Considered in Grand Committee
My Lords, the Treasury has been undertaking a programme of legislation to ensure that after the end of the transition period there continues to be a functioning legal and regulatory regime for financial services in the UK. The Treasury is laying SIs under the European Union (Withdrawal) Act 2018 to deliver this legislative programme and the majority of these SIs have already been approved in this place and in the House of Commons.
As part of this financial services legislative programme before exit day the Treasury laid the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019, commonly known as the Equivalence Regulations 2019. Those regulations were designed to ensure that if the UK left the EU without a transition period, the UK would have a fully functioning equivalence framework from exit day. The additional time afforded by the transition period has provided us with the opportunity to put in place supplementary measures in the Equivalence Regulations 2019 to ensure that the UK continues to have a robust and functioning equivalence framework for financial services, both during and after the end of the transition period.
The measures in the instrument being debated today complement the Equivalence Regulations 2019 by creating additional stand-alone powers in this instrument for the UK-relevant financial services regulators—the Bank of England and the Financial Conduct Authority in this case—which are appropriate for those regulators in the transition period. They also make minor amendments to the earlier 2019 regulations, again as appropriate for the transition period. This SI will, finally, make minor amendments to add to the powers available to the regulators after the end of the transition period and to correct errors in earlier financial services EU exit legislation.
I am grateful that this SI was raised as an instrument of interest by the Lords Secondary Legislation Scrutiny Committee in its July report and for the question that the committee raised. I intend to address the question now and in the course of the debate.
The instrument being debated concerns the UK’s future regime for equivalence, a process to determine that another country’s regulatory and supervisory regime is equivalent to the UK’s corresponding regulatory framework. Recognising the regulatory equivalence of third countries is a key component of financial services regulation. Equivalence of determinations can help to reduce regulatory burdens on firms and can facilitate cross-border market access. This may lead to increased competition that can benefit both UK firms and consumers by engendering healthy market incentives to lower prices and offer innovative products.
At present, equivalence functions are performed by the European Commission and the European supervisory authorities. At the end of the transition period, these functions will be transferred to HM Treasury and the UK regulators as provisions in retained EU law. During the transition period, equivalence determinations can be made for EEA states via powers within the 2019 equivalence regulations. This instrument provides a UK equivalence framework that is appropriate for use during the transition period in relation to the EU’s existing framework. It allows the UK financial services regulators to complete the associated actions that mean that HM Treasury equivalence determinations taken during the transition period can take full effect at the end of that period.
This is a technical SI that provides for the UK’s transition to its new position outside the EU. I will turn now to the main categories of fixes that are being introduced here. The first three changes provide UK regulators with the appropriate powers to complete the associated actions to ensure that HM Treasury equivalence determinations can take effect fully at the end of the transition period. Currently, the 2019 equivalence regulations allow HM Treasury to make equivalence determinations by direction during the transition period for EEA states where these directions would not enter into force until the end of the transition period. As part of the equivalence process, almost all equivalence provisions in retained EU law will require UK financial services regulators to conclude co-operation agreements with the relevant regulatory authority or authorities for that EEA state before the determination can take effect.
There is currently no mechanism to allow regulators to undertake this during the transition period. Where the Treasury has made an equivalence determination by direction, this SI will make transitional provision for UK financial services regulators to have the power to enter into relevant co-operation agreements with the appropriate EEA regulatory authorities before the end of the transition period. These co-operation agreements would come into effect at the end of the transition period for the necessary provisions in retained EU law.
In addition, as part of the direction-making process, almost all equivalence provisions require regulators to issue recognition or registration decisions for non-UK firms. Where the Treasury has made an equivalence determination by direction during the transition period, this instrument puts in place a regime for firms to make an application to the appropriate regulator, and for that application to be processed. It will therefore ensure that regulators have the power to process applications and issue recognition and registration decisions during the transition period to come into effect at the end of that period for the necessary provisions in retained EU law.
