Considered in Grand Committee
My Lords, as this instrument has been grouped, I will speak also to the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019. The Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already been undertaken here and in another place. The SIs being debated today are part of this programme and have been debated and approved in the other place.
These SIs will fix deficiencies in UK law on investment funds to ensure they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
Turning to the substance of these instruments, noble Lords may remember previous debates relating to alternative investment funds and their subcategories on 16 January. Those instruments, along with these being debated today, will ensure there is a functioning legislative and regulatory system for investment funds in the UK. The first instrument focuses specifically on the regulation of Undertakings for Collective Investments in Transferable Securities, commonly known as UCITS, which are funds aimed at retail investors. The second instrument relates to long-term investment funds, a further subcategory of alternative investment funds that promote long-term investment, such as in infrastructure and small and medium-sized enterprises. In a no-deal scenario, the UK would be outside the EEA and the EU’s legal, supervisory and financial regulatory framework. Retained EU and domestic law relating to the regulation of UCITS and long-term investment funds needs to be updated to reflect this.
I will begin with the collective investment schemes regulations. First, this instrument removes references to the Union and to EU legislation that will no longer have legal effect, replacing them where appropriate with references to the UK and UK legislation. It removes obligations to co-operate with EU authorities and defunct references to the EEA passporting system. However, as set out in FSMA and other legislation, it maintains the ability for co-operation between authorities which may be in the interests of both the UK and the EEA.
Secondly, this instrument maintains a standalone UK regime for UCITS. This includes ensuring that UK funds use firms for depository and management services that are incorporated in the UK, and re-labels UCITS in the UK as “UK UCITS”.
Thirdly, like many other instruments this instrument includes a temporary regime for funds. It will allow an EEA UCITS that is currently marketed into the UK under an EEA passport, and subsequent new sub-funds of an existing umbrella fund, to be marketed to UK investors in a similar manner to before. This regime will last for up to three years, although, if judged necessary, the Treasury may lay a statutory instrument to extend the temporary period for up to 12 months at a time, following an assessment by the FCA and a Written Ministerial Statement to both Houses. In order for funds to continue to be marketed into the UK after the temporary permissions regime, they will be directed to gain permissions as with any other third-country fund. The process for gaining this permission is outlined in Section 272 of the Financial Services and Markets Act 2000. The Government have committed to reviewing this process and will bring forward any necessary legislation in due course.
This instrument will transfer powers from the EEA bodies, such as the European Securities and Markets Authority ESMA to UK bodies such as the Financial Conducts Authority, the FCA. For example, the power to make binding technical standards will be transferred to the FCA. This is considered appropriate, because the FCA, as the UK’s national competent authority within the EEA, is already responsible for supervising investment funds.
Finally, this instrument makes an amendment to a similar instrument, the 2018 regulations on alternative investment fund managers. This will bring forward the commencement date relating to the temporary marketing permissions regime for alternative investment funds, which will allow the FCA notification window to operate as intended.
I move on—if my voice permits—to the long-term investment funds regulations. These funds are a further sub-category of alternative investment funds. The take-up across the EEA has been low, with no such funds set up in the UK by the end of 2018, according to the FCA. However, in line with the Government’s approach to European legislation, this regulation ensures a functioning framework for long-term investment funds. This instrument maintains the existing investment rules for long-term funds. It addresses deficiencies, for example by removing references to European institutions and replacing them with UK bodies. It will also create the UK-only label “long-term investment funds”.
As always, the Treasury has been working very closely with the Financial Conduct Authority in drafting this instrument. It has also engaged the financial services industry, including TheCityUK and the Investment Association, on this SI and will continue to do so. In particular, I note that the funds industry has reacted positively to the Treasury’s preparations. In December, the chief executive of the Investment Association, which is the main industry body for investment funds, noted:
“In a possible no deal Brexit, HM Treasury’s commitment to remain open to international funds ensures that the UK will remain a world leading asset management centre and that UK savers will continue to have access to a full range of investment opportunities”.
In November and December the Treasury published these instruments in draft form, alongside Explanatory Notes to maximise transparency to Parliament and industry. The impact assessment for the collective investment schemes regulations has also been published recently.
The Government believe that the proposed legislation is necessary to ensure that there is a functioning investment funds framework in the UK, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting these regulations. I beg to move.
My Lords, we have allowed my noble friend Lady Bowles to go off to her committee today so I am afraid that there is somebody on these Benches with a far less-detailed knowledge of the intricacies of the relevant pieces of legislation. That may be of some relief but she will be back on future occasions so the respite is only temporary.
