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Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021

Volume 812: debated on Thursday 10 June 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021.

Relevant documents: 3rd Report from the Secondary Legislation Scrutiny Committee

My Lords, prior to the end of the transition period, the Treasury undertook a significant programme of legislation, introducing more than 65 statutory instruments under the European Union (Withdrawal) Act 2018. As noble Lords will know, these SIs covered all the essential legislative changes that needed to be in law to ensure we had a coherent and effective financial services regulatory regime at the end of the transition period.

This statutory instrument amends a transitional regime created in an earlier financial services EU exit instrument. It is intended to ensure that the transitional regime continues to provide continuity for UK firms, as was originally intended. The instrument, broadly speaking, concerns insolvency-related protections that are provided to systems under the EU settlement finality directive, or SFD. In this instance, these systems are financial market infrastructure such as central counterparties, central securities depositories and payment systems, which provide essential services and functions relied on by the financial services sector.

Prior to the end of the transition period, if an EEA-based system was designated under the SFD it received specific protections in insolvency law. For example, where a designated system had received funds or securities from a system user—for example, a UK bank—those funds and securities could not be clawed back in the event of the UK bank being subject to insolvency proceedings. Importantly, this framework ensured that these vital elements of the financial plumbing were not at risk when individual members were in insolvency procedures. Now that we have left the EU, providing such insolvency protections is sometimes also a requirement for UK firms’ continued membership of these systems. Designation is therefore important, as it facilitates the smooth functioning of, and confidence in, financial markets.

Under the SI that we are amending today, a UK framework was established for designating any non-UK system so that it can receive settlement finality protections under UK law. It also established a temporary designation regime to provide settlement finality protections for a period of three years to existing designated EEA systems that intended to submit an application under the UK’s framework. The purpose of temporary designation is to allow time for applications to be processed by the Bank of England, while ensuring continuity of access for UK firms to relevant EEA systems.

However, there is a requirement in the temporary designation regime for EEA systems to submit an application under the UK framework by 30 June 2021; they will otherwise lose UK insolvency protections. This instrument amends the consequences for EEA systems failing to submit an application by this deadline. Instead of immediately losing settlement finality protections under the temporary designation regime, EEA systems will retain protections for an additional two years. This ensures that UK firms using those EEA systems have sufficient time to put mitigants in place should access to those systems be impacted.

The Treasury has worked closely with the financial services regulators in the drafting of the EU exit instruments amended by this instrument. We have also engaged extensively with the financial services industry on the instrument to which this SI relates. I also note that the Secondary Legislation Scrutiny Committee has reported on this SI as an instrument of interest.

In summary, the Government believe that the proposed legislation is necessary to ensure continuity for UK firms following the end of the transition period. I hope noble Lords will join me in supporting these regulations. I beg to move.

My Lords, the memorandum for this instrument has been prepared by the Treasury. It contains information for the Joint Committee on Statutory Instruments. The Explanatory Memorandum says:

“This instrument is being made in order to ensure there is a coherent and functioning financial services regulatory regime”

in the UK

“following the end of the Transition Period ... This instrument makes amendments to an earlier financial services EU Exit instrument”

which will address

“deficiencies in retained EU law arising as a result of the UK's withdrawal from the EU, in line with the approach taken in other financial services EU exit instruments under the European Union (Withdrawal) Act 2018”.

It continues:

“To ensure the legal framework for settlement finality protections continued to operate effectively after the end of the TP, the FM&I Transitional SI introduced a Temporary Designation Regime”

which will ensure

“that non-UK systems benefitting from Settlement Finality Regulations … protection … at the end of the TP will continue to do so for three years from that point. The purpose of the TDR is to allow time for applications from such EEA systems under the UK SFR to be considered by the Bank of England. In order for systems to begin to benefit from the TDR, they were required to notify the Bank of England before the end of the TP that they wished to enter the regime. In order to remain in the TDR, EEA systems are required to submit an application to the Bank of England for SFR designation within 6 months following the end of the TP”.

This SI will amend

“the consequences for systems failing to submit an application within 6 months. Instead of immediately losing settlement finality protections under the TDR, systems will retain protections for a period of 30 months following the end of the TP. This ensures that UK firms which are using EEA systems that fail to submit an application for designation under the UK SFR, will have sufficient time to find alternative providers should those systems choose to stop providing services to UK firms”.

My Lords, first, I declare my interests in financial services as in the register, in particular as a director of London Stock Exchange plc. I thank the noble Baroness for the introduction to this instrument. I do not have any objections, as it is pragmatic.

I guess we always knew as we waded through the sea of Brexit SIs—I think it was said there were 65 —that updates and possible extensions would be needed. Although, I am not sure that it was understood, or at least clear to us at the time, how often such changes and extensions would come along and why, but this is one of them. For settlement finality, originally there was to be a separation between those intending to be part of a continuing UK settlement finality system—which had to give notice by the end of this month, with the Bank of England having until 2023 to deal with their applications—and those which did not give such notice and would cease to be part of the system.

That always was a cliff edge in the absence of other measures to ensure migration for those that were going to remain in the system and would therefore have the transitional provisions in place. There did not seem to be any system to manage that migration and make sure that it happened. Now we have until 2023. Both the systems that will join the UK procedures under the Bank of England and those that will be leaving still have until 2023 to enjoy those protections in the event of insolvency.

