Delegated Legislation Committee
Draft Package Travel And Linked Travel Arrangements (Amendment) (EU Exit) Regulations 2018
The Committee consisted of the following Members:
Chair: Stewart Hosie
† Caulfield, Maria (Lewes) (Con)
† Chishti, Rehman (Gillingham and Rainham) (Con)
† Cooper, Rosie (West Lancashire) (Lab)
† Gibson, Patricia (North Ayrshire and Arran) (SNP)
† Harris, Rebecca (Lord Commissioner of Her Majesty's Treasury)
† Hayes, Sir John (South Holland and The Deepings) (Con)
† Jones, Darren (Bristol North West) (Lab)
McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† O'Brien, Neil (Harborough) (Con)
† Onwurah, Chi (Newcastle upon Tyne Central) (Lab)
† Rashid, Faisal (Warrington South) (Lab)
† Rowley, Lee (North East Derbyshire) (Con)
Shuker, Mr Gavin (Luton South) (Lab/Co-op)
† Smith, Nick (Blaenau Gwent) (Lab)
† Sturdy, Julian (York Outer) (Con)
† Swire, Sir Hugo (East Devon) (Con)
† Tolhurst, Kelly (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)
Bradley Albrow, Committee Clerk
† attended the Committee
Second Delegated Legislation Committee
Tuesday 4 December 2018
[Stewart Hosie in the Chair]
Draft Package Travel and Linked Travel Arrangements (Amendment) (EU Exit) Regulations 2018
I beg to move,
That the Committee has considered the draft Package Travel and Linked Travel Arrangements (Amendment) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Hosie. The draft regulations, which were laid before the House on 29 October, will be made under the powers conferred by the European Union (Withdrawal) Act 2018. They form part of the wider programme of work to adjust our legislative framework in readiness for leaving the European Union.
If a withdrawal agreement is reached between the UK and the EU, the implementation date of this draft statutory instrument could be changed by any Bill that the Government introduce to implement the withdrawal agreement in UK law. However, it is sensible to prepare for all scenarios, and that is what we are doing by bringing this instrument before the Committee today.
The Package Travel and Linked Travel Arrangements Regulations 2018 came into force in the UK on 1 July this year. They implemented the European Union’s 2015 package travel directive, and expanded the definition of “package” to ensure that it encompasses modern methods of purchasing package holidays, online in particular. They also created the new concept of linked travel arrangements, which are looser combinations of travel services, and introduced limited protection for consumers who purchase them.
The 2018 regulations require the provision of information to travellers, so that they have clear information about their package holiday or linked travel arrangements and their statutory rights. They also require that organisers put in place adequate insolvency protection to cover the refund of payments made by passengers and, if necessary, their repatriation.
If approved, the draft instrument will make amendments to deal with deficiencies that arise from a possible UK withdrawal from the EU on a no-deal basis. The 2018 regulations implemented the mutual recognition requirement of the EU directive. That requires member states to recognise the insolvency protection put in place by traders under the law of the member state in which they are established. In consequence, the 2018 regulations exempt traders established in other member states from having to comply with UK insolvency protection rules. Upon EU exit, the UK will become a third country, and so will no longer benefit from the mutual recognition provisions of the directive. In consequence, member states will no longer recognise the UK’s insolvency protection under the 2018 regulations.
The draft instrument will remove the exemption that allows European economic area traders to sell in the UK as long as they meet the insolvency protection of the member state in which they are established. If they sell or offer for sale package holidays or linked travel arrangements in the UK, they will be required to comply with UK insolvency protection rules on the same basis as UK traders—and, indeed, traders established anywhere else in the world. That change is necessary, first, to ensure that UK travellers are fully protected by the 2018 regulations if they purchase a package from EU traders that choose to trade within the UK market; and, secondly, to ensure fairness for UK-based traders. EU-based competitors should not have the advantage of an exemption that is no longer reciprocal.
The 2018 regulations also required member states to establish central contact points, the main purpose of which is to facilitate information sharing between member states in relation to insolvency protection. The Civil Aviation Authority is the lead central contact point in the UK. Should the UK leave the EU without a deal, the role of the central contact point would become redundant. The draft instrument will revoke the function of the central contact point to reflect that. It does not affect the Civil Aviation Authority’s other enforcement functions in relation to the 2018 regulations.
The draft instrument will also change the obligations on UK retailers that sell packages put together by a non-UK organiser. Regulation 27 of the 2018 regulations requires UK-established traders selling a package put together by an organiser outside the European economic area to be responsible for the performance of the package. They must meet the insolvency protection obligations of the 2018 regulations, unless they can provide evidence that the organiser complies with those requirements. The draft instrument changes regulation 27, so that this responsibility is placed on UK-established retailers when selling a package put together by any organiser established outside the UK, including organisers established in the EEA. This change is important to ensure that UK travellers purchasing packages combined by EEA established organisers can continue to be confident that they would be protected by adequate insolvency cover in the event of the organiser’s insolvency.
The Minister may be familiar with the role that I played when I was Transport Minister in doing exactly the sort of work and supporting the kinds of businesses that she is talking about. As she will know from the explanatory notes, one of the principal objectives will be to get those kinds of businesses, voluntary bodies and charities, to understand the changes. She is a competent and extremely diligent Minister, so I know that she will want to find means by which the Government can support that growing understanding. Will she agree to make provisions to get the word out among those kinds of businesses about what the changes mean?
I thank my right hon. Friend for that point. If the draft statutory instrument is agreed to, and we move into a no-deal situation in which this piece of legislation is required, the Government are committed, as we have always made clear, to ensuring that consumers’ rights are protected. We are and will continue working with the industry, and with consumer representative bodies, to make sure that consumers are aware of what they need to be looking at, and that businesses operating in this area make sure that people are fully aware of the consequences of the draft instrument.
Finally, the draft instrument makes other technical changes to deal with references to EU legislation, for instance replacing references to EU directives with references to the relevant saved domestic legislation. Importantly, the instrument does not otherwise change the 2018 regulations, so that after EU exit, travellers will continue to benefit from all the protections in those regulations. Officials from the Department have undertaken the appropriate assessment of the impacts of the draft instrument. That has shown that there is likely to be a small impact on business in cases where UK businesses have to provide the relevant insolvency insurance.