We have no objection to these two SIs, although I would like to probe around them a little. Clearly the UK Government should make this move because, frankly, EEA UCITS with a presence here in London suddenly fleeing because of a lack of temporary permissions would be a hole beneath the waterline for the future of fund management in London. The measure is absolutely necessary. The vast majority of those funds have said that if they had to go back and apply again as third countries for third-country permissions to keep their existing funds in place, they would prefer to exit. That is the situation with which we are dealing so the Government’s move is appropriate.
However, noble Lords will be aware that a great deal of money has already fled London. Two or three weeks ago, EY provided a report setting the number of assets to have left the City, primarily funds, at around £800 billion. With the latest Barclays announcement, that takes the number to about £1 trillion, which is a reasonable amount of assets under management to have left because of Brexit. So that everybody understands, I say that this is not about people being disloyal or unpatriotic. One of the companies involved, Somerset Capital Management—co-founded by Jacob Rees-Mogg—domiciled two recently launched funds in Dublin, apparently because of the demands of various clients. Clearly, a great deal of the movement out of London has been client-led.
That is a problem because conglomeration is a very powerful factor in driving this industry forward. Losing something like £1 trillion of funds under management and finding that many players are playing double-handed, with a presence in both London and somewhere else—typically in Dublin but perhaps in other places in the EU 27—puts into doubt a future never before doubted: that London would dominate in this area. Did I understand correctly from the Minister—and do I understand correctly from reading the instrument—that the transitional arrangements described are simply to provide continuity for existing London-domiciled EEA UCITS? Has there been any assessment of the likelihood of new funds to open choosing London for their headquarters? Has there been any assessment of whether the limited reach of the regulations means that, if we leave on 29 March, funds to open later in the year are far less likely to be London-domiciled because they will have to apply through a third-country process? I would be interested to understand that.
In a sense, that leads me on to the impact statement, which is peculiar. The Minister is absolutely right that the statement is recent: I think it went online on Friday and was printed only today. The costs are defined in the summary as “Unknown: likely significant”. But the description which follows that brief table says that the only really quantifiable costs on businesses are,
“marginal compared to the … costs arising from the UK leaving the EU”—
thank goodness, as this is one tiny area—and that they,
“mainly consist of familiarisation costs”.
Has there been any attempt in that estimate of significance to estimate the changing pattern of investment for new funds that will follow, because of the limited nature of this new SI? From a cost perspective, I do not know whether that has been included in the numbers.
The benefits are described as “significant” but, again, we have no numbers around any of that. I suppose that one person’s significant differs from another’s but it seems that it is significant compared to having nothing to protect us from a cliff edge. I can certainly understand that that is significant but it seems peculiar, frankly, to suggest it as a benefit. The status quo is clearly the benefit; there are no costs and there is no reduction in the future location of funds in the UK. A benefit that basically avoids the damage of a cliff edge seems a terribly odd description.
Finally, I saw the humour on the Minister’s face, and I share it, at the second SI, which deals with long-term investment funds. Since, as I understand it, this is a continuity and rollover SI and there are no funds, can he help me with the logic of why we are bothering with it? I do not mind it being on the statute book but it seems slightly redundant to provide for the continuity of nothing. I thought that the Minister might help me in this context with these issues, but we will of course oppose neither instrument.
I thank the Minister for introducing this statutory instrument but I repeat my concern that we are considering such instruments at all. I and my party feel that the Government should have given a commitment that we would not have a no-deal exit; day by day, there is growing evidence that such an exit will be disastrous for our country. I will say no more on that but try to process these SIs on their merits against—how shall I put it?—the strict limitation that we are assuming a no-deal situation and recognising that things have to be done to achieve that.
The Treasury, I assume to be consistent, has reproduced the same eight paragraphs in all the Explanatory Memorandums. Paragraph 7.4, which I will repeat, says:
“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation”.
It is against that test that I spent my time studying the Explanatory Memorandum. It seems to do all the right things: it creates a new name; it says that passporting dies; and it goes on to offer a temporary permission regime. This regime may last for up to three years, or three years and 12 months, or three years and 24 months, or perhaps for ever. One has to view the SI in the light of that regime.
The SI goes on to make perfectly reasonable rules about information sharing, which is not mandatory but discretionary to make sure there is a function transfer. This SI suffers from what I would loosely call asymmetry. As I understand the situation under the temporary permission regime, EEA UCITS can be marketed in the UK but there is no reciprocity. UK UCITS have no right to be marketed in the EEA. The justification for that is that if this temporary permission regime were not there the disruption would be negative for customers and for participants in the market. Will the Minister affirm that there is consideration on both sides and that that is why we have chosen not to seek reciprocity in this SI?
In this SI and in all the SIs coming forward we need to discuss what happens if we have a deal. When and how does this SI get repealed?
The Long-term Investments Funds (Amendment) (EU Exit) Regulations seem even less controversial. There seem to be no particular problems or transition problems and they do not create asymmetry.
