.
Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018.
Relevant document: 38th Report from the Secondary Legislation Scrutiny Committee
My Lords, as this is the first in a series of SIs preparing the ground for a potential no-deal scenario, it may be helpful for me to set out in more detail in my opening remarks the context in which these SIs are being brought forward. I hope that it will help the Committee in considering future SIs.
Following the UK’s decision to leave the EU after the referendum of 2016, the Treasury has undertaken a significant amount of work with respect to the withdrawal negotiations themselves and in preparing for a range of potential negotiation outcomes. The best outcome is for the UK to leave with a deal, and we have put forward a serious and credible proposal for the future relationship. While we remain confident of agreement this autumn, in the meantime we must continue to work to prepare ourselves for the event of no deal. As the department responsible for financial services, the Treasury is working to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period. This includes using powers delegated to Ministers under the European Union (Withdrawal) Act 2018 to fix deficiencies in applicable EU law that will be transferred directly on to the UK statute book at the point of exit from the European Union.
The approach of the European Union (Withdrawal) Act is to maintain existing EU- derived legislation at the point of exit to provide continuity and certainty for businesses and consumers. While the fundamental elements of current financial services legislation will remain the same after exit, it will need to be amended to ensure that it works effectively once the UK has left the EU. The Treasury is therefore in the process of laying around 70 statutory instruments ahead of exit day to ensure that the UK’s financial services regime is prepared.
A key decision the Government had to make in approaching this work was how to allocate responsibility for the huge body of financial services regulation being brought on to the UK statute book by the EU withdrawal Act. The Government have decided to allocate responsibility in a way which respects democratic accountability and the UK’s existing regulatory framework, as set up by Parliament. Legislation which has been developed at the political level—proposed by the European Commission and negotiated through the Council of Ministers and the European Parliament—will become the responsibility of the UK Parliament, while rules developed at a technical level will become the responsibility of the UK regulators.
The EU’s directly applicable financial services legislation broadly falls into three categories. The most important category is regulations, which play an important part in setting the overall policy direction for areas of financial services activity; then there are the delegated regulations, which tend to be used for setting out more detailed requirements; and the lowest level of legislation is technical standards, which are used to flesh out the most detailed and technical aspects of regulations. It is only this last level, the technical standards, which the Government propose to delegate to the UK’s financial services regulators.
The responsibility for developing these technical standards currently lies with the European supervisory authorities, before they are adopted by the European Commission. As required by EU law, technical standards do not need policy decisions to be taken but lay out the granular level of the requirements that firms need to meet to implement policy set out in higher EU legislation. The existing stock of these technical standards runs to over 7,000 pages. Common examples of technical standards are those that set out the processes for providing supervisory information to regulators, including the specific form templates that firms should use.
The job of this SI is to set out the terms on which UK regulators will exercise the proposed new function for EU technical standards. It will also delegate the EU withdrawal Act’s deficiency-fixing power so that the UK regulators are able to ensure that these technical standards, as well as domestic regulator rules, work effectively from exit day. Part 1 of the SI, which will come into force the day after it is made, is necessary so that UK regulators will be able to use the EU withdrawal Act’s deficiency-fixing power in advance of exit to ensure that technical standards and UK regulator rules are amended to work effectively from day one of exit.
Part 2 of the SI delegates the EU withdrawal Act’s deficiency-fixing power to UK regulators and sets out the basis on which they are to exercise this power. The regulators specified are the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and the Payment Systems Regulator. In delegating the deficiency-fixing power, Part 2 applies those requirements and constraints that would apply to a Minister’s exercise of that power. The regulators will be able to make changes only to the technical standards listed in the schedule to these regulations or to regulator rules in order to correct deficiencies that arise as a result of the UK’s withdrawal from the EU. The two-year time limit on using the power will also apply.
Part 2, along with the schedule to this SI, allocates each existing technical standard to the appropriate UK regulator. The schedule lists all EU technical standards currently in force and specifies the appropriate regulator for each standard. A limited number of technical standards will be relevant to the responsibilities of more than one regulator and Part 2 also sets out how the regulators will co-operate when amendments need to be made to those standards. The regulators will make their deficiency fixes for technical standards and regulator rules using EU exit instruments. The Treasury will need to approve these instruments before they are made and will ensure that the fixes proposed by the regulators are consistent with the fixes that Parliament will be asked to approve in higher onshored legislation.
The Government are not proposing that Parliament be required to approve these fixes. Parliament will be asked to scrutinise and approve around 70 SIs amending the legislation that sits above technical standards. The regulators will use an open and transparent process for making fixes to technical standards. There will be public consultation on all of their fixes—the FCA published its first consultation last week and the Bank of England will follow shortly. Should Members of this Committee or this House have concerns about any fixes proposed by the regulators, Ministers will, of course, look into them before approving the regulators’ EU exit instruments. Part 3 of these regulations sets out the procedure that will be used when the regulators are given power to make technical standards under the EU exit SIs.
The post-exit responsibility for each EU technical standard will be transferred to the appropriate UK regulator by the SI that deals with the relevant area of EU legislation. For example, technical standards that sit under the Solvency II directive will be transferred to the Prudential Regulation Authority using the Treasury SI that makes fixes to onshored Solvency II legislation. Wherever a Treasury SI transfers responsibility for a technical standard, Parliament will be asked to approve the SI using the affirmative procedure.
As I mentioned earlier, the Government propose to transfer responsibility for technical standards in a way that is consistent with the UK’s existing regulatory framework, as approved by Parliament in successive pieces of legislation. Specifically, the Financial Services and Markets Act 2000, or the FSMA, is a key piece of framework legislation for regulation of financial services in the UK. The FSMA already delegates to the PRA and the FCA the responsibility for making the detailed rules that apply to firms in order to operationalise the framework that Parliament has set in legislation.
Part 3 of the SI amends the FSMA and the Financial Services Banking Reform Act 2013 so that the regulators will be responsible for technical standards in the same way that Parliament has given the PRA and the FCA responsibility for rules made under the FSMA. Whenever the regulators propose changes to technical standards in future, they will be required to consult and carry out cost-benefit analysis of their proposals, just as they do now for rules made under the FSMA. The Treasury will need to approve post-exit changes to technical standards and will be able to veto them if it appears to the Treasury that a proposed change would have implications for public funds or would prejudice any negotiations for an international agreement. This would include any negotiations that may still be taking place for an agreement with the EU.
As well as being consistent with the FSMA framework set by Parliament, this approach recognises the fact that it is UK regulators which have the necessary expertise and resource to maintain technical standards after the UK’s exit from the EU. UK regulators have played an important role in the EU to develop these standards through their membership of the boards and working groups of the European supervisory authorities.
In advance of laying this SI, Her Majesty’s Treasury published the instrument in draft, along with an explanatory policy note, in April 2018, in order to maximise transparency to Parliament and industry ahead of laying the SI. We have engaged and will continue to engage stakeholders on these issues and are publishing advance drafts of our financial services onshoring SIs throughout the autumn.
As already mentioned, UK regulators are committed to a fully transparent process for fixing deficiencies in technical standards and their own FSMA rules. Starting with the FCA last week, the regulators will issue public consultations on all of their proposed deficiency fixes. This SI will play an essential part in ensuring that the UK has a fully functioning regulatory regime for financial services in the event that we leave the EU in March without a deal.
The UK regulators perform a vital role in our financial services regime and they will have an important job in ensuring that the UK is ready for exit. This SI proposes a clear and transparent statutory basis for the job that regulators are being asked to do, which I hope this Committee can support.
Following the approach set by Parliament in the FSMA, our regulators are best placed to ensure that EU technical standards are fit for purpose as we prepare to withdraw from the EU and in the period following exit. I hope that the Committee will join me in supporting these regulations and our regulators in this important preparation period which is now taking place. I commend the regulations to the Committee.
My Lords, I am grateful to the Minister for introducing the SI. I am sorry that my colleagues and noble friends Lady Bowles and Lady Kramer cannot be with us today, which is why I am here rather late in the day.
Returning to retail banking and other matters—it is a long time since I was last involved in it, both in the City and the north-east—when I saw the Explanatory Memorandum and the mention of some of the Acts, I realised that I am more familiar with the Acts that I remember were passed when I was in the House of Commons back in the 1980s than some of the legislation that has been coming through in recent times.
However, this is a very different situation from any we have ever faced. Therefore, before I go on to ask questions and seek assurances about the contents of this SI, I wish to say something about the political position that has led to this. I regard all this as a complete and utter waste of time and effort. It would never have been necessary if it had not been for the Conservative Government getting us into the predicament that we are in at the moment. The referendum and the decisions that have been taken since then have given rise to a massive distraction from the many problems facing this country. I frequently sit in the Chamber of this House and think we must have gone mad. Although this SI has big implications it is one small example of many thousands of other problems that are taking place because of the distraction of Brexit on the country, the Government and Parliament. These SIs today are symbolic of the terrible problem we face as a country. It is completely fatuous that we should be doing this but we have got to live with it and hope to get through to the other side. This is really the Treasury’s equivalent of preparing the M20 and M26 as car parks, and I assume other departments are doing similar things.
I give my broad acceptance to these regulations. We have questions to ask and assurances to seek. The Minister has already given some in his comments introducing the statutory instrument, but the first thing I would like to ask is: where is the impact assessment? It is mentioned in the Explanatory Memorandum but we still do not have it. It is vital that we know the impact that this is going to have on the important and complex financial services sector. I will be grateful if the Minister will tell us where it is, and when not just the Houses of Parliament but the industry can expect to see it.
I was pleased to hear what the Minister said about openness and the consultation that will be done by the bodies taking over the binding technical standards. That was one of my major queries about how this is going to operate. Can he say a little more? He mentioned some 7,000 pages of regulation, which gives an indication of the scale of the work that these organisations will be involved in, but it is vital that institutions in the City and the financial services sector are consulted properly on changes that might be made. In addition to publication in the way that the Minister described, I hope that active consultation will take place with City institutions and the different sectors that work in financial services to ensure their input in any changes in the regulations that will so profoundly affect them. I will be grateful if the Minister will give some indication of how the financial services sector will be consulted on any changes that take place.
Will the Minister also give us an assurance that if there is any amendment to the principal financial services legislation it will be done through a Bill rather than by statutory instrument? I take it that that will be the case and that if some of the financial services legislation is to be amended it will be done through the normal procedure of a Bill and that the Government will not try to make changes—even minor amendments —to primary legislation through statutory instruments. If the Minister can give assurances on the way in which this will operate, he will have our support for the statutory instrument coming into operation.
