Motion to Approve
My Lords, noble Lords will be aware that since July 2018 Her Majesty’s Treasury has put in place legislation using powers under the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020, to ensure that the UK has an independent and coherent financial services regulatory regime at the end of this year, when the UK leaves the transition period.
This SI is part of that programme of work, and the approach aligns with the general approach established by the EU withdrawal Act 2018: providing continuity by retaining existing legislation at the end of the transition period, but amending where necessary to ensure that it continues to function and is effective in a UK-only context. This SI makes deficiency fixes to a new piece of EU legislation that has recently become—
My Lords, I apologise; I am speaking to the wrong SI. I will have to briefly get the correct SI, so I will defer to the Whip.
My Lords, on this occasion I will not read out the usual preamble but will go straight to the point. Motion in the name of the noble Baroness, Lady Penn, to approve the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2020. The time limit is one hour.
My Lords, I apologise for the previous confusion. I believe I have already set out the programme of work that this SI—in addition to the previous SI—is part of, so I turn to the specific content of this SI.
The approach taken in this SI aligns with the general approach established by the EU withdrawal Act 2018: providing continuity by retaining existing legislation at the end of the transition period, but amending where necessary to ensure effectiveness in a UK-only context. While this SI makes amendments to approximately 20 pieces of legislation, the number and nature of these amendments are modest and minor. They act to preserve the effect of recent changes to EU legislation in the UK, and in doing so limit any impact on business that would otherwise arise at the end of the transition period.
Primarily, this SI fixes deficiencies in recently applicable EU legislation. For example, the fifth money laundering directive was transposed in the UK in January this year through amendments to the Money Laundering Regulations. This SI fixes minor deficiencies in the Money Laundering Regulations resulting from the recent transposition of this directive. These minor amendments remove references to EU institutions and regulatory distinctions between EEA and other third countries, and change a requirement for co-operation with overseas authorities into an ability to co-operate. This will ensure that the UK has an independent and coherent anti-money laundering regulatory regime at the end of the transition period.
As a further example, the EU has recently amended the benchmarks regulation to include two new categories of low-carbon benchmarks—the “Climate Transition Benchmarks” and “Paris-aligned Benchmarks”. The EU also extended existing transparency rules to reflect environmental, social and governance, or ESG, factors. This SI fixes deficiencies that will arise in retained EU law as a result of these EU amendments. It inserts definitions for a “UK Climate Transition Benchmark” and a “UK Paris-aligned Benchmark” into the retained EU law version of the benchmarks regulation. It also specifies disclosure requirements in relation to ESG factors. This will ensure that the UK continues to have an effective regime to enhance the transparency and comparability of low-carbon benchmarks, enabling investors to make informed decisions.
At the end of the transition period, there will be elements of retained EU law and domestic law that would not be appropriate to keep on the statute book. This SI therefore revokes certain pieces of retained EU law and UK domestic law—for example, elements of the European system of financial supervision regulations—that will not be relevant in a UK-only context.
This SI also makes a small number of minor clarifications and corrections to previous financial services EU exit instruments. Noble Lords will be aware of the unprecedented scale of the legislative programme that the Treasury has undertaken, and this has been carried out with rigorous checking procedures. However, it is unfortunately the case that errors are made on occasion, and when they arise it is important that they are corrected as soon as possible.
I note that this SI also includes provisions initially included in the Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019. This instrument was laid using the “made affirmative” procedure in October 2019, when it was necessary to ensure that the SI was in force prior to the previous exit date of 31 October. The SI subsequently ceased to have effect, but it is important that those provisions, which include amendments to the UK’s prospectus regime to ensure it remains operational in a wholly domestic context, are in force before the end of the transition period. These provisions have therefore been included in this SI. Noble Lords will be aware that this information was also identified by the Secondary Legislation Scrutiny Committee in its report published on 7 May.
Finally, I turn to the amendments this SI makes to a previous EU exit instrument: the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, which I will refer to as the equivalence SI. The equivalence SI enables the Treasury to make equivalence directions for EEA states, for specified provisions, during the transition period. Today’s SI adds additional equivalence regimes to the scope of the power for the Treasury to make equivalence directions for EEA states during the transition period—through the inclusion of provisions relating to central securities depositories, which are entities that hold financial instruments, and trade repositories, which collect and maintain records of derivatives trades.
This SI also amends the existing drafting on the length of the direction power to tie it to the end of the transition period. This will enable Ministers to make directions during the transition period to come into force at the end of the transition period, granting equivalence to those EEA regimes. Finally, it clarifies that Her Majesty’s Treasury can impose limitations on the application of state-level equivalence decisions when granting equivalence to the EEA; for example, in response to EU conditions placed on the UK.
