Motion to Approve
That the draft Regulations laid before the House on 25 February be approved.
Relevant document: 19th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A).
My Lords, as this instrument is grouped, with the leave of the House, I shall speak also to the draft Electronic Commerce and Solvency 2 (Amendment etc.) (EU Exit) Regulations 2019.
These two instruments are part of the same legislative programme that we have discussed previously in the House to ensure that, if the UK were to leave the EU without a deal or an implementation period, there continued to be a functioning legislative and regulatory regime for financial services in the UK. Both SIs have already been debated in the House of Commons.
The Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 revoke a number of pieces of UK domestic law and retained EU law which it would not be appropriate to keep on the statute book after exit. The instrument also makes amendments to a number of financial services EU exit SIs to reflect other instruments that have been laid as part of the wider legislative programme, corrects minor errors identified in legislation, and makes amendments to ensure consistency between EU exit instruments.
The SI has five main components. First, it amends UK domestic law to ensure continuity with other legislation amended under the European Union (Withdrawal) Act. Specifically, it makes amendments to primary and secondary legislation that do not fall within the remit of changes made by other instruments. Specifically, the SI will remove references to EU institutions and regimes in four Acts of Parliament; namely, the Insolvency Act 1986, the Financial Services and Markets Act 2000, the Income Tax Act 2007 and the Corporation Tax Act 2009. These amendments will ensure that provisions that are irrelevant in a UK-only context are not retained on the UK statute book.
Secondly, the SI makes minor technical amendments to 19 statutory instruments, including 12 other financial services EU exit instruments that have previously been debated in this House. A number of those amendments are made in this instrument because they are consequential on other instruments that have been made only recently, such as the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019. A minority of the amendments correct drafting errors and improve the clarity of drafting. For example, a duplicate provision is omitted from the Bank of England (Amendment) (EU Exit) Regulations 2018, as the same amendment is made by the Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018.
Thirdly, this SI revokes three UK statutory instruments that relate to EU regimes that will not be applicable to the UK in the event of a no-deal exit given that they implement EU law being revoked at exit day under separate instruments. Fourthly, the SI makes amendments to, or revokes, retained EU law to ensure consistency with other EU exit instruments that have been made and to remove references to EU institutions that will no longer be relevant post-exit. Fifthly, the SI makes transitional and saving provisions to address deficiencies that arise from the UK’s withdrawal from the EU and to limit disruption to the financial services industry if the UK leaves the EU without a deal.
On the substance of the second instrument, at present there exists a regime within the EEA to facilitate greater cross-border e-commerce activity, implemented by the e-commerce directive 2000—or ECD for short. E-commerce refers to commercial activity that takes place online only. This regime allows an EEA firm to undertake online-only activity in an EEA state other than its home state without being subject to regulation in that EEA country. This is on the basis that such firms will be subject to relevant regulation in their home state. In the field of financial services, this means that an EEA firm, excluding Solvency 2 insurers, can undertake online-only activity in the UK without needing authorisation from the Financial Conduct Authority.
In a no-deal scenario, the UK would be outside the EEA and not subject to the e-commerce directive. As a result, the reciprocal arrangement that permitted EEA e-commerce financial services providers to operate in the UK without being regulated in the UK will no longer be valid. The exclusion in the regulated activities order will therefore be revoked to prevent EEA e-commerce financial services providers being able to undertake online-only financial services activity in the UK without the appropriate authorisation from the FCA. With regard to the e-commerce directive, these draft regulations therefore revoke Article 72A of the regulated activities order, where the exclusion from UK regulation for EEA e-commerce financial services providers currently lies.
In addition, this SI revokes the bulk of the regulations in the Electronic Commerce Directive (Financial Services and Markets) Regulations 2002, which gave the FCA rule-making powers pertaining to incoming EEA e-commerce financial services providers. These will no longer be relevant post exit. To help protect the interests of UK customers of EEA financial services firms, and those firms themselves, it is necessary to implement a regime that allows contracts taken out under the current exclusion to continue to be legally serviceable. This instrument will therefore implement a run-off regime to allow EEA e-commerce firms to legally service financial services contracts that were taken out before commencement of the instrument, and which utilised the exclusion in the regulated activities order, for a limited time. Pre-existing financial services contracts taken out under the e-commerce exclusion will continue to be excluded from the scope of regulated financial services activities under the Financial Services and Markets Act 2000. This will enable EEA providers of e-commerce activity of a financial services nature to wind down their UK operations in an orderly manner. This will provide certainty and fairness to both providers and users of financial services, and demonstrate that the UK remains open for business and takes seriously legal certainty and business continuity.