This SI will also give regulators the power to request fees from applicants for such regulatory decisions. I appreciate that the House of Lords Secondary Legislation Scrutiny Committee questioned whether there is enough time for UK regulators to establish co-operation agreements with EEA regulators once an equivalence determination is made and then process applications made by EEA firms. I am pleased to say that regulators have a period of one year to process applications from EEA firms once the required co-operation agreements have been established. Both the Treasury and the regulators consider this to be ample time for the regulators to decide any applications.
Secondly, this SI will amend the Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019, which in turn make provision for the onshoring of the EU credit rating agencies regulation. The amendments will onshore powers to enter into co-operation arrangements currently held by the European Securities and Markets Authority, such that in the future they will be held by the FCA. The amendments also make provision for existing EU equivalence determinations that will form part of retained EU law by operation of Section 3 of the European Union (Withdrawal) Act 2018.
Finally, two minor but necessary amendments are made to the Central Securities Depositories (Amendment) (EU Exit) Regulations 2018. The first relates to a provision which stipulates that equivalence may be granted only to states that have a regime for the recognition of central securities depositories authorised in other states. The amendment ensures that the UK is one of these states. The second amendment ensures that the Bank of England has the appropriate timescales to make recognition decisions for central securities depositories.
In summary, the Government believe that the proposed instrument is necessary to ensure that there is an appropriate equivalence framework for financial services during the transition period and to complement that already put in place by the 2019 equivalence regulations. I hope that colleagues will join me in supporting these regulations, and I commend them to the Committee.
My Lords, I refer to my interest set out in the register as a director of the London Stock Exchange.
I thank the Minister for introducing the regulations, but I admit that I got off to a bad start when looking at them. Helpful though it is to have tables in the schedule, I found it very awkward to have the regulations themselves drafted as an adjunct to a table that requires simultaneous viewing on different pages. I thought that I was in a puzzle book and having to take a cheat peek at the answers at the back.
First, I must consult the Schedule 1 list in the 2019 SI, and then I must cross-reference to table 1 in Schedule 1 of this SI—although it is unclear from reading Regulation 3 whether this refers to Schedule 1 of the 2019 instrument, as has just been referenced, or, as happens to be the case, Schedule 1 of this SI. I can find that out by discovering that Schedule 1 of the 2019 SI does not have a table. I must then repeatedly consult the table and look at each column to find out which paragraph of Schedules 2 and 3 and Schedule 1 of the 2019 SI are relevant. All of these instructions distract greatly from the clarity of Schedules 2 and 3, which really did not need all this obfuscation.
Aside from the structure, the SI seems to do what is necessary—although I reckon that it should have been part of the 2019 regulations to give regulators clarity. Unfortunately, this is all part of a patchwork that replicates, and makes even more confusing, the already tangled web of EU equivalence provisions that has evolved over time.
I hope that one day soon an overarching policy will be outlined on how the UK will balance openness, competitiveness, security and public interest in our future equivalence regime. This must reflect the needs not just of financial service companies in large countries but also the real economy companies that they serve, and encompass issues such as enabling trade at reasonable cost for the less developed countries. There can be a lot more to equivalence than first meets the eye, as was eventually realised with EMIR. At times, the benefits of equivalence may be needed within the country giving equivalence rather than the country gaining equivalence.
A similar point can be found in one of the fixes in today’s SI, which creates equivalence-determining powers so that where EU legislation says a third country has to have a recognition regime, we have one that qualifies. For us, this is fine, but the subtext of the EU requirement is a reciprocity requirement, and it is the sort of provision that needs care before imposing in any generic way, should that idea arise in the future.
It has been discussed previously, and in the context of authorisations, that regulators have been busy making various co-operation arrangements with third-country regulators where they did not already exist. It would be good to have an update on the progress of those agreements and how complete they are, including the business volume covered and the countries or instances where requirements are being waived.