The Treasury has been working closely with the financial services regulators in the drafting of this instrument. The Treasury is also engaged with the financial services industry on this SI, as it has been extensively over the course of its financial services EU exit legislation programme. In summary, the Government believe that this instrument is necessary to ensure that the UK has a coherent and functioning financial services regulatory regime at the end of the transition period. I hope noble Lords will join me in supporting these regulations. I beg to move.
My Lords, I thank the Minister for her agility in so seamlessly and cogently speaking to the correct regulations. She says that they are minor, but the real importance of these regulations is that they illustrate what is at risk if we fail to reach an adequate trade deal, as seems very possible. Surely the regulations cannot in themselves begin to replace the unfettered access to the single market for our financial services sector which EU membership provided.
As the Minister will know, this sector employs 2.2 million of our workforce and is estimated to account for 6.5% of the UK’s economic output, generating more than £70 billion in tax revenues in 2017, making up 11% of the national total. Until the financial crisis of 2008, the City of London was seen as the country’s greatest economic asset, as well as being by far the most important financial centre in the European Union. Financial firms in London have benefited hugely from EU membership, most obviously through passporting rights which enable firms to trade in any other member state, under the supervision of British regulators, without having to seek further authorisation from each country. Around 5,500 firms based in the UK currently benefit from passporting, with financial exports worth £26 billion, while 8,000 companies in the European Economic Area use this mechanism to offer services in Britain. After the post-Brexit transition period, UK financial services will lose their EU passport rights and be forced to rely on equivalence for their market access to Europe. Under that scheme, the European Commission decides whether a country’s regulations are deemed robust enough for it to operate within the single market, and can later withdraw the decision with as little as 30 days’ notice—so much for taking back control.
In the run-up to the last election, many financiers seemed to assume that a Conservative victory would ensure business as usual for the City. However, as these regulations show, Britain’s status as Europe’s leading hub for financial and legal services is at real risk after Brexit. Already, more than 300 firms in Britain have opened EU hubs in order to ensure single market access, while £1 trillion of City assets and 7,000 banking jobs have been transferred to the eurozone. London has been supplanted by New York as the world’s leading financial centre in the Global Financial Centres Index and is close to being overtaken by Hong Kong. Again, so much for the Brexit promise of taking back control, even with these regulations.
My Lords, I thank the Minister for her introduction, and her team for the clarity of their Explanatory Notes. Can the Minister confirm that the Gibraltarian authorities are happy with these provisions? In relation to the United Kingdom, we need to stay aligned during the transition period, but it also seems clear and welcome that we intend to stay aligned after that. Can the Minister confirm this?
The EU has amended its regime to include new categories of low-carbon benchmarks and extended rules on transparency in relation to environmental, social and governance factors. I note that
“As far as possible, HM Treasury’s approach ensures that the same laws and rules would continue to apply at the end of the Transition Period, to provide continuity and certainty to firms and their customers.”
That is excellent. Also, as new EU legislation becomes applicable during the transition period, the Treasury will introduce further SIs to ensure that this continues to operate effectively in the UK
“at the end of the Transition Period.”
The emphasis here is mine.
Despite this apparent commitment, however, the duty to co-operate with supervisors has been substituted with a power to co-operate after the transition period—why the difference? At the end of transition, the UK will be outside the EU’s single market for financial services, including the passport regime. This is hugely to be regretted, as the noble Lord, Lord Hain, has just said. There is the possibility of equivalence. How do we make sure that we secure this, and secure it long-term? My noble friend Lady Kramer, in the previous SI discussion, expressed her enormous concern about this. I did not feel that the Minister grasped the overarching point she made.
Given the potential impact of this, how optimistic is the Minister about securing equivalence in the long term? To what extent do the Government consider diverging from the EU in financial services, and what would be the effect on equivalence? Significant resources will need to be put into our close monitoring of any changes governing the EU financial services market, ensuring that we follow suit. Of course, this does indeed make us a rule-taker rather than a rule-maker. Can the Minister spell out how the Government intend to do this? I look forward to her reply.
My Lords, I thank my noble friend the Minister for introducing this regulation and giving us the opportunity to debate it this afternoon. I commend her for her speedy recovery in a very difficult opening. She has certainly worked extremely hard this afternoon for the House and, indeed, the public.