My Lords, we all know that there is no chance of anybody voting against this SI or any of the other SIs the Government bring forward, because we all know we are not going to start a constitutional crisis at this time. There are enough of them being generated by the Government as it is.
We now know that there are 70-plus SIs that we are going to have to consider, and I know that I am going to have do all 70 of them, so I have had a look at why we are here. What do we achieve? We do not have massive attendance in Grand Committee, and even if we had been on the Floor of the House we would not. This is what I think we should be doing. Of course, the great thing about SIs and the House of Lords is that you can get away with more or less anything. As a result, one can take an SI and lay a political point on it. I do not criticise the noble Lord for doing that; it is what we do. But with 69 SIs in front of me, I do not want to make 69 searing political points. What will be useful? I think what is useful is to give the Minister a hard time. That is not because I enjoy the spectator sport of Ministers squirming through lack of knowledge, but because the Minister is responsible for the machinery that generates the SI, the Explanatory Memorandum and the elusive impact assessment.
My experience of organisations is that they perform better when they know that their leader is going to come under scrutiny than when they do not. I believe that the process of scrutinising and questioning the SIs that come in front of us is constructive in its own right in encouraging quality both in drafting and right the way through the process. I also think the process of questioning SIs and Hansard reporting the conversation is useful to the industry that they impact on. It allows people who read the raw SI to look at the debate and on occasion get a better view of the nuances. I believe it is also useful to those people who will have to draft the advice, regulations and so on that flow out of the Sis. I am talking about the generality of it.
Lastly, although we may criticise the SIs, there is little chance of the Government ever withdrawing them. In fact, with the timetable in front of them it would probably be impossible. But from the SIs flows a lot of material, and if we can make turning points at least at the level of the nuance that will allow the Government to reflect on what has been said in Committee and, perhaps, nuance the regulations or the advisory material. On this and the other 69 SIs we will be trying to do those things. What I am not going to do is produce elegant speeches because I do not have the energy to do that 70 times. Rather, I am going to stick to questions that I hope will bring out points that are useful.
Starting with this particular SI, there is a fundamental point—I will call it a political point—that distresses me. I have a problem here because I do not actually have a remedy, but the substantial part of the SI depends on Section 8 of the European Union (Withdrawal) Act. The section is headed, “Dealing with deficiencies arising from withdrawal”, Subsection (1) begins:
“A Minister of the Crown may by regulations make such provision”.
I know there were an awful lot of debates about that section because I sat through them, and I am absolutely convinced that Parliament took comfort from the words “Minister of the Crown”—that is, from the fact that there would be political involvement in the use of Section 8. But the whole essence of this SI is to take politicians out of it. There is no obvious requirement for them. The SI says that wherever you read “Minister of the Crown” in this section, in so much as it relates to the SI, you should substitute “appropriate regulator”. So there is a clear transference of responsibility from the Minister of the Crown to the regulator.
The Minister said that, in order to inspire confidence, the regulators will work in an environment that means their response will—and so on, and so on—and that they will work within the constraints of Section 8, which says that changes have to be small and must not create a new policy. My worry is that there is going to be an enormous volume created by the regulators out of this, and the problem when there is an enormous volume of anything is that systematic biases or errors can be built in. I would be happier if there were some more obvious form of supervision or scrutiny in the process. I do not actually have a solution, as I have said, but this transference of powers from a Minister of the Crown to the regulators is not what Parliament had in mind when it approved Section 8. I make that point to the Minister and invite him to try to convince me that there are necessary safeguards.
When you read this stuff—which is a pretty brave thing to do—from time to time you come across the words “the Treasury must approve”. So it looks as though the Treasury is playing a supervisory, checking and scrutiny role. But then you discover, as the Minister said in his speech, that the particular role of the Treasury is, first, to ensure that the SI is not a call on public funds, and, secondly, that the instrument or whatever being made does not interfere with the negotiation taking place at the time. That would imply that the Treasury has no other role. So I ask the Minister: is that true or does the Treasury—and hence, at least, accountability through Treasury Ministers—have a general role to supervise the activities of the regulators enabled by this statutory instrument?
My next question is about the regulations, rules and whatever produced by this system. Will they be put in the public domain? If so, how? What sort of documents? Will there be some way one can track the products of this SI and see what its impact is and where? Will there be a system, somewhere or other, of summary reports, if only on how many pages have been covered, how many areas fixed et cetera?
Another thing I could not get my mind around is that Section 8, which I referred to, has a two-year sunset clause. How will this work with this instrument? At one extreme you could argue that all the powers have to be reviewed after two years. Or you could take the view, at the other end of the spectrum, that all this work will have happened in the two years. Alongside the sunset clause is the commencement. This SI will commence the day after it is made, so it will be there all the way through. Does it in itself have a de facto sunset clause, or is that part of Section 8 somehow eroded?
Another area that I did not understand which is rather more mechanical is when the regulators will actually do this work and how it will relate to exit day. Will they create new regulations in draft so that they can come in on exit day? Basically, how will the work carry on? Will the work of these SIs be finished, in a sense, as soon as they are made by the fact that the authorities are being transferred, or will there be an ongoing look at what needs to be transferred to regulators that can be transferred under this SI?
I think the Minister made the point that this is for a no-deal situation, so what happens if there is a deal? If this SI is commenced, will it become uncommenced if there is a deal or will it carry on because it is a useful device to put responsibility on particular parts of government to carry on with the complexities for the financial sector of being outside the EU?
My next point was raised by my colleagues in the other House: it is the sheer resource problem. I think the Explanatory Memorandum admits to thousands of pages. A considerable resource is required just to read thousands of pages, never mind go through and carefully alter them as required by the new situation. It is difficult to believe that the regulators can execute this SI or its consequences without increased resources—and if they need increased resources, will the Treasury stand behind them and provide the additional resources that will be necessary, in our view, as a result of the transfer of responsibilities?
As I read it, the regulators may have an ongoing responsibility to relate to the EU, particularly in the interim period between March and 2021. How will the regulators co-ordinate that? It will be important to maintain a stable relationship between UK industry and European industry. Even if we crash out of the EU, I would have thought that that would be an objective. If we crash out and are in a no-deal situation, this SI will be alive and well and doing its work. The regulators will be doing their work of supervising the industry and it is very important that they establish a relationship that will be outside a treaty. It will have to be a bilateral, practical relationship. How are they going to work to keep the two sectors in step?
Finally, the noble Lord raised the point of whether it is reasonable to seek approval without an impact assessment. What is the point of an impact assessment produced after the commencement date? You might as well say we are not going to produce an impact assessment. I do not have the faintest idea what I will do with this document when it appears on my desk. I would like to claim that I have the energy to read it—but, knowing that there is absolutely nothing I can with it, I suspect that that energy might drift away after the first two or three pages. I thank the Minister for introducing the instrument.
I thank the noble Lords, Lord Wrigglesworth and Lord Tunnicliffe, for their questions. I guess that the noble Lord, Lord Tunnicliffe, and I are going to be spending many happy hours in this Committee over the next year, and I know that the noble Lord is always assiduous in the way that he prepares for these matters and in the questions that he puts. He is also right to say that this is an opportunity to provide scrutiny for these regulations and what is being put forward.
Many questions have been raised and I will go into a bit of detail in responding to each of them. The first issue is in relation to impact assessments. This statutory instrument would have no cost to business as it deals with the transfer of responsibility from the Treasury to the regulators. As a whole, these SIs will significantly reduce costs to business in a no-deal scenario. Without them, the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their business.
In making these changes we have attempted to minimise the disruption to firms and their customers and to maintain continuity of service provision. However, it is inevitable that firms will need to prepare for changes made by these SIs and the Government have committed to providing the UK regulators with the power to phase in regulatory requirements that change as a result of exit. This will substantially mitigate the costs to firms and give them more time to implement the changes.
On the issue which, I suppose, is at the heart of this initial—
It seems to me that the Minister has just given a précis of the impact assessment, which is designed to satisfy us when we do not need one. I would have been much more comfortable if the document had said, “We do not intend to produce an impact assessment because the argument is simple,” and then printed his explanation, rather than receiving a document that says, “We do not have an impact assessment because we have not finished doing it yet and we will publish it later”.
We are in the process of preparing five impact assessments covering financial services and onshoring legislation. They will be considered by the Regulatory Policy Committee, the independent body that scrutinises impact assessments before they are released. As has been said many times, we are in extraordinary times in terms of what we are seeking to do with this work. I think we all recognise that the conventional form would be that the impact assessment would have been available at the same time. With that explanation about the context of the decision—
I wonder whether the Minister will mind if I emphasise the importance of this. We are dealing with thousands of businesses whose procedures are possibly going to be changed as a result of this. Not only are businesses going to be affected: millions of customers may possibly be affected. It is tremendously important that they and their customers know what impact this will have, so that if necessary they can change their forms and procedures, move their money and do whatever they want to do in the light of the impact of this. If changes are in the pipeline as a result of this, and they are going to affect businesses, it is vital that businesses know about them as soon as possible.
On the same point, I draw attention to page 33 of the statutory instrument:
“Explanatory Note (This note is not part of the Regulations)”.
The final paragraph states:
“An impact assessment of the effect that this instrument will have on the costs of business, the voluntary sector and the public sector will be available from HM Treasury, 1 Horse Guards Road, London SW1A 2HQ and published alongside this instrument”.
I apologise for this, but if we are going to get impact assessments on time, the Government have to realise the irritation it causes to the Opposition and our colleagues in the Liberal Democrats if we do not have them published on time.
I fully accept the point the noble Lord is making. There is no need to apologise, because the point is that there should be scrutiny. I am trying to explain that this SI would not be expected to have an impact on business for the reason that I have set out. Other SIs will have impact assessments published. This SI has been published in draft form and we have been engaging in consultation with the Financial Conduct Authority and the regulators. The Financial Conduct Authority and the regulators interact most with businesses and consumers and therefore they have already commenced work on that part of the process to ensure preparedness.
On that point, the noble Lord, Lord Wrigglesworth, asked how industry will be involved in the regulators’ role. The regulators will consult on their deficiencies fixes. The Financial Conduct Authority has published its first consultation and the Bank of England will follow.