Finally, a lot of energy and time has been expended researching, debating and hoping for a broad equivalence deal with the EU on financial services. Maybe that kept some in the City sweet and had to be heard and tried, but it has always been my informed view that that was unrealistic. Taken collectively, and in practice, equivalence for the EU is not really a matter of co-operation; it is yielded only when essential or aimed at promoting EU regulatory prevalence. Both those tendencies meant that resisting giving the UK equivalence was always going to be tested to destruction. It is what rises from the destruction that will be interesting, but it is not a sit-and-wait game.
My Lords, I thank my noble friend the Minister for introducing the debate today. It is good news to know that the Government are taking the necessary steps to ensure that a coherent and functioning financial services equivalence framework continues in the UK after the end of the transition period.
The position is complicated by the fact that the EU’s single market in financial services is only partly developed. It is therefore necessary for the Treasury to determine whether or not each member state has an equivalent regulatory regime for a particular firm or product to that which applies in the UK.
There are several problems with this approach. First, does it mean that arrangements similar to the EU passport system for particular individual firms are to be continued? Secondly, the products referred to in the SI seem to conform to the categories of products—or, rather, services—covered in individual European regulations. Would it not be simpler for the UK to set out its own regulatory regime based on equivalence of outcomes, and to allow all regulated service providers in a particular category to operate in the UK subject to satisfactory co-operation arrangements being established between the relevant member state or EEA country regulator and the FCA or the Bank of England?
Presumably, ESMA also needs to be involved, because it has taken over many powers from the member state regulators and will doubtless continue to expand its area of control. It may not be just ESMA: perhaps the EBA or EIOPA is the relevant European regulator for the firm or product concerned.
The SI does its job in avoiding a cliff edge and providing stability and continuity for financial companies and markets in the UK after the end of the implementation period. However, is it sensible to continue to grant equivalence on the basis of single European regulations? Going forward, do we want a regulatory system that is a clone of the EU system? How are we going to make equivalence decisions in respect of financial firms from third countries such as the United States, Japan and Australia, and others whose regulatory systems are not based on prescriptive EU-style legislation?
Many smaller British firms have been forced out of business or to merge by the cumbersome rules and excessive costs forced on them by European directives such as the AIFMD and MiFID II. To ensure that the City of London will preserve and further consolidate its position as the world’s leading and most competitive financial centre, does it not need to move away from the cumbersome European system and adopt a simpler, rules-based proportionate system which would allow innovative new products and markets to develop?
Does my noble friend the Minister not agree that the Government cannot legislate only for continuity EU-UK arrangements but must do more to set out their stall and attract financial services companies from third countries as we again take responsibility for our own regulatory policy and framework, and as we start to play a bigger part, commensurate with the size of our markets and the skills of our practitioners, in the development of common international regulations through IOSCO and other bodies?
My Lords, I refer to my role as a director of a financial services company, as listed in the register.
We all know the importance of financial services to our economy: it is the highest exporting sector that we have. However, as this legislation indicates, we risk jeopardising its success. There is no denying the need for this legislation, but we are already into September: if a comprehensive deal is not agreed soon with the EU—and the omens do not look good—then the financial services industry risks being badly damaged.
I listened to the noble Viscount, Lord Trenchard, talk about how much we could innovate and so on if we were free of EU regulations. But innovation in financial services is rarely a benefit; in fact, I am hard-pressed to think of an innovation since the invention of the hole-in-the-wall that has actually been beneficial.
Equivalence in regulation is imperative for trade with the EU to continue, and recognition of that equivalence has to be in place for transactions to continue. The Minister sounded confident that that will be the case within the required timescale. Can he explain why he is so confident that equivalence will be granted in the EU?
The political declaration sounded optimistic about the prospects for equivalence, with the implicit intention that cross-border service provision would continue. But can we now be assured that this is a view shared by both parties? The direction that the negotiations have been taking appears to be diverging somewhat drastically, and certainly progress is not being made.
More specifically, do the UK regulators have the capacity required to make the decisions on equivalence that they will be asked to make? Has a decision been taken on the level of charges that they can implement and whether this will be sufficient to cover the extra costs involved?
