Delegated Legislation Committee
Draft Interchange Fee (Amendment) (EU Exit) Regulations 2018
The Committee consisted of the following Members:
Chair: David Hanson
† Badenoch, Mrs Kemi (Saffron Walden) (Con)
Bryant, Chris (Rhondda) (Lab)
† Ellman, Dame Louise (Liverpool, Riverside) (Lab/Co-op)
† Glen, John (Economic Secretary to the Treasury)
Hoey, Kate (Vauxhall) (Lab)
† Knight, Julian (Solihull) (Con)
† Lamont, John (Berwickshire, Roxburgh and Selkirk) (Con)
† Lewer, Andrew (Northampton South) (Con)
† Morris, Grahame (Easington) (Lab)
† Reynolds, Jonathan (Stalybridge and Hyde) (Lab/Co-op)
† Scully, Paul (Sutton and Cheam) (Con)
† Smith, Jeff (Manchester, Withington) (Lab)
† Sturdy, Julian (York Outer) (Con)
† Thewliss, Alison (Glasgow Central) (SNP)
† Tomlinson, Michael (Mid Dorset and North Poole) (Con)
† Walker, Thelma (Colne Valley) (Lab)
† Whittaker, Craig (Lord Commissioner of Her Majesty's Treasury)
Jack Dent, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Tuesday 22 January 2019
[Mr David Hanson in the Chair]
Interchange Fee (Amendment) (EU Exit) Regulations 2018
I beg to move,
That the Committee has considered the draft Interchange Fee (Amendment) (EU Exit) Regulations 2018.
First, may I say what a pleasure it is to serve under your chairmanship, Mr Hanson? As the Committee will be aware, the draft regulations are part of a programme of legislation that is being undertaken by the Treasury, which will ensure that, if the UK leaves the EU without a deal or an implementation period, the UK will continue to benefit from a functioning legislative and regulatory regime for financial services. They will fix deficiencies in UK law relating to interchange fees applicable to card payments, as well as rules for card schemes, issuers, acquirers and merchants.
The approach taken aligns with that of other statutory instruments being laid under the European Union (Withdrawal) Act 2018, by maintaining the fundamentals of existing financial services legislation at the point of exit while amending it to ensure that it functions effectively in a no-deal context. The SI was debated and approved by the House of Lords last week, on 15 January.
Interchange fees are paid whenever a payment is completed using a debit or credit card. They are typically set by card schemes, for example Mastercard or Visa. They are paid from a merchant’s payment service provider, also referred to as a merchant’s acquirer—typically, the banks of the merchant and the consumer—to a card user’s payment service provider, also referred to as a card issuer.
The 2015 EU interchange fee regulation brought in two main policy interventions. First, it imposed caps on interchange fees for transactions where both the acquirer and the card issuer are located within the European economic area; the caps do not apply where either the acquirer or the card issuer is located outside the EEA. The caps limit interchange fees for such transactions to 0.2% of the total value of the transaction for consumer debit cards, including prepaid cards, and 0.3% for consumer credit cards. Furthermore, the EU interchange fee regulation allows individual member states to apply lower caps for domestic debit and credit card transactions where both the acquirer and issuer are in that country.
Secondly, the EU regulation sets rules on card schemes, issuers, acquirers and merchants. For example, it requires the separation of card schemes and processing entities, such as Worldpay.
In the event of no deal, that EU regulation would no longer include the UK within its scope, and interchange fees would therefore no longer be capped for payments involving a UK acquirer and an EEA card issuer. Higher interchange fees that might result from that could in turn be passed on to UK businesses and consumers, directly or indirectly. Without the change in scope to UK legislation introduced by the draft regulations, caps would still apply to card payments involving an EEA acquirer and a UK card issuer, which would result in asymmetrical obligations on UK card issuers vis-à-vis EEA card issuers.
The draft regulations make the following amendments in order to ensure that retained EU law related to the 2015 EU interchange fee regulation continues to operate effectively. First, they reduce the scope of the UK legislation relating to interchange fee regulation from the EEA to the UK, in line with the general principle as set out in the approach by Her Majesty’s Treasury to financial services legislation under the EU (Withdrawal) Act. That means that interchange fee caps will continue to apply to domestic card payments where both the merchant’s acquirer and the card issuer are located in the UK. The interchange fee caps will no longer apply to cross-border card payments where either the merchant’s acquirer or the card issuer are located outside the UK but within the EEA.
The draft regulations will continue to allow the Treasury to set lower caps on domestic consumer debit and credit card payments by making regulations that are exercisable by statutory instrument subject to the negative procedure. This approach mirrors the EU interchange fee regulation.
Secondly, the draft regulations will transfer from the European Commission to the Payment Systems Regulator the power to make regulatory technical standards regarding the requirements for separation of card schemes and their processing entities. That follows the Treasury’s general approach of delegating responsibility for technical standards to the appropriate UK regulator.
In drafting the regulations, the Treasury has engaged with the PSR and with industry. To maximise transparency to Parliament and industry, we published the regulations in draft on 16 November before laying them before the House. As set out in the accompanying explanatory memorandum, which was re-laid on 19 December, the most significant change is that interchange fee caps will no longer apply where either the merchant’s acquirer or the card issuer are located outside the UK but within the European economic area. Any resulting adjustment to interchange fees would be a commercial decision; such an impact would be a consequence of the UK leaving the EU, rather than of the approach taken in the regulations. The direct costs as a result of the draft regulations will be minimal—hence the de minimis impact assessment.
The draft regulations are necessary to ensure that the UK’s legislative and regulatory regime for financial services remains effective under a no-deal scenario. That will be to the benefit of UK business and consumers. I hope that colleagues from all parties will join me in supporting the draft regulations; I commend them to the Committee.
Good morning, Mr Hanson; it is a pleasure to see you in the Chair.
Once again, the Minister and I are here to discuss one of the many Treasury statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. As he well knows, on each such occasion my Front-Bench colleagues and I have spelled out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation that passes through Delegated Legislation Committees.
The last instrument that we debated before Christmas related to a sprawling piece of EU financial legislation known as the markets in financial instruments directive. Our repeated requests to debate the instrument on the Floor of the House for 90 minutes were denied, even though there was ample parliamentary time. Such decisions diminish the good will between the Government and the Opposition; given the simple fact that every scenario before us requires some degree of legislative co-operation between us, that is of concern.
The prospect of no deal looms large after the chaotic events of the past week and the Government’s refusal to rule it out, so we must recognise that on 29 March, instruments considered by Delegated Legislation Committees may well become what we rely on—especially given the very real risk that the Government are simply running down the clock. Such instruments could represent real and substantive changes to the statute book, so they need proper scrutiny and in-depth analysis.
As the Minister said, interchange fee regulations on credit and debit cards form an important part of consumer protection. I was therefore very concerned to read in paragraph 2.8 of the explanatory memorandum that
“cross border card payments between the UK and the EEA, where the acquirer or card issuer are based in different jurisdictions, would no longer be subject to the caps established under EU or UK law, and the card issuer could receive higher interchange fees. This means, for example, that if a consumer used a UK-issued card to make a purchase from an EEA-based merchant acquirer, then neither the UK IFR or the EU IFR would apply, because the UK would be a third country vis-à-vis the EU.”
Will the Minister confirm my understanding of that paragraph, which is that no provision has been made to prevent cardholders from having to pay higher interchange fees from acquirers if we crash out without a deal? That seems to carry a very high risk of consumer detriment, given the prevalence of using cards to buy goods from across the EEA. As we are all aware, it is not uncommon for large retailers that operate in the UK and across Europe to channel payments across locations in the EEA—that is certainly the case for many large online retailers. Will the Minister therefore state the Government’s intention for the transposition of payment services directive II, which contains vital provisions to prevent surcharging for card usage?
Secondly, the legislation notes that the technical standards for interchange fee regulations will be transferred to the Payment Systems Regulator in the UK, which published a consultation on the matter in December 2018. The PSR is still a relatively new regulator. Can the Minister explain how the PSR will be sufficiently resourced to cope with that new workload?
The interchange fee regulations have been a large and contentious issue at an EU level for a number of years. They have required extensive engagement with stakeholders and the triangulation of competing interests. It is therefore no small matter to move those functions over to the domestic regulator. I shall be grateful if the Minister provides further detail on those points.
It is a pleasure to join you here in Committee again, Mr Hanson. I echo a lot of the concerns that the hon. Member for Stalybridge and Hyde expressed about the scheme.
It seems to me that, as with all things to do with Brexit, we are moving backwards. The EU and the EU Commission have moved over many years to reduce fees to make transactions simpler. What we are doing here, particularly with the statutory instrument and the prospect of a no-deal Brexit in the offing, is going backwards—reducing the benefits that our citizens have, and their ability to carry out transactions, to work, travel and live across different countries and to carry out their business.
I seek a couple of points of clarification. My understanding is that the explanatory information differentiates between credit cards and debit cards, but that differentiation is not within the SI itself, which mentions only credit card transactions—
“0.3% of the value of the transaction for any UK credit card transaction.”
In the explanatory information, debit cards are differentiated from credit cards. I would like to understand from the Minister why that is the case. Obviously, it would be to the detriment of debit card users were they to pay that higher fee because they are not recognised in the legislation.
A briefing that I found on the legal firm Bird & Bird’s website mentions that higher interchange fees could be passed on to consumers, “either directly or indirectly”, as it says in the explanatory memorandum. Bird & Bird says that “indirectly” is perhaps
“a reference to the fact that UK merchants may increase their retail prices in order to recoup the increase in interchange fees.”