On the key issue of where the powers in the SIs are derived from, it is Section 8 of the European Union (Withdrawal) Act. That Act was subject to considerable debate in Parliament, including debate on the nature and scope of the deficiency-fixing power delegated to Ministers. Part of that debate considered whether it would be appropriate for Ministers to subdelegate the power to non-ministerial bodies. Parliament decided to leave open the possibility of subdelegation. Subdelegation of the powers is provided for in this SI so that UK financial services regulators can fix deficiencies in EU technical standards and regulator rules in time for exit. Section 8(6) of the Act provides for the transfer of EU functions to an appropriate UK body.
On the amendments to principal financial services legislation, which the noble Lord, Lord Wrigglesworth, asked about, some deficiency fixes will be put into primary legislation through SIs. These will not change policy but will be technical in nature.
On how we have consulted industry in drafting these SIs, we have not carried out a formal consultation on these particular SIs. What they can do is strictly limited by the enabling power of the EU withdrawal Act to fixing deficiencies. Therefore, there are limited policy choices. We discuss EU exit preparations regularly with the industry. This engagement has been invaluable for understanding the impact of these SIs. We share draft legislation with the industry to allow stakeholders the opportunity to familiarise themselves with our approach and to test our understanding of the likely impact. We are also, where possible, publishing draft legislation in advance of laying it.
The noble Lord, Lord Tunnicliffe, asked how the regulatory changes will be put in the public domain. The regulators are committed to a fully transparent process for fixing deficiencies in EU technical standards. The FCA has already issued its first consultation on this. The regulators are required to publish all the instruments in which they will make regulatory changes to ensure that they are brought to the public’s attention. In practice, they will do so by publishing them on their website.
The noble Lord also asked whether there was any requirement for the regulators to report on how they are exercising these powers. All regulatory deficiency fixes will need to be approved by the Treasury. I accept the point he made about the circumstances and tests, and whether there was an impact on the Exchequer, but the EU withdrawal Act requires an annual report on the exercise of the powers under the Act. The regulators will provide this on their use of the deficiency-fixing power and on their post-exit responsibility for technical standards. Parliament will be able to scrutinise and question the regulators on the use of these powers through the Select Committee system, as it does now across a range of regulatory functions.
I do not know whether the Minister feels that he has answered the question, but does the Treasury have a supervisory responsibility other than through or in relation to the two reasons he just outlined?
I have an answer to that and it will be ready in just a couple of minutes. It was on how the powers will be used.
The noble Lord also asked how regulators would co-ordinate with EU regulators after exit. This statutory instrument does not deal with the co-operation arrangements between the UK and EEA regulators. However, if the UK leaves the EU without a deal, the UK will fall outside the EU’s legislative framework for supervisory co-operation. The EU has confirmed that the UK will be treated as any other non-EEA country in this scenario. Common legislation will no longer be the basis for co-operation between UK and EEA regulators, but the UK’s firm intention is to maintain the current high level of co-operation that we have with EEA authorities. UK statutory powers have this under the FSMA. As some of the world’s most important regulators, the Bank of England and the FCA are well-established co-operation partners with non-EEA regulators.
The noble Lord asked what would happen to the statutory instrument in the event of a deal. These regulations will come into force on the day after they are made. This will allow regulators to prepare for exit day by making these changes. However, if we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law, including binding technical standards. It will also generally not be necessary to fix deficiencies in regulators’ rules until the end of the implementation period. The withdrawal agreement Bill will include provision to delay, amend or revoke SIs made under the powers of the EU withdrawal Act.
On the supervisory point the noble Lord asked about, the regulators may make an instrument to fix deficiencies using the powers delegated by this statutory instrument and an EU exit instrument only with the approval of the Treasury. In this case the Treasury can approve the EU exit instrument only if it is satisfied that the instrument makes appropriate provision to fix deficiencies arising from the UK’s withdrawal from the EU—in other words, that the EU exit instrument is not doing anything which could not appropriately be done by the Treasury using its own powers under Section 8 of the EU withdrawal Act. Similarly, the regulators may make an instrument to exercise any powers to make technical standards transferred to them by other SIs made under the 2018 Act only if the instrument is approved by the Treasury. For standards instruments, the Treasury may refuse to approve a standard instrument only if the regulators believe it would affect public funds or the instrument would prejudice international negotiations.
On the point which was made about resources—clearly we are placing a heavy responsibility on the regulators—the Treasury is confident that the financial services regulators are making adequate preparations ahead of 2019 and have an appropriate level of resources to manage their new responsibilities. We have worked extremely closely with the regulators in preparing this legislation. The current business plans of the FCA and PRA set out their priorities in preparing for EU exit and their plans for ensuring operational readiness. The regulators have considerable experience in this area. This means that the responsibilities of EU bodies can be reassigned effectively and efficiently, providing firms and their customers with confidence after exit. The FCA has published its first consultation on the changes it proposes to make using these powers.
The noble Lord asked about the sunset clause. Under Section 8 of the EU withdrawal Act, no government department would be able to make any regulations after 11 pm on 29 March 2021—that is, two years after exit day. Under regulation 3(3) of these regulations, Section 8(8) also applies to the regulators, so they will not be able to make any EU exit instruments to fix deficiencies after this date. This relates to a question which I dealt with in my previous remark. However, in supervisory situations—I have said this—regulators may make an instrument to fix deficiencies using the powers delegated by this SI only with the approval of the Treasury.
I hope my responses have gone some way to addressing the points and concerns raised by noble Lords in the course of this debate. As I said, this is the first of many debates on these issues, but this first statutory instrument is crucial and I commend it to the Committee.
Building Societies Legislation (Amendment) (EU Exit) Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Building Societies Legislation (Amendment) (EU Exit) Regulations 2018.
My Lords, following the UK’s decision to leave the EU after the referendum, the Treasury has undertaken a significant amount of work with respect to withdrawal negotiations and in preparing a range of potential outcomes for these negotiations. The best outcome is for the UK to leave with a deal and we have put forward a serious and credible proposal for the future relationship. While we remain confident that agreement will be reached this autumn, in the meantime we must and will continue to work preparing ourselves for no deal.
As the department responsible for financial services, HM Treasury has been conducting particularly intensive work to ensure that there continues to be a functioning legislative and regulatory regime for financial services in the event that the UK leaves the EU without a deal or an implementation period. An essential part of that work is using powers delegated to Ministers under the European Union (Withdrawal) Act to fix deficiencies in applicable EU law that would be transferred directly on to the UK statute book at the point of exit.
The Building Societies Act 1986 and related legislation contains various technical provisions governing how building societies must act. This includes setting out requirements relating to the UK’s membership of the EEA. For instance, one provision ensures that loans secured on UK land and loans secured on EEA land are treated equally. The concept of a loan secured on land is used when defining who counts as a building society member in legislation and calculating a building society’s lending limit—a legal requirement which makes sure that the building societies focus on their core business of mortgage lending.
Other parts of the legislation ensure that EEA bodies and UK companies are treated in the same way regarding transfers of business from a building society to a commercial company. However, in a no-deal scenario the UK would be outside the EEA and outside the EU’s legal supervisory financial framework. The legislation therefore needs to be updated to reflect that, and to ensure that the provisions work properly in that scenario.
The original legislation treats members of the EEA differently from third countries in certain respects. Given that that will no longer be appropriate after exit day, this SI will amend the Building Societies Act 1986 and related legislation to treat EEA countries similarly to other third-party countries after exit day. To take an example, I have already set out that this SI will amend the original legislation to ensure that in future new mortgages on properties in non-EEA states and EEA states are treated the same after exit day. Note that the instrument maintains the pre-exit legal treatment of mortgages on properties in EEA states, providing contractual continuity for building society members who have an existing mortgage on a property in an EEA state. Building societies will have to take this treatment into account in calculating lending limits and defining building society members.
The original legislation also allows building societies to transfer business to and from companies and mutuals in EEA states but not those in countries outside the EEA. This SI will amend the legislation so that such transfers are no longer allowed, equalising the treatment of EEA firms with those in other third countries. The SI also replaces several references to EU directives with equivalent references to the Prudential Regulatory Authority’s rulebook and ensures that the current relationship between the UK and the Channel Islands, the Isle of Man and Gibraltar is maintained. There may be some cost to businesses linked to the restriction on the ability of building societies to lend on properties in the EEA, although since building societies do the overwhelming majority of their lending in the UK we believe this would be minimal.
In summary, the Government believe the proposed legislation is necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves the EU without a deal or implementation period. I hope the Committee will join me in supporting these regulations, which I commend to the Committee.
I am grateful to the Minister for managing to get through the presentation of this SI to us. He might think of going into juggling at some stage. I want to raise a number of very important issues that affect millions of our fellow citizens. There is no more self-evident part of the financial services industry that impacts on so many people than the building societies. I will therefore return to the discussion we had a few moments ago about impact assessments.
Once again, we have no impact assessment of how this will affect those societies. I refer to the millions of people involved, but they are not all people with mortgages. There are also people saving in building societies and they want to know what the impact of all this will be on their savings. What will be the impact on the balance sheets, profitability and liquidity of building societies? Their resources may be at risk as a result of changes of this sort being made. The importance of the impact assessment for this SI is tremendous; it cannot be exaggerated.
In that context, I also want to return to the question of this being time-limited under EU legislation, which could have a direct bearing on the impact it will have on people—a point made by the noble Lord—and the fact that it will fall away two years after exit. When will our exit take place? Here we are, with the Cabinet not knowing on this very day where it is going and whether there will be a deal, discussing alternatives that will impact upon very many people. What impact will a no-deal scenario have on when this statutory instrument comes into effect? What will happen with the transitional period? Will we leave on the date forecast? It raises profound questions that will affect the livelihoods, savings and mortgages of millions of our fellow citizens. This is just one example of where the Government have a tremendous responsibility to make things as clear as possible to building society customers. I hope that the Minister will address the issue of the impact of this when he responds.
Can the Minister also say something about the impact of this SI, if it is agreed to, on the members of buildings societies who will no longer necessarily be able to become members if they borrow overseas? As I understand it, the position is that as soon as they get a mortgage with a building society, they become members of it; in the future, under this statutory instrument, that may or may not be the case. What position will those people be in? It has been well understood that membership of a building society comes with being a customer in that way. It would be helpful if the Minister could make it clear whether people can, and will, become members of building societies if they do business in that way in the future.
What will be the position of people if they wish to borrow money from building societies to buy overseas? A lot of people might be contemplating buying a property in France, Italy or somewhere else in Europe. Will they be able to borrow from a building society and what will the status of their mortgage be? What happens from the building society’s point of view if the customer defaults on an overseas property? If the building society cannot regain the property and set it against the debt, that will have an impact on its financial position. Can the Minister tell us how many of these loans there are, whether they can be rolled over and what the impact on building societies will be if these changes take place? How will their business be affected in the future?