Finally, I point out that one of the major assets of the UK financial services sector will not be impacted at all by any success on the equivalence front: the supply of talented Europeans who have played such an important part in making a success of the financial services industry in the UK. They have already been leaving in large numbers, and it is highly unlikely that they will return once freedom of movement has been turned off. The UK has been a star in the global financial services market; we are now deliberately risking dimming that star.
My Lords, I thank my noble friend for moving this necessary SI and I support the measures it contains. However, I have a number of questions—I will try to be brief, as requested.
Clearly, there is an assumption that a 12-month transition period is sufficient to reach the agreement necessary, but can my noble friend tell me what provision might be made should it not prove sufficient, as many of us are concerned about? Perhaps 12 months seemed to be enough at the time, but will it be?
I also ask my noble friend—I declare my interests as set out in the register—what impact there might be on defined benefit pension schemes in a no-deal scenario, regardless of these measures, which I assume and hope we will approve today, with respect to financial derivatives and remittance of payments, including assessment of the risk that clearing or margin requirements could be triggered, and what provisions the Government may be able to make in changes to derivatives documentation entered into by those funds.
Another important area is the third-country requirements for the purposes of EMIR and whether this might mean that counterparty risks from EU banks may no longer rely on the exemptions under EMIR when entering into derivatives with UK entities such as defined benefit pension schemes. I note that the FCA, the Bank of England and the PRA are involved and would be grateful to know whether there have been any discussions with the Pensions Regulator in this regard. That is particularly relevant here for UK pension schemes if their bank counterparty in the EU is relying on exemptions available to pension schemes under EMIR’s mandatory clearing obligation.
Finally, when the UK’s asset management industry enters into intragroup transactions with EU group companies, should it consider whether those EU companies will continue to be able to rely on the exemptions under EMIR and what impact this SI or other government plans may have on those entities?
My Lords, this instrument raises many more questions than it answers, as is increasingly the case with government business.
First, what does paragraph 7.2 of the Explanatory Memorandum mean when it states:
“The UK has now left the EU with a deal”?
Is that not at best disingenuous, if not downright deceitful? We have an agreement to leave; we do not have a deal.
At the end of June, M Barnier said that the political declaration committed us to use best endeavours to finalise our respective assessments by the end of June. The Commission sent 28 questionnaires to the UK covering the areas where equivalence is possible. At that time, only four had been returned. Where are we now? Are we not empowering ourselves to set out our terms for equivalence to third parties? This is of course necessary to enable us to deal with the world and to negotiate with the EU, but when will the industry get any clarity as to what equivalence will be agreed with the EU? Is there any prospect—which always seemed unlikely, and is much less so given the current mood music—that the EU will agree to any longer time for ending equivalence unilaterally than its current 30-day rule?
I turn to the impact of the changes in Scotland, which is the UK’s largest financial centre outside London. It is estimated that financial and related professional services account for 9.4% of the Scottish economy, something the Scottish National Party sometimes seems unaware of. According to Scottish Enterprise, there are 28,865 companies in the sector in Scotland, employing 247,000 people directly or indirectly and generating around £16.7 billion. UK in a Changing Europe also highlights the importance of financial services to Scotland. In Edinburgh, a conservative estimate of employment in financial services stands at 10.7% of the workforce. Indeed, Edinburgh employs a larger proportion of people in financial services than anywhere in the UK outside the square mile and Tower Hamlets, and significant numbers also work in financial services in Glasgow and West Dunbartonshire. Edinburgh has now risen 12 places in the 2020 global financial centres index to be ranked as the 17th most important financial centre in the world. It is home to the global headquarters of the Royal Bank of Scotland and Scottish Widows, and CYBG, which owns the Clydesdale Bank, Virgin Money and Yorkshire Bank, has its European headquarters in Glasgow.