Baroness Bowles mentioned in the Lords that before the EU interchange fee was introduced in 2015, the cost passed on to goods across the EU was €9 billion in 2011 alone. I would like to know from the Minister the estimated cost of the fee to ordinary people buying things in shops, because he has not provided explanatory information on the basis that it does not make the £5 million threshold. That might be a cost to business, but what is the cost to consumers? It is unclear from what the Government have provided what the cost will be to consumers of increased interchange fees.
Bird & Bird goes on to say:
“The reference to ‘directly’ would seem to be a reference to surcharging. However it is not clear to us how this would be possible since the Consumer Rights (Payment Surcharges) Regulations 2012 prohibit merchants from surcharging consumer cards altogether (whether in relation to transactions that are subject to interchange fees caps, or not).”
I would be curious to hear from the Minister what “directly” refers to, because it does not seem to me that it is something that is permitted—certainly it is not as far as Bird & Bird is concerned.
Bird & Bird also noted the reference in paragraph (2) of regulation 11, “Final provisions”, to article 16 on universal cards. Bird & Bird says that
“it is proposed to keep the article on ‘universal cards’ under the UK regime—however this article is not relevant to the UK. It is relevant to a situation where consumer credit cards and consumer debit cards are ‘not distinguishable’”.
They definitely are within the UK. Bird & Bird goes on to say that that is
“applied exclusively (or at least primarily) in France.”
Bird & Bird is therefore not quite clear why that is being passed through. I appreciate that the Minister said that the instrument was not about making changes but about transposing things. However, it is transposing something that is not actually relevant. May we have further clarification on that?
May we also have a bit of clarity on how the matter will be monitored in future? The provision is for the event of no deal. We hope very much that that will not be the case, but if it is, the increase in UK-EEA cross-border transaction fees would be set by Treasury regulation. Will the Minister give more clarity on how that oversight of Treasury regulation would be carried out? Is this matter just for the Treasury to go off and decide? When we find that consumers are suddenly being charged more, how do we then question and monitor that in the years ahead? What is the Government’s plan for this area?
It just seems to me that this measure is giving too much power to commercial companies. The Government say that this matter will be a commercial decision for companies, but that will almost certainly be—because these things almost always end up being—to the detriment of our constituents. I would like to see a bit more pressure on the Government to keep a bit more control over these interchange fees, rather than letting the market decide, because as I said and as was pointed out before in the Lords, the market deciding ended up with customers losing out quite a lot.
We can all remember—it was not very long ago, indeed—that if we travelled and tried to make transactions, we would always get a fee on our bills. That fee has been reduced and the situation has improved over time. So I do not see why the Government should allow companies to decide this matter, when it has been EU regulations over the piece that have managed to drive down these fees, to the benefit of all of us in this country.
Finally, I just ask the Minister to rule out no deal, because we do not want to get to no deal. We do not want this piece of legislation that we have been poring over actually to end up being used, because that would be a disaster for all of us, right across these islands, and I hope very much that we do not get to a no-deal situation. It would be useful to hear more from the Minister on that issue.
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central, for their points. I will do my very best to respond to them all.
First, I will address the overall context of where we are. It would be wholly undesirable for us to have a no-deal outcome, but my job is to deliver 63 statutory instruments to ensure that we have a functioning regime in place. Never has so much effort gone in to achieving something that hopefully we will not need.
I acknowledge the rigour and seriousness with which the Opposition Front Benchers have taken to this task, and I take on the points that are repeated each time. All I can say is that I will seek to maintain good will by giving as full an explanation as possible. Where I can, I will follow up with letters if I do not know all the responses that are sought.
Now I will seek to address the points that have been made, in sequence. The hon. Member for Stalybridge and Hyde mentioned the issue that was raised in the Lords concerning, first of all, the scope of this measure and why we are taking action under this mechanism. This SI reduces the scope of the UK legislation relating to interchange fee regulation from the EEA to the UK, and it maintains caps on transactions that involve only UK entities. It is laid under the EU (Withdrawal) Act, which transfers directly applicable EU law to the UK statute book, and it gives the Government the power to amend legislation to fix any provisions. However, it does not allow us to innovate.
Baroness Bowles of Berkhamsted legitimately wanted us to move forward and insert a cap so that we would not be vulnerable in a third-country situation to whatever might come from the EEA, but that is not something that the Government are permitted to do under this legislation. So, the measure is limited just to making those fixes, to restrain the Government from that sort of proactive innovation.
Linked to the point about the payment services directive, I will say that all legislation that is ongoing through the EU will be subject to the in-flight files Bill, which is now going through the House of Lords and will come to the Commons, I believe in February. That will determine the mechanism by which we onshore files that are ongoing.
So, there is a deliberate restraint on innovation during this SI process, which therefore prompts questions. However, what we cannot do in this situation is to assert proactively what sort of third country we want to be to the EU, when the EU has not offered a reciprocal arrangement that would make sense.
I understand very clearly what the Minister is saying. However, we have sold this process to the public and to our colleagues in the rest of Parliament as a process that continues the status quo. I understand that logically what the Minister is saying is absolutely right; effectively, he is saying that we cannot innovate to provide for the status quo. By transposing this measure, however, we are actually diminishing the position of British consumers, which is of concern.
I fully recognise that that is a legitimate point to raise, but in addition to this process we have the in-flight files Bill, which determines how we would go about onshoring—or not—provisions of ongoing directives, and we are also working on financial services legislation for the 2019-20 session, which would seek to respond holistically to the challenges that would be presented in a no-deal scenario. We are not passively waiting to be vulnerable, but this is the first stage of a process that we would have to undertake. It would be complex and time-consuming, and there would be a lot of work to be done, but that is where we are.
With respect to the challenge posed by the hon. Member for Glasgow Central about no deal, I really do not want to see a no-deal. There are a lot of observations that a managed no-deal would be okay, but what is not clear to me is how one determines that degree of management. It seems to me to be quite a random set of actions and the consumer detriment in the short term would be considerable.
I have covered the point about why I am using secondary legislation rather than primary legislation, and the constraints under which I have to act. I was asked about the capacity and expertise of the payment systems regulator to deal with these new responsibilities. The payments systems regulator was set up four years ago. It has issued public statements on the actions that it is taking. In the Treasury, we are confident that it will be making adequate preparations and effectively allocating resources ahead of March 2019. It has responsibility for monitoring and enforcing compliance with the new interchange fee regulation and for some regulation of the UK payments systems. We remain confident in its ability to continue to discharge its responsibilities.
The hon. Member for Glasgow Central raised the issue of the de minimis impact assessment. It has been prepared in line with the better regulation guidance, and we consider that the net impact on businesses would be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the payments systems regulator, and that is where that cost comes from. Firms will benefit from the reduction in uncertainty under a no-deal scenario, and without this instrument legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.
The hon. Lady made a number of points related to the Bird & Bird legal paper. I have not seen that. To be fair, I would prefer to reflect on that fully and write to her in detail, so I can address some of the concerns raised around different drafting elements of it. She asked whether the SI capped debit card fees. We are maintaining a domestic cap for debit and credit card transactions. Those are referred to in amendments made to articles 3 and 4 by regulations 6(1) and 7(1). However, their derivation applies only to debit card transactions in the existing law.
I was asked about the broader question of monitoring the interchange fee in future, as a third country in a no-deal situation. Clearly, the Government keep all policy under review, but we would need to look proactively as soon as possible at what would be the appropriate arrangement to come to. As has been made clear in the discussion this morning, if we were a third country the 0.2% and 0.3% cap would not automatically be applied, and that would have serious implications.
I understand what the Minister is saying about the unworkability of the legislation if this does not go through, but from what he is saying it seems that if this SI were not passed, the British consumer would be in a stronger position than if it were passed. When we think about the circumstances of no deal—immediate tariffs, almost certainly some further depreciation of sterling, higher inflationary pressures—I am not sure that we are in a position to say that passing this legislation is in the best interests of the British consumer.
We have to remember that this is in a no-deal situation; we would be outside and without the scope of the EU regulations of which we are currently a part. We would have no regulations for maintaining the caps within the UK. All we are doing is domesticising that existing provision as far as we can, within a UK environment. In our engagement with industry and with the PSR, it has been recognised that this is necessary but it is not the final solution. That is why there would need to be further innovation and policy work subsequently, as I have set out.
In conclusion, the SI is needed to ensure that the UK continues to have a functioning legislative and regulatory regime for payment card interchange fees in the event of a no-deal scenario. I have reiterated my belief that that should not be the outcome we secure in the end, but I hope I have dealt with the points raised. I will return to the hon. Member for Glasgow Central on her specific concern about the Bird & Bird note, and I shall make that available to the Committee.
I thank the Minister for his offer to write and for the welcome letters he has sent after previous inquiries. Does he accept, however, that this is completely inadequate? We came here this morning with serious questions, and we are being asked to approve the SI without any impact assessment. It is great that the Minister will write to us, but that will be after we have voted.
I draw the hon. Lady’s attention to the de minimis assessment that was passed as per the rules of the House and that sets out the impact of this SI, as well as to the consequences of our engagement with industry and the regulator that suggest that it is necessary in a no-deal scenario. The hon. Lady refers to specific legal drafting, which I am confident can be addressed. There is scope within the SI programme, in the last four or five SIs, for us to address any issues that have been raised, but the regulations have been scrutinised by the Lords Committee and no points were raised. I do not take her concerns lightly, but when referring to legal drafting I do not want to give an ad hoc response when that would clearly be problematic. I hope that members of the Committee have found this morning’s sitting as informative as I could make it, and that they will join me in supporting the regulations.