If any changes are to be introduced—this is the same question as on the previous SI—can we have an assurance from the Minister that the building societies will be consulted? I assume from his previous remarks that they will be as a matter of course. But clearly, like so many other institutions in the country, they are wondering what the devil is going to happen in the coming months. If they at least know that they will be consulted if changes are taking place, I think they will be consoled to a certain extent. Because so many people—people with very modest means, in many instances—could be involved if these changes take place to their detriment, I hope that the Minister will be able to respond to these questions and that the Government will be able to reassure us that that will not be the case.
My Lords, I join the noble Lord, Lord Wrigglesworth, in his comments on an impact assessment. I have to admit that rather than knowing that there is not one, I could not find it—but that may be a lack of skill on my part. I hope that the Minister’s answers may cover my concerns. On a lighter note, can the Minister confirm that paragraphs 7.1 to 7.8 of the Explanatory Memorandum are identical to the same paragraphs for the previous instrument? From my reading, they are. Will it be standard procedure for all Treasury SIs to have identical paragraphs 7.1 to 7.8? If they are to be identical, it will save an awful lot of time in reading them if I know that to be true.
An impact assessment would have been useful because it tends to use plainer language. It would have been particularly useful in this case because I took an entirely different view of this instrument from that of the noble Lord, Lord Wrigglesworth. I did not put much effort into it because it seemed pretty benign and reasonably consequential. I did not see the risks, so perhaps I may ask the questions that the noble Lord asked—but rather more bluntly. What will happen if there is a deal, as this document’s commencement date is the exit date? Will it therefore still be alive or be deleted? Will all contracts in force on exit date between a building society and its members be secure thereafter? If they are entered into before exit date, will they continue in force after it? My reading was that they would, but it is an absolutely key point that they should. If you have foreign property as a result of a loan from a building society, is your security in the relationship and all that sort of stuff unchanged by this instrument? Does it refer only to new loans or not?
My reading of the instrument was that it would not have an immediate impact on a building society’s balance sheet, because the composition of that balance sheet would be unchanged by it. The instrument starts to impact on the balance sheet only as new contracts are commenced, which will then have different weightings and so on. Will all UK consumer protections stay in place, so that consumers will in no way have less protection as a result of the instrument?
I thank noble Lords for their questions. Perhaps I may make one top-line comment at the outset, in order to assist. We are effectively seeking here to ensure that there is absolutely no change in the situation of the building societies in relation to their members and mortgages. The whole purpose behind this provision is to bring onshore that legislation which currently operates while we are members of the European Union, and to ensure that there is no break in or interruption to that work.
It is not anticipated that this SI will have any impact on savers or mortgage holders. On the question of the impact on balance sheets, which the noble Lord, Lord Tunnicliffe, asked, the SI will have no direct effect on either side’s balance sheets on day one. However, EU exit could more broadly impact on both sides’ businesses, in which case we could see changes reflected in balance sheets over time—but of course that depends on a number of factors, including the nature of a future relationship and future deal.
With regard to the wider impact on savers, the Government published a series of technical notices explaining what the consequences of a no-deal exit would be for most UK-based customers. We stated clearly that UK-based customers would not be affected. Where customers will be affected, firms including building societies will be expected to communicate that at the appropriate time. I stress again that building societies overwhelmingly deal with lending against properties and savers based in the UK, and that the provisions in relation to the treatment of property and land on which mortgages are granted in non-EEA states and EEA states are to ensure that there is consistency of treatment in future so that differences and problems will not arise.
I wonder whether the Minister will therefore explain why the memorandum says:
“There will be some costs for businesses linked to the restriction on the ability of building societies to lend on properties in the EEA. This is because loans secured on properties in the EEA post-exit will no longer count towards the calculation of the building societies’ lending limit (which requires that 75% of a building society’s assets are secured on residential property)”.
Another paragraph says that,
“the legislation allows building societies to transfer business to and from companies and mutuals in EEA States, but not countries outside the EEA. This SI will amend the legislation to no longer allow these transfers”.
So we are in a different situation again. Taking out a mortgage with a building society on property in the EEA will no longer automatically mean becoming a member of that society, which I have referred to as a slightly separate point. There are specific references to changes that will take place under this SI, and those could have an impact both on members and on the societies.
I would counter that by saying that the majority of those changes are going to relate to the building societies themselves that have been cited in terms of the treatment of those provisions. I will come back to that in just a second, if I may, after dealing with another point that the noble Lord raised about members borrowing overseas and members’ rights. All current building society members will retain their membership and associated rights. Loan terms are not affected. If people wish to borrow from the building society for an overseas property, they will not automatically become members. This is the current situation with all non-EEA countries, but it will be extended to EEA countries as the EEA will become a third country. Paragraphs 7.1 to 7.8 are the same in both these Explanatory Memorandums and will be very similar for all the SIs in this group.
The noble Lord asked what the impact of the SI on building societies would be and how the Government were mitigating it. The SI will act to prevent building societies diversifying too far into EEA-based mortgage lending in future, should they wish to. However, the vast majority of building societies conduct all their lending in the UK and show no interest in lending overseas. Mortgages currently owned by building societies in EEA states such as Spain will not be affected by this SI as the provision applies to new mortgages only. However, the SI may make building societies which have previously given mortgages on properties in Spain unwilling to remortgage such properties. In that case there is no reason why the individuals concerned would be unable to remortgage with another bank.
The noble Lord, Lord Tunnicliffe, asked what will happen to the SI if there is a deal. These regulations will not come into force on exit day if there is an implementation period, as we expect. If we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law. Building societies can continue to operate in the same way as they do now. The noble Lord asked what will happen to all contracts on exit day. This SI does nothing to affect existing building society contracts. On exit day all contracts between a building society and its customers, including mortgage contracts, will remain unchanged.
The noble Lord, Lord Wrigglesworth, and the noble Lord, Lord Tunnicliffe, asked whether UK consumer protection would remain in place. This SI does not remove any existing protections for building society customers. Financial services compensation varies depending on the financial services in question. Generally, FSCS protection for customers in the UK will not change. Further details on the changes to FSCS protection will be set out by the regulators over the autumn.
I hope that I have been helpful in responding to the questions raised by noble Lords in this debate. I commend these regulations to the Committee.
Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
My Lords, I beg to move that these regulations, which were laid before the House on 18 July 2018, be approved.
The purpose of this statutory instrument is to introduce additional requirements for quoted companies and new requirements for large unquoted companies and large limited liability partnerships—LLPs—to report annually on emissions, energy consumption and energy efficiency action. In 2013 the UK was the first country to make it compulsory for quoted companies to include emissions data for their entire organisation in their annual reports. At the time, the Government made a pledge to review the legislation and whether it should be extended to all large companies at a later date.
The Government recognise that for organisations to take action to reduce their energy use, they must have the appropriate tools and guidance. Measuring energy use and emissions is the first step to managing them effectively, and this legislation provides large organisations with a legal framework, creating the much-needed consistency in emissions reporting that aligns with the existing requirements for quoted companies. The importance of disclosure of consistent, comparable and clear energy and emissions information was also highlighted by the Task Force on Climate-related Financial Disclosures in June 2017, which the Government endorsed in September this year.
These regulations deliver what is known as streamlined energy and carbon reporting—part of a package of changes that were announced in the 2016 Budget with the aim of simplifying what stakeholders view as an overly complex tax and reporting policy landscape. They ensure that reporting on emissions will continue following the early closure of the CRC energy efficiency scheme, while further incentivising energy efficiency and thereby helping to improve productivity and reduce energy bills and emissions across the UK.
I turn now to the regulations. The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 brought in requirements for quoted companies to report their annual greenhouse gas emissions in their directors’ report, alongside an intensity metric, and to disclose the methodology used. The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018—these regulations—introduce a new obligation for these companies to report their underlying global energy use to reflect the true impact of their operations.
These regulations also introduce new requirements for large unquoted companies and large LLPs to report information about their UK energy use and greenhouse gas emissions in so far as it relates to electricity, gas and transport, and to disclose the methodology used in calculation of the relevant disclosures. Additionally, these regulations bring in a new requirement for all the organisations in scope to report on the principal measures taken to increase energy efficiency if any such action has been taken in the organisation’s financial year.
As per the existing requirement for quoted companies, these regulations require the disclosures for companies to be included in annual reports, specifically in the directors’ report. We consider that this will provide visibility of energy efficiency for senior management and transparency for investors and stakeholders, and will enable energy and carbon performance to be aligned with both financial and operational performance. These regulations introduce a new vehicle for reporting energy and carbon emissions information for large LLPs via a new report, the energy and carbon report, to be filed with Companies House alongside an LLP’s annual accounts.
To simplify reporting at group level, if a company or LLP is preparing group accounts and its report is a group report, the company or LLP must make the relevant disclosures on the basis of its energy use and greenhouse emissions and those of its subsidiaries—but only as far as those subsidiaries would themselves be in scope of these regulations. A subsidiary which would itself be required to disclose its energy and carbon information in its directors’ report will not have to do so if the group report meets certain requirements. These regulations apply to financial years that start on or after 1 April 2019.
The Government consulted widely on the policy behind this legislation, receiving responses from a wide variety of stakeholders including businesses, regulators and trade associations. The majority of respondents agreed that mandatory reporting was important and that it should apply UK wide, align with best practice in the UK and internationally and build on the existing mandatory reporting of greenhouse gas emissions by quoted companies and mandatory energy audits under the Energy Savings Opportunity Scheme. However, there was also a strong message that the Government should not be imposing unnecessary administrative burdens on UK business.
To balance these concerns with the overall objective of increasing transparency and improving consistency of energy and carbon reporting, the provisions contained in these regulations have undergone a number of refinements, such as the introduction of a minimum energy use threshold for the full disclosures, enabling organisations using domestic levels of energy to meet their obligations by simply confirming that they used 40 megawatt hours or less of energy in the reporting period.
We have also introduced the ability for unquoted companies and LLPs to state where they have not disclosed the information required under these regulations on the grounds that it would not be practical to obtain the information, or if, in what we expect would be exceptional circumstances, the directors or members think that disclosure would be seriously prejudicial to the interests of the organisation.