I notice that, at the end of the transition period, the passporting provisions will no longer apply. I join other noble Lords who have spoken in expressing my deep regret and recording the massive contribution that financial services have made to facilitating investment not just in this country but across the European Union. Obviously, the loss of passporting equivalence will be a very poor second; again, I join other speakers in wanting to make sure that this will work as well as it possibly can.
I welcome the fact that the regulations, as set out by my noble friend the Minister, will ensure that low-carbon benchmarks enable investors to have the knowledge and choices to make their investment—in particular, recognising the environmental, social and governance factors that this covers. They are extremely important; I am pleased that environmental and social policies feature as strongly as they do in the instrument before us.
I have a specific question for my noble friend. The statutory instrument clearly sets out the exemption that investment funds do not have to produce a key information document detailing potential investment risks and how the funds will operate; that exemption is extended for a further period of two years. Is she minded to extend it beyond this period, and will Parliament be consulted at that time?
What is the significance of replacing a “duty” on the UK supervisory authorities to co-operate with other supervisory bodies with only a “power” to do so? Surely it is in the best interests of the industry and investors to seek to co-operate wherever it is appropriate, particularly in sharing best practice.
My Lords, I am pleased to speak to these regulations. In doing so, I thank all those across financial services, in the City of London and beyond, who helped to get the regulations into the condition they are in. We have one of the finest financial services centres on the planet, and potentially the best is yet to come—but that is “potentially” rather than “inevitably”. Does my noble friend agree that a large part of the success to date of financial services, not least in London, is due to the fact that London is one of the most diverse cities on the planet? Like cities, financial services organisations benefit from such diversity, and we have seen that benefit throughout the UK and across the world.
Echoing the question asked by the noble Baroness, Lady Northover, will my noble friend the Minister set out the position of Gibraltar as regards the regulations? Secondly, will she clarify whether equivalence is still the target and, if not, why not? Come our exit, does she believe from her perspective that financial services in the UK will be in a better position going forward than they are today?
My Lords, I find these regulations very hard to scrutinise on their own, without knowledge of what the future of financial services will look like. There are two huge moving parts here: what, if anything, will come out of the EU negotiations, and what plans the Government have to diverge from EU regulations. I am curious about whether the Government have identified any blockages caused by EU law that they believe can now be overcome now we have left the EU, or will finance be yet another area where we are apparently free from the shackles of the EU but choosing to stay exactly where we are?
The Queen’s Speech contained the most incredible green stuff:
“My Government will continue to take steps to meet the world-leading target of net zero greenhouse gas emissions by 2050. It will continue to lead the way in tackling global climate change.”
Somehow, I do not find this world-beating ambition in any legislation coming through at the moment. Moving money out of dirty investments and into the clean, green revolution is absolutely essential for solving the ecological and climate emergency. The Government should lead global ambition on this and use our international negotiations as a route to turn the global finance system into a delivery arm of the Paris climate agreement. To what extent do the Government see green finance as a priority in their future plans, and how much work are they doing to make the UK the centre of global green finance?
I agree that the Minister recovered very quickly earlier; it was very impressive.
My Lords, the Minister in outlining these measures said that it is important that we are coherent and in good order. By “coherent”, I think she meant that we should be in good functioning order, but there is no coherence as in good policy regarding the Government’s direction of travel. The changes may be modest and minor, as she indicated, but they speak to a wider and major impact on our economy.
Two things this week summarised neatly this Government’s philosophical approach to the future of our economy. The first was the great fanfare about the opening of trade talks with New Zealand and Australia; the second is the rather mouse-like way that these changes, which may be technical in nature but will have a significant impact, are being handled. The first of those, the new trade talks, came with an assessment of what the impact would be on UK GDP. The Financial Times put it today at a homeopathic 0.01% over 15 years, though some estimates suggest that it could actually cost the economy 0.01%. The FT went on:
“If you’re in the UK, nip out and buy a bag of crisps after reading this and you might well have done more for the British economy than a New Zealand trade deal.”
These regulations, with—rightly—no government promotion, show piece by piece a dismantling of the UK’s relationship with the most well-developed and successful financial services single market ever devised in the world, whether it be combined funds, the ability to market across country to our biggest market or having a common view on how funds are invested sustainably, on how we continuously drive up ethics in investment and on how services and products within the UK can be easily passported to the most well-developed market in the world. It is clear that the approach of this Government is a real and present danger to our economy.
I am sure that the Minister will not take my word for it, and I know that the Government like listening to Americans, so let me use what the Chamber of Commerce of the United States said of the UK in its report about the Atlantic economy published earlier this year:
“In terms of FDI trends, UK-based EU institutions are decamping for other parts of Europe. According to Reuters, financial firms in the UK have opened over 300 subsidiaries in the EU with an estimated 7,000 workers to staff these operations, in order to avoid any disruptions to financial market access after the transition period. According to preliminary data from the UN, total world FDI flows to the UK declined 6% in 2019 due to a lack of large M&A deals targeting the country.”