Question put and agreed to.
Draft Equality (Amendment and Revocation) (EU Exit) Regulations 2018
The Committee consisted of the following Members:
Chair: Sir Graham Brady
† Atkins, Victoria (Parliamentary Under-Secretary of State for the Home Department)
Beckett, Margaret (Derby South) (Lab)
† Bradley, Ben (Mansfield) (Con)
† Butler, Dawn (Brent Central) (Lab)
† Charalambous, Bambos (Enfield, Southgate) (Lab)
Crawley, Angela (Lanark and Hamilton East) (SNP)
† Daby, Janet (Lewisham East) (Lab)
† Duguid, David (Banff and Buchan) (Con)
† Freer, Mike (Lord Commissioner of Her Majesty's Treasury)
† Goldsmith, Zac (Richmond Park) (Con)
† Grant, Mrs Helen (Maidstone and The Weald) (Con)
Hodge, Dame Margaret (Barking) (Lab)
† Maclean, Rachel (Redditch) (Con)
† Quince, Will (Colchester) (Con)
† Reynolds, Emma (Wolverhampton North East) (Lab)
† Thomson, Ross (Aberdeen South) (Con)
† Yasin, Mohammad (Bedford) (Lab)
Medha Bhasin, Committee Clerk
† attended the Committee
Sixth Delegated Legislation Committee
Tuesday 22 January 2019
[Sir Graham Brady in the Chair]
Draft Equality (Amendment and Revocation) (EU Exit) Regulations 2018
I beg to move,
That the Committee has considered the draft Equality (Amendment and Revocation) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Sir Graham. I note in passing that the consisted list is incorrect, so for the record, I re-promote you to Sir Graham.
You are very kind.
I am pleased to present to the House the draft Equality (Amendment and Revocation) (EU Exit) Regulations 2018. The regulations do not introduce any new policy, but in common with others currently passing through Parliament, they are part of the Government’s commitment to delivering a managed exit from the European Union.
The regulations make purely technical changes to the Acts listed, and ensure that our equalities legislation continues to operate effectively after exit day. They are wholly consistent with our commitment to upholding equalities protections across the United Kingdom as we leave the European Union, including those previously conferred by EU law, which have now been incorporated into domestic law through the European Union (Withdrawal) Act 2018.
I am proud to say that the provisions in the Equality Act 2010, to which the bulk of the amendments relate, provide some of the strongest equalities legislation in the world. That includes provisions to provide comprehensive protections from discrimination, harassment and victimisation on the grounds of nine protected characteristics. We are determined to ensure that the 2010 Act will continue to give certainty and continuity to, among others, employees, employers, and service users—creating a stable environment in which the UK economy can grow and thrive. By passing the regulations, Parliament would ensure that those hard-won protections continue to operate after we have left the European Union.
Although I appreciate that hon. Members may not require, or indeed welcome, a detailed description of each of the regulations, I hope that the Committee will find it useful if I set out the legislation that is being amended and use an example for illustrative purposes. The draft regulations amend references to “enforceable EU rights”; references to EU law and the European economic area; and specific EU directives and harmonisation provisions. Those elements will become deficient after EU exit unless they are amended. The draft regulations amend such references in the 2010 Act, the Civil Partnership Act 2004, the Gender Recognition Act 2004, and the Equality Act 2006, which established the Equality and Human Rights Commission and sets out its governance arrangements and powers.
The draft regulations also make minor amendments to the Equality Act 2010 (Amendment) Regulations 2012, which implement a ruling of the Court of Justice of the European Union that sex should not be used as a risk factor in determining individuals’ insurance premiums and benefits, and amend the corresponding Northern Ireland regulations. We have worked closely with the Scottish Government and with the Equality and Human Rights Commission to draft the regulations, and we are pleased that both bodies have helped us with their preparation.
Lastly, two pieces of retained direct EU legislation are being revoked. One is regulation 1922 of 2006, which established the structure and governance of a European Institute for Gender Equality—the research papers for that institute are available on the web. The regulations simply concern the structure of the organisation, which will not be of relevance to us following our exit. The other is decision 771 of 2006, which established the European Year of Equal Opportunities for All of 2007. As the title suggests, it is a little past its sell-by-date.
In conclusion, I hope that I have reassured hon. Members that the sole purpose of the draft regulations is to correct deficient or redundant provisions in the legislation, which we simply want to work as Parliament intended after we have left the EU. That is why we have presented the regulations, which I commend to the Committee.
I thank the Minister for outlining the parts of the regulations that have been revoked and the reasons for that. We are inclined to support this technical statutory instrument, but I would like to ask the Minister some questions. On our leaving the European Union under the European Union (Withdrawal) Act 2018, the EU charter of fundamental rights will cease to apply in the UK. I thank the Face Her Future campaign, which is run by a coalition of lots of women’s organisations, for doing great work on this issue.
That is absolutely vital, and it feeds into some of the questions that I want to put to the Minister to ensure that we not only maintain our current rights but can improve our rights.
The Minister talked about revoking a couple of pieces of legislation. I need clarification that the regulations do not amend any provision in the equalities legislation or repeal any current legislation. The Prime Minister has previously refused to rule out scrapping the working time directive, the agency directive and the pregnant workers directive. It is imperative that equality and human rights legislation is protected once the UK leaves the EU. Will the Minister give some legislative assurances that these rights will be protected and improved?
I know that the Minister has been working with the Equality and Human Rights Commission, which has found that our rights will be seriously diluted when the charter no longer applies in the UK once we have left the EU. Will she provide some clarification on that? We welcome the inclusion of the European protection orders in the transition period, which is already set in statute. Once we leave, the Government will need to opt in to this protection. Can the Minister confirm that we will opt in? How will the UK replicate the protections and funding currently provided by the EU? Once we leave, obviously that will all disappear.
There is a genuine concern that we will not be able to keep up with the protection of gender equality for UK citizens. We need a broad commitment from the Government, because there are directives currently in play that we will have no access to, such as the directive on work balance for parents and carers. It would be useful to know how we will keep up with those kinds of directives.
The Minister knows that we have discussed on the Floor of the House the number of gaps in the protection of women, on which we urge the Government to take action. As I have this opportunity, I ask the Minister to update us on progress on reinstating section 40 of the Equality Act 2010 to protect against third-party sexual harassment; on amending the regulations to require large employers to provide action plans to tackle their gender pay gap; and on enacting section 106 of the Equality Act to require all political parties to report diversity data on their candidates. Any updated progress on that would be very much appreciated.
I have just a couple more questions. What steps will the Government take to ensure that the UK keeps pace with EU measures that maintain gender, race and LGBT+ equality? Will the Government commit to ensuring that women’s service providers, including women’s refuges and other domestic abuse services, receive stable funding through the UK’s shared prosperity fund? Obviously, we will lose a lot when we leave the EU.
Research by the Migration Observatory identified categories of EU citizens at risk of failure to secure their rights after Brexit. The Prime Minister mentioned yesterday that the charges had been removed, which is very welcome, but the research shows that women and girls are over-represented in groups that will be disproportionately negatively affected, especially EU citizens and victims of domestic abuse and other forms of violence against women and girls. They may find it difficult to access the documentation needed to prove that they have been here for five years. Can the Minister shed any light on whether there will be any flexibility for victims who are unable to prove five years of continuous residency?
It is common knowledge that there is strong evidence that Brexit would have a negative impact on the UK economy overall, with a no-deal scenario being the most damaging. In line with the Women’s Budget Group report last year, which looked at the impact of Brexit on women, are the Government taking any steps to ensure that trade agreements and policies reflect the gender equality objective and do not increase barriers to women’s economic empowerment?
Before I call the Minister to respond, I remind the Committee of the very narrow scope of the matters before us. I allowed the shadow Minister to range a little wider because, as she said, she was taking an opportunity, and there may be one or two things that the Minister would like to clear up. I hope that the Minister will not digress too much into the wider economic debates about future relationships and that she will bring the debate back to the starting point of today’s business.
I am grateful for that nudge, Sir Graham. I thank the hon. Lady for her response and for her support for the regulations. If I may—taking the Chair’s guidance to heart—I will write to her on matters that I cannot cover in the debate.
The regulations do not cover the charter because we are copying EU law straight into the statute book after exit day. Protections from the European Convention on Human Rights are provided for directly in our domestic law via the Human Rights Act 1998. I will go into more detail on the charter in my correspondence with the hon. Lady.
To reassure colleagues who are concerned about ensuring that we keep pace with the EU in maintaining gender equality, we will of course be free to set our own priorities after we leave. I note that we are leaders when it comes to issues such as the gender pay gap and tackling modern slavery, which, as the hon. Lady knows, can have a terrible impact on women who are trafficked for sexual enslavement. We do not see our exit from the EU as reducing our commitment to human rights and, indeed, we are fully committed to the retention of all rights under the Acts and equivalent Northern Ireland provisions.
On the transition period, if the House does not approve a deal, there will be no transition period. We are carefully introducing regulations so that, whenever exit day occurs—regardless of whether there is a transition period—the legislation remains workable and as Parliament intended.
The two pieces of legislation that we are seeking to revoke are frankly way out of date and do not cover what we now consider, 12 years later, as part of our human rights landscape. That is the only reason why we are revoking them. Of course, we remain committed to maintaining human rights. We want the Equality Act 2010 to be absolutely as strong as Parliament intended, which is precisely why we have brought the draft regulations. Unless hon. Members have any other points to make at this juncture, I invite the Committee to support the regulations.