The draft instrument is a sensible and necessary use of the powers of the European Union (Withdrawal) Act 2018 that will ensure that our consumer law continues to function effectively on exit day. I commend the regulations to the Committee.
It is a pleasure to serve under your chairmanship for the first time, Mr Hosie. As the Minister indicated, with the rise of the internet and the boom in low-cost airlines, the way we book our holidays has changed significantly. Last year, 38% of all holidays abroad by UK residents—17.5 million holidays—were package holidays. Holidays to the European Union made up 79% of all holidays, and 74% of package holidays, by UK residents. Consumers often buy packaged holidays a long time in advance. They often spend a considerable amount of money—a very significant proportion of their income—on a holiday, including on flights, hotels and car rental.
As the popularity of package holidays rises, so do the risks, including the risk of trader insolvency leaving consumers stranded, the risk of accommodation providers going bust, and the risk of difficulties with access to information, help or redress, to name just a few. That is why the EU directive was an important step forward in protecting consumers in both the UK and the EU.
As the Minister outlined, this statutory instrument amends EU-derived regulations that protect consumers buying package holidays or linked travel arrangements to ensure that these protections continue to operate effectively after the UK’s departure from the European Union. It proposes a new obligation on UK businesses that sell package holidays put together by a European Union business. Those UK businesses will be required to comply with UK insolvency protection requirements, unless they can demonstrate that the EU business has taken out appropriate insolvency protection.
Clearly it is vital that insolvency protection schemes work. To give just one example, in 2016, Lowcostholidays failed, which left 140,000 UK consumers at risk of losing the money they had paid for their holiday, and some stranded overseas. At the time of the failure, the company, which sold primarily to the UK market, was based in the Spanish Balearic islands, following a controversial move in 2013, and its insolvency arrangements were held there. The UK regulator, the CAA, was powerless to prevent the company selling to UK consumers, or to obtain information on its insolvency arrangements. Fortunately, in that case, the majority of UK consumers ended up receiving refunds through the Consumer Credit Act 1974, which covers refunds of credit card payments. However, it has since emerged that the company’s insolvency protection came nowhere near to covering the sales it had made. That illustrates the potential risks of insolvency protection schemes not working in a joined up manner. It is not enough to have a scheme; it needs to work in a joined up way.
The intention behind the mutual recognition rules is to prevent this type of scenario occurring, but without those rules, the only way to do that is to require UK sales to be protected here. As a result of the regulations, the mutual recognition of insolvency protection with EU member states will end. As part of the withdrawal negotiations, have the Government attempted to negotiate continued mutual recognition of this? If not, do they intend to?
As UK individuals and businesses will no longer benefit from mutual recognition of insolvency protection, they could see a reduction in their consumer rights. Is that compatible with the Prime Minister’s statement in October 2017 that she wanted a partnership with the European Union based on strong consumer rights?
Furthermore, the Minister will know when this SI came to the Committee in May, an impact assessment was undertaken, as it was recognised that businesses offering packages that would be newly within the scope of the package travel directive of 2015 would face costs of £21 million in ensuring proper performance of the package. Does she not agree that an impact assessment should have been prepared prior to this debate? The right hon. Member for South Holland and The Deepings asked how businesses could be made more aware of these changes; should that not have been costed as part of an impact assessment? Will she estimate what exactly the cost will be to businesses?
The Minister did talk about an impact assessment. What assessment has she and her Department made of the number of travel companies that may move away from the UK market as a result of the new changes in insolvency protection? Finally, what discussions has she had with British trading standards on the impact these amendments will have on its workload? We know British trading standards has, unfortunately, been underfunded. Will this add to its workload without adding resources? My final question: given the 56% reduction in staffing for trading standards due to Government cuts, has the Minister any assurance to make?
I thank the right hon. Gentleman for his intervention, even though it is a little mischievous in nature. As he knows, we would have undertaken these negotiations in an entirely different and more effective way. To ask questions on the detail of what we would do—
I will finish answering the right hon. Gentleman’s first point before I give way a second time. Asking how we would mitigate the negative consequences of agreements that are part of the Government’s deal—we will see whether it will be approved by the House in a week’s time—is taking hypothetical questions to the extreme.
For the sake of the Hansard reporters, let me state that I would never want to be accused of saying that the Opposition were strong on detail, but the hon. Lady has just accused the Government of cuts, and of reducing the amount payable to a body, which suggests that her party would commit more funds. It is not hypothetical; we need to know what she means by this.
It is entirely wrong to say that I am making an accusation against the Government by simply stating that there was a 56% reduction in staff numbers. How is that an accusation? That is a statement of fact, a statement of the consequence of this Government’s and the preceding Government’s austerity agenda, which has led to our consumer protection services being decimated. The right hon. Gentleman was looking for more detail on this point, and I am happy to give it to him. Our services have been decimated as a consequence of the Government’s austerity agenda. His Prime Minister has said that austerity has ended, but his Chancellor has in no way committed the funds to make that real.
Again, I would like to answer the right hon. Gentleman’s first point before giving way another time. A Labour Government will ensure that our public services are properly funded. We need to see exactly what mess this Government leaves for us before we can say exactly how much that will cost.
Hopefully it will not be as great a mess as the one we inherited from her Government in 2010. People are beginning to rumble the Opposition for being opportunistic. The hon. Lady has talked about cuts and decimation; she has accused the Government of decimating this particular body. It is entirely right that, as parliamentarians, we should know what her counter-proposals are. It is no good trying to lose the room in blandishments and vague promises. We need to know, if she has looked at this, how she would better resource it.
Our commitments are to comprehensive investment in our public services and our infrastructure, and to strengthening consumer rights and protections. I will not go through every line of funding in our first Budget as a Labour Government, because I am not in a position to do that. However, I am in a position to say categorically that we would not have indulged in the failed economic policy of austerity, which has cut our public services while also giving us the lowest economic growth within the Organisation for Economic Co-operation and Development, and the second lowest within the European Union. If that is successful economic investment, then I think the right hon. Gentleman has a lot to learn about a successful economic policy.
