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House of Lords Hansard
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Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019
16 October 2019
Volume 800

Considered in Grand Committee

Moved by

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That the Grand Committee do consider the Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019.

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My Lords, as the Committee will be more than aware, Parliament has now approved well over 50 EU exit SIs for financial services. That includes three miscellaneous provisions SIs, which are sometimes necessary to make isolated deficiency fixes that do not fit easily into more thematic instruments. These miscellaneous SIs have sometimes been used to correct minor errors in or omissions from earlier exit legislation. This instrument makes some such changes and updates some earlier exit provisions to account for the Article 50 extension. As I have explained to the House previously, the errors in our exit legislation have been minimal. Of approximately 1,300 pages of financial services instruments, miscellaneous instruments have accounted for only 60, with these miscellaneous instruments used only partially to correct errors.

However, this instrument also makes substantive changes to earlier exit legislation in two key areas: first, to the contractual continuity and temporary permissions regimes for payment services; and, secondly, to transitional arrangements for financial benchmarks. These changes are not to correct errors but to strengthen our readiness for exit. We are continually reviewing our exit arrangements to ensure that they are as robust as they can be. In these two areas, we decided it is right to do more to protect UK consumers of payment services and to prevent disruption to firms and markets that rely on financial benchmarks.

An important aspect of our no-deal preparations is the temporary permissions regime, which will enable European Economic Area firms that operate in the UK via a financial services passport to carry on their UK business after exit day while they seek to become fully UK-authorised. We have also introduced run-off mechanisms via the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, which were made on 28 February, for EEA firms that do not enter the temporary permissions regime or that leave it without full UK authorisation.

Part 3 of this instrument supplements provisions for the temporary permissions and contractual continuity regimes for EEA payments and e-money firms through changes to underlying payment services and e-money legislation and previous EU exit SIs. A review of this legislation has identified a limited number of provisions that require amending by this SI to ensure that these temporary regimes are as robust as possible. The amendments fall into two categories. The first is to ensure that EEA firms in contractual run-off can continue to carry out various payment-related activities as intended. This will include provision of payment and e-money services by EEA credit institutions such as banks. The second category applies to the temporary regimes for EEA payments and e-money firms. These amendments clarify and make more explicit the full range of permissions and obligations of firms that enter these regimes. For example, the amendments make explicit that an EEA firm in a run-off regime can legally redeem outstanding electronic money, making it clear that it can return any balance on an account to UK e-money holders. In a limited number of areas, the instrument makes FCA powers more consistent with the powers it has with respect to credit institutions in the run-off regimes, for example by making explicit that the FCA may publish a register of firms in contractual run off. These changes ensure that the FCA has proportionate powers to take action to protect UK consumers.

The second substantive set of provisions in this instrument covers changes being made to the onshored benchmarks regulations by the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019, which the House debated in February. As they stand, these onshored regulations contain a transitional regime for third-party benchmarks, allowing UK entities to use non-registered third-party benchmarks until 31 December 2019. However, since these regulations were made, it has become clear that there will be a damaging cliff-edge impact when this transitional regime expires at the end of 2019, a point highlighted by the Secondary Legislation Scrutiny Committee in its report published on 3 October.

Very few third-party benchmark administrators have made applications to be registered, and only two equivalence determinations have been made by the European Commission, covering only seven third-country benchmarks. If we leave the EU without a deal on 31 October, benchmark administrators outside the UK will have insufficient time to make an application under the UK regime by 31 December 2019. This would mean that UK firms would no longer be able to use those benchmarks for new contracts and products, causing considerable market disruption. For example, loss of access to third-party foreign exchange rate benchmarks, such as the Indian spot FX rate, could prevent firms carrying out important risk-management functions, such as hedging their currency risk. Equally, the inability to use equity benchmarks, such as the Nikkei 225, may make it more difficult for UK investors to gain or hedge equity exposures. These instruments extend the period that the transitional regime applies by three years, from the end of 2019 to the end of 2022, ensuring that benchmark administrators outside the UK have an appropriate period to make an application under the UK’s onshored third-country regime.

Finally, I want to explain the amendments that the instrument makes to our onshored equivalence framework. These amendments are purely for legal clarity and do not change the policy approach to equivalence that Parliament has already approved. When making an equivalence determination after exit, the law needs to be clear about on which aspects of the UK regime a third country has equivalent provisions. For example, if Parliament were to approve a decision on a third country having equivalent insurance regulation to the Solvency 2 directive, UK law will be clear that this refers to the UK’s implementation of Solvency 2 as it stands when the equivalence decision is made.