Question put and agreed to.
Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, Etc., and Transitional Provision) (EU Exit) Regulations 2018
The Committee consisted of the following Members:
Chair: Sir David Crausby
† Blackman, Kirsty (Aberdeen North) (SNP)
† Dodds, Anneliese (Oxford East) (Lab/Co-op)
† Eagle, Maria (Garston and Halewood) (Lab)
† Glen, John (Economic Secretary to the Treasury)
† Hayes, Sir John (South Holland and The Deepings) (Con)
† Heald, Sir Oliver (North East Hertfordshire) (Con)
† Herbert, Nick (Arundel and South Downs) (Con)
† Lopez, Julia (Hornchurch and Upminster) (Con)
† McCarthy, Kerry (Bristol East) (Lab)
† McGovern, Alison (Wirral South) (Lab)
† Merriman, Huw (Bexhill and Battle) (Con)
† Metcalfe, Stephen (South Basildon and East Thurrock) (Con)
† Smith, Jeff (Manchester, Withington) (Lab)
† Streeting, Wes (Ilford North) (Lab)
† Swayne, Sir Desmond (New Forest West) (Con)
† Walker, Thelma (Colne Valley) (Lab)
† Whittaker, Craig (Lord Commissioner of Her Majesty's Treasury)
Dominic Stockbridge, Committee Clerk
† attended the Committee
Ninth Delegated Legislation Committee
Tuesday 22 January 2019
[Sir David Crausby in the Chair]
Draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018
I beg to move,
That the Committee has considered the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
It is a pleasure to serve under your chairmanship, Sir David. As part of our contingency preparations for a no-deal scenario, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the UK. To deliver that, we are laying statutory instruments before the House under the European Union (Withdrawal) Act 2018. A number of those instruments have already been debated in this place and in the House of Lords. The draft regulations are part of that programme.
The draft regulations will fix deficiencies in UK law to ensure that regulations on over the counter derivatives, central counterparties and trade repositories continue to operate effectively post exit, following an approach that aligns with that of other instruments laid under the 2018 Act: providing continuity by maintaining existing legislation at the point of exit, but amending it where necessary to ensure that it works effectively in a no-deal context. They are the last of three sets of regulations to address deficiencies in the European market infrastructure regulation—EMIR—and ensure that an effective regulatory framework is in place for over the counter derivatives, central counterparties and trade repositories in a no-deal scenario. They follow two instruments that have already been debated and made: the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018.
EMIR is Europe’s response to the G20 Pittsburgh commitment made in 2009 to regulate over the counter derivative markets in the aftermath of the financial crisis. It imposes requirements on all types and sizes of entities that enter into any form of derivative contract, including those not involved in financial services, and establishes common organisational, conduct-of-business and prudential standards for central counterparties and trade repositories. It places three main requirements on entities that enter into any form of derivative contract: reporting to a trade repository every derivative contract that they enter into, implementing new risk mitigation standards for uncleared derivative contracts, and clearing through a central counterparty those over the counter derivatives that are subject to a mandatory clearing obligation.
A derivative is a financial contract linked to the fluctuations in the price of an underlying asset or basket of assets. Common examples of assets on which a derivative contract can be written include interest rates instruments, equities and commodities. Over the counter derivatives, which make up the vast majority of the derivatives market, are derivatives that are privately negotiated and not traded on an exchange. Central counterparties stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. By guaranteeing the terms of a trade, even if one party defaults on the agreement, they reduce counterparty risk. Trade repositories centrally collect and maintain the records of derivatives and play a key role in enhancing the transparency of derivative markets and reducing risks to financial stability.
In a no-deal scenario, the UK would be outside the European economic area and outside the EU’s legal, supervisory and financial regulatory framework. The draft regulations will therefore address deficiencies in EMIR and related UK legislation to ensure that the UK continues to have an effective regulatory framework for over the counter derivatives, central counterparties and trade repositories in a no-deal scenario.
First, they will provide for a continuation of the key requirements set out in EMIR and transfer the relevant EU functions to UK authorities, ensuring that the UK remains compliant with its G20 commitments and maintains a safe and transparent derivatives market. Those requirements include the clearing obligation—the requirement that certain derivatives contracts be cleared through authorised or recognised central counterparties—and the reporting obligation, which is the requirement that firms report details of their trades to an authorised or recognised trade repository. They also include the margin requirements—the provisions in EMIR that dictate that derivative contracts not cleared through a central counterparty should be subject to higher margin requirements.
The margin requirement compels firms to put forward money to cover the costs associated with trades. To have a framework in place to facilitate these requirements, the relevant functions are transferred from the European Securities and Markets Authority to the UK regulators, namely the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England.
The responsibility for drafting binding technical standards relevant to EMIR is also transferred to UK regulators. The Bank of England will take responsibility for specifying which classes of over the counter derivatives should be subject to the clearing obligation, and will set the phasing in of new clearing obligations for firms regulated by the PRA, with the FCA setting the phasing in for all other firms. The FCA will assume new supervision and enforcement powers for UK trade repositories and the ability to suspend the reporting obligation for firms for up to a year, in the unlikely scenario where no trade repository services are available. The PRA will take on the function of specifying the over the counter derivative margin requirements for those financial counterparties that are authorised by the PRA, with the FCA responsible for setting the requirements for all other cases.
Secondly, the draft regulations transfer the power of granting equivalence decisions for non-UK trade repositories from the European Commission to the Treasury, and transfer functions for recognising non-UK trade repositories from ESMA to the FCA. They also remove from the equivalence process the requirement for an international data agreement, to take into account the UK position outside the EU financial services framework.
Thirdly, the draft regulations create a temporary intra-group exemption regime. Under EMIR, intra-group exemptions may be granted to allow parts of corporate groups to be exempt from the clearing obligation and certain requirements of the risk management obligations, such as the margin requirements, when trading with each other. In a no-deal scenario, after exit day certain cross-border exemptions granted before exit day will no longer apply to the UK. The regime will ensure that intra-group transactions that are exempt from the EMIR requirements before exit day or currently will continue to be so after exit day, to avoid any unintended additional cost and burden on UK firms. The regime will last three years from exit day to allow time for the FCA to determine a permanent exemption, and can be extended by the Treasury if necessary. Under the MiFID II—the second markets in financial instruments directive—legislation, there is an exemption from clearing and margining for certain energy derivative contracts and this exemption is maintained in the draft regulations.
Finally, changes are made to ensure that redundant EU processes that will no longer apply after exit, are removed and replaced with relevant UK processes. Under EMIR, EU trade repositories are authorised and supervised by ESMA and follow the EU's processes of appeal. However, following the transfer of functions from the trade repositories SI, it will be the FCA rather than ESMA who will authorise and supervise trade repositories operating in the UK after exit. EU central counterparties are supervised by colleges, which are groups of EEA regulators that oversee the jurisdiction in which central counterparties and their members are based. After exit day, the UK will be independent from EU jurisdiction and will no longer be required to comply with the EU college system; that regulatory oversight will instead be provided by the Bank of England.
Provisions relating to obligations of member states to share information with ESMA will also be omitted as after exit the UK will no longer be part of the EU supervisory framework. That will not preclude the regulators co-operating with each other in future, as appropriate.
The Treasury has been working closely with the FCA, the Bank of England and industry bodies. The statutory instrument was published in draft form, with an explanatory policy note on 5 December 2018, to maximise transparency to Parliament, industry and the public ahead of laying. Regulators and industry bodies have generally been supportive of, and welcomed, the provisions in this SI. The Government believe that the proposed legislation is essential for ensuring the UK continues to have an effective regulatory framework for over the counter derivatives, central counterparties and trade repositories if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting the draft regulations and I commend them to the Committee.
It is a pleasure to serve on the Committee with you in the Chair, Sir David. It is a pleasure to once again sit across from the Minister. I am grateful to him for his opening comments.
We are yet again in Committee to discuss a Treasury statutory instrument that makes provision for the financial regulatory framework after Brexit in the event that we crash out of the EU without a deal. On each such occasion, I and my Labour Front-Bench colleagues spell out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation passing through Committee. The frustration that we must spend time and resources—£4.2 billion—creating a framework that might never be used has already been expressed in Committee. I am sure that hon. Members are aware that yesterday there a Committee divided because of ambiguities over customs arrangements for our Crown dependencies. Just before Christmas, we sought a debate on the Floor of the House concerning the transposition arrangements for MiFID, but were rebuffed by the Government. Today, we are yet again being asked to pass legislation without any impact assessment having been provided and with many aspects of the legislation going unexplained. That is just not good enough.
Because of the dangerous game being played by the Prime Minister and her party, instruments being passed through Committee may well not disappear into the ether on 29 March. They could represent real and substantive changes to the statute book, so they need proper and in-depth scrutiny. Equally, we must bear in mind the stress that financial markets would be under were the Government to allow the no-deal scenario to be realised. This instrument must be considered through that lens.
As the Minister explained, the main purpose of the instrument is to transfer responsibilities from EU institutions to the Bank, PRA and FCA and to establish a temporary intra-group exemption regime. That regime will initially last three years, to ensure that intra-group transactions can continue to be exempted from EMIR requirements. Colleagues will be aware that the EMIR system was created in the wake of the financial crisis to ensure that over the counter derivatives would be logged and cleared—conducted through central clearing counterparties in many cases, as the Minister explained—and, where necessary, that margin would be posted. That was required to provide more market transparency and to prevent the kinds of contagion that were in evidence during the financial crisis. EMIR has not been a completely uncontentious technical package of legislation—quite the opposite. There has been controversy about its scope. When I was a Member of the European Parliament, I was involved in discussions about its scope when applied to non-financial firms.