Might I be helpful? I realise that I cannot match the assertiveness of my right hon. Friend the Member for East Devon, but this seems to be less about trading standards than about the way in which people book holidays. When I looked at these matters as a Minister, as I mentioned earlier, it became clear that the regime that has prevailed for some time was based on the fact that most people booked their holiday through a supplier, as a package. Increasingly, people construct their holiday by a variety of means, including through the internet. There is a reasonable point to be made about this being a dynamic sector that requires a moving regulatory environment.
When I challenged the Minister on this, she very helpfully committed—I thought she would—to providing information to all those bodies associated with that highly dynamic part of the market, as the explanatory note implied that we should. I am not putting words into the mouth of the hon. Member for Newcastle upon Tyne Central, but a more telling critique would be about that, rather than taking this more conventional approach around trading standards.
I hesitate to disagree with the right hon. Gentleman, who is so well informed in many areas, but as I said in my opening remarks, while it is absolutely true that consumer behaviour has changed in terms of how holidays are booked, that does not mean that the need for protection and for trading standards has reduced. For example, if we look at how crime has moved from the high street to the virtual high street, then some might argue that there was a greater need for trading standards and for protection of consumers. While I take the point that any consumer protection regime needs to reflect consumer behaviours, I do not think that that in any way reduces the need for trading standards bodies to have the proper resources.
Order. Before the hon. Gentleman makes another intervention, the statutory instrument is very narrow; it is about package travel and linked travel arrangements, not about trading standards. If you stuck to the statutory instrument, I would be very grateful indeed.
I am always guided by your wisdom, Mr Hosie. The point is that this is a complex area. The hon. Member for Newcastle upon Tyne Central is right that trading standards matter, but that is not all that matters. The Minister has made it clear that she is determined to make sure that information is provided to the businesses, voluntary organisations and charities that are likely to be affected, in exactly the way that I requested.
Thank you for your advice, Mr Hosie. Let me reflect the right hon. Gentleman’s point and ask the Minister specifically what assurance she will make to resource British trading standards adequately to reflect additional workload. Assurances are very well, but it takes resource and funding to make them into reality. What resources will she put behind the information and communication campaign that she has apparently committed to in this debate?
Thank you, Mr Hosie; it is a pleasure to see you in your place. My remarks will be brief.
The statutory instrument brings welcome consumer protections, but the Minister will be aware that it does nothing to reverse the loss of income that Brexit has meant and will continue to mean for holidaymakers, should it go ahead, which is becoming less clear with every day that passes. I say that at the risk of raising the ire of Government Members. It seems to me that the only thing that is clear is that Brexit is unclear.
Mark Carney, the Governor of the Bank of England, told the Treasury Committee that
“real household incomes are about £900…lower than…forecast in…2016.”
The question is why, and what drove that difference. Some of it, according to Mark Carney, is ascribed to Brexit. I crave your indulgence for just a brief second, Mr Hosie. Alongside what Mark Carney notes, there has been a decline in real wage growth since the Brexit referendum, largely fuelled by persistent inflation, which has been above the 2% target each month since February 2017, one of the key drivers being the weak pound as a result of the market’s dim view of the UK Government’s Brexit plans. That is the context in which we are thinking about consumers booking future holidays.
It is extremely important that the UK Government give assurances that they will seek to ensure a future partnership framework, and will retain the consumer benefits of the 2018 regulations. I agree that it is important that protection be expanded for consumers buying package holidays, to reflect modern travel booking methods, such as online booking, and that we broaden the definition of “package” to encompass new ways of purchasing package holidays.
This statutory instrument shows the importance of EU member states working together, but I fear—perhaps the Minister will seek to reassure me—that over time, Brexit will inevitably dilute and damage the consumer rights that are currently protected by EU member states working together. This will be at the expense of general consumer protection measures. As the right hon. Member for South Holland and The Deepings said, the package holiday sector is a moving and dynamic environment, so any UK Government have to be on their game to ensure that there is no unnecessary and damaging divergence in the kind of protection that we seek in this dynamic and innovative environment, to use the right hon. Gentleman’s words.
The new directive introduced a requirement for insolvency protection arrangements that were mutually recognised by EU member states and the UK, backed up by a central contact point that should, I hope, reassure consumers of package travel. As we have heard, this insolvency protection must work for all consumers who need it. I am sure that the Minister will agree that travel businesses need to be made fully aware of consumer rights and protections, as others have indicated.
I welcome the protections offered in this statutory instrument, but I have to say again that it will not put back into holidaymakers’ and householders’ pockets the income that has been lost since this Brexit episode started. People’s income is an estimated £900 less than the Bank of England forecast it would be in 2016. That comes alongside a decline in real wage growth since the Brexit referendum. I fear that consumers will be taking fewer holidays and therefore, sadly, will need fewer protections, but those who do take holidays rely very heavily on the kind of protections set out today.
First, I reassure the hon. Lady that the 2018 regulations were implemented in July; we are making an amendment today based on a no-deal scenario. I thank her for her comments about the SI and the protections that we are trying to establish.
I will try to answer the questions raised by the hon. Member for Newcastle upon Tyne Central about the SI. As she will know, if a deal is agreed by this House, the Government will enter into a future economic partnership with the EU. This Government have been clear in their technical notices that consumer protection is at the forefront of what we are doing. Particularly in my role in the Department for Business, Energy and Industrial Strategy, consumer protection and what we are doing to support consumers is always at the forefront of our mind. I said it twice in two debates last week, and I say it again today: we are committed to continuing to deliver the highest consumer protections possible for the people of the United Kingdom.
The hon. Lady talked about consumer rights and different mechanisms as we move this statutory instrument forward. I alert her to the fact that in future weeks we will lay before the House an SI about mechanisms that we are working on for cross-border co-operation and redress in the event of no deal.