These regulations strike the right balance between disclosure of energy and carbon information by organisations and limiting the administrative burden. In line with the Government’s goal of enabling businesses and industry to improve energy efficiency and contribute to the goals of our clean growth and industrial strategies, consistent, transparent and comparable reporting will ensure that businesses make informed investment decisions in their preparations for a low-carbon future—an appropriate goal in Green Great Britain Week, which we are in at the moment, when we are showcasing the benefits of clean growth and what it will bring to all parts of society. I commend the regulations to the Committee.
My Lords, I thank the Minister for going through the detail of this instrument. It is Green Week and I suppose we ought to welcome that. To put this in perspective, the thing I would really like to do during Green Week is go through actual hard legislation that will determine how we meet our fifth carbon budget, rather than something that is very worthy in many ways but concerns the details of medium-sized companies or non-listed companies doing some carbon reporting mandatorily. But there we are; we are where we are and I welcome the fact that we are extending carbon reporting. As the Minister said, we were in the lead as a nation in 2013 by having carbon reporting for listed companies in the UK, which is good. Where we have led, others have followed.
We have to remember, as the Explanatory Memorandum says so well, that this is part of a broader package announced in the 2016 Budget where the death knell of the carbon reduction commitment as I know it—I know that it got a different name latterly—was announced. I was always very sad about that scheme, because when it originally came about it was to look at that tier of commercial business that was not captured by the EU ETS. It was brilliantly designed before it was launched so that it was taxation-neutral and rewarded those companies at the top of the league table that had done best in carbon and energy savings while penalising those at the bottom. There were incentives and, like all good energy taxation, it was neutral overall. Unfortunately, by the time it was introduced it was taken over by the Treasury and became a tax-raising regime that had all the complications that the Explanatory Memorandum goes through. I can see that that scheme became a burden for industry when it was effectively just a method of taxation rather than a proper method of incentivising through league tables and having good performance.
There is something I would be interested in understanding from the Minister. I know it is in the figures, but I found them quite difficult to go through—although I see the figures very clearly on the financial savings of the sector, which I agree are important. What is the net estimated carbon saving or deficit with this overall package of raising the climate change levy taxation rate and getting rid of the CRC and bringing in this management information system? I think that it is in the figures, but there was a whole range of figures and I found them very difficult to understand. I hope that the carbon savings are still positive because of that. I would be disappointed if they were not.
I am interested in the term “streamlined”, because going through the detail I was unclear whether it meant “rough estimate” or “back of the envelope” rather than the proper way that these things are calculated. I presume it is the latter but I am interested in the term “streamlined”.
The Minister mentioned global reach on these figures. As we know, the long supply chains in industry these days are one of the problems for carbon reporting. It can be relatively straightforward for corporates and large companies to estimate and publish their emissions, but one of the major ways in which any corporation can reduce its emissions is through offshoring or subcontracting more of its supply chain to suppliers. I would like to understand whether these figures include supply chain emissions and how the Government see themselves coping with that issue in future. I understand that it is not an easy question, and I am not suggesting that it has an easy answer. I would be interested to know how the Government see that area working as part of their broader green growth strategy.
Lastly, the Minister mentioned ESOS, a European scheme which is very useful in this area. Perhaps he can assure us that the scheme will continue post Brexit.
I, too, thank the Minister for his introduction to the regulations. Although limited in scope and somewhat technical, they are crucial to highlighting and building energy efficiency into everyday activities. We greatly welcome that.
As the Minister said, the regulations introduce mandatory requirements on emissions, energy consumption and energy efficiency action for large, unquoted companies. They also extend the reporting requirements for quoted companies to bring both, along with large limited liability partnerships, in line with common reporting requirements. Such organisations must set out their activities and performance in each year’s annual report. The intention of the changes is to compensate for and extend the reporting requirements previously obligated by the carbon reduction commitment, which is to end in April 2019. The new reporting requirements are to be in place after that date.
I have always thought that an organisation’s annual report is a very important document that sets out its strategic direction and how it has performed against its objectives. It should be a good promotional tool for its activities. Last week, the Intergovernmental Panel on Climate Change brought out a special report to warn again of the dangers of climate change without serious corrective action being taken on emissions, decarbonisation and energy efficiency. Previously, Labour supported and advocated companies reporting their activities in a coherent regime.
Regrettably, although the new measures are welcome they do not exactly replicate all that was in place under the carbon reduction commitment. Primarily, there was a league table of companies’ performances alongside the report. In the regulations, there is no measure of comparative performance and no means of producing such comparisons other than by a time-consuming and expensive trawl through all company reports, which may—or, more likely, may not—be reported in strictly comparable terms. While the regulations are prescriptive regarding what should be reported and how, there appears to be some leeway in the regulations whereby reports could mislead or be non-comparable in their meaning, particularly in terms of the possible distribution of reporting among subsidiaries of the main company. Does the Minister recognise the deficiency that there will be a lack of full comparability of reports because of the absence of a mechanism to allow performance to be compared and graded?
As what gets measured gets attention, how are companies to understand how they compare to their peers? Surely the full impact of these energy use indicators in annual reports is not being utilised as a competitive challenge for improvement. As the clean growth strategy states, businesses need measures,
“to improve their energy productivity, by at least 20% by 2030”.
The CRC was due to run until 2043. Here I echo the questions asked by the noble Lord, Lord Teverson, in his analysis of the CRC and its workings. The impact assessment outlines that the policy will be reviewed in 2024. That is some time away, especially given the timeframe in which the intergovernmental panel stresses mitigating measures need to be taken. How will any comparative analysis take place under these regulations? Indeed, will the Government undertake any analysis of the results of this reporting prior to 2024, and how will they measure success? Will government incentives be brought to bear on poor performance, not merely on reporting?
While we are in favour of these regulations today, there are nevertheless serious issues to address in which these regulations have perhaps not been as constructive as they might have been. Climate change is one of the most pressing issues of our age. The intergovernmental panel issued a special report last week between its fifth and sixth reports to underline its most recent assessment that there could be a very limited number of years, may be as few as 12—that is, until 2030—in which the world’s increase in temperature could be limited to less than 1.5 degrees above 1990 levels. I thought it was strange that the Conservative Government came out with a Ministerial Statement on Monday extolling all the achievements that have been secured when we all know that greater progress was made under previous Labour Governments and even under coalitions. Indeed, under the Conservative Government from 2015 progress has slowed, with a litany of cuts and policy reversals that I need not list at length today. Suffice to say that the UK is possibly no longer on track to meet the fourth, but more definitely the fifth, carbon budget.
I have one question for the Minister on the Government’s Statement on Monday. Labour has a policy of net zero emissions above 1990 levels by 2050, subject to the advice of the climate change committee. On the back of the report last week the Government have asked the CCC to advise on when and how we could achieve a net zero target. Whether they have precluded the CCC assessing and issuing immediate advice, it must advise on actions to secure net zero emissions to start at the end of the fifth carbon budget. That carbon budget is set to conclude in 2032. So the CCC cannot issue guidance or recommendations to begin until two years after the IPCC estimates that the world will be in a dangerous condition, recording in excess of its maximum 1.5 degrees above 1990 levels. The CCC advice will need to work hard and fast to secure a net zero target by 2050. I ask the Minister to answer on this feature of Monday’s announcement. Do the Government have some strategic assessment by which they have decided to limit the CCC’s advice until after 2032? The Government’s self-congratulatory words must be met by coherent and comprehensible policies. Winning slowly on climate change is the same as losing.
My Lords, I thank both noble Lords for their interventions. I rather regret the unnecessarily party-political line that the noble Lord, Lord Grantchester, took. Perhaps he could instead have taken that by responding to Monday’s Statement, which we offered to the Opposition but they did not wish to have it repeated in this House.
I welcome the fact that the noble Lord, Lord Teverson, highlighted that it is green Week. I think the Government have been doing their bit to highlight the achievements that we have made in green Week. I hope the noble Lord, Lord Grantchester, has received a number of invitations to some of the events that we have been holding to highlight the achievements of this Government, the previous coalition Government and—dare I say it, on this occasion, because, unlike the noble Lord, I do not want to be party political—the Labour Government who left office in 2010. In 2008 that Labour Government brought in the Climate Change Act, which had cross-party support. The noble Lord will find that Ministers—I am going way beyond the regulations, but it is worth getting this on the record—have been making it quite clear that over the past 10 years this country, again with cross-party support with the Labour Government, the coalition Government and the Conservative Government, has achieved great things on this front, particularly when he compares what we have done in carbon reduction with other G7 countries. Would he have liked us to have followed the route of Germany, which is now burning more coal than it has for many years while we are on the road to seeing coal disappear from energy generation by 2025? It is down to some 7% of our energy needs at the moment from 40% only a few years ago. The Government are very proud of those great achievements but we also pay tribute to the Labour Government who brought in the 2008 Act and the coalition Government, of which I was a part and the noble Lord, Lord Teverson, was a supporter. So in this green Britain or green UK week, whatever its long-winded title is, let us pay tribute to what we have dealt with as a country.
Turning to the regulations—it is important that we stick to the subject—I hope I can answer a number of questions and make it clear to the noble Lord, Lord Grantchester, that we will keep this under review and analyse how it has gone on, just as we did with the original regulations brought in in 2013. These regulations now extend them to other organisations and we will want to see how they develop and what they achieve. We want to make sure, as the noble Lord put it, that they not only provide information to potential investors or shareholders but act as a competitive challenge to business to do what it can to achieve a reduction in carbon over the years.
I will deal with some of the more detailed questions. I promise to write in due course after the debate on any detailed points that noble Lords may feel I have not answered. The noble Lord, Lord Teverson, asked what was the overall saving as he was having problems with the figures. The advice I have is that we are hoping that between 2019 and 2035 this could lead to 12.8 million tonnes of CO2 equivalent being removed. That would be equal to 0.75 million tonnes being saved per year. I hope that provides him with the information he wanted.
The noble Lord also asked how the streamlining of energy and carbon reporting is a simplification. A key aim of the package announced in the 2016 Budget, which included a revised reporting framework, was to reduce duplication and simplify measuring and reporting. The Government will deliver this through the abolition of the CRC energy efficiency scheme after the current phase covering emissions to March 2019 ends and the integration of mandatory greenhouse gas reporting by quoted companies into the SECR framework.
We are taking simple approaches that are familiar to organisations to avoid, as far as possible, additional burdens resulting from them having to learn new rules and put in place new processes. The new framework also does not involve CRC’s complex allowance trading aspects.