We must act to secure the future of UK derivatives clearing services. Those services play an important role in helping to increase the resilience of our financial system by decreasing the risk of trading. A no-deal Brexit could pose significant risks to access by European traders to services in the UK, as well as vice versa, so although many elements of these measures would be necessary in the event of no deal, we need to know that there would be reciprocation from the rest of the EU. That means working with our partners in the EU to guarantee that we will be granted equivalence rights for UK clearing services in the case of no deal if the Government insist on not ruling that out. I hope that the Minister will inform us of any assurances that he has received from ESMA and others on that point.
As was echoed in the Minister’s comments, the explanatory memorandum for this instrument states that it is aimed at making
“derivatives markets safer and more transparent”
in the event of no deal, but I have questions about the drafting that I hope the Minister can answer. The first and most significant point is that, yet again, we are in Committee without an impact assessment for the instrument. That contradicts the claim on the first page of the explanatory note for these measures, which states:
“An impact assessment of the effect that this instrument, and other instruments made by HM Treasury under the 2018 Act”—
the European Union (Withdrawal) Act—
“at or about the same time…is available from HM Treasury…and is published alongside this instrument at www.legislation.gov.uk.”
I wasted quite a bit of time looking for the impact assessment. Incidentally, I also looked for the instrument; it is not on that website, either, from what I can see. Later on in the text of the explanatory memorandum I understood why. Section 12.5 states:
“An Impact Assessment has been prepared and will be published alongside the Explanatory Memorandum on the legislation.gov.uk website, when an opinion from the Regulatory Policy Committee has been received.”
Does my hon. Friend agree that such statements, whether they were drafted when the intention was to publish a proper impact assessment, as it states, are misleading to the Committee? I have every sympathy with staff rushing to prepare all kinds of statutory instruments, but the fact is that it completely undermines the capacity of the Committee properly to scrutinise this instrument.
I strongly agree. My hon. Friend is absolutely right that our civil servants are being placed under enormous pressure. None of us underestimates the enormous challenge they face, but equally, as Members of this House, we need to be able to scrutinise legislation properly. That requires knowing when we will have those kinds of documents available to us or otherwise.
I am aware that the Minister said to me at the last such Committee that I attended that the Regulatory Policy Committee was looking at a number of the no-deal related Brexit SIs in the round, in terms of impact assessment, but that its processes take some time to work through and we should receive the assessment soon. I understand the challenges facing the Regulatory Policy Committee—it is facing an almost impossible task—but we need those assessments. When does the Minister expect the Regulatory Policy Committee to be finished with its task? Was it the right decision for it to lump together a number of different SIs and conduct the impact assessment collectively? Is that approach being taken to other bodies of legislation? I know that financial services are particularly complex, but presumably we have similar complex constellations in other areas of no-deal planning. Committee members need to have some degree of certainty that more information will become available. Hon. Members are deeply concerned about that.
“Part 2 of this instrument also introduces a power for the FCA to suspend the reporting obligation for a period of up to one year and with the agreement of HM Treasury, in a scenario where there is no registered or recognised UK TR available.”
I was not able to find out before the sitting whether that provision exists within EMIR itself—that the reporting obligation would be suspended if there was no recognised or registered TR at EU level—but it would be helpful to hear from the Minister in what scenario the Government envisage that a UK trading repository would not be available. He said in his comments that this was unlikely, but if this has been identified as a potential issue and if gaps in provision are possible, we should be making provisions now for equivalence, so that there would not be any risk of detriment to UK market participants, but there does not seem to be anything in this SI, which aims towards that.
Five of the registered trading repositories seem to my eye—admittedly non-expert—to have at least some kind of a presence in London, whereas only two of them are based entirely outside the UK, in Poland and Sweden. Therefore, the converse question also applies. What will happen to the EU’s EMIR regime if UK-based trading repositories cannot provide a service to EU27-based traders? I ask specifically about this because it is surely essential that the reporting obligation is maintained so that transparency continues to be a feature of both UK and EU27 derivatives trading. This is a highly internationalised activity.
Thirdly, the statutory instrument states:
“Provisions relating to TR appeals, fines, supervisory fees, penalties and other supervisory requirements are being omitted and replaced with provisions that align with those already contained in the Financial Services and Markets Act 2000 (FSMA) concerning supervision and enforcement”.
However, no indication is provided here of whether these are more or less onerous. Can the Minister enlighten us on that score? Again, there is no clear indication here of the additional resourcing that might be required. That is something we talked about a lot in this Committee until now. This is occurring in a context where the FCA has never before had responsibility for dealing with the supervision of EMIR-related functions.
Finally, the draft regulations transfer powers from the European Commission to the Treasury and from ESMA to the FCA, as with MiFID no-deal transposition, which has already been passed. Most equivalence decisions will be made by the FCA, but as the Minister just confirmed again, those on central counterparty clearing houses will ultimately be made by the Bank of England, so this will not be occurring through the collegiate system that applies currently at the EU level. Will the Minister give us more background? Why is it happening? It sounds like a policy judgment, but we have not been provided with a rationale. As the Opposition have pointed out before in Committee, the Government are effectively trying to transpose the Lamfalussy process into the UK institutional context, but the Commission and ESMA do not interact in the same way as the Treasury interacts with the FCA. There is a different relationship. It is surely inappropriate to port the powers over without any change to supervision. I hope the Minister will give us some assurance on that point. Also, we really need clarity on when the impact assessment will be available if we are to be willing to allow this SI to pass.
I am not the Scottish National party’s most regular contributor to this Committee, so I have some learning to do before I get to the level of knowledge that many people in this room have. I have a few questions in relation to the information that has been provided to us and also some of the information that has not been provided to us.
My first question is about the lack of consultation on this statutory instrument. The explanatory memorandum says clearly that no consultation has been undertaken on the instrument, although it says that the Government have been interacting with the Bank of England and the FCA in relation to the drafting of this regulation, which I appreciate. I am pleased that the Treasury put it online back in October so that people could access it. It would be useful to understand how many people engaged with that process. Were representations made by individuals and companies or those who use these regulations and are governed by them? If the Government put them online and only four people see them, there seems little point in doing so. The Government should publicise the fact that the regulations are online for people to comment on. Also, it would be useful for people who might want to comment to know that the Government take comments on board and might actually make changes to the draft instrument before it comes to Committee. Even the Minister’s making a statement to that effect would be useful for the people who think, “Is there a point in me spending my time writing a submission on this SI when the Government are just going to ignore me, anyway?” If the Government were willing to say that they would take on board representations, it would be helpful.
My second question is about the intragroup regime and the period of time when it will happen, which is a three-year period with the possibility for extensions, as the Minister mentioned. The explanatory notes state that
“equivalence decisions will be sought, allowing for the establishment of new permanent exemptions.”
I am not clear about the exact process for those equivalence decisions being made, as mentioned by the hon. Member for Oxford East. Are such decisions difficult to achieve or relatively smooth? If we have the three-year time period, will there be sufficient time for equivalence decisions to happen, and in adequate ways so that the legislation equivalence rules that we have going forward are appropriate? Does the Minister foresee that being a smooth or a difficult process, and, to allow those things to happen, will it require input from lots of people whom we have no control over?
My next point relates to no deal. The explanatory memorandum states that the Government do not anticipate no deal happening, although, since it was written, things look a little different from the Government’s point of view. I am still not particularly clear on any of the statutory instruments that come forward. A lot of them seem to be things to do with no deal as well as things to do with deal. I am not always entirely clear which bits relate to no deal and which bits relate to deal. Not necessarily for this instrument, but going forward, it might be better for the Government to be clearer in the explanatory memorandum about which parts of any SIs would be necessary in all outcomes for Brexit: which ones would be necessary in a no-deal scenario and also which ones would be necessary in a deal scenario, but not until the end of the implementation period. There are all these different outcomes, and I do not have the level of clarity needed. Given that we have quite a packed parliamentary agenda, it is difficult to spend a huge amount of time on legislation.gov.uk trying to find out all these bits of information.
The last point was in relation to the impact assessment. I managed to find the SI online. If you look on the back page there is a direct link to legislation.gov.uk—probably you never thought to look on the back page, but it is there. That takes you through the statutory instrument. I do not know whether it has got the explanatory memorandum there. On that web page, which I checked before I came here, it says that no impact assessment has been prepared for this SI—which is directly contradicted by the information that we have in the explanatory memorandum, which says that an impact assessment has been prepared—[Interruption.] I absolutely agree that it is a mess. I do not understand why, if the Government have prepared an impact assessment, we need to wait until the Regulatory Policy Committee sees the impact assessment before we can see it. Surely it could come to hon. Members, with the caveat that it has not been through that Committee? Then we would be in a position to make better decisions.
One of the lines in the explanatory memorandum says:
“It is difficult to quantify the size of the market affected as the instrument covers both the financial sector and non-financial counterparties”.
I would expect the impact assessment to cover that information and provide Committee Members with the information included. If the information is not there for the explanatory memorandum, I am concerned about how good the impact assessment must be—if it does not include proper information about the financial impact on various types of companies and organisations. The way this has been put together is not great. I am particularly concerned about the lack of an impact assessment. As I said, MPs do not have a huge amount of time right now. If we had been provided with the impact assessment at the outset, this meeting would have been a lot quicker, given that we would have been able to read all the information before coming here and easily have it to hand.