Another indicator—just one of many—is that the £3.5 billion German digital bank, N26, pulled out of the UK because of losing passporting rights to operate here using a German banking licence.
It seems a long time ago, on 27 February, that Chancellor Sunak wrote to the EU saying that he saw no reason why equivalence assessments could not be completed by the end of June. Can the Minister confirm that we have carried out what we could consider to be equivalence assessments, and will the Government make them public? Clearly, if the Government said that they saw no reason why they could not be carried out, we should have sight of them.
The EU was rightly sceptical about this, because, only a week earlier, Sajid Javid, the Chancellor’s predecessor, told the EU that it was the Government’s policy to seek “comprehensive, permanent equivalence decisions”. Can the Minister confirm that that is still the position?
On Regulation 21, on the ending of marketing passports, which had been considered vital by another previous Conservative Chancellor, what assessment has been done of the economic impact of losing those marketing passports? And what economic impact assessment has been carried out for the changes to combined fund management and delegated funds?
Let me give one real example of this, because it is not simply academic. I was contacted to raise in this debate an issue relating to the 40,000 combined funds across the UK which are used for diaspora disbursement by people who work within the UK and the EU but send money to some of the poorest areas of the world. They are extremely concerned that there will be major disruption to those diaspora funds, so can the Government guarantee that some of the changes down the line for the operation of the combined funds will not see any disruption to those that are focused on social aims?
On sustainability, as mentioned by the Minister, Regulation 22 creates elements of confusion as to what sustainability-related disclosures there will have to be in the UK. These are set out clearly in the EU, but we will no longer be compelled to operate under a straightforward and common system, and we will have to set our own. What will they be? If we are no longer participating in a joint committee on standards, how will we operate?
On equivalence, combined funds and others, and integrated markets, we are leaving an integrated market that we currently lead. We are replacing duties to co-operate with simple options. We are creating uncertainty over sustainability, ethics and standards, and there is a great lack of clarity as to what the Government’s intentions are for this fundamentally important market for the United Kingdom.
My Lords, I am very grateful to the Minister for introducing the statutory instrument, which touches on many aspects of financial services-related retained EU law. Overall, it seeks to replicate at a national level the regulatory regime for financial services to which we currently subscribe at an EU level. Until the end of the transition period we will of course continue to follow the EU’s regulatory rulebook. This is about what will happen in January, if, as the Government confirmed last week, the end of this year marks the end of the transition.
As the Minister outlined, the regulations cover areas such as equalising the regulatory requirements of enhanced due diligence measures; replacing references to the European Securities and Markets Authority with references to the Financial Conduct Authority or the Bank of England; tidying up a number of previous EU exit instruments to ensure that they function correctly following the transition period; and revoking certain EU-derived measures that will no longer be applicable beyond the end of December. We welcome the changes in this instrument that will help maintain the pre-Brexit relationship between the UK and Gibraltar, and we have no fundamental objections to the other specific measures, although I have a number of questions.
On the anti-money laundering provisions, why is the current duty to co-operate with supervisors in other countries being removed and replaced with the weaker power to co-operate if we so choose? It is unclear why we would ever not want to co-operate to tackle money laundering, which can fund everything from international terrorism to the drugs trade. I was perplexed by an answer given by the Minister in another place on Tuesday, when MPs were told that there is no need to maintain a duty to co-operate with other countries’ supervisory bodies because there remains a political desire to talk. But if there is no duty, what happens if a future Minister takes a different view?
On the cross-border distribution of funds, can the Minister confirm that this statutory instrument enshrines the loss of passporting rights for our financial services that will result from the Government’s decision to withdraw from the single market, as well as from the EU itself? As a side note, on this issue of cross-border co-operation, while in the past we have not been critical of the Government’s approach to the “lift and shift” exercise, it is concerning that policy change is now starting to creep in.
Finally, on equivalence determinations, can the Minister confirm that, as yet, we have no guarantee that our regulatory regime will be regarded as equivalent by the rest of the EU? It is of course true that negotiations are ongoing and that we may in time gain an equivalence decision from the Commission. However, the loss of passporting rights will require a fundamental change in how UK institutions do business. We have already seen the restructuring of companies and the redeployment of staff. This will no doubt continue.