Financial services are Scotland’s largest service export, with the EU being a significant component of our exports. The EU single market is an important export market for Scotland’s financial services. Some 18% of Edinburgh’s total services exports are financial services to the EU, which is higher than the comparable figure for London, at 15%. This suggests that, proportionately, Scotland’s financial services are slightly more dependent on the EU. There are now signs that Scottish financial firms, as elsewhere in the UK, are planning a future outside the UK. For example, Scottish Widows transferred its European portfolio to a new legal entity in March 2019, Standard Life Aberdeen has opened a portfolio management and distribution service in Dublin to service the EU 27 and Royal Bank Of Scotland began operating a banking entity in the Netherlands in March 2019 to serve non-UK EEA customers.
In the financial crash, the impact of the changes was more severe outside London, so it is important to monitor how the changes we face impact on the Scottish economy in terms of jobs and access to finance, and on other areas of the UK outside London.
Big companies will do whatever it takes to develop their business, and that may not be in the interests of the UK. They will put their business before the UK national interest. There are a lot of small businesses in financial services. They might not find it so easy. Valid as this legislation is, what is lacking is any sense of political direction or certainty on which such businesses can be planned.
My Lords, I am grateful to my noble friend the Minister for setting out so clearly the ramifications of these technical regulations, as he describes them. I have just a couple of questions, which are not dissimilar to those raised by other noble Lords. On page 1 of the Explanatory Memorandum, paragraph 2.3 states:
“At present equivalence functions are performed by the European Commission and the European Securities and Markets Authority ... At the end of the Transition Period these functions will be transferred to HM Treasury and the UK regulators as provisions in retained EU law.”
Clearly, they will be the regulators and will apply the equivalence regime but, in the event of an alleged breach being raised by a financial services company in the UK, which body will provide a remedy? My understanding is that currently, the EU Commission is the watchdog and recourse can be had to the European Court of Justice. Which body do the Government imagine will provide an appeal and a remedy in the event of the regulations being breached?
My second question relates to my noble friend’s clear statement that the regulation before us today deals with retained EU law. As other noble Lords, not least the noble Lord, Lord Bruce, have said, the current regime is a matter of ongoing interest in the EU Commission. Concerns were raised in the Financial Times in the middle of August that it may take longer for firms based in London to gain access after Brexit. My final question to the Minister is: what will be the position on 1 January 2021 for any future changes to the equivalence regime in Brussels? Will firms based in the UK—any part of the UK, either Edinburgh or London—have blanket access to the whole of the European Union or will the Commission insist that negotiations take place on a country-by-country basis? The noble Lord, Lord Bruce, accurately stated that only a small number of questionnaires have been returned. They will obviously take some time to complete fully and accurately.
Finally, I say on a note of disappointment that, while it is excellent that we have the equivalence regime under retained EU law, it will not provide anything like the prosperity and excellence that has made the City of London the most successful global financial centre.
My Lords, this statutory instrument is clearly necessary to enable an equivalence regime for financial services to be in place following the transition period.
We all know that financial services are critical to this country’s GDP and tax base. Historically, the sector has provided more than 2 million jobs in the UK and more than £76 billion a year in tax revenue but, in the past, one-third of the sector has relied on EU clients, nearly half of whose business has been lost due to Brexit. I note with concern that, reflecting this shift, London, according to the think tank Z/Yen, which manages the index, has lost its position as the global number one financial centre to New York.
Even more concerning, both New York and London have been losing position, although London is losing it faster than New York. The rising locations are in Asia and the EU 27. One expert described these centres, especially the EU ones, as small black holes, growing rapidly as they sweep in new and transferred operations. We cannot afford to lose any more business. Equivalence matters. My party therefore supports the passage of this SI. We note that, like all the SIs dealing with equivalence, this one represents unilateral action by the UK, without which EEA firms could not continue to access the London markets. However, to deny that access would be extreme self-harm as we would be the losers. Essentially, this SI attempts to retain some parts of the status quo.
However, I want to confirm that the arrangements in Schedule 3, which relate to benchmarks, allow Libor to be replaced by risk-free reference rates set by the eurozone and non-eurozone EEA countries. The UK equivalent will be SONIA, the sterling overnight index average. Your Lordships will know that Libor has been a disgraced benchmark since American journalists exposed that it had been corrupted and manipulated for decades under the noses of the UK Government and regulators, who were blinded by their philosophy of light-touch regulation.
