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House of Lords Hansard
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Money Market Funds (Amendment) (EU Exit) Regulations 2019
25 February 2019
Volume 796

Motion to Approve

Tabled by

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That the draft Regulations laid before the House on 24 January be approved.

Relevant document: 15th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A)

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My Lords, I will speak on behalf of my noble friend. The Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the EU withdrawal Act to deliver this, and a number of debates on these SIs have already been undertaken here and in another place.

This SI is part of this programme, and has been debated and approved by the other place. The SI will fix deficiencies in UK law on regulations for money market funds to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context.

The European regulation on money market funds relates to their establishment, management and marketing. These funds invest in highly liquid instruments—such as Treasury bonds—and provide a short-term, stable cash management function to charities, local government, businesses and other financial institutions. They are predominately used by investors as an alternative to bank deposits. The regulations were introduced as part of the response to the 2008 global financial crash, to preserve the integrity and stability of the EU market, and to ensure that money market funds are a resilient financial instrument. This is achieved by having further rules on prudential requirements, governance and transparency for operators of money market funds.

Money market funds are structured as either an Undertaking for Collective Investment in Transferable Securities or alternative investment funds. Consequently, they are required to comply with regulations that apply to UCITS or alternative investment funds. The regimes for UCITS and AIF managers have been separately amended to reflect the UK leaving the EU by the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 and Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019, which were made on Wednesday 20 February.

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

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

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

This instrument amends the scope of the regulation to apply to the UK only, with the effect of only allowing the marketing of UK-authorised MMFs, or MMFs managed by UK fund managers. However, additional amendments maintain the eligibility for EEA MMFs with temporary permissions to continue to market in the UK at the end of the temporary marketing permissions regime period, if they gain the required permissions to market as a third-country fund under existing UK domestic frameworks.

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

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

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

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

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

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

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

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

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

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

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

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

“make different provision for different purposes”,

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

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

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

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

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

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

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

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

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

Having said all that, I noticed the standard format: references are changed appropriately; scope is changed appropriately; functions are allocated appropriately; and then there is the old favourite of a temporary marketing permissions regime of three years and as many 12 months as the Treasury feels it needs. However, when you have read all the way through these things, the fundamental issue is that the provisions are asymmetric; they do nothing to allow UK firms to trade in the EU, which will be one of the many economically negative things that are coming out of this exercise.

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

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

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

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

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

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

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

“different provision for different purposes”.

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

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

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

Motion agreed.