Before I conclude, I should point out that this instrument was made and laid before Parliament on 5 September, under the made-affirmative procedure provided for in the EU withdrawal Act. This is an urgent procedure which brings an affirmative instrument into law immediately, before Parliament has considered the legislation, but this procedure also requires that Parliament must consider and approve such a made affirmative instrument if it is to remain in law. As I explained to the House last week, the Government have not used this procedure lightly and it must be remembered that, across departments, we have already laid over 600 exit instruments under the usual secondary legislation procedures. Indeed, of the 58 SIs that the Treasury has put before Parliament, only four have been made using this procedure. But as we draw near to exit day, it is vital that we have all critical exit legislation in place, including legislation necessary to ensure that our financial services regulatory regime continues to function effectively from exit. Industry and our financial regulators need legal certainty on the regime that will apply from exit if we leave the EU without an agreement.

I have spoken of my gratitude for the hard work that has gone into preparing our regulatory regime for exit in previous EU exit SI debates, and I repeat that thanks. I know that the Bank of England, the FCA and industry have greatly appreciated the Treasury’s constructive, collaborative approach to this task. The legislation we have put before Parliament has been very positively received by the industry and has done a huge amount to provide confidence and reassurance that the UK’s regulatory regime will continue to work effectively in all scenarios. Once again, I thank all those involved. I hope colleagues will join me in supporting these regulations. I beg to move.

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My Lords, I thank the Minister for this introduction and also for sharing with us a draft of his speech. I appreciate that he us trying to be as helpful as possible, because this House is of course not involved in the various consultations. It is industry that gets the benefit of that. A point that I have made about when we get into non-Brexit legislation in future is that I think we need to have more consultation at the same time as industry.

As this is a financial services matter, I declare my interests as in the register. As the Minister said, this is a miscellaneous provisions SI, which have been thankfully rare from the Treasury. I repeat what we have said before: in general, the Treasury has done a very good job of converting the EU legislation into UK law and following a formula that we can generally see on all the documents as they come forward. I agree that it adds clarity and is a useful extension to previously defined transition periods.

I broadly welcome the provisions, in particular regarding the contractual run-off. It seems a very useful provision for the FCA to be able to list firms that are in contractual run-off, and it is very useful for consumers. I do not expect consumers to be wandering around the FCA website—I might do that and it is hard enough for me—but there are various consumer-oriented organisations, some of which make useful broadcasts to alert consumers to things.

They would find a use for that kind of information in circumstances where a consumer needs to be alerted: for example, if some provision is coming to an end or if the time is right for them to have to switch away from a provider that will not continue forever. It says that the FCA “may” do this; this is one of those occasions where I wish it said “shall”, because I regard this as essential and hope it is written with that spirit in mind.

I welcome the clarity on and extension to the transition period for third-country benchmarks. Benchmark regulation is still relatively newly within the regulatory perimeter—in fact, anywhere in the world. It is something on which the EU has largely been in advance of regulation elsewhere, so it is actually quite new for third countries to have to grasp the fact that they may need permissions and other approvals around their own benchmarks. For that reason I thought that the time provided previously was too short, so I welcome the longer extension. I do not consider this soft; it is highly necessary.

I notice that the conversion date in Regulation 20(2)(a) for those already in the system is 31 December 2019, the three months, I think, for an application for registration or authorisation of an existing EEA entity, benchmark or something of that nature. I query the wisdom of writing a date in. “Three months after exit day” might have been more sensible, in case there is a delay to get some kind of deal, particularly one to 31 December 2019—I suppose that if that fell through we would have to reamend, although I hope that that is a circumstance we do not have to entertain.

I kind of welcome the clarifications around equivalence. It is always difficult if you say, “Saying we are equivalent on Solvency II relates only to Solvency II and not other things”, because there is a great deal of entanglement. There will be bits to do with MiFID and bits to do with other things that have either amended, imported or applied Solvency II. Where there are explanations regarding this, to say, “Just Solvency II” could lead people astray. You have to make it clear whether, if you are finding them equivalent on Solvency II, that means that any related bit to do with some other obligation somewhere else that you have to do if you are an insurance company has also been taken account of. Again, that is where the web of legislation, made more complex by the way in which we have imported and amended it, and the absence of checklists and correlation tables about what is where, will make it very difficult for industry and any practitioner to follow. It will also be quite difficult for those seeking equivalence decisions. I have no objection to what is being done, but I fear that on equivalence and clarification it will need revisiting at some point in a more generic way.