I also want to use this opportunity to ask the Minister to give the Committee an update on the status of the equivalence negotiations with the EU. Can the Government confirm that they are no longer seeking mutual recognition? Quite a number of members of the Tory party—we heard some of this again today—and the regulators have indicated that they expect and want divergence to be a significant feature of future financial services regulation. Is that correct? What will be the underpinning philosophy of divergence, since I assume that light-touch regulation remains disgraced? Are the Government making any progress on finding a mutually agreed mechanism with the EU to resolve any dispute on divergence and equivalence? Is there any progress on getting a notice period for cancellation longer than the current norm of 30 days? Without a notice period of at least two years for equivalence cancellation, firms that use London will be living with disturbing uncertainty.
How are other issues that could lead to the cancellation of equivalence to be resolved? Perhaps the most obvious issue is that of financial stability related to the supervision in the UK of central counterparties clearing trillions of euros in derivatives. Actions to protect the UK economy in a crisis could cause havoc for the euro and the EU without some mechanism for co-operation and mutual support.
The expectation of the financial services industry is not that London will collapse as a global financial centre the day after the end of the transition period but that it will be in the EU’s interest to pull business into the 27 salami slice by salami slice as capacity expands, which is at least a 10-year strategy. New York has been reasserting its dominance in dollar-based financial business. China and India, as rising economic stars, have made it clear that they have no intention of ceding control of their key financial markets to any foreign country. The UK remains a major global player only so long as it dominates European financial services. How this Government deal with equivalence will essentially determine the future of this key sector of our economy.
My Lords, I thank the Minister for presenting this SI. As he knows, the Opposition will not oppose it as it would create a constitutional crisis. Nevertheless, it is the duty of Her Majesty’s loyal Opposition to scrutinise the instrument.
As we have discussed on previous occasions, the volume of and interplay between the Treasury’s EU exit SIs makes keeping track of the changes somewhat difficult. The intricacies of this instrument, which simultaneously amends and supplements a 2019 measure, is a case in point. I thank Vanessa McKay, the designated Treasury contact, for helping me to achieve a limited understanding of the regulation and the equivalence framework in which it fits.
I conclude that the instrument is technical in nature and complements the actions taken under the authority of the equivalence regulations of 2019 and 2020. The instrument provides for subsequent co-operation arrangements and regulatory decisions. I do not believe that it introduces any significant new policy. I would value an assurance from the Minister on that point.
Nevertheless, having previously met the Commons Minister on this issue, I am dissatisfied with the level of understanding that I was able to achieve on first reading the supporting documentation. It may be inevitable that the instrument is written in impenetrable language but surely the Explanatory Memorandum is supposed to overcome this barrier. In January 2020, the Secondary Legislation Scrutiny Committee published guidance for departments on statutory instruments. I quote from paragraph 4 of Part 2:
“The purpose of an EM is to provide the Houses and the public with a plain English, free-standing, explanation of the effect of an instrument and how it is intended to operate. It is not meant for lawyers. Legal explanations of the changes are given in the Explanatory Note that forms part of an SI and should not be duplicated.”
This Explanatory Memorandum clearly fails this test. Perhaps it is what comes of reading such documents during Recess, but I fear that if somebody like myself who has dealt with 50 of these instruments has difficulties in following the commentary, an interested citizen without prior knowledge stands no chance. For example, paragraph 2.2 of the Explanatory Memorandum contains a circa 100-word, nine-line sentence. I understand that there are more Treasury SIs to come. I hope that Her Majesty’s Treasury will prioritise EMs that are easier to read, set the SI in context and require less prior knowledge. I would be happy to discuss this matter with the Minister and his officials if they feel this would be of use.