The hon. Lady talked about the impact assessment and mentioned a figure of £21 million. I am afraid I do not recognise that figure. Our assessment is that the potential cost to business is between £1.4 million and £1.8 million. As that falls below £5 million, a full impact assessment was not undertaken. I may need to make the Committee aware that the impact had already been established prior to 1 July, when the 2018 regulations came in, because UK businesses already had to provide protection for other holiday packages sold in the UK. We are pretty sure that our estimate of the burden on business will be at that level. In actual fact, we estimate that even if 70% of retailers currently supplying package holidays or linked travels arrangements in the United Kingdom were affected, it would still fall below the £5 million mark. More than 70% of retailers would need to be affected for that amount to be larger, and we think that the burden and the number of businesses affected will be reduced.
The hon. Lady also spoke about trading standards and enforcement. I take issue with her saying that trading standards have been decimated, and that the Government have not wanted to fund and have not taken seriously the enforcement of consumer rights. That is quite simply untrue. The priority given to trading standards locally is decided on at local level. Trading standards already enforce current regulations. We are committed to enforcement. We have National Trading Standards, and this year we put in the Office for Product Safety and Standards, which works very closely with National Trading Standards, and which obviously shows our commitment to delivering on product safety. We will continue, as ever, to maintain our trading standards capability.
As the hon. Lady knows, there was a Green Paper on consumer protections and enforcement. The Government are looking at that, and at how we can better our consumer protection and enforcement. I assure her that, as the Minister with responsibility for this area, I am committed to that. I reiterate that commitment, as I have in previous such Committees when consumer protections and enforcement have been raised.
I also highlight to the hon. Lady that, under the draft regulation, the CAA is still responsible for enforcement when flights are included. The Department for Transport is confident that even with the increased workload, it will be able to discharge its responsibilities under the draft regulation sufficiently well.
The hon. Lady also asked about the campaign that I agreed to. I did not agree to a marketing campaign; I do not think I spoke about a marketing campaign. I said that we will continue to work with consumer protection groups such as Which? and stakeholders. We have roundtables. We will also make sure that if there is a change and we are in a no-deal situation, the Government will work with our stakeholders, industry representatives, Citizens Advice, trading standards and all our usual stakeholders to make sure that the information is out there as prominently as possible. My right hon. Friend the Member for South Holland and The Deepings made the point that we have already had significant discussions with the industry and with stakeholders prior to laying this SI before Parliament.
We remain confident that we will reach a deal with the EU. However, it is of course important that we prepare the legislative framework to protect consumers and businesses in case we leave the EU with no deal. That is what this draft instrument will do. It does not make any substantial change to the regime for the protection of consumers purchasing package holidays or linked travel arrangements, or to the standards that travel operators are already expected to meet.
The draft regulations are essential to ensuring that the retained EU legislation that sets out those requirements continues to work effectively in the UK immediately after exit day. That is what they are designed to do. We need to make sure that we have the right regulatory and legislative framework to provide travellers with adequate protections, irrespective of the outcome of the negotiations. I therefore hope that the Committee approves the draft regulations.
Question put and agreed to.
That the Committee has considered the draft Package Travel and Linked Travel Arrangements (Amendment) (EU Exit) Regulations 2018.
Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018 Draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018
The Committee consisted of the following Members:
Chair: Mr Nigel Evans
† Brown, Lyn (West Ham) (Lab)
Coaker, Vernon (Gedling) (Lab)
† Donelan, Michelle (Chippenham) (Con)
† Elmore, Chris (Ogmore) (Lab)
† Glen, John (Economic Secretary to the Treasury)
Kyle, Peter (Hove) (Lab)
† Lopez, Julia (Hornchurch and Upminster) (Con)
† Mercer, Johnny (Plymouth, Moor View) (Con)
† Merriman, Huw (Bexhill and Battle) (Con)
† Prisk, Mr Mark (Hertford and Stortford) (Con)
† Scully, Paul (Sutton and Cheam) (Con)
† Shah, Naz (Bradford West) (Lab)
† Skidmore, Chris (Kingswood) (Con)
Streeting, Wes (Ilford North) (Lab)
† Thewliss, Alison (Glasgow Central) (SNP)
† Tredinnick, David (Bosworth) (Con)
† Walker, Thelma (Colne Valley) (Lab)
Peter Stam, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Tuesday 4 December 2018
[Mr Nigel Evans in the Chair]
Draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018
I beg to move,
That the Committee has considered the draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.
With this it will be convenient to consider the draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Evans. The two statutory instruments before the Committee, which were debated in the House of Lords on Wednesday 28 November, form part of our contingency planning for a potential no-deal EU withdrawal scenario. They are two of approximately 60 SIs that we are laying under the European Union (Withdrawal) Act 2018 to ensure that the UK retains a fully functioning legislative and regulatory regime for the financial services sector after our withdrawal from the EU in March 2019.
Last December, the Treasury pledged to transfer functions and powers in relation to trade repositories and central securities depositories to the Financial Conduct Authority and the Bank of England respectively, thus enabling the regulators to manage any cliff-edge risks arising from a no-deal scenario and to ensure an orderly exit from the EU. The statutory instruments deliver on those commitments.
Trade repositories and central securities depositories provide essential services to UK customers under EU regulation. Should the UK leave the EU without a deal or an implementation period, they would be unable to provide services to UK firms until they had the appropriate permissions under the UK’s domestic regimes, given that the UK would be outside the single market for financial services. The SIs therefore seek to ensure that there will continue to be a functioning regulatory regime to mitigate any risk of disruption to the provision of services in the event of a no-deal scenario.
Let me first discuss the draft Central Securities Depositories (Amendment) (EU Exit) Regulations. A central securities depository is an element of financial market infrastructure that keeps a record of who owns individual securities such as bonds or shares. Central securities depositories carry out three core functions: the registration of share ownership, trade settlement, and the maintenance of obligations arising from owning a security. Central securities depositories are governed by the central securities depositories regulation, which created a common authorisation, supervision and regulatory framework for central securities depositories across the EU.
The failure to maintain access to the UK for non-UK central securities depositories would introduce unnecessary risk to any UK firm using those services and would potentially cut off access to central financial markets. The draft regulations will therefore introduce a UK transitional regime that will allow both UK and non-UK central securities depositories to continue to provide services in the UK after exit next March.