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My Lords, I will be brief thanks to my noble friend Lady Bowles, who takes all the pressure and burden off my shoulders. I thank her very much. I also thank the Minister for his clarity and advance notice of his speech. I want to bring up a couple of issues. As with my colleague, it seems to me good sense to follow the tactic of contractual run-off. That that was not in one of the earlier SIs was probably an oversight given the volume that the Treasury has had to deal with, and I do not think that anybody can raise too many eyebrows at that.

I want to focus a little more on the third-country benchmarks, because I wonder whether that really was an oversight. The UK may have assumed that third countries would stand in line so that, on the first possible day that they could have a discussion on recognition of benchmarks, they would be knocking at our door and begging to be able to go through the process. It has been a rather salutary experience to find that many countries have not been all that concerned about standing in line to make sure that they continue to be able to use London for a wide range of their activities—most of them are exploring alternative markets fairly vigorously and with quite a bit of enthusiasm. Making it easier and taking away some uncertainty for a period of three years therefore makes great sense, but I suspect that the initial thought was that London was so necessary to everybody that it could not be replaced by anyone in any way and consequently did not have to think carefully about providing the opportunity now covered by this SI.

That brings me to the issue of equivalence which the Minister mentioned, although I know it is not essentially embedded in this SI. He said that the UK almost from the moment we leave—if Brexit happens—would begin potentially to diverge. Different interpretations and different rules might come under the umbrella of Solvency II, but their UK life would be different from that for the 27 countries within the European Union. That is one of the things that worry me more than anything else. While all these measures focus on the UK discussing how it will allow EEA firms to continue to use London, the real issue is whether UK-based firms can continue to service clients across the EU, because that is obviously where the overwhelming majority of the client base is.

Let us look at insurance. Commercial insurance is the most significant part of that industry and the overwhelming majority of its clients are EU 27 companies. I have no idea whether any relaxation in terms has now been offered by the EU that is greater than the original temporary permissions. As I remember, most of the temporary permissions from the EU expire next March, so potentially we are looking at some fairly rough waters. If the Minister is making a statement that underscores the expectation that the UK will have a different interpretation or will step away from our common heritage quite rapidly after Brexit, he is doing a great deal to diminish any willingness on the part of the European Union to extend temporary permissions or to consider that the terms are being met for equivalence. I counsel him to think carefully before flagging up an intention to create divergence, when such divergence is largely at a cost to the UK financial services.

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My Lords, I welcome the Minister to the Moses Room. I do not know whether he has done any propositions here before, but I hope he is not overwhelmed by the number of Peers in attendance.

The Liberal Democrats are blessed with people who understand this industry. I am afraid that the Labour Opposition is blessed with me; I do not know the industry and have had to slog through the Explanatory Memorandum to try to understand what it is all about. I note the Minister’s praise of the Treasury staff and others involved in its creation. As a constant critic of Explanatory Memorandums, I also extend praise, because slotting together these 58 SIs must have been a dreadful task. Nevertheless, I fall back on reading the Explanatory Memorandum and hope I add some rigour to the exercise by insisting on explanations where the plain language has failed to get the information across to me.

The first issue I raise is in Regulation 1(2) itself, which says:

“This regulation and regulations 2 to 7”,

et cetera,

“come into force the day after the day on which these Regulations are made”.

By my understanding of the “made affirmative” process, that means they are actually in force now—I stand to be corrected on this. One of the problems we have had all the way through is that this is a so-called no-deal SI, so what happens to the parts of the regulations which are now in force if in fact we get a deal? Will they be repealed, when and by what mechanism?

Plunging into the Explanatory Memorandum itself, the first place I paused was paragraph 2.5. Here, there is an amendment to FSMA,

“so that the Financial Conduct Authority … can, if necessary, be exempt from consultation requirements where an urgent change to BTS is needed to protect UK consumers. The ability of the FCA to make urgent rule changes, where necessary to protect consumers, is an important crisis management tool in the UK regulatory framework”.

I always worry about these urgent tools where consultation is abandoned. If it is important and about a crisis, and if there is no consultation because of the timescale, is there subsequent consultation? Should amendments made under these circumstances be subject to some sort of review process?

The next area I will look at is paragraph 2.6, which says:

“Updates are necessary to take account of EU amendments made to the CRR which became applicable in June 2019. The CRR cross-references to be updated are in domestic legislation concerning the recovery and resolution of banks, and the reorganisation and winding up of credit institutions”.

For my sins, I have been involved in this legislation over the past several years and know that this is really important stuff. Is it possible to give me some sort of feel as to what these changes effect? Clearly I could go back through the many documents, but it would be useful if the Minister could give a short explanation.