The essence of today’s debate is equivalence for financial services. The guidance in this area is provided in paragraphs 35, 36 and 37 of the political declaration. It envisages concluding,
“these assessments before the end of June 2020.”
I understand that that deadline was missed. What are the implications of this in terms of the trade negotiations and the preparedness of financial services firms? Does the Minister have an estimate of when the process will be completed?
John Glen, Economic Secretary to the Treasury, said in a letter of 27 May 2020 to the noble Lord, Lord Sharkey, chair of the EU Financial Affairs Sub-Committee:
“Successfully concluding equivalence assessment and delivering comprehensive positive findings will be in the UK and EU’s mutual interest and we can see no reason why the UK and EU will not be able to find each other equivalent across all existing equivalence regimes. As you will be aware, equivalence assessments are unilateral processes and thus not part of the ongoing negotiations on the future EU/UK partnership.”
Further, the concluding sentence of paragraph 2.1 of the EM says:
“This statutory instrument … is not linked to the ongoing UK-EU negotiations on a free trade agreement.”
These statements imply that the determination of equivalence is independent of the free trade negotiations. Does this not display heroic optimism and naivety in the light of the Swiss experience? Switzerland lost its equivalence recognition over a lack of progress in an unrelated negotiation.
Further, what is the Minister’s view of the recent statement by Mr Dombrovskis, an executive vice-president of the European Commission? The Financial Times reports him as saying that Brussels would not be ready in the coming months to assess whether Britain qualifies for some pan-EU access rights, known as equivalence provisions, because the bloc’s own regulations are in flux.
If an equivalence ruling is not given, or at least not in a timely manner, what is the Minister’s assessment of the impact on cross-border financial services trade between the UK and the EU? Is he concerned about a financial stability impact if access is withdrawn suddenly after 31 December? What assessment has he made of London’s attractiveness as a place from which financial services firms operate if their ability to sell services into the EU on the basis of equivalence is withdrawn?
My Lords, I thank noble Lords for their questions and for the important points raised in this debate. I will try to answer as many as I can in the time available, and, where I am not able to, I will ensure that we write to noble Lords.
The noble Baroness, Lady Bowles, asked about progress on co-operation agreements. That is an ongoing process, and we will of course keep this House updated on that process of engagement over the next few months. My noble friend Lord Trenchard asked whether we should continue with a policy of holding to equivalence with the EU regime. That is certainly our policy at the moment, because that is how the City has worked over the past 40 or so years. However, by being in control of our own regulatory policy, we will have the opportunity in the coming years to keep reviewing that. The noble Baroness, Lady Kramer, made the important point that the growth is now in Asia. By having our own regulatory regime, we will have the flexibility to consider those opportunities.
My noble friend Lady Wheatcroft raised a number of questions. Possibly the most important one was whether the EU will grant equivalence. We are of course at the tail end of these negotiations, a time at which things will be most fraught. It would certainly be absolutely in the interests of the EU to grant equivalence, but I cannot prejudge the outcome of the discussions over the next few weeks.
On the capacity of our regulators to take on these decisions, we have engaged in depth on this issue and we are assured that they have this resource. Fees will be a matter for individual regulators in order to recover their costs in processing any applications.
My noble friend Lady Altmann asked what provision should be made beyond the 12-month period to process these applications. Certainly, that was the period of time that was considered reasonable. My noble friend made a perfectly reasonable point that the transition period has seemed tight, but we have had the worst pandemic in nearly at 100 years in the middle of it, so I am confident that we can deliver on that. She raised one or two other technical questions on defined benefits, and I will write to her in an attempt to answer them.
The noble Lord, Lord Bruce, made one or two points on paragraph 7.2 which states,
“The UK has now left the EU with a deal.”
While decisions on equivalence are autonomous and unilateral in many areas of financial services, it is essential to understand the approach of the other party when deciding how to approach an area of cross-border activity. While the UK has undertaken an assessment of the EU, we will not be making equivalence decisions at this stage; we will make decisions where and when we determine that it is in the UK’s interest. Our ambition is to achieve a reciprocal equivalence, supported by the effective regulatory co-operation of an ambitious FTA, and we continue to work towards that goal. We continue to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both countries. However, as I said in relation to earlier questions, it will be a very rough few months. We must be perfectly realistic about that.