To make use of the UK transitional regime, the draft regulations will also introduce a requirement for non-UK central securities depositories to notify the Bank of England, before exit day, of their intention to provide services in the UK after exit from the EU. The Bank of England has sent letters to non-UK central securities depositories—10 of them, I think—to set out the notification process. The draft regulations will introduce measures to mitigate those risks and ensure a smooth continuation of the provision of services by central securities depositories to the UK.
The draft regulations will transfer the various functions and powers currently held by EU bodies to the appropriate UK authorities. After exit, the powers that are currently held by the European Securities and Markets Authority in the EU to recognise non-UK central securities depositories will be transferred to the Bank of England. The European Commission’s powers to make equivalence decisions are being transferred to the Treasury. This is a process of reviewing another country’s regulatory framework to determine whether it is equivalent in outcome to one’s own. Once the Treasury has deemed a country equivalent, the Bank of England can recognise central securities depositories within that country. This will allow such central securities depositories to provide services to UK firms in compliance with the UK regime.
I now turn to the draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations. Trade repositories centrally collect and maintain data on derivative transactions. Derivatives are financial instruments that can be used to hedge against risks such as interest rate fluctuations or asset price volatility. The European market infrastructure regulation requires all data and information on European derivative transactions to be reported to trade repositories that are registered with or recognised by ESMA; this is known as the EMIR reporting obligation. If trade repositories are unable to provide services to UK firms post exit, those UK firms will be unable to fulfil their reporting obligation under the UK’s regime, resulting in the UK regulators losing access to the data necessary for monitoring financial stability risks to the UK market.
The draft regulations will introduce measures to mitigate that risk, ensuring a smooth continuation of services from trade repositories to UK firms. First, they will establish a framework in the UK for the registration of UK trade repositories, while maintaining the same regulatory criteria for new UK trade repository applicants. To achieve that, ESMA functions relating to the registration of trade repositories will be transferred to the Financial Conduct Authority, including the mandate to make technical standards specifying the information to be provided by trade repository applicants. The FCA currently supervises UK firms subject to existing EU reporting obligations and is therefore familiar with the reporting requirements under EMIR, so it is the most appropriate UK authority to take on that role.
Secondly, the draft regulations will provide powers to the FCA to consider applications ahead of exit day so that a trade repository can provide services in the UK as soon as possible after exit. Thirdly, they will establish a temporary registration regime for eligible trade repositories that will allow them to continue to provide services to the UK by setting up new UK entities. This provides temporary registration for a period of three years to UK trade repositories that are part of a group that contains an ESMA-registered trade repository. The purpose is to allow additional time for those trade repositories’ applications for permanent registration to be considered by the FCA and ensure continuity of services to UK firms. To enter the temporary regime, an eligible trade repository must, ahead of exit day, submit an application to the FCA for registration and set up a new legal entity in the UK.
Finally, the draft regulations will create a conversion regime whereby UK trade repositories that currently have ESMA authorisation are deemed to be registered by the FCA from exit day. To enter the regime ahead of exit day, a UK trade repository must notify the FCA of its intention to be registered. The conversion regime will ensure the smooth continuity of services from UK trade repositories to UK firms.
The Treasury has worked very closely with UK financial regulators and industry bodies to draft the statutory instruments. To ensure full transparency with Parliament, industry and the public ahead of laying the instruments, the Treasury published the trade repositories regulations in draft on 5 October 2018 and the central securities depositories regulations in draft on 22 October 2018, with an accompanying explanatory policy note for each. The regulators and the industry have generally been supportive of the policy decisions in the SIs, both of which are essential to ensuring that the UK retains a fully functioning legal regime both for trade repositories and for central securities depositories in the event of a no-deal scenario. The relevant UK regulators are also equipped to manage any cliff-edge risks. No matter what the outcome of the exit negotiations, UK businesses and customers who use trade repositories and central securities depositories can therefore be confident that they will continue to operate and provide services in the UK.
I hope colleagues from all parties will join me in supporting the draft regulations. I commend them to the Committee.
Before I call the shadow Minister, let me inform the Committee that if there is a Division in the House, I will suspend our sitting for 15 minutes so that hon. Members can vote.
It is an absolute pleasure to serve under your chairmanship, Mr Evans.
As we know, the regulations before us are two of a large number of statutory instruments relating to preparations for a potential no-deal Brexit. We expect around 70 to have been tabled by February. With this process, we have effectively begun to construct the bare bones of a functioning regime for financial regulation post Brexit.
Labour has consistently advocated for consolidated legislation on financial regulations. Since 2010, we have been faced with confusing, piecemeal legislation. There were financial regulation Acts in 2012, 2013, 2014 and 2015, and there have been more since—reams of reams of detailed amendments to legislation that was already complicated. On top of those Acts, Delegated Legislation Committees like this have attempted to scrutinise the many pieces of secondary legislation that have been needed to correct technical errors.
Put simply, we are concerned that the process for these Brexit regulations is not accessible or transparent. Not only does that make our role more difficult; it raises questions as to how stable the regulations will be if they do need to be used in respect of the industry itself or the wider public. My colleagues who are normally in this place, because I am not one of the economists in my team, have been reassured by the Government that these measures will not come into force should a deal be agreed before 29 March, but many of these powers could be applied whatever happened with Brexit. Which provisions will be revoked or substantially modified if, for example, we go into an implementation phase and no deal has, rightly, been ruled out as a possibility?
Before I ask my other questions, I want to make it clear why I think the regulations are important. The global financial crisis a decade ago taught us that the trading of derivatives and other securities needed to be better regulated within a transparent framework, and with robust infrastructure to monitor and enforce compliance. During the crisis, there was behind-the-scenes, over-the-counter buying and selling of complicated financial contracts, introducing risks that regulators and financial firms themselves could not properly assess or manage. There was no requirement to keep proper accessible records in the midst of that terrible crisis, and regulators could not always know who had bought which derivative and from whom. That meant that they could not know which banks or other financial institutions were exposed to bad loans or wrongly priced assets, gumming up the works of the financial system, and which were close to going under.