The next area I tripped up on was in paragraph 2.7, when I was happily reading through the document. Clearly there was a problem, and here was a solution. The end of paragraph 2.7 says:

“A review of this legislation has identified a limited number of provisions which should be amended in order to ensure these temporary regimes operate as intended from exit day”.

That seemed to me a pretty sensible idea, until I read the explanation over the page, at paragraph 2.9(i), which states that the regulations,

“ensure that relevant funds of payment service users and e-money holders continue to be prioritised above the claims of other creditors as they are currently, in the event that these firms enter a UK insolvency procedure”.

That seems to me, as a non-expert, to be a pretty significant impact on insolvency law. Am I right that it amends or influences the appropriate insolvency law, and is it accepted that this is quite a significant impact? It seems entirely sensible and I cannot quibble with it; I just worry that it is a little paragraph in an instrument that amends an instrument, and so on. Have all the implications been taken into account, or is it a more straightforward situation that there was some ambiguity and it is merely eliminating that to a minimum of ambiguity?

Later in the document, paragraph 2.16 introduces the MAR, which is about market integrity and investor protection. Clearly this is very important. I do not understand how the MAR works. It seems that it must relate to criminal law, because any insider trading and so on presumably has a criminal consequence. But the paragraph goes on to specifically explain that this removes any ambiguity as to whether overseas territories are involved. First, I do not understand who the overseas territories are; I knew the definition once, but I would like it repeated just to clarify things in my own mind. Secondly, do we have the appropriate law to intrude into overseas territories to make sure that the MAR has the right impact?

On the benchmark issue, Liberal Democrat colleagues have drawn out the issue in paragraph 2.25 of the poor rate at which other authorities have sought to administer. I too shuddered a little at this. Is it an indicator that London will have a diminished status after a no-deal Brexit? Is our feeling that Europe cannot manage without London justified? This is the first direct reaction to it, and it is almost as though the importance of London is being ignored.

Finally, I have a little quibble about paragraph 3.1. I try to be nice to civil servants, but that paragraph explains that the “made affirmative” procedure is being used because it is urgent—and if you then look at the schedule at the back, it explains again why it is urgent. However, the only reason it is urgent is because the process was started late. Are there good reasons why the process was late to begin with?

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My Lords, I thank noble Lords for a lot of scrutiny of this set of incredibly technical SIs. I appreciate the time and consideration that has gone into examining them. I also thank noble Lords for their warm welcome to me in the Moses Room because it is indeed my first time. However, I like and welcome the more intimate and friendly nature of the debate here. Many specific and technical questions have been put, so I hope that I will be forgiven if I go through them systematically and share some answers in the best way possible.

On contractual run-off, I welcome the view of the noble Baroness, Lady Bowles, that the creation of this device is helpful. It has been warmly received by the industry. When it was explained to me, I wondered why we did not have it in the first place, so I am pleased to see it. I completely understand and can convey the noble Baroness’s point on changing “may” to “shall” to the Treasury; I will pass it on to officials. The noble Baroness also queried the date on benchmarking—that is, changing it from a fixed day to perhaps a more flexible one; the noble Lord, Lord Tunnicliffe, also referred to this. Again, I will convey that point to officials because it seems an extremely sensible suggestion.

Let me say a few words about equivalence. The noble Baroness is right: what the third parties are equivalent to must be extremely precise. We will review this in the longer term but, for the moment, we must prioritise getting something prepared for a potential no-Brexit date, so we are working on a shorter term. However, we will not lose sight of the need for that precision in the long term, so we will revisit it.

The noble Baroness, Lady Kramer, asked about third-party benchmarks and why we had not spotted the benchmarks issue earlier. I assure the noble Baroness that it was not a question of not spotting it because it was very much on the radar screen. However, there is an issue right across the EU around putting in the regulations for third-party benchmarks. In particular, they are newly more important and the problems that we have faced flow from new EU regulations, not from the UK’s approach. We have been playing catch-up during the drafting of these SIs and I think that we have reached a place where we now feel much more confident than before.

I turn to reciprocity. Again, I assure the noble Baroness, Lady Kramer, that onshoring has kept divergence to a minimum, as she will know and as we have discussed in the House a couple of times. The UK provisions that a third-party country will need to be equivalent will, in substance, be exactly the same as the EU provisions, so the question of whether firms based in the UK will be able to trade as normal in the EU will, we believe, be substantially secure in the case of no deal. I also take confidence from some of the progress that has already been made in our negotiations with EU member states. I cite two or three examples. The first is the granting of temporary equivalence in recognition of UK CCPs and CSDs. The second is the decision of ESMA to approve MOUs to include provisions to allow the cross-border delegation of portfolio management between the UK and the EEA. The third is the EIOPA recommendations, which call on relevant member state regulators to put in place measures that aim to minimise detriment to insurance policyholders. I believe that that was an error referred to by the noble Baroness. Certain member states, particularly France, Germany, the Netherlands, Sweden, Finland, Italy, Luxembourg and Ireland, among others, have also announced various contingency measures. We are reassured that there is a commitment on the part of our EU partners to ensure that trading continues and that there is not some kind of problem should a no-deal Brexit occur.