The fact that the shortened web address is written throughout the explanatory memorandum and the actual address is only at the very back is not particularly helpful. It means that MPs are wasting time trying to find these things, when the full web address could have been provided throughout the text of the explanatory memorandum.
To push on the point that the hon. Member for Oxford East made, if the Minister can give the Committee today a date when the impact assessment will come, or, at least, some kind of timeline, that would give us a level of comfort. Going forward, though, it is totally inappropriate for MPs to be asked to consider statutory instruments when an impact assessment has been written and is required, yet we are not provided with it until after we have considered the statutory instrument—at which point it is too late for us to make any changes to it. If the Minister could give some comfort and, going forward, look at any other SI Committees so that this shambles does not happen again, that would be incredibly helpful.
I rise to support my hon. Friend the Member for Oxford East on the points she made, and on some of the points made by the hon. Member for Aberdeen North. I was appointed to this Committee last week. I do not normally spend my time considering derivatives of the over-the-counter version—or any other kind. However, having spent many years as a Minister—and therefore knowing how to look at legislation—I found, when I looked at this instrument, something else that I would like to raise with the Minister. When I was a Minister I used to spend my time, before I came to Committees, making sure that my officials would bring along to the Committee all instruments referred to in the regulations, to enable the Committee, if it wished to look in detail at some wording, to be able to understand what that meant. I thought that having the other instruments in the Committee room was the norm. What we have here is an instrument that refers in terms, for example in part 2, to regulations from 2013, and then sets out:
“In regulation 2, in paragraph (1), for the definition of ‘the EMIR regulation’ substitute—
‘“the EMIR regulation” has the meaning given in section 313 of the Act;’.”
To understand the meaning of that, one has to have the regulation to hand. I do not see any copies of the regulation that the instrument refers to here. It was always the practice when I was in Government, and I am sure it was the practice of some Conservative members of the Committee who have been in Government in their time too, to have in Committee all the regulations referred to and being amended, so that if somebody had a particular point to make about a particular part we could see clearly what was being changed, what the implementation of that change would mean, and whether the wording appeared appropriated.
Here, we are left with nothing, in practice, but the explanatory memorandum. We have to take on trust—not that I am saying that I do not trust the Minister—that what we are being told in the explanatory memorandum is in fact being done by the wording that we see in the instrument. I think it is poor practice, if I might say so, and I hope that he will take this back to his Department, to come to Committee with instruments that effectively alter other regulations without making them available in the room. Any officials who had left me in that position as a Minister would have known about it. In fact, I used to ensure that such things were correct in Committee.
I know that there is a big burden of statutory instruments at present, and I understand that Ministers are hard pressed, but it is not right in terms of proper scrutiny for us not to be able to understand the meaning of the regulations. Regulations under the European Union (Withdrawal) Act 2018 are more complex than many because they often simply refer to amendments to primary legislation. Here we have a suite of three regulations, but I was not on the Committees that considered the other two.
It makes it increasingly difficult for an ordinary, intelligent person to understand what the hell is going on. That is not good for scrutiny, for the Minister, for the Government, or for good governance, and it leads us to the impression that what is happening is rushed, has not been thought through, and may be defective. If it is, it will not be possible for members of the Committee to pick up the defects. That is a real problem for proper parliamentary scrutiny.
My hon. Friend the Member for Oxford East referred to part 2. When I was reading the explanatory memorandum, one of the things that jumped out at me, as it clearly jumped out at her, was in paragraph 7.16, on page 6:
“Part 2 of this instrument also introduces a power for the FCA to suspend the reporting obligation for a period of up to one year…in a scenario where there is no registered or recognised UK”
trade repository. I immediately wondered in what circumstances that might be the case. The Minister made a reference to that, and said that it would be highly unlikely—but it is not so unlikely that steps are not being taken in the instrument to deal with it.
Can the Minister tell me how many UK-registered trade repositories there are, and in what circumstances—unlikely though they might be—he envisages that this part of the instrument might have to come into force, or that the powers specified might have to be used? As he said, the whole purpose of the regulations, whether they are operated by EU institutions or by the Treasury, the Bank and the Financial Conduct Authority, is to try to prevent the disaster of the global financial crisis that resulted last time from insufficiently prudent, untransparent regulation of such trades. Will he give us a bit more detail about why he has felt it necessary to include such a provision in the regulations?
I agree with the remarks made thus far by my hon. Friend the Member for Oxford East and others about the lack of any kind of impact assessment. It struck me that there is not even a guesstimate of the cost. Will the Minister tell us what trades we are talking about? If the regulations were referring to a couple of hundred thousand pounds a year, we would not worry as much about it as we would if we were dealing with the equivalent of a quarter or a half of our GDP. Will he tell us what level of financial dealings the regulations relate to?
I am struck that in these Committees, the Government do an impact assessment for more than £5 million of costs to businesses, but not for under £5 million of costs to businesses. If that is all the information we have to go on, that is sketchy, at best.
The hon. Lady makes a good point, and perhaps the Minister would like to comment on that as well.
The other point I would like to make is about the financial and resource burdens that the transfers made through the regulations will put on those who inherit the obligations and functions that used to be carried out by the EU institutions. That appears to be the Bank and the Prudential Regulation Authority part of it, the Financial Conduct Authority and, of course, the Treasury. There is nothing I can see that suggests that extra resources will be passed on to the FCA and the PRA part of the Bank for dealing with the additional obligations that the regulations place upon them. While they may well have experts in such instruments and this kind of trading already on their staff, the work that they are going to be expected to do as a consequence of the regulations, if they have to be used, would be different to the work they are already doing.
What financial provision are the Government making to ensure that the FCA and the Bank have the relevant staff and resourcing to do this very important job that he is asking us to bestow on them? There does not seem to be any information about the impact on those who will acquire the extra burdens of doing this work, or the likely cost to the Government, the Bank, the FCA and any other authorities, of carrying it out in a way that will work as well as their current arrangements.
I thank the hon. Members for Oxford East, for Aberdeen North and for Garston and Halewood for their clear questioning. I shall try very hard to answer the points raised.
I hear the frustration on the volume and the time that this scrutiny process is taking. All of the 63 statutory instruments we are bringing forward are under the terms of the European Union (Withdrawal) Act that we have previously debated.
The hon. Member for Aberdeen North referred to the issue of equivalence and what would happen with respect to the EU’s assessment of the UK. Clearly we cannot determine that unilaterally. We have as deep a dialogue as we can, but these are provisions for no deal. We have sought to engage deeply with the industry and all the different industry players to achieve an outcome that is as optimal as can be in the circumstances. That is why I put on record my absolute commitment to ensuring that we get a deal. I feel very keenly the frustration of the speeches on the process, and I acknowledge that it is not as it would be under normal circumstances.
In terms of the consultation with industry, we have engaged with stakeholders, including the financial services industry, while drafting the SIs. They are strictly limited by the enabling power, and therefore have limited policy choices within them. In some of the areas I cannot go further than what I said in my opening remarks, which is that we are transferring things over and dealing with deficiencies. However, I shall in a moment address the points raised.
We published a document in June, which set out the approach. We have been publishing draft legislation in advance of laying it to maximise transparency, and securing industry knowledge from TheCityUK and others along the way. We discuss EU exit preparations regularly with industry, which has helped us to understand the impact of the SI. We shared a draft version of the SI to allow stakeholders to familiarise themselves with aspects of it.
As to the key question raised in all three Opposition speeches, about impact assessment, I am conscious of the need to publish the relevant impact assessments as soon as possible and want to reassure the Committee that I am doing everything I can to make that happen. I met officials last week and this morning to try to expedite that and complete the necessary clearance processes. We will publish it as soon as possible.
Because at the time it was printed it was anticipated that it would have been published by then.
As ever, I must stress that some firms would incur some costs adjusting to the changes made by the SIs, if they come into effect, but those costs are significantly outweighed by the benefit that is provided by ensuring that the legislation transferred by the European Union (Withdrawal) Act operates effectively after exit. Without the amendments made by the SIs firms would face far greater disruption to their businesses.
The Minister is being generous with his time and none of us doubts his commitment to ensuring that the process works properly, but will he enlighten us as to the blockages that are preventing that? Is it a matter of resources or policy issues that have to be dealt with? It would be helpful for us to understand, because although it is wonderful to hear he is trying so hard to get it sorted out, the Committee needs more.
I am happy to give clarification. Essentially the process of gaining approval for the impact assessment demands that we share certain information and provide it in an adequate form. Because of the unusual nature of the process and the volume of material, it is difficult to line up. As I said to the hon. Lady in the last Committee in which we served opposite each other, we submitted a group of SIs together, and are working as hard as we can to resolve that.
As Miles Celic, the chief executive of TheCityUK, said in a letter in November, these are exceptional circumstances, which require a unique response. We are doing everything to reach that, but I would not want the process to be truncated. We have not yet had an impact assessment that does not give us a green rating, and I want to make sure that that is how things will end up. However, I fully accept that the situation is not an optimal one. I take on board the observations of all three hon. Ladies, and all that I can say is that I am doing everything I can. I understand that that is inadequate in itself, and wish I could give a date, but it is not possible.