That is why, in the immediate aftermath of the crisis, it became a priority of the G20 in 2009 to move the regulation of over-the-counter derivatives to a regulated clearing framework. That change was put in place across the EU by the European market infrastructure regulation, which is implemented by the European Securities and Markets Authority. Having a robust, transparent infrastructure for derivatives trading imposes compliance requirements on firms across the EU, but it does help to protect us from a repetition of the events of 2008—we hope.
Colleagues will be aware that the draft Central Securities Depositories (Amendment) (EU exit) Regulations 2018 will make technical changes to ensure that the UK still has functioning regulations for central securities depositories, or CSDs, in the event of no deal. The regulations will transfer the power to make equivalence decisions from the European Commission to the Treasury. They will transfer powers from ESMA to the Bank of England, enabling the central Bank to recognise third-country CSDs after Brexit. They also make amendments to the transitional regime so that third-country CSDs can continue to provide services relating to the UK after exit.
The draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 are intended to ensure that the UK’s legal framework for the reporting of derivatives trades to trade repositories continues to operate effectively after Brexit. Of course, we support the general aim of improving the transparency and predictability of the settlement of securities transactions. However, I do have some specific questions.
The explanatory memorandum for the draft central securities depositories regulations says that they aim only to ensure that the UK’s framework will continue “to operate effectively”. Will the Minister clarify whether any departure at all from EU rules is envisaged, however small? The Treasury website’s guidance on those regulations states that an application before exit
“will be subject to existing UK law…while that application is being considered.”
Will the Minister elaborate on whether there is any difference between the UK law that applies to applications before exit and the onshored regulation, once firms switch to it?
Similarly, the transfer of regulatory powers does not tell us anything about how UK-based companies will be affected in their future relationships with other countries’ financial sectors. How will any decisions about third-country equivalence be taken in situations where in the past there was a joint decision by European and other authorities? In previous SIs, equivalence decisions have been transferred to the Treasury, not to the Bank of England. Will the Minister elaborate on why in this case it has been decided to transfer them to the Bank of England instead? How and why was the decision reached? Was it consulted on?
Our strongest commitment, as with all no-deal SIs, is to ensuring that such amendments to our regulations need never be used. We hope that they never will be, because a no-deal scenario is something that no responsible Government would allow to happen.
On the broader question of financial regulation, Labour will take measures to ensure that there is public faith in the financial and investment system. We will not repeat the light-touch regulation mistakes of the past. We have commissioned independent experts to report on how the regulatory system should be reformed to ensure that the kind of behaviour that caused such terrible damage during and before the financial crisis can never happen again. We know that people and society want and need banks in which they can safely deposit their money, that lend responsibly and that provide credit to finance investment across the whole country. All I can say is that I wish we were discussing how to do that, rather than these no-deal Brexit preparations.
It is a pleasure to see you in the Chair, Mr Evans, and to join the Committee for another session as we hurtle towards EU exit. As I have said in other such debates, it is not something that the Scottish National party wanted to see or that voters supported in Scotland, where 62% voted to remain. However, I will play my part in these things and call for the Government to answer some questions.
As always, I have concerns about a potential reduction in regulatory standards. I seek assurances from the Minister that that will not occur and that at the very minimum we will keep to the standards outlined in current EU legislation. We know the long-term impact that the financial crash has had on our economy; I do not think that anyone would argue that lack of regulation was not a major driver of it. We cannot veer back towards that situation; that would be terrible for all our constituents throughout the UK.
Let me address the central securities depositories regulations first. I note from the impact assessment that the familiarisation cost is £400 per firm—£4,400 to all firms affected. That is a further burden to business from making these changes for Brexit. I am sure that nobody told businesses at the time of the referendum that they would incur such costs as a result of Brexit; it is one of those things that is hidden in the detail.
The Minister mentioned Sir Jon Cunliffe’s letter of 25 October to CSDs. Can he tell us what reply he has received from them? I appreciate that the number of CSDs is rather small, but it is not unreasonable to expect some response. It would be good to have a little more detail about what they are saying about the draft regulations.
I note that there is nothing in the impact assessment about monetised non-familiarisation costs of the central securities depositories regulations, whereas that information is provided about the trade repositories regulations. Is that because the costs are not known, or because there are no costs, as the central securities depositories regulations do not have an impact in the same way?
On trade repositories, will the Minister give us more information about the UK’S future relationship with ESMA? Clearly, ESMA will continue to function, make regulations and do things. How much notification will there be of obligations to apply the rules set up so that we continue to have a relationship? Is there any indication of what formal agreements or other types of arrangements might be put in place?
I note that there is a draft registration form on the FCA website, as well as a consultation on fees, which runs until January for the trade repositories. Will the Minister give more detail about that process? Does a draft registration form become a formal registration form at the point that the UK wishes to leave the EU, or before then? What is the process? Is there much point in those trade repositories that wish to fill out that form doing so in draft if they can do so in a permanent form? Will they have to do the paperwork twice? Will the Minister indicate what level of fees the Government feel are reasonable for the process? If people are asked how much they would like to pay, I am sure that most people will say that they would like to pay no fee, but the Government might have a different idea.
The impact assessment quotes familiarisation costs of the trade repositories regulations as £150 per firm, which is £1,200 for all impacted firms, as there are only eight. However, the wider impact of the monetised non-familiarisation costs to business, as outlined on page 47 of the impact assessment, is quite different, as they could run to £10,000 to £15,000 per trade repository—a total of £80,000 to £120,000. There would also be a cost of £5,000 per firm accessing trade repositories, with an unknown total cost, because it is about changing IT systems and internal processes. If we read the start rather than the end of the document, we get quite a different picture of the impact of the regulations.
The impact assessment states, at the bottom of page 47, that trade repositories are
“currently regulated by ESMA, so the UK regulators do not have direct access to information relating to clients of trade repositories.”