The noble Lord, Lord Tunnicliffe, asked a number of characteristically focused questions. I will tick some of those off, if I may. There was a correct question about commencement. Yes, some of the measures are in force because of the procedure used to lay and make them. They are in force right now and, if a deal is secured, we expect that any provisions in EU exit SIs due to commence on exit day will be deferred until the end of the implementation period. That would be achieved by legislation used in ratifying the deal. We are keeping an eye on all these loose ends and they will be rolled up in the ratification process. Some provisions in exit legislation have already commenced—for example, our temporary permissions regime, which enables firms to apply now to be covered by all of the regimes covered by these SIs in time for exit. Any provisions that have commenced already will need to be amended appropriately to cater for any agreement reached between the UK and the EU.

The noble Lord also asked about the urgent and crisis procedures, quite understandably. He asked whether there was any way that they could be reviewed after they have been implemented or consulted on. The particular amendment in these regulations does not introduce any urgent procedures itself. It enables the FCA to use a provision that it already has in the Financial Services and Markets Act 2000 to dispense with consultation requirements when an urgent rule change is needed to protect consumers. Since it is already on the statute book and the procedure already exists, there was not felt to be a strong need for further consultation in this case, but we have continued to engage with regulators in the industry on our exit legislation, including instruments made under the “made affirmative” procedure, and we are keeping all the exit legislation under review. The noble Lord makes a good argument for potentially revisiting all this in the case of a no-deal Brexit to ensure that the provisions made under the urgent and crisis procedures remain relevant and of the best quality.

On paragraph 2.6, and the question of what these regulations actually do, I will try to explain. Regulations 2(3), 3, 9 and 12 update cross-references in various pieces of domestic legislation to the UK’s onshore capital requirements regulation to ensure that these references continue to function after exit. These amendments are purely about updating cross-references in legislation and do not change the substance or policy of the regulations concerned. After exit, we cannot continue to refer to EU legislation. We must refer to equivalent provisions in UK law.

Paragraph 2.7 was another area that invited a question. The noble Lord, Lord Tunnicliffe, asked about “as intended”. That stray phrase refers to the intention in the originating legislation—the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019—which introduced temporary run-off regimes for EEA credit institutions, payment institutions and e-money institutions with pre-existing contracts. The intention was that they could continue to service pre-existing contracts for a limited period. This instrument ensures that they will be able legally to provide the full range of services that may be required under pre-existing contracts.

The noble Lord, Lord Tunnicliffe, asked about insolvency and whether these regulations would have a big impact on insolvency law. I confess that when he put it to me, it made me lift my head and wonder the same question—for instance, by changing the order of claimants on assets. I assure him that that is not the case. The amendment continues to prioritise the claims of customers, for instance against payment firms in a UK insolvency procedure. That totally protects UK consumers of EEA firms in a run-off as currently required by the European payments regulations, and will be transposed into UK law. Currently, if an EEA payment or e-money institution becomes insolvent, UK customers would enter a single insolvency procedure in the firm’s EEA home state. In the event of a no-deal Brexit, there is the potential for an additional UK insolvency procedure. From what I understand, that actually enhances the security of UK customers.

The noble Lord also mentioned the market abuse regulations in paragraph 2.16. He asked whether they cover criminal offences and asked about overseas territories. I cannot reel off the 16 overseas territories off the top of my head, but I would be happy to send him a link to that list. With reference to paragraph 2.16, I assure the noble Lord that this is about ensuring that existing criminal offences continue to apply as they do now once the UK is outside the EU’s jurisdiction; it is not about creating any new criminal offences. Overseas territories—for example, Bermuda—are currently within the scope of the EU’s market abuse regulations for activities carried out in the EU, so the regulations ensure that they continue to remain within the scope of the UK’s post-exit market abuse scheme.

Lastly, both the noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, asked about diminished status, which is a difficult issue to address because we do not know what is happening in the negotiating room. This Government and, I think, everyone in this Room, very much hope that a deal will be done. It is very much the intention behind the SIs and the entire thrust of government policy to ensure that, even under a no-deal Brexit, the financial services industry will be protected and will not suffer diminished status. We very much hope that these measures will achieve that objective.

Motion agreed.