What comes across with all the SIs is the increased workload for the SCA and other regulatory bodies, the Treasury, the Bank of England and the PRA. Whenever we ask this question, we are assured that these institutions have plans in hand to cope with it. Will the Minister give that assurance again? I understand that these institutions work on a cash-neutral basis—that is, they charge for their services so the industry pays their costs—but there are only so many competent people. Whatever the funding situation, are the Government sure that they have sufficient resource of quality people to allow these agencies and institutions to discharge their duties?
I am grateful to all noble Lords who have taken part in this debate for their broad support for the statutory instrument before us. The noble Baroness, Lady Kramer, implied that she was not well informed on financial matters, but we all know that not to be the case. I agree with what she said about the TPRs. These are sensible measures, not least for seeking to keep the City of London’s pre-eminent position in financial markets at the forefront of our priorities.
The noble Baroness mentioned the migration of funds. I, too, saw the EY report. The £800 billion figure was an estimation of firms’ stated intentions rather than of actual assets transferred. The report states that the estimate is a “modest” sum when compared to the total assets of the UK banking sector, which stand at almost £8 trillion. None the less, it underlines the case for taking forward measures such as this to prevent any unnecessary migration of funds out of the UK. She also asked whether new funds could be established. The answer is that where there is an umbrella fund with lots of sub-funds, an existing umbrella fund with a sub-fund approved under the TPR can then get another sub-fund approved subsequently because it shares the same governance structure as the original one, so it has already been validated. Otherwise, a brand new one would have to start from scratch, in the way that the noble Baroness implied.
The noble Baroness asked about the impact assessment, She is quite right that it was published recently. These impact assessments focus narrowly on the changes that these SIs make and how businesses will need to respond. They do not deal with the broader economic impact of leaving the EU. The whole point of these SIs is to try, wherever possible, to maintain stability and continuity and minimise the amount of turbulence for firms involved. An impact assessment for the EU withdrawal Act deals with the impact of the parent Act; the Government have also published analysis of the potential economic impact of a range of scenarios, including no deal. These SIs mitigate the impact of leaving the EU without a deal. As the noble Baroness said, if they were not in place, there would be substantially more disruption and turbulence for the industry as a whole.
I think I have dealt with temporary marketing permissions. New EEA UCITS that are not sub-funds with temporary permissions, as I have just described, will have to use the third-country regime to market into the UK after exit day. The instrument does not change the process for authorising UK UCITS; that remains the same. There should be minimal change for the domestic industry.
The noble Lord, Lord Tunnicliffe, reiterated his opposition to no deal, which I understand and which he has made absolutely clear on earlier occasions. The best way to avoid no deal is to agree a deal; as I think he knows, the Prime Minister wants to meet others to identify what would be required to secure the backing of the House.
I think I answered the question from the noble Baroness, Lady Kramer, about removing LTIFs, in that some market and want to go on doing so. It will allow for EEA funds that market into the UK before exit day to continue to do so through the temporary marketing permission regime. The noble Lord, Lord Tunnicliffe, is right that it can be renewed at the end of three years. The TMPR can be extended only by the Treasury, pursuant to an FCA assessment on the effect of extending, or not extending, on financial markets, funds in the TMPR and the FCA’s objectives. It must also go through the House.
I was asked, if reciprocity is so important that they can continue marketing into this country, what about the reverse? The answer is that we can legislate only in relation to EEA funds and managers that passport into the UK. We cannot, through our own unilateral action, oblige them to do the same to us. That is why we are seeking to agree a deep and special partnership with the EU, as well as an implementation period—important for both of us—so we can have this reciprocity.
On reciprocity, we know that some temporary permissions are now being provided by the EU. For example, the London Clearing House has been given 12 months. Does the Minister anticipate temporary permissions in this area? Some guidance would be extremely helpful for the industry.
The noble Baroness makes a valid point. The answer may become available before I sit down. I agree that it would be of great value to firms based in this country if they could continue marketing into the EU in the event of no deal. I have just been handed the answer to an earlier question, which I have already replied to off the cuff. There may be some more in-flight refuelling.
On the response of industry to what we are doing, I draw the Committee’s attention to the remarks of Richard Withers, the head of government relations for Vanguard in Europe—one of the world’s largest asset management firms. He said that the collective investment scheme regulation that the Committee is debating now is a well-considered and well-drafted piece of secondary legislation, which removes possible disruptions to the UK public’s long-term investment and pension savings activity while also ensuring that the UK remains an attractive and pre-eminent target market into which global fund management companies distribute their products.
On the last point, it looks as if I may not be able to give a response to the very good question aimed at what representations are now being made by the Government or City institutions to encourage the EU and the relevant authorities there to do to us what we are in the process of doing to them. If I have not got the information by the time we reach the end of the next statutory instrument, I will write to the noble Baroness, Lady Kramer. I beg to move.