As my noble friend Lord Hain observed, while these regulations are intended to ensure continuity for UK financial services at the end of the transition period, the Government’s stated intention is to erect new trade barriers between our financial services and the rest of the EU, so even as we replicate EU regulations at the UK level, we are pursuing a course that will be incapable of replicating the market access we currently enjoy. We are taking the area that makes up 80% of our economy and, in the case of the financial services sector—a sector in which we trade at a substantial surplus with other countries—inserting new barriers between us and our nearest customers. The fact that the sector is resigned to that, and has established alternative bases in Dublin, Luxembourg, Frankfurt or Paris, does not change that reality.
We will start January 2021 largely at a point of regulatory equivalence. That is welcome. However, regardless of the outcome of negotiations, no amount of duplication can avoid the basic fact that although we can replicate the rules, we cannot replicate the market access to which they apply, and for which they were designed in the first place. As a result, UK businesses will start next year with significantly diminished market access, and at a significant disadvantage as a result.
I thank all noble Lords for their contribution to this debate and for their forbearance with my confusion at the beginning of it.
I will first address three points which many noble Lords raised. The first is about the coherence of the UK strategy in the process for leaving the EU and setting up a system of financial services regulation after the end of the transition period. There is a clear, coherent and consistent strategy when it comes to this: a simple—that is the wrong word; I should say “clear”—process for onboarding existing EU regulation, without policy changes, into UK law, so that there are no changes on the day at the end of the transition period, apart from where it may be to correct inconsistencies that may arise from the fact that we are no longer part of the EU and therefore no longer part of EU bodies. That is the strategy and that is what we are pursuing. This SI is part of that, as so many others have been.
The next question is on what we do after day one, when we have left. Many noble Lords also raised the question of divergence. I will say three things on that point. In taking the decision to leave the EU and the single market, we have had feedback from the financial services sector that it is important for it to have regulatory autonomy and control and not be a rule-taker from the EU. We are therefore committed to regulatory autonomy, and this process reflects that. However, the freedom to change rules does not mean pursuing divergence for the sake of it. The UK is committed to high standards of regulation and appropriate levels of supervisory oversight, and, in many areas, we go beyond that which the EU rules require. Where we make any changes, they will be for good reasons, and our starting point will be what is right for the UK, to protect our economy and our financial stability.
That brings me to the point about the equivalence procedures and the process for securing an equivalence agreement with the EU, which remains our aim. I reassure the noble Baronesses, Lady Northover and—if she is still listening—Lady Kramer, that we take that very seriously. We are committed to meeting the June deadline for those assessments to be made. As part of that process, we have received questionnaires from the EU, as part of its assessment process. The Treasury is working closely with the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and others on this process.
The noble Baroness, Lady Northover, my noble friend Lord Holmes of Richmond and others raised the question of Gibraltar. We have liaised closely with Gibraltar during this process, and this SI is consistent with government policy to preserve the pre-withdrawal relationship between the UK and Gibraltar on financial services.
A number of noble Lords, including the noble Baroness, Lady Northover, and the noble Lords, Lord Livermore and Lord Purvis, raised the question of the duty to co-operate on anti-money laundering versus a power to co-operate. I reassure noble Lords that this is not an intention to dilute that commitment. It is merely that a duty to co-operate requires both sides to be under that duty, so the power reflects that the other side is not under the same duty. However, there is no intention to reduce the commitment to seek and use that co-operation in this area.
On prospectus exemptions, raised by my noble friend Lady McIntosh, we will keep the time period and that measure under review as regards going beyond two years.
The noble Baroness, Lady Jones, talked about the priority that the UK gives to green finance. The UK wants to become a global hub for green finance. She will know that, as part of our hosting of COP 26, we appointed the former Governor of the Bank of England, Mark Carney, to lead on work in the area of green finance. As regards to the environmental standards that this SI brings into UK law, the intention is to maintain the same, if not better, standards than those which the EU has on this.
The noble Lord, Lord Purvis, raised a number of issues to do with trade. They go slightly beyond the scope of this SI, the purpose of which is to bring in existing EU regulations so that we have certainty, in the context of having or not having a deal with the EU at the end of the year.
The importance of having a regulatory regime in place was raised by the noble Lord, Lord Hain, at the outset. Of course, this SI is part of the process of getting us ready for the end of the transition period, but I assure noble Lords that we are working hard to reach a deal with the EU. The Prime Minister met the Presidents of the EU Commission and the EU Council this week. The result of that meeting was an agreement to intensify efforts to reach an agreement during July, which we hope to do.
I hope I have covered most of the points raised during this debate and I commend the regulations to the House.