My concern is whether this will be the end of the story. I accept that migration from one system to another takes time, and I know only too well that industry was slow to make a start, expecting that there would be some kind of ongoing relationship with the EU that would make things all right on the night. Can the Minister now say with any degree of certainty that there will not be a repeating pressure for the 2023 end date to be extended yet again for the systems that are not transitioning into the UK regime? In connection with that, how will businesses using those systems know when it is safe to jump? Will lists of those that have and have not applied to the UKSFR be made public so that there is knowledge about where to move to if you are going to change from system to another? If that does not happen then surely some businesses will come back crying in 2023, saying that they have not done it yet. What will be the response and what monitoring of progress will take place to make sure that does not happen?

As part of that, when will the Bank of England have approved the applications? Will it not be necessary for businesses to know that they have approved systems to transfer to, rather than ones simply awaiting approval? If not, they may fear that they will go to one that is not going to get approval and they will have to change yet again. Until there are approvals, will there not always be reluctance to move and further cliff edges? What incentive is there to move from this run-off system into an as yet unauthorised system that is waiting among the applicants?

I do not really see that this is the end of the legislative story. I do not disagree with what is being done here, but I still do not see that it solves the problem of what the future picture will be for ensuring that everybody has their businesses in the right place. I do not know whether the Treasury has an overview of this now that there has been more time to work out how things are measuring up post Brexit, to make sure that we end in the right place by 2023—or, if needs be, by 2025 or some other date. But it cannot just be “never, never”, where we never manage to get businesses onboarded to the right system and we are therefore always up against a deadline and another extension always come along. I approve of and agree with the pragmatism of our regulators but if it is used to the extreme then, in the end, one undermines the credibility of having separately running UK systems. I wonder whether anything can be said to reassure us that we are not just part of a continuing cycle that will repeat until some far time in the future.

My Lords, I am grateful to the Minister for introducing this SI and to other colleagues who have spoken. As she outlined, the instrument essentially extends protections under the temporary designation regime to give UK firms more time to find alternative providers. This is deemed necessary to ensure continuity of service in cases where domestic firms rely on EEA systems that miss the 30 June deadline for applying to the Bank of England for designation under the UK settlement finality regulations.

While we certainly do not oppose giving UK firms time to

“put proper contingency plans in place”,

as the Explanatory Memorandum puts it, the need for this measure once again calls into question the Government’s approach to Brexit and the practical impacts of their lack of preparedness for our new relationship with Europe. For example, having been desperate to implement their own customs regime, we have debated statutory instruments which immediately disapplied certain rules and procedures, and Ministers had to extend grace periods due to lack of readiness on the ground.

In today’s newspapers, we have read about the continued difficulties around the operation of the Northern Ireland protocol, with talks led by the noble Lord, Lord Frost, supposedly close to breaking down. This would be concerning enough without the reports of unprecedented diplomatic steps taken by the Biden Administration due to their fears for the peace process.

I return to the broad topic of the statutory instrument. Could the Minister provide an update on negotiations with the EU in the field of financial services? Measures such as these are designed to keep the show on the road in the absence of the comprehensive financial services agreement that the Government have promised. While they may afford firms more time to plan, does the Minister acknowledge that it is hard for different parts of the sector to do so when facing so much uncertainty?

My Lords, I thank both the noble Lord and the noble Baroness for their contributions to this debate and for their ongoing participation in debates on financial services and the expertise they bring to them.

As the Committee will know, the Treasury took extensive action to provide certainty for firms around the end of the transition period, and the Government continue to engage extensively with industry. I hope the Committee can rest assured that the Government will continue to do what it takes to ensure that the UK remains the best place in the world to do financial services business.

I am happy to provide the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Bowles, with an update on the negotiations with the EU on financial services, although I note that the provisions within this statutory instrument are not subject to any further negotiations or equivalence decisions. Indeed, the EU does not have an equivalence process or a third-country regime for settlement finality, thus the UK created the third-country regime to designate non-UK systems as part of the original statutory instrument.

However, on the broader question of ongoing negotiations on financial services, technical discussions with the EU on the text of the memorandum of understanding on financial services regulatory co-operation have now concluded. The MoU, once signed, will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues, including our respective frameworks and any discrete equivalence issues or changes. This is an important step forward in normalising the future relationship on financial services between the UK and the EU. The Treasury is now working to operationalise our future relationship with the EU on financial services, on the basis of the trade and co-operation agreement and the MoU.

In reply to the noble Baroness, Lady Bowles, I say that the original design of the temporary designation regime was to allow three years for the Bank of England to assess all applications for permanent designation under the UK regime. The amendment proposed in this SI does not change that, and we still expect all applications to be assessed by the end of 2023. We expect UK firms that are members of EEA systems which enter into the run-off regime to put contingency plans in place to ensure that they are prepared for any actions that those systems may take as a result of losing UK insolvency protections on 30 June 2023.

The Bank of England publishes a list of all EEA systems that are in the temporary designation regime. The list currently published is of those who notified to enter the regime. After 30 June, only those which submitted an application will remain and a new list will be published so that firms using the services of these organisations will be aware of who has entered the application process, and who has entered the run-off period and does not seek to be designated.

I thank the noble Lords and the noble Baroness once again for this short debate. I commend this instrument to the Committee.

Motion agreed.

Sitting suspended.