The noble Lord, Lord Teverson, echoed by the noble Lord, Lord Grantchester, asked whether ESOS would continue. These regulations have no impact on the separate ESOS regulations. Businesses required to comply with ESOS should already be gearing up for the next compliance deadline in December next year. Systems already in place to collect annual energy consumption across buildings, processes and transport for the purposes of ESOS should provide much of the information that organisations will need for their SECR obligations. SECR also strengthens ESOS by requiring organisations to disclose energy efficiency action they have taken, if any, which can include progress with implementation of the ESOS recommendations.
Lastly, I turn to consistency of reporting. That was a query from the noble Lord, Lord Grantchester. Moving from a number of established schemes to a specific single methodology could have added significant costs for a number of organisations that are already reporting. This goes back to the point about balance I made earlier. While we have not specified in the regulations specific methodologies to be used, we will set out in the guidance what we consider to be good practice, in particular to improve transparency and consistency of reporting when considering issues such as on-site generation, green and renewable energy tariffs, business travel, carbon off-setting and the increasing prevalence of ultra-low emission vehicles.
I appreciate that that does not deal with every detailed point put to me by noble Lords, but I offer to write in due course.
I do not want to prolong this, but will part of that be on supply chains and how the Government see they should be incorporated into carbon reporting?
I notice exactly what the noble Lord says. It would be very difficult for these regulations to include supply chains, but it obviously is a relevant matter. If we close down one business and shift the thing overseas we do not achieve anything for the world as a whole. Obviously it needs to be considered how it could be done, but that is another matter. I will write in greater detail to the noble Lord.
I believe that what we are offering offers simpler, better energy and carbon reporting and will encourage compliance by companies and LLPs to support the transition to the low-carbon economy that we wish. It will deliver long-term benefits across the UK and throughout the world. I commend these regulations to the Committee.
Business Contract Terms (Assignment of Receivables) Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Business Contract Terms (Assignment of Receivables) Regulations 2018.
My Lords, this instrument has a simple aim. It seeks to free small and medium enterprises from onerous contract terms that currently restrict their ability to raise finance. The terms in question are found in many purchase contracts. They prohibit the supplier from assigning to a third party the value of amounts owed to them, referred to as receivables. The supplier is typically unable to negotiate any changes to these terms. Their bargaining position is weak. If they want the work, they had better accept the standard terms of purchase. The impact of such a contract term is to cut the supplier off from an option that would otherwise be open to them, which is to use invoice finance. The aim of this instrument is simply to restore that option.
There is some debate as to why these restrictive terms persist in ordinary purchase contracts. In some cases the intention is to prevent subcontracting, but the term is drafted so widely that it affects assignments of all kinds. Whatever the reason, the impact is the same: the denial of choice to suppliers, which may need to resort to expensive short-term credit to fund their working capital needs. There are, of course, legitimate reasons to prohibit assignment: for example, in financial services, in long-term project agreements and in contracts for the sale of a business. These cases are excluded from the scope of these regulations. Some of these exclusions were anticipated in the enabling Act and others have been added later, as I shall describe in a moment.
These exclusions ensure that the impact is focused, as intended, on invoice finance. This is an arrangement whereby a supplier receives an advance of funds on the invoices that they issue. The advance may be 80% or even 90% and is typically received within a few days. Invoice finance is not borrowing. The supplier is receiving advance payment for an asset—the receivable—that they already own. In this way, the supplier can pay their costs before the customer settles the invoice. Once this is paid, the finance provider deducts its fee and pays the remaining balance to the supplier.
There are currently some 40,000 businesses using invoice finance, of which the majority—38,000—are small and medium-sized enterprises. They account for roughly half of all advances drawn down, which is to say about £9.5 billion out of a total of £20 billion. There are 5.7 million businesses in the United Kingdom and your Lordships could be forgiven for thinking that this is a marginal issue. Yet that is precisely the point: the use of invoice finance is less than it might be, because of the restrictions to which I referred. In fact, the Government estimate that the number of businesses which could potentially use invoice finance is 10 times the current figure. The financial benefits have been calculated from survey evidence and follow-up research. In summary, this instrument brings both direct and indirect benefits, with a net present value to the economy of some £966 million—just short of £1 billion. This figure reflects savings to existing users of invoice finance and the additional growth and profit generated by new users. The underlying figures are available in the published impact assessment.
During the preparation of this instrument, concerns were raised about the impact on the attractiveness of English law. English law is one of this country’s most valuable exports and forms the basis for contracts in areas as diverse as aircraft leasing, project finance and infrastructure. The Government are determined to ensure that there will be no adverse impact from these regulations and undertook extensive discussions with the City of London Law Society and others. As a result, the regulations were substantially amended. I am glad to say that the draft regulations before the Committee incorporate changes and exclusions that meet the concerns raised.
In the debate in another place, the point was made that invoice financing is not the whole answer to the challenges of SME finance. I agree wholeheartedly; I also agree that invoice financing is no substitute for a culture of responsible payment. We should not expect suppliers to seek finance to subsidise their larger customers. That is why the Government have taken extensive and decisive steps towards eliminating late payment, including the appointment of the Small Business Commissioner one year ago and the requirement for all businesses to report on their payment performance. Earlier this month, we launched a call for evidence to invite proposals on further measures. It is not always appreciated that the value of late payments outstanding has halved in the past five years. The problem is obviously not yet solved but we believe that is a promising start.
These regulations will give businesses freedom to access invoice finance when they wish without being prevented from doing so by their customers. It will bring a worthwhile benefit to the economy with a net present value of just under £1 billion without imposing a burden of compliance or reporting and while preserving the attractiveness of English law. I commend these regulations to the Committee and beg to move.
My Lords, these regulations address a problem that I did not know existed. The colloquial expression for “assignment of receivables” is factoring, and that is what I know it as. Why would companies build these terms into contracts, with the exceptions permitting, unless there was a question mark about their payment? I will be interested to hear the Minister’s comments about that. It seems unjustified. I understand the importance of being able to get hold of money for your contract early on, but if companies paid in a more timely way, factoring would perhaps not be necessary. Those are just a couple of comments, but I wholeheartedly welcome the regulations.
Will the Minister explain paragraph 10.13 in the Explanatory Memorandum? It is headed “Additional Exclusion”. It states that contracting parties need to be certain that they are dealing with each other rather than an assignee. Does the Minister understand that to mean subcontracting? If he does not, are there other examples of what could be meant by that? Other than that question, I welcome this legislation.
I am grateful to the Minister for the introduction to this SI. This is my sixth week in your Lordships’ House and it is a pleasure to be speaking on my first SI. If I make any procedural or other errors, please forgive me. I am still learning and have a long way to go.
Invoice financing as set out in paragraph 7 of the Explanatory Memorandum is one way of securing working capital. More simply, it is the ability to borrow money against unpaid invoices to improve cash flow. We on this side agree that invoice financing has its place, but it is not always the solution to the problem. When laying these regulations, Her Majesty’s Government have missed a great opportunity to sort out the wider issue, which the Minister touched on, around payment culture. The recent consultation on prompt payment received some very good responses on the wider issue of late payment which simply must be addressed soon. In excess of £2 billion a year is owed to SMEs in late payments—payments past the agreed invoice payment date. Does the Minister agree that this is a far larger and more easily solvable problem?
I was general secretary of the Labour Party before coming here. The Labour Party led on this by example and had 30-day payment terms. More widely, there is the absurdity of having a voluntary prompt payment code. Many large firms are signatories but there is no enforcement, so in real terms the code is worthless, especially as many companies have 60-day terms.
What if a company breaches those terms? Let us not forget that Carillion was a signatory but then went on and changed its payment terms to 120 days. Does the Minister agree with me that a sensible term for the code, even in its voluntary state, would be 30 days? Why has the prompt payment code not been made compulsory? Why has consideration not even been given to making it so? These reforms would help to solve the problem that IF looks to solve.
The correspondence with the Secondary Legislation Scrutiny Committee touched on the question of implementation dates. I note the Government’s response supporting the status quo, but do they still believe that there is any point in having common commencement dates? The CCDs of 1 October and 6 April each year are introduced to help businesses to plan for new regulations and increase awareness of the introduction of new or changed requirements, yet these regulations are to be introduced 21 days after they are passed. As the correspondence with the Secondary Legislation Scrutiny Committee reveals, it is not as if there has been a great rush to get these regulations in. As we can see from the Explanatory Memorandum, the first discussion paper was published in 2013, so I am sure that another few months’ delay to ensure better regulation would not have hurt.
I congratulate the Business, Energy and Industrial Strategy team on their detailed and helpful work on the impact assessment and the Explanatory Memorandum. Having said that, I think the Committee has done a brilliant job of sorting out the documents before us and holding the Government to account for a certain amount of confusion. It might have taken time, but I believe it would have been better if the Government had issued new documentation following the consultation. As the Minister said, substantial amendments to the regulations were made, so was the impact assessment carried out after they were made or before, in 2013?
I turn to the substance of the regulation. Could the Minister satisfy me that no problems or unintended consequences of these regulations may arise in the accounting treatment following the introduction of these regulations? I am thinking particularly of when income from invoice financing is to be recognised in the accounts of a trading company when that is not done through factoring. If the Minister is unable to give me a direct answer today, I am more than happy for him to write to me.
Paragraph 7.4 of the Explanatory Memorandum states that this regulation will help diversify finance markets and encourage competition. Could the Minister expand a little on how exactly that will happen? The bit that confuses me is the exclusion of large companies from IF. Could the Minister explain why they have been excluded, especially as paragraph 10.7 of the Explanatory Memorandum, as he touched on earlier, outlines the problem with large commercial contracts, not large commercial companies or businesses per se? Paragraph 10.8 then outlines the solution of banning large companies from IF. This appears to be a completely different answer to a completely different question. Maybe the Minister could explain what the persuasive arguments by the legal profession were and how these led the Government to exclude large companies from IF.
In the Explanatory Memorandum, under the heading “Territorial Extent”, the paragraph following Paragraph 10.14 is labelled 10.1. I think that this is just a typographical mistake but it should be picked up on. The serious point here is that the regulations appear to interact with powers devolved to the Scottish Parliament. Is that right? If so, did the Government consider seeking a legislative consent Motion? If not, why not?
As I said at the start, the Opposition will not oppose these regulations on invoice financing, but it is a shame that the Government missed the opportunity to bring forward legislation to improve invoice payment practices within these regulations.