Because I wanted the opportunity to explain face to face in the Committee and, given the need to secure the SIs for industry, as I made clear in the quotation from TheCityUK, it is not the perfect process. [Interruption.] I understand the point that the hon. Lady makes but I think I have responded to it as reasonably as I can.
Lastly, although the Minister has not said it, it appears to me that the issue might be with the Regulatory Policy Committee not getting through the impact assessments that are sent to it. Given that we are going to have an awful lot of SIs and, presumably, an awful lot of impact assessments, that is likely to become more of a problem. Is it necessary for the assessment to go to the Regulatory Policy Committee? Is there a way we could see it without it going to the RPC?
The responsibility rests ultimately with me and my officials, and I have to take it on board. It is for me to be accountable for the impact assessments—I am not blaming anyone else. I will continue to do everything I can over the coming hours and days.
The hon. Lady mentioned impact. The draft regulations will not place new regulatory burdens on UK firms. We expect a one-off familiarisation cost for legal experts to examine the draft regulations, which we estimate will have an impact on just over 400 firms and cost £350,000 in total.
The regulatory requirements for trade repositories as defined in title VII of EMIR, will remain largely unchanged. The FCA has been given the power to supervise trade repositories against those requirements, but it has been in close engagement with trade repositories to ensure that their transition is as smooth as possible. Trade repositories will have to familiarise themselves with changes to the supervision and enforcement procedures under the UK regime, but we do not anticipate that that will be burdensome or that the familiarisation costs will be high.
The hon. Member for Oxford East asked how likely the FCA is to use the power to suspend the reporting obligation. It is almost certain that it will not need to use that power because the trade repositories regulations enable it to process advance applications for new trade repositories, or convert authorisations for existing UK trade repositories, to ensure that the UK has operational trade repositories from exit day.
As I read it, part 2 makes it clear that, should the obligations be suspended, the FCA will retain the power to decide when any trades conducted through the period of suspension are made known. The a priori assumption that businesses should retain information and be willing to report it during the period of suspension provides considerable reassurance.
The hon. Member for Oxford East asked whether the regulator has adequate resources to cope with its new powers to supervise trade repositories. The Treasury has worked closely with the regulator to prepare the legislation, and we are confident that it is making adequate preparations ahead of exit day and that it has the resources to manage its task. I should point out that, at the end of December 2018, the FCA had a total of 158 full-time employees working on Brexit—an increase from 28 in March 2018. It will publish its 2019-20 plan in the spring, setting out its work for the coming year. When I met Andrew Bailey, head of the FCA, for an hour last week, he did not raise the matter—he has the resources in place.
The hon. Lady asked what would happen in a scenario in which the Treasury provided a temporary regime for intra-group transactions that was not reciprocated by the EU. The Government can address only deficiencies in UK firms, not the issues for EU-based entities—that is why we want to get a deal and get the equivalence process signed off six months before the end of the implementation period, as was set out in the political declaration. The Commission has adopted a temporary equivalence decision for UK CCPs, and in the central counterparties regulations we put in place a reciprocal temporary recognition regime in the UK for EU CCPs.
The hon. Member for Garston and Halewood made a point about the publication of appropriate documents for the Committee. I can only apologise to her. I will examine immediately whether our approach needs to change.
The hon. Member for Oxford East asked why the EMIR provisions on trade repository appeals, fines, supervisory fees and penalties are being replaced with provisions in the Financial Services and Markets Act. The current EU provisions on those matters will no longer be effective under a UK regime, so it is appropriate to replace them. The FSMA provisions that currently apply to FCA supervision of authorised persons will be applied, with appropriate modifications, to its supervision of trade repositories. The new provisions on trade repositories will be equivalent to those to which they are currently subject.
The hon. Member for Aberdeen North asked whether the draft regulations will apply in a no-deal scenario only. This legislation is being implemented to ensure that in the event of no deal we have a fully functioning regime. It will not come into effect in March 2019 in the event of an implementation period on securing a deal, which would be delivered through a separate piece of legislation—the EU withdrawal agreement Bill. However, it could be amended to reflect an eventual deal on the future relationship or a no-deal scenario at the end of the implementation period.
I think I have dealt with all the points raised. I believe that the draft regulations are essential to ensuring that the UK continues to have an effective framework in place for over the counter derivatives, central counterparties and trade repositories if the UK leaves the EU without a deal or an implementation period. I hope the Committee has found this afternoon’s sitting informative and will support the draft regulations.
Question put and agreed to.
That the Committee has considered the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018.
Draft Transfrontier Shipment of Radioactive Waste and spent fuel (EU Exit) Regulations 2018
The Committee consisted of the following Members:
Chair: Sir David Amess
† Afriyie, Adam (Windsor) (Con)
† Bacon, Mr Richard (South Norfolk) (Con)
† Bruce, Fiona (Congleton) (Con)
† Burden, Richard (Birmingham, Northfield) (Lab)
† Burghart, Alex (Brentwood and Ongar) (Con)
† Cadbury, Ruth (Brentford and Isleworth) (Lab)
† Chapman, Douglas (Dunfermline and West Fife) (SNP)
Coffey, Ann (Stockport) (Lab)
† Hands, Greg (Chelsea and Fulham) (Con)
† Harrington, Richard (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)
† Harris, Rebecca (Lord Commissioner of Her Majesty's Treasury)
† Jones, Mr David (Clwyd West) (Con)
† Kyle, Peter (Hove) (Lab)
Phillipson, Bridget (Houghton and Sunderland South) (Lab)
† Smith, Nick (Blaenau Gwent) (Lab)
† Whitehead, Dr Alan (Southampton, Test) (Lab)
† Whittingdale, Mr John (Maldon) (Con)
Harriet Deane, Adam Evans Committee Clerks
† attended the Committee
Fifth Delegated Legislation Committee
Tuesday 22 January 2019
[Sir David Amess in the Chair]
Draft Transfrontier Shipment of Radioactive Waste and Spent Fuel (EU Exit) Regulations 2018
I beg to move,
That the Committee has considered the draft Transfrontier Shipment of Radioactive Waste and Spent Fuel (EU Exit) Regulations 2018.
I do not have to tell you this, Sir David, because you know it is true, but it is a pleasure to serve under your chairmanship. I have pointed that out on other occasions, but I reiterate my previous comments on the subject.
I am, unusually, speechless; I say only that if all parliamentary business were like the Statutory Instrument Committees we have sat on in the past couple of weeks, we would all be able to have a much longer break in February.
It is my duty and pleasure to introduce the draft regulations, which were laid before the House on 28 November. They are made under powers set out in section 8 of the European Union (Withdrawal) Act 2018 and address specific inoperabilities arising from the UK’s withdrawal from Euratom. They will come into force on exit day, only in the event of there being no deal between the UK and the EU. I shall not comment further on that.
As I have said in the House, we are seeking a wide-ranging nuclear co-operation agreement with Euratom while putting in place the necessary measures to ensure that the UK industry can operate in all scenarios. The draft regulations are one such measure. They revoke and replace the Transfrontier Shipment of Radioactive Waste and Spent Fuel Regulations 2008, which will become inoperable once the UK is no longer a member of the EU. The draft regulations introduce broadly equivalent procedures for the import, export and transit of radioactive waste and spent fuel into and out of the UK, but they reflect the UK’s independence of the Euratom community in such circumstances and apply to the whole UK.
The draft regulations set out a regime to ensure that radioactive waste and spent fuel are not shipped into or out of the UK without prior authorisation from the relevant competent authorities. They are vital to protect the public and the environment from the dangers of ionising radiation when radioactive waste and spent fuel is shipped into or out of the UK. They allow for the continuation of crucial nuclear activities such as the decommissioning of legacy sites and the return of radioactive waste to the relevant country of origin following the reprocessing of other nations’ spent fuel.
I will say just a few words about the background to the draft regulations. To put them in perspective, I should say that every year we make about 400 shipments of radioactive waste to Euratom member states. The majority of those shipments are of contaminated metals for treatment in Germany and Sweden. Hon. Members may be aware that we have ceased reprocessing other nations’ spent fuel, but we will need to return high-level waste arising from the last of the reprocessing contracts to its countries of origin—Australia, Japan, Germany and Italy. The draft regulations will allow for the return of that high-level waste, and they are of strategic importance to the UK’s fulfilling its reprocessing contracts and supporting the decommissioning and clean-up mission at Sellafield.
The 2008 regulations introduced a set of regulatory procedures for transfrontier shipments within Euratom and a separate set of procedures for shipments entering or exiting the community. When we leave the EU and Euratom, those regulations will become inoperable because they treat the EU as a single bloc that includes us. To ensure there is an operable regime after exit day, the draft regulations treat Euratom member states and all other countries in the same way.
There will be three operational changes for our operators shipping to and from Euratom member states. First, they will need to request authorisation from the relevant authority when importing a shipment from Euratom. The competent authorities are the Environment Agency, Natural Resource Wales, the Scottish Environment Protection Agency and the Northern Ireland Environment Agency.
Secondly, UK operators will need to notify the relevant competent authorities when the shipment is completed. Thirdly, when importing from a Euratom state, UK operators will need to provide evidence that they have made an arrangement with the exporter that has been accepted by the exporter’s competent authority. That arrangement would oblige them to take back the radioactive waste or spent fuel if the shipment cannot be completed in accordance with the regulations.
To put the changes into context, I should say that they do not affect the entire nuclear industry, and at present only six UK operators have authorisations in place to ship radioactive waste. Were these not formal proceedings, I would ask you, Sir David, and others to estimate the total costs to all affected industry from these additional steps—they are far less than I thought. My Department’s officials have estimated that they are between £1,700 and £6,000 every three years, as well as a minor familiarisation cost for operators of £100 to £900 each.