These draft regulations also make minor changes to a Commission delegated regulation related to the EU Solvency 2 directive and EU securitisation regulation. This delegated regulation sets out the requirements for investments in securitisations that no longer comply with the risk-retention and qualitative requirements. Specifically, these regulations amend the delegated regulation to correct a cross-reference and add references to the UK regulators. These changes are necessary to reflect the UK’s position outside the EU.
In summary, the Government believe that these instruments are necessary to ensure that the UK has a coherent and functioning financial services regulatory regime once the UK leaves the EU, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations. I beg to move.
My Lords, I have no issues with the first of these SIs. It is another that deals with errors and omissions; I suspect we will see quite a number of them. I do have serious concerns about the second SI, but not with its content or the fact that we need it if we are to take the step of leaving with no deal. I want to understand what happens to the financial services industry as a consequence. Perhaps the Minister can help me with this. He will know that I have been involved, from the earliest days, with the development of fintechs in the UK. An example is crowdfunders, whether they are US ones that have created a core European subsidiary in the UK, or home-grown ones, of which we have quite a few. We have been a magnet particularly for young people across Europe with a tech and finance interest to come here and start their companies. Those companies have, essentially, been pan-European from the first breath that they took. For example, under the e-commerce directive, a crowdfunder has been able to put up a project and seek investments through its online presence—the only way it exists—all across the UK plus the 27.
I understand from the SI that a crowdfunder based in the EEA will no longer be able to seek investments from UK investors unless it goes through the process of registering with the FCA and having its UK activities regulated by the FCA. I suspect that most will not bother. When you have 450 million people you can go to, going to an additional 65 million is probably not worth the effort. It is taking on the burden of an additional regulator just for a small part of the investor base you will be catching on to. If you do, you have only one regulator to deal with, and I assume that this is reciprocal. So if I am a UK-based crowdfunder, do I now have to go to the regulators in every one of the 27 and seek to become registered, certified or whatever else it is, to be able to continue to raise those funds? It is unusual for a crowdfunder based in the UK to raise most of its money in the UK. As I said, these have been pan-European from the day they took their first breath. They think that way, they are structured that way and their employees are designed in that way. Are we, in effect, hearing a death knell for crowdfunding and a whole series of related fintechs that are UK-based but have been reliant for building their investor or participant base from a pan-European, 500 million-person community? If there is this consequence then I am extremely concerned. Perhaps the Minister can explain; I may have it completely wrong.
After having some conversations I am quite concerned about a second point. Is the Minister clear that the UK companies that would find themselves trapped in this position are aware of it? Looking today at websites such as Seedrs or Crowdcube, there are hundreds of projects up on their systems seeking new investors. Those would presumably be grandfathered in this run-off programme, but dozens of new ones go up every single day. Do they understand that, in a week’s time, they may have to stop putting projects up in a way that can be accessed by a pan-European community? If not, are they in a position where they may be in breach and there may be serious repercussions as a consequence?
We are looking at an industry which many hold up as part of the fundamental future of financial services, an area the UK always considered itself a crucial leader in, and which we see as underpinning so much of our future prosperity. Can the Minister help me understand the consequences of what is about to happen?
My Lords, I will speak mostly about the first SI, if only to moan a bit. Paragraph 3.6 of the Explanatory Memorandum says that the Secondary Legislation Scrutiny Committee,
“noted that the legislation proposed to be amended by the instrument includes: four Acts of Parliament; seven ‘pre-EU Exit’ statutory instruments; 12 ‘EU Exit’ statutory instruments that have been considered by the House during the last six months; and several items of retained EU legislation”.
As far as I can tell, there are 36 amendments in this SI which have no themes or interrelationship. To get a feel for how difficult it is to work on the SI, paragraph 2.6 of the Explanatory Memorandum gives up almost altogether and says:
“Part 3 also makes minor technical amendments to correct the following financial services EU exit instruments. Further information on these instruments can be found in the EMs accompanying the instruments on legislation.gov.uk”.
If I threw all that in, it would take hours. Indeed, if one devoted just 10 minutes’ attention to each amendment, it would take six hours to read the thing.