We therefore do not know how many will be affected. Will the Minister tell us a wee bit more about what conversations he has had with ESMA? Is ESMA unable or unwilling to give him that information? Has information been requested? It is difficult to get an idea of the total impact if we do not know how many are currently regulated, so we should be able to access that information.
The Minister will expect me to raise my usual concerns that both sets of regulations put more burden on the FCA, the Bank of England and other regulators, and that we do not have the specialists to deal with it. Registering is a new thing, so will the relevant functions and IT be in place in good time to allow all that to happen?
I thank the hon. Members for West Ham and for Glasgow Central for their points, and I will endeavour to answer all of them. I recognise that some of the scenarios are obviously not desirable, and I echo their comments about that. We are seeking a deal, and the framework of the deal for financial services would give us provision for early equivalence decisions before the end of the implementation period, and we hope that will happen. We believe that the regulations are necessary to ensure that the UK retains a fully functioning legal regime for the trade repositories and central securities depositories in the event of a no-deal scenario. I also want to make the point, which applies in response to both hon. Ladies’ comments, that the Government do not, in any eventuality, see the UK financial services sector trading on some deregulatory arbitrage basis, where we somehow remove ourselves from the context in which we have been so intimately involved within the EU with respect to regulations. The hon. Member for West Ham made reference to the Pittsburgh agreement in 2009 to improve transparency, and we stand by that. A holistic review was undertaken following the crisis and the ESMA rules came into effect to try to address that.
On the point about how stable the regulations on central securities depositories will be when needed, we have engaged extensively with the regulators and with industry, and we are confident that we will ensure a stable and functioning regime at the point of exit. With respect to what happens if there is a deal, the withdrawal agreement Bill will include provision to delay, amend or revoke statutory instruments made under the European Union (Withdrawal) Act 2018, so we would make a decision based on what was appropriate at that time.
The hon. Lady asked about the differences between the transition regime for CSDs and full authorisation or recognition under CSDR. While a CSD is within the transitional regime, it will be subject to the recognised clearing house regime in part 18 of the Financial Services and Markets Act 2000. Other legislation, such as the Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001, is also relevant. Recognised clearing houses must be recognised as part of the Bank of England, which gives an exemption from the general prohibition under FSMA IV regulated activity. A recognised clearing house may provide clearing services in the UK.
Once a UK CSD has been authorised, or a non-UK CSD has been recognised, the onshore CSDR regime will apply to it. That consists of the EU CSDR and the UK’s 2014 and 2017 regulations that implement it, and CSDs are given a separate exemption in section 285 of FSMA. As the hon. Lady pointed out at the start, the regulation is complicated by the way that those markets function. That regime is more extensive than the recognised clearing house regime and contains more detailed requirements about the operation and supervision of CSDs.
The hon. Lady also asked whether there would be any departures from EU law. The legislation is drafted using powers under the European Union (Withdrawal) Act 2018, so there is no policy innovation or deviation. That Act does not allow such policy changes, except where necessary to address deficiencies in language or such like. No changes are made to the regulatory requirements on CSDs.
The hon. Lady asked about the appropriateness of the Bank of England recognising non-UK CSDs. The Bank of England is obviously the UK regulator responsible for the authorisation and supervision of UK CSDs. It has a process in place for the recognition of UK CSDs and therefore has the most relevant experience for recognising non-UK CSDs. That sort of pattern has been followed throughout the construction, engagement and laying of these statutory instruments, so where the Commission is appropriate for making equivalence decisions, that comes to the Treasury, because we are equivalent, and the same with ESMA and the Bank of England.
The regime that we would be onshoring for the future recognition of third countries would be a matter for us to consider, on the same basis that we would be onshoring EU entities that would have a new legal entity in the UK. It will be the same process, but one that we would essentially have to do domestically, rather than relying on the ESMA framework.
I now turn to the points of the hon. Member for Glasgow Central. I acknowledge the recurrent but appropriately made comments about her party’s position. All I can say is that I have tried to conduct this in as professional a manner as possible. The regulators have the resources available. They have a supervisory framework and, through the levy, they have the ability to make the appropriate resources available.
The hon. Lady asked about the temporary registration regime, which is intended to allow existing EU trade repositories to continue to provide services to the UK. It allows the new UK legal entities, which are part of an ESMA-authorised group, to submit an application. In terms of the process for that application, she mentioned the drafts on the site. I cannot give her the responses to the letter of 25 October, but I undertake to write to her on that. I need to speak to the regulators to understand where they are with that.
The hon. Lady also made a point about the degree of engagement that we have had with the EU. We have had a wide range of discussions with our EU counterparts—I have not personally, but my officials have—on matters relating to our withdrawal from the EU and this matter.
The UK Government and regulatory authorities will continue to do everything we can to ensure a smooth adjustment for firms and customers on both sides. Unfortunately, as with many of these matters, we cannot determine the EU’s response. That has been a challenge over this period. It is inevitable that, in a no-deal scenario, hostility will break out. It is in the interests of all market participants, regulator-to-regulator, Government-to-Government, to continue to work closely together, because that is in the interest of stability.
I believe that has addressed most, if not all, of the points raised.
On the point about not knowing the exact number of firms affected, I draw the Minister’s attention to paragraph 124 on page 32 of the impact assessment, which says:
“As the volume of firms affected is so large, and both financial counterparties and non-financial counterparties are affected by the reporting obligation, it is difficult to provide an estimate of the number of firms affected.”
Will he tell me more about what can be done to raise awareness among the firms that may be caught up in this? If they do not know about it, they will not know about their obligations to comply.
The existing reporting obligations for both statutory instruments are enduring and have been established for a long time. The issue of reporting into a different legal entity would come to pass following the enablement and the enacting of this regime.
The hon. Lady referred to the different parts of the impact assessment and the wider cost of familiarisation. She is absolutely right to draw attention to the undesirability of this additional cost and expense. That is why we do not advocate a no-deal scenario. I am not in a position to give her any more information, because I do not possess it. It will be incumbent on the regulator to send out timely information updates on what will be required. There is no meaningful change in what a market participant will need to do, in terms of the information they will need to share.
I hope the Committee has found this afternoon’s sitting informative and that it will support these regulations.