My Lords, I offer my welcome to the noble Lord, Lord McNicol, on his first appearance at the Dispatch Box. I look forward to many more in the future. He will know that it was during the opening of the batting, as it were, of my honourable friend Kelly Tolhurst that she brought these regulations before another place some weeks ago. She was probably grateful for the noble Lord’s opposite number in another place for giving her a relatively easy run on them.
I think that I have broad agreement from both the noble Lord, Lord McNicol, and the noble Baroness, Lady Burt, that the regulations are doing the right thing, but obviously they have wider questions. Some of them are impossible to answer at this stage. For example, I think it was the noble Lord who asked whether I could give a guarantee that there would be no unintended consequences as a result of this. That goes slightly wide in that one never knows whether there will be unintended consequences until the unintended consequence hits one in the face. However, we certainly will, as with all matters, keep these under review as they develop.
I will start dealing with some of the more detailed questions. The noble Baroness, Lady Burt, asked a very sensible question as to why some companies have these contract terms. I think that I made it clear in my opening remarks that we were not absolutely sure. I think I quote myself in saying that there is some debate as to why these restrictive terms persist in ordinary purchase contracts. Some suppliers suggest that this is a deliberate attempt. I have to say that the evidence is mixed. Either way, these regulations will resolve this issue and those terms will be removed, but, to come back to the point that the noble Lord made about unintended consequences, and as the noble Baroness said with her detailed questions about I think paragraph 10.13, we consulted very carefully on these regulations and we want to make sure that we get them right.
On paragraph 10.13, there are situations where companies need long-term, trusting relationships. That is why, in that case, assignment can be undesirable. We do not know precisely and we will keep them under review, but we hope that these regulations will get to the heart of the matter.
However, that takes us on to the broader question that both noble Lords raised, particularly the noble Lord, Lord McNicol, about the wider problem of prompt payment. That is why I quoted the figures earlier. We have seen some improvement. The number of overdue debts outstanding has halved in the past five years, which is pretty good; it is down from 30 billion to 14 billion. I want to make it clear to noble Lords—this goes way beyond the regulations—that we are not complacent about this matter. Further action is under way to bring that number down further. We do not believe that companies having to make use of invoice financing is a substitute for prompt payment by those who owe them money.
We have a number of specific measures in place to tackle late payment, such as the Small Business Commissioner, addressing small business complaints about late payment and fostering cultural change. Other noble Lords on the Committee will remember that we had a debate about this last year; there have been questions in this House and another place about this matter, which we will continue to press on. The payment performance reporting duty has also created more transparency in payment behaviour, while the Prompt Payment Code is setting standards and best practice in payment culture. Again, that makes a difference.
I remind the noble Lord. Lord McNicol, that earlier this month, on 4 October, my department published a call for evidence to assess what further steps and intervention may be needed to create a responsible payment culture. Now that he has been released from the rather intractable problems of his previous job, he may like to devote more time to that issue. Alongside that call for evidence, the Secretary of State announced further immediate measures he will take to tackle late payment but even without those measures, we welcome the views of the noble Lord and his colleagues. We have already appointed a Small Business Commissioner; the Secretary of State has appointed him to the Prompt Payment Code Compliance Board and wants to explore whether all company boards should give one of their non-executive directors responsibilities for prompt payment. Further ideas will come, including from the noble Lord, and I hope that the call for evidence will explore those matters.
As I said, invoice financing is not the sole answer, although it is very helpful for small and growing businesses. We hope that the instrument will allow them to seek the increased value of invoices outstanding, ensuring that they have the appropriate funds. It may be less suitable for long-term investment or asset purchases, but that is for the companies to decide. These regulations make that small change and deal with that small problem identified by the noble Baroness, Lady Burt, and the Government. We do not quite know why it is there. We think that we can deal with it through the regulations but because of potential problems—I spoke earlier about the attractiveness of English law and so on—the issue was one worth consulting on and one that I hope we have got right. As I said, we will keep it under review and note the points made by noble Lords, whom I thank for their contributions.
There was a specific issue with larger companies. I am still struggling to understand why they were excluded. What was the reasoning behind that? The impact assessment was carried out with the inclusion of large companies. If we look at the bottom of its front page, the assessment was signed on 4 July 2018 although it took place earlier, in 2015. That is three and a half years out of date. Is that normal? As I said, substantial changes were made; I would appreciate more information on that.
Obviously with the larger companies there is less of the problem of what one might refer to as the imbalance of power between the two parties. For that reason, we thought it was easier for them to negotiate the appropriate terms. Whether we have got that precisely right in terms of the size, I do not know—again, these matters were consulted on—but I hope we have. There was the question of whether, where there is no imbalance, they might feel the need to keep these terms on those occasions. If I wish to add a little more to that, I will consider very carefully what I have said and write to the noble Lord.
Department for Transport (Fees) (Amendment) (EU Exit) Regulations 2018
Considered in Grand Committee
That the Grand Committee do consider the Department for Transport (Fees) (Amendment) (EU Exit) Regulations 2018.
My Lords, these draft regulations would be made under the powers conferred by the European Union (Withdrawal) Act. They form part of the work being done to adjust our existing legislative framework in readiness for our leaving the European Union. The draft regulations, if approved, will make amendments to three Department for Transport fees orders to correct deficiencies in the orders arising from the withdrawal of the United Kingdom from the EU. This will be done by removing references to the Secretary of State carrying out functions to comply with EU law. Those functions will continue but under domestic law rather than EU law.
The fees orders themselves do not set fees, nor do they amend, raise or lower fees. They set out in secondary legislation the matters that can be taken into account when setting fees for delivery of the functions specified in the orders. For example, for any of the functions prescribed in the orders, account can be take of the proportion of the cost in providing staff, premises, equipment and facilities that are attributable to the carrying out of the relevant function. The actual fees for the functions listed in the orders, such as for driving licences, are contained in other secondary legislation. Generally, before any change can be made to the fee level in that other legislation, the Minister must first have the agreement of the Treasury, then conduct a consultation with representative organisations of those affected and consider the impact on stakeholders. The Minister must take account of that impact in deciding whether to proceed. Only after this process has been followed can the SI to change the fee be laid before Parliament.
The functions contained in the fees orders are all in the areas of road vehicles and drivers. They are carried out by three of the Department for Transport’s executive agencies: the Driver and Vehicle Standards Agency, the Driver and Vehicle Licensing Agency and the Vehicle Certification Agency. The functions that are relevant to the draft regulations are: driver licensing, vehicle registration, international road haulage permitting, vehicle type approval certification, the approval of tachograph calibration centres, international road passenger transport authorisation, licensing to operate public service vehicles, licensing to operate goods vehicles and, lastly, enforcement against UK and non-UK drivers and vehicles that break the law on these matters. The fees orders relate to both EU and domestic law, and the regulations before the Committee are concerned only with amending the EU-related aspects of the orders.
In conclusion, the amendments contained in this instrument are to ensure that the fees orders recognise EU exit but otherwise maintain the status quo. I commend the regulations to the Committee.
My Lords, I am grateful to the noble Baroness for outlining these regulations with such brevity and clarity. I have a couple of questions, though. As she said, they cover international agreements, driving licences, vehicle registration, public service vehicle operation and licences to operate goods vehicles. I believe we have added licences for trailer operation, or something, which we discussed in some legislation—I cannot remember its name now—a few months ago.
The Minister mentioned non-UK drivers. Does this change mean that the charges are going to go up? Did the European Union previously have any control or oversight or a role in setting these charges? It is always very easy to say that the costs of doing it are going up. There may have been some control or advice from Brussels as to how these things should be assessed and charged.
Lastly, the noble Baroness mentioned that there might be some changes to the licences of non-UK drivers. The impression I get is that licences from other member states will no longer be valid in this country. How do drivers get new licences and are they going to be charged a rate seen by most people to be reasonable—or is it going to be one of these Home Office ones that make you pay £500 to try to dissuade you from coming? I hope it is the former and not the latter. I look forward to the Minister’s comments.
My Lords, I thank the Minister for her clear explanation. I believe this is the first in a very long line of statutory instruments on transport issues that are directly related to Brexit. I want to express my regret that the time and effort of the Department for Transport is being mopped up in this way when we face so many transport challenges. We would considerably appreciate its efforts being put to another use.
I want to ask a couple of questions that are not unlike those from the noble Lord, Lord Berkeley. I want to start with the Explanatory Memorandum. Paragraph 4.1 says:
“The territorial extent of this instrument is the United Kingdom”.
Then it says that,
“the territorial application is either the United Kingdom, or Great Britain”.
I am concerned about whether the devolved Administrations have been properly and fully consulted. These SIs are really going to annoy and upset the Scottish Government in particular. Therefore, it is particularly important that the Government maintain clear and detailed discussions with them on these things.
In the policy background section in the Explanatory Memorandum, paragraph 7.4 says that fees orders lay out the costs that the Government can take into account when setting fees. Paragraph 7.5 summarises the sorts of things that can be taken into account. They are very logical: driver licensing, vehicle registration, international permits and so on. Paragraph 7.9 then makes it clear that the Department for Transport is responsible for this legislation. It contends that these changes are “minor” and simply recognise Brexit. It says that, as a result:
“Stakeholders will not be impacted”.
I query that statement because, as current fees are not set by the EU but take into account the framework to which the EU has given approval, there are limits and requirements set down by the EU which are taken into account in the costings. After Brexit, surely we will be free to take into account what we wish to when the fees are set. So, just as the Government can vary the level of fees, they can now start taking into account other things. That chimes with the concerns expressed by the noble Lord, Lord Berkeley, that the Government will be freer to change policy on this—to take an attitude which does not only cover costs but makes money, or to use it as a deterrent to people taking up these rights. My argument is that the fees could well change and that it is therefore not accurate to say that there will be no impact on stakeholders. I hope I am wrong and will listen with interest to the Minister’s explanation.
Finally, paragraph 13.1 states:
“The legislation does not apply to activities that are undertaken by small businesses”.
Really? A significant slice of the haulage market is in the hands of small and medium-sized businesses with just a handful of employees. In addition, the haulage industry moves the products of a range of producers and is used to import components, ingredients and so on into this country. This involves both small and large businesses. Surely the Government should have given some consideration to the impact of this on small businesses. My concern is that if the Government decided to charge another £50 it probably would not mean make or break to large haulage businesses—it would be passed on to their customers, of course—but if they start to charge another £50 or £100 to small businesses, it might well make them uncompetitive in an already difficult situation. Our hauliers would be put at a disadvantage internationally, and anything in addition which makes life more difficult for them should be avoided. I would welcome any assurances the Minister can give on this.