The Minister said, rather grandly, that this had been considered by the House of Commons. I too noted that fact and leapt at the Official Report to give me some help. It told me that the Commons committee sat at 6 pm —that is quite keen—but adjourned at 6.11 pm, having completed its work. Members devoted 11 minutes to this SI. I am sure that, due to their natural brilliance, they scrutinised it fully, but I am rather slower than that.
There is a real problem of how we get proper scrutiny. I sought help from the Civil Service, as one is invited to by the Explanatory Memorandum. As I understand it, the amendments fall into three groups. One group corrects errors; I would value knowing how many of the 36 are error corrections. Another group makes previous SIs compatible with those created subsequently by other departments. So we have one bit of government making SIs that create complications in another; it is a bit brave to consider creating complications in Treasury SIs.
The third group comes from a review of the previous legislation. One worries about that until turning again to the Explanatory Memorandum. The Treasury has been consistent and kept paragraphs 7.1 to 7.8 identical in all its 50 SIs. Paragraph 7.4 says that 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 the situation”.
Therefore, I want a categorical assurance that in these 36 amendments there is no new policy. If there is new policy hidden among them, will the Minister tell me what that new policy is?
Turning to the second instrument, I found almost the opposite to the noble Baroness, Lady Kramer. Not that I am suggesting that what she said was not valid, but I thought this was a commendable Explanatory Memorandum. It is a stand-alone document that one could understand and it seemed that it was doing what the SI should do. In other words, it was dealing with inevitable consequences, so I am content with it. I think the essence of what the noble Baroness was saying is that here is yet another bad consequence of leaving the European Union, and to that extent I totally agree with her.
I thank the noble Baroness and the noble Lord for their scrutiny and questions on these points. I shall do this in reverse order because I am waiting for a little further inspiration about fintech—it is arriving. The noble Lord, Lord Tunnicliffe, is always assiduous in these matters and drifts easily between bus operations in Northern Ireland and financial services across the European Union in his scrutiny of SIs. He raises a very serious point: the first of these documents runs to some 26 pages, and 26 pages of Explanatory Memorandum, while the second has 11 pages and 14 pages of Explanatory Memorandum, so there is an awful lot of detail.
During this process—we are now nearing the end of it—we have worked on some 52 statutory instruments and have been grateful for the way the noble Baroness and the noble Lord have engaged with us very constructively over the past four to five months. During that process, of course, there will be consequential amendments that were not foreseen, because some of the 48 affirmative statutory instruments that have gone through this House were laid after the previous ones were made, and therefore changes need to be made. We envisaged, when we began this, what we call an onshoring process to ensure seamless activity, so that there is no disruption for UK financial services. We always envisaged the need for some instrument such as this at the end that corrected any errors and dealt with consequential changes. All the amendments are being made to ensure a functioning financial services regulatory regime in the UK, in any scenario, when the UK leaves. These amendments ensure continuity and clarity.
The noble Lord asked me to make the very specific commitment that no policy changes are involved in these: that is certainly the case. To make policy changes would be in contravention of the letter and spirit of the withdrawal Act and we certainly would not do it. The approach has been consistent. He asked about the number of errors. Around eight drafting errors in previous EU exit financial services SIs are being corrected in this measure.
The noble Baroness raised some issues around fintech and I appreciate her expertise in this area. Fintech is very much a jewel in the crown of the UK. We have some of the most amazing financial services firms in fintech, including start-ups in places, such as Shoreditch, around the City of London: it is a quite incredible and burgeoning industry and certainly one that we want to see continuing to expand. UK providers of online services to the EEA countries will need to continue to comply with a range of EEA countries’ individual legal requirements relating to online activities. The exclusion we are referring to here is limited to online-only activities. We expect that firms will use passporting rights rather than this exclusion; therefore, we estimate the number of fintech firms will be very small.
Will the Minister, if he has the opportunity, look into this? I know that crowdfunders and many others—I have tried to tell the Treasury a million times—use the e-commerce directive, not passporting rights. It has played a key role. Whether they can transfer from using the e-commerce directive to passporting rights, I am not clear, but it seems at least an issue somebody should look at.
I was just coming to that precise point, because the noble Baroness raises a serious point which is worthy and very important for us to look into further. I undertake to do that and to write to her, to copy in the noble Lord, Lord Tunnicliffe, and to place a copy in the Library. It is very important that we ensure that there is no unintended, deleterious impact on such an important sector of the UK financial services industry. With that, I commend the regulations to the House.