Question put and agreed to.
That the Committee has considered the draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018.
Draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018.
That the Committee has considered the draft Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018. —(John Glen.)
Independent Parliamentary Standards Authority
The Committee consisted of the following Members:
Chair: Mr Laurence Robertson
† Burns, Conor (Bournemouth West) (Con)
† Campbell, Mr Alan (Tynemouth) (Lab)
† Cryer, John (Leyton and Wanstead) (Lab)
Efford, Clive (Eltham) (Lab)
† Freer, Mike (Lord Commissioner of Her Majesty's Treasury)
† Hair, Kirstene (Angus) (Con)
† Linden, David (Glasgow East) (SNP)
† Lucas, Ian C. (Wrexham) (Lab)
† Maynard, Paul (Lord Commissioner of Her Majesty's Treasury)
† Percy, Andrew (Brigg and Goole) (Con)
† Phillipson, Bridget (Houghton and Sunderland South) (Lab)
† Prentis, Victoria (Banbury) (Con)
† Ross, Douglas (Moray) (Con)
† Shapps, Grant (Welwyn Hatfield) (Con)
† Sharma, Mr Virendra (Ealing, Southall) (Lab)
† Shelbrooke, Alec (Elmet and Rothwell) (Con)
† Smyth, Karin (Bristol South) (Lab)
Laura-Jane Tiley, Hannah Wentworth, Committee Clerks
† attended the Committee
Fifth Delegated Legislation Committee
Tuesday 4 December 2018
[Mr Laurence Robertson in the Chair]
Independent Parliamentary Standards Authority
I beg to move,
That the Committee has considered the motion, That an humble Address be presented to Her Majesty, praying that Her Majesty will appoint Richard Lloyd to the office of ordinary member of the Independent Parliamentary Standards Authority for period of 5 years with effect from 1 December 2018.
It is a great pleasure to serve under your chairmanship, Mr Robertson, and to make a guest appearance to move the motion in the name of my right hon. Friend the Leader of the House.
The proposed appointment is due to the resignation of Jackie Smith from the IPSA board. The Speaker’s Committee for the Independent Parliamentary Standards Authority has produced a report—its first of 2018—that relates to the motion, but it may help if I set out the key points for the record.
IPSA board members are appointed under the Parliamentary Standards Act 2009. Under the Act, the Speaker is responsible for overseeing the selection of candidates for appointment to IPSA. The names of any candidates to be members of IPSA must be approved by the Speaker’s Committee for IPSA. On this occasion, the vacancy was for an ordinary board member. Such members are not subject to any of the specific statutory requirements listed under the Act.
The Speaker is not regulated by the Office of the Commissioner for Public Appointments, but in making this appointment Mr Speaker has chosen to follow recommended best practice in his supervision of appointments. As is normal for such appointments, Mr Speaker appointed a panel to conduct the shortlisting and interviewing of candidates. The panel was chaired by Mr Mark Addison, a former civil service commissioner. The other panel members were Ruth Evans, chair of IPSA; Shrinivas Honap, lay member of the Speakers Committee on the IPSA; and Meg Munn, former MP for Sheffield, Heeley.
The candidate recommended by the appointment board is Mr Richard Lloyd, the current UK chairman of Resolver, who has substantial experience both of organisational strategy and of operational delivery in public, private and third sector services. He exhibited a strong understanding of the role of IPSA and the critical challenges that it faces. He also has experience working with regulators, including the Food Standards Agency, the Gambling Commission and the Financial Conduct Authority. His full CV is included in the Speaker’s Committee report.
As required under the Act, the appointment was approved by the Speaker’s Committee at its meeting on 20 November. If the appointment is made, Mr Lloyd will serve on IPSA for five years. Should this Committee, and ultimately the House, support his appointment, I wish him well as he takes up his new post, and I thank the panel for its endeavours.
It is a pleasure to serve under your chairmanship, Mr Robertson. I, too, thank the interview panel for its work, which often goes on unseen behind the scenes. The panel—the independent chair Mark Addison, Ruth Evans, Shrinivas Honap and Meg Munn—has been independent, transparent and diligent in that work, reviewing more than 179 applications. Its unanimous view is to support the appointment to the IPSA board of Richard Lloyd, whose previous experience the hon. Member for Blackpool North and Cleveleys outlined.
The Speaker’s Committee report notes:
“Mr Lloyd exhibited a strong understanding of the role of IPSA and the critical challenges it faces”—
something that I think we all agree on. The Opposition agree with Mr Lloyd’s appointment, as recommended in the report, and wish him well in his new role.
As ever, Mr Robertson, it is a pleasure to serve under your chairmanship. I congratulate the hon. Member for Blackpool North and Cleveleys on opening the debate on behalf of the Government; I suspect that he did not expect to be here, but given that his boss is downstairs in the Chamber trying to hold the Government together, it is no surprise that he is. I do find one thing rather amusing: like many hon. Members present, I have just come from the Chamber, where we were discussing an Humble Address not being followed, so it is with a sense of irony that I see another Humble Address before this Committee.
I have one question for the hon. Gentleman standing in for the Leader of the House. As I understand it, the gentleman who is proposed for the IPSA post took up office on 1 December, yet Parliament is being asked to approve his appointment today, on 4 December. Over the EU referendum campaign, we were told that Parliament was taking back control, yet essentially we are being asked to rubber-stamp something that has already happened. I suspect that that is an indication of how the Government see the role of parliamentarians. We can draw our own conclusions about that, but I want to put it on the record that I ask the hon. Gentleman why Parliament is being asked to approve an appointment that has already started.
I am happy to try to respond. I was not sure whether we were getting a question or a running commentary there, but I think I detected a question at the end. The hon. Member for Glasgow East may have been paying attention to what I said; I do say things for a reason. The Speaker’s Committee reached its decision on 20 November. I am sure that the hon. Gentleman, as someone with great knowledge of the workings of the House, realises the time it takes to process delegated legislation. We brought the motion before the Committee as soon as we could; I hope he can support it, because I am sure that Mr Lloyd will do a good and diligent job.
Question put and agreed to.