This SI refers to goods vehicle licensing in the UK—or England, Great Britain, whatever—and as about 80% of the trucks crossing the channel are now driven by Romanians or Bulgarians or people from other member states, where the trucks may also be registered, what happens to the licensing of the vehicles from these member states if they come in here? Will they be subject to the same arrangement or is there another arrangement that would require them to be registered? If so, will they have to do that at the frontier and so on? I hope not.
The noble Lord has found an ingenious way of adding an extra question and I will pass it on to the Minister.
I thank the Minister for explaining the purpose and content of the SI, which we will not oppose. In the light of concerns that have been expressed about the possible effect on fees in future and other possible impacts, will the Minister gives us some clarification on the consultation? Paragraph 10 of the Explanatory Memorandum states:
“A consultation is not considered necessary as the amendments are minor and technical in nature and do not impact upon either business or the individual”.
Does that mean that there has been literally no consultation, or have some bodies or organisations been consulted? If so, which organisations or bodies have been consulted about this SI and its contents?
As the Minister said, the regulations amend the Department for Transport’s fees orders covering the road traffic field. Fees orders do not set fees but specify functions and their costs which may be taken into account in setting fees. These regulations amend those orders by removing references to the Secretary of State having functions to carry out to comply with EU obligations or requirements on the basis that we are withdrawing from the European Union. Those functions referred to in the fees orders will no longer be carried out under EU legislation but will continue to be carried out by the Secretary of State under domestic law as provided for by the European Union (Withdrawal) Act 2018. As the Minister said, the functions currently carried out by the Secretary of State under EU legislation are those relating to international road haulage permits, type approval certification, tachograph calibration centres, international road passenger transport authorisations, driver licensing, vehicle registration, licences to operate public service vehicles and licences to operate goods vehicles.
The SI relates to a situation where we have withdrawn from the European Union. It would appear that it covers a no-deal situation and our intended departure on 29 March next year. What is the position if there is a deal approved by Parliament and that deal entails a transition period with continued membership of the customs union and/or the single market for an unspecified of time or other provisions that do not provide for a clean break on 29 March next year? What is the need for this SI in that scenario? We may not in reality have withdrawn from the EU because we would still be bound to accept that some or all of its legislation applies to us. We would not be able to alter it unilaterally and we would also be bound by any subsequent amendments made to that legislation by the European Union pending our full withdrawal.
What then would be the relevance of an SI, such as the one we are now considering, coming into effect on 29 March next year, which asserts in paragraph 2.4 of the Explanatory Memorandum:
“The relevant EU related functions specified by the Fees Order will, after EU exit, no longer be carried out in pursuance of EU legislation”,
when, if there is a deal, these functions could have to be, including to the extent, for a possible period of time unknown, that we would also have to abide by EU legislation that was further amended by the EU without our agreement? Would it not be better, with a decision on a deal apparently close, to withdraw this SI and wait until we know whether there is a deal and, if there is, produce an SI which reflects the reality and terms of that deal? It is, after all, not the fault of this House if the Government are having difficulty adhering to their intended timetable for progress in negotiations with the EU, as appears to be the case. It would be helpful if the Minister could spell out what the impact of a deal with a transition period could be on the provisions and relevance of this SI, and whether during the transition period agreements could be reached or arrangements made that could have an impact on the terms and relevance of this SI.
I turn to one other point. The Haulage Permits and Trailer Registration Act gave the Secretary of State the power to introduce regulations to charge fees for international road transport permits if a new permit scheme is required, as UK-issued Community licences will no longer be valid in the EU if we leave unless an agreement is reached otherwise. The Government have previously said that any permit fees would only cover the cost of any new scheme and that the detail on fees would be consulted on later in 2018 when the outcome of the negotiations was clearer. Has the consultation started, or has the lack of clarity at the moment over how the negotiations with the EU will end precluded the commencement of the consultation?
Since an issue of concern is that hauliers or taxpayers will incur additional costs if a new scheme is required, does that not underline the importance of continuing with the Community licensing system? Once again, would it not therefore be better to be discussing this SI once the outcome of the negotiations was clearer and the SI itself could reflect that outcome? The SI is not intended to come into force for another five and a half months, yet we are being asked to agree to it now when it is not clear to what extent we will or will not be continuing to follow EU legislation, including any subsequent amendments to the legislation, after the SI is intended to come into effect on 29 March 2019.
My Lords, I thank noble Lords for their consideration of these draft regulations. As the noble Baroness said, I am afraid they are the first of many EU exit transport regulations. The purpose of these regulations is indeed to make minor and technical amendments to the three pieces of legislation that we are discussing, by amending the language used to take account of EU exit, but otherwise to maintain the status quo.
As I said in my opening remarks, the regulations themselves do not set, raise or lower fees. The fees orders are supplementary to existing powers that the Secretary of State has in other legislation, and that other legislation sets the fees. The regulations do not in any way extend the powers of the Secretary of State or relate to a change in the fees.
I turn to the questions that were asked. The noble Lord, Lord Berkeley, mentioned the Haulage Permits and Trailer Registration Act, as did the noble Lord, Lord Rosser. We have consulted extensively with the industry on that and we will be discussing the regulations under that Act soon. There is a government response to the consultation, which I will forward to the noble Lord, explaining where we are on fees. We will be discussing that soon.
As I said, the regulations do not set or change the fees themselves but merely set out what can be taken into account, so charges absolutely will not go up. There has been a role for the EU Commission in setting the charges in the past but there will not be after exit.
For the non-UK driver—an issue raised by the noble Lord, Lord Berkeley—EU driving licences will continue to be recognised in the UK post Brexit, as set out in some of our recent technical notices, so the charges for getting a GB driving licence will not change.
On the question of devolved Administrations, which the noble Baroness, Lady Randerson, mentioned, we are working closely with them throughout our entire SI programme—obviously more so on some which are directly relevant than on others, but on every one we are working closely with them. Some of the fees orders’ functions are GB-wide—for example, driving licences, as Northern Ireland has its own regime and its own legislation to set its own fees—while others relate to the whole of the UK.
The Minister mentioned that driving licences from EU member states will still be valid. That was in the technical note and I should have mentioned it; I am sorry. What about licences for vehicles? Are we involved in quotas and the like? If so, how would that work? Will a Bulgarian vehicle need a licence to operate in the UK?
That is very much subject to negotiations. We hope to agree a mutually beneficial deal with liberalised access to continue as it is for haulage firms. Bilateral permits exist. In the event of no deal, we will work bilaterally with the countries involved to agree permit systems. We are very keen to pursue continuing the access that we have at the moment, which would be reciprocal. That is what we are working towards.
The noble Baroness is quite right that many of our goods are moved by small businesses and we are reliant on them for that. I agree that an increase in charges would adversely affect them but, as I said, the regulations do not change the fee or regulate businesses. The fee orders determine what the Secretary of State can consider rather than regulate small businesses. That is why it is noted as such.
The noble Lord, Lord Rosser, asked about consultation. We are working closely with all our transport stakeholders on the Brexit regulations. We have spoken to them about all the different SIs. This SI will not affect stakeholders. All it will do is remove the obligation on the Secretary of State to take note of the European Union.
On the impact of a deal, which we are all working hard to achieve, the SI will come into force on exit day, which is defined in the withdrawal Act as 29 March 2019. Ultimately, the coming into force of the SI will depend on the outcome of the EU negotiations and any new legislation arising from that outcome. If the UK reaches a withdrawal agreement with the EU, that agreement is expected to provide for an implementation period. We have announced that in that event, we will introduce to Parliament a European Union withdrawal agreement Bill as a primary means of implementing the agreement. Exit day would remain as 11 pm on 29 March 2019 but the coming into force of the SI may be reviewed and delayed until the end of the implementation period. The SI may not be needed, but it is part of our readiness work, as are the SIs to come, which we strongly believe we should be doing as a responsible Government. Noble Lords are aware of the number of upcoming SIs and the limited parliamentary time, so we will spread them out between now and exit day to get through them. Obviously, if a deal is reached and an implementation period is agreed, that will affect that.
Can the Minister say something about what is said in the regulations under “Citation and commencement”? She said that the regulations will come into force on exit day. We have been told repeatedly by the Government that we will exit the European Union on 29 March next year, but I sense from what she just said—I am sure that she will correct me if I am wrong—that the reference to exit day may not apply to 29 March 2019 if a deal is done, so the Government accept that we may not withdraw from the European Union on that day. Is that the Government’s position?
As I said, exit day will remain 11 pm on 29 March 2019. When this SI comes into force is currently defined in the withdrawal Act but should a deal be reached where we get a withdrawal agreement, the implementation day of the instrument could change through the subsequent Bill that the Government will bring forward to implement the withdrawal agreement in UK law.
I am not sure whether the Minister has responded to my point, but I asked whether there was any possibility that during the transition period, agreements could be reached or arrangements made that could have an impact on the terms and relevance of the SI. Is it the Government’s position that even if there is a transition period, nothing will happen then that could have an impact on the relevance of anything in this statutory instrument?
The expectation is that with the withdrawal agreement we will have an implementation period. During that period we would be covered by current EU laws and therefore this secondary legislation would not come into effect. Obviously I cannot give a guarantee of that because we do not yet know the outcome regarding the withdrawal agreement and it has yet to pass through Parliament, but the expectation is that during the implementation period we would continue as we are and the SI would not come into force until the date agreed through the withdrawal agreement Bill that will be coming through the House.
Is the Government’s position that in any discussions during the transition period nothing would be agreed that might have an impact upon the relevance of this SI and necessitate it being altered, other than its effective date?
I am afraid I am not able to give a definitive answer to the noble Lord’s question. As I said, we have yet to agree a transition or implementation period with the EU. As we do not know those terms, I am not able to answer the question. However, our expectation is that throughout that period we will continue as we are so this SI would not come into effect until a date set out in the EU withdrawal agreement Bill.
I take the noble Lord’s point that the negotiations and discussions on that agreement are ongoing, and the outcome of that may of course affect what we do in future. However, due to the number of regulations that will have to be discussed in order to ensure that our statute books are fit for 29 March should we not reach an agreement, we think it is the responsible thing to do to keep going with this programme and start these discussions between now and exit day.
I reiterate that the detail around the delivery of the specified functions and the prescription of the fees that can be charged for delivery are set out in other legislation. Making this proposed instrument would merely enable the continuation of the current fee-setting process by removing references to the EU after we leave, so things would absolutely continue as they are.
Committee adjourned at 6.37 pm.