My noble friend Lady McIntosh asked about the handling of a breach. The normal rules of public law will apply, and, after the transition period, equivalence will be covered by provisions in retained EU law, as amended under the European Union (Withdrawal) Act 2018.
The noble Baroness, Lady Kramer, asked about the status of the negotiations. We have completed round 7. We have been clear in discussions throughout that this intensified process continues to be constructive, but there are still significant differences. Our preference is to leave with an FTA as long as it guarantees our political and economic independence, and these are tricky issues.
On plans for divergence, as I mentioned on an earlier question, we are committed to regulatory autonomy but at this stage to providing as much equivalence as we can. We are committed to the highest standards of regulation and the appropriate levels of supervisory oversight. In many areas we already go beyond what the EU rules require. Where we make changes, they will be for good reasons, but our starting point will be what is right for the UK, our economy and to ensure financial stability.
The noble Lord, Lord Tunnicliffe, raised a number of questions. He was worried about the quality of the guidance documents and felt that they were not in a spirit of providing clarity. That is a fair criticism, and I will certainly encourage officials to try to provide a more accessible guidance for future SIs, which I expect we will have over the next few weeks and months.
The noble Lord asked whether the instrument, which provides for subsequent co-operation agreements and regulatory decisions, introduces any significant new policy. I can confirm that that is correct; the provisions in this SI complement existing provisions and make minor amendments to earlier EU exit instruments and retained EU law but do not alter the policy of the earlier instruments or introduce any new policy.
The noble Lords, Lord Tunnicliffe and Lord Bruce, asked about the progress on the questionnaires, which have a deadline of the end of June of this year, and about the implications of not having met that deadline. We returned all 17 questionnaires received from the EU as part of its assessment process. The returns totalled some 2,500 pages. We received the first questionnaire only in late March, and the last 250 pages of questions reached us only at the end of May. The equivalence assessments are a technical process which each side is carrying out separately and are not linked to the UK-EU trade negotiations. Many, if not most, of the questions relate to explaining the details of the rules and regulations in the UK and the rules and regulations that we share with the EU. We have made sure that the EU has the information it requires to make a positive decision for the UK for all regimes, and we have always been clear that as the UK and EU start from a position of having very similar financial services regulations, that should be a straightforward process. We continue firmly to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both parties.
The noble Lord, Lord Tunnicliffe, asked about statements from my colleague the Economic Secretary, which he believes are optimistic. Equivalence is a unilateral autonomous process that is distinct from the FTA negotiations, and the politicisation of the financial services sector is not in anyone’s interest. The financial stability that underpins our economy and the EU’s economy depends on trust and predictability in relation to regulatory matters. A thriving financial services sector is clearly important to our economy but also to the EU’s economy. The UK is a global financial hub. Among other things, it channels investment into Europe cost effectively and manages the assets of millions of EU firms and consumers. Fragmentation of that market would be costly and disruptive and, given the shock of the pandemic over the past few months, it would be an odd decision for the EU to make that more difficult for its member states.
The noble Lord asked what is my assessment of the impact on cross-border financial services trade between the EU and the UK if the equivalent ruling is not given, or at least not in a timely manner. We continue firmly to believe that comprehensive mutual filings of equivalence between the UK and the EU are in the interests of both parties. We remain open and committed to continuing the dialogue with the EU about its intentions on this. The financial stability that underpins our economy and that of the EU depends on trust and predictability in relation to regulatory matters.
This SI is needed to ensure that the UK continues to have a robust and functioning equivalence framework for financial services in the UK during and after the end of the transition period. The SI will also make minor amendments to modify the errors in onshore legislation. I hope that the Committee has found this afternoon’s sitting informative. I will write on technical questions that I have not been able to answer. I hope that noble Lords will join me in supporting these regulations.