The guidance for the regulations will be published online prior to coming into force, and our officials have been engaging regularly with the operators that will be affected to ensure that there is minimum disruption. As I say, it is de minimis, but it still needs to be done properly.
For the record, the instrument was drafted collaboratively between the officials in our Department, the devolved Administrations, the UK’s environment agencies, the Office for Nuclear Regulation and the Nuclear Decommissioning Authority. Although the legislative competence is reserved, we have been very collaborative about it. I thank the devolved authorities and all other partners for the help that they have given. Further engagements have taken place through stakeholder workshops, the Euratom industry forum and other industry events.
The regulations are vital to the success of our decommissioning programme and to the completion of our last few reprocessing contracts. The regulations will allow the UK to maintain the highest nuclear safety standards, while ensuring that the relevant UK operators can continue to operate, even in the unlikely event of a no-deal scenario.
It is a pleasure to serve under your chairmanship, Sir David. I will leave it at that, because I am concerned about the spread of so-called “pleasure creep”, where one has to put a number of nouns, adjectives and adverbs in front of the word “pleasure” to indicate that it really is a pleasure. I will be straightforward and stick to what I have just said.
The statutory instrument is essentially a very sensible piece of work to ensure that after exiting the EU we have in place the authorisation, certification and all other necessary arrangements to allow radioactive waste to transit properly—the Minister mentioned some 300 shipments a year. Previously, that was all done essentially under the aegis of Euratom; the question of having those arrangements, certainly as far as transfer to Euratom countries was concerned, did not come before us.
The Euratom arrangements also applied to trans-shipments that were not to Euratom countries but were under the aegis of Euratom as far as such trans-shipment arrangements were concerned. Trans-shipments to Japan, Australia and various other places were effectively covered by the fact that Euratom had an arrangement with those countries; we did not need a separate one. Now, we will have to have separate arrangements under all those circumstances, which is what this SI effectively does. It does so by revoking the 2008 regulations, and then—as is stated in the explanatory memorandum—largely replicates them
“by laying down broadly equivalent procedures”.
My comment to the Minister, which I have made on a number of other occasions when we have had these discussions about similar SIs, is that the broadly equivalent procedures seem to replicate quite well what would have happened under Euratom, given how the regulations are written. I would like the Minister to confirm that he is satisfied that that is the case. Obviously, I have not been able to compare regulation with regulation, but I assume that that is the basis of the “largely replicates” quote.
I thank the Minister for that. That is exactly what I had anticipated he would say, and I am grateful that he was able to say it.
The second issue relates to the quantity and concentration of consignments that trigger the need to define a shipment as a transfrontier shipment under the terms of the SI. I am sure that the Minister will have been party to the translation of regulations determining that: those regulations have been changed from a 2008 Euratom Council directive to a more recent directive in order to get those definitions right. In so doing, at least some reference to Euratom Council directives appears to have been preserved, but I assume that reference is only for purposes of definition, not of jurisdiction. I guess that the Minister will be able to put my mind at rest on that point as well.
I thank the Minister for that. My final brief point follows from the one the Minister made about the total cost of these arrangements, which is indeed very modest: as he has said, it is between £1,700 and £6,000 every three years. Those extra costs arise from the fact that, on occasions, transfrontier shipments will have to accede to both the existing Euratom regime and the new regime being created in this country. If a cost went from Euratom to the new transfrontier shipment arrangements, then there would be no net cost; that additional cost arises only when the cost is being doubled up. That is my understanding of the situation.
That is good. My observation—I think I am still under five minutes—is that the cost could be mitigated were we to make some kind of associate arrangement with Euratom in the future, perhaps in the long term. Obviously, the SI is predicated on the fact that we will have no arrangement with Euratom post 31 March, but if there is a longer associate arrangement—as was discussed a little while ago during the passage of the Nuclear Safeguards Act 2018—those costs would presumably not arise and that very modest additional cost would therefore be dissolved. That is just an observation about the future. I hope the Minister will be able to encourage the idea that we might have a future closer arrangement with Euratom, even though we will no longer be members of Euratom. I have just discussed one of the minor things that would be facilitated by such an arrangement.
I think hon. Members will have gathered from those remarks that we do not oppose the draft regulations. Indeed, we wish them success and hope they can be applied in the most expeditious way possible.
I reassure colleagues that I do not intend to detain the Committee for long. I just want to put on the record that for my first 12 years in this place I represented an operational nuclear power station at Bradwell-on-Sea. In the past 10 years, that power station has been being decommissioned, and that work has just successfully been completed. I pay tribute to all those who worked so hard to achieve that.
I do not think that power station required a great deal of transfrontier shipment, but there may be cause for that in the future. I remain strongly supportive of the Bradwell B project for a new nuclear power station. We have had a bit of a setback in the past few days with the news about the Japanese investment at Wylfa, but as far as I am aware—I went to the China General Nuclear reception a couple of days ago—Bradwell B remains very much on track, so there may be a need for transfrontier shipments there in the future.
I very much welcome the draft regulations. I just wanted to use this opportunity to say that I remain very supportive of a future generation nuclear programme in the UK.
I thank the Minister for outlining the draft regulations so well, but we are concerned that we are breaking our link with Euratom. Some things in the EU seem to work very well, and that competence and collaboration will be sadly missed—but so be it.
Let me pose a few questions about the position in Scotland. Will the radioactive waste management policy currently under the auspices of the Scottish Government remain intact? Will the Scottish Government and the Scottish Parliament retain their current devolved competences? Will the draft regulations have effect from day one? I think that will be 1 April—probably timely for some people, given that it is April Fool’s day. Again, we need to deal with that.
Is the Minister in a position to outline future plans, beyond Euratom, to ensure the safe transfer of radioactive materials and technologies? That will affect all parts of the UK, including services such as the NHS. Will those plans be subject to meaningful negotiations and consultation with the Scottish Government and other devolved Administrations?
I rise very briefly to observe that Lakeside Energy from Waste in my constituency disposes of quite a lot of radioactive material. It seems to me important that, as a commercial business, it is able to accept goods from overseas rather than just from the NHS. I wonder whether the transportation of radioactive materials that result from hospital and laboratory activities is covered by the draft regulations, or whether that is outwith their scope.
I thank right hon. and hon. Members for their contributions. On the general point about Euratom, I hope the charges will disappear if we have the closest possible associate membership of Euratom, which, as the shadow Minister knows very well, is what we hope to have. That of course is all for negotiation. It is my sincere hope that we will have such close associate membership that there will not be a question of costs, but I cannot say that. If only we could say that the cost generally of our leaving the EU without a deal were as little as £6,000. The cost in this case is pretty small—it is symbolic, really—and we hope to have the closest possible future relationship.
I endorse what my right hon. Friend the Member for Maldon said about Bradwell. I sincerely hope not only that the nuclear tradition there continues but that the site has a great future in providing employment and energy security for the country. I completely support what he said.
I reassure the Scottish National party spokesman, the hon. Member for Dunfermline and West Fife, that we introduce the draft regulations in a spirit of complete co-operation with the Scottish Government and other devolved authorities, and that will continue. There is no change in jurisdiction, but some things extend beyond jurisdiction to our having a good working relationship in this field, and we have that. He made a specific point about the management of radioactive waste, which remains devolved. Nothing will change in that regard, although I must say, just so there is no confusion, that that is a separate issue from the frontier shipment of waste, which is what the draft regulations deal with. However, he made his point very reasonably, and luckily I was able to answer it.
My hon. Friend the Member for Windsor asked about the medical side of things—radioactive waste from hospitals and so on. The draft regulations cover only radioactive waste and spent fuel; they do not concern medical radioactive material, so I can satisfy him on that point.
I think I have answered all the questions that were raised. I thank the shadow Minister for his support for this brief but important piece of delegated legislation.
Question put and agreed to.
Draft Civil Legal Aid (Amendment) (EU Exit) Regulations 2019
The Committee consisted of the following Members:
Chair: Sir Henry Bellingham
† Ali, Rushanara (Bethnal Green and Bow) (Lab)
† Foxcroft, Vicky (Lewisham, Deptford) (Lab)
† Frazer, Lucy (Parliamentary Under-Secretary of State for Justice)
† Goodwill, Mr Robert (Scarborough and Whitby) (Con)
† Hair, Kirstene (Angus) (Con)
† Harper, Mr Mark (Forest of Dean) (Con)
† Hepburn, Mr Stephen (Jarrow) (Lab)
† Johnson, Dr Caroline (Sleaford and North Hykeham) (Con)
† Keegan, Gillian (Chichester) (Con)
† Kinnock, Stephen (Aberavon) (Lab)
† McFadden, Mr Pat (Wolverhampton South East) (Lab)
† Milling, Amanda (Cannock Chase) (Con)
† Powell, Lucy (Manchester Central) (Lab/Co-op)
† Qureshi, Yasmin (Bolton South East) (Lab)
† Twigg, Derek (Halton) (Lab)
† Warman, Matt (Boston and Skegness) (Con)
† Watling, Giles (Clacton) (Con)
Mems Ayinla, Committee Clerk
† attended the Committee
Eighth Delegated Legislation Committee
Tuesday 22 January 2019
[Sir Henry Bellingham in the Chair]
Draft Civil Legal Aid (Amendment) (EU Exit) Regulations 2019
I beg to move,
That the Committee has considered the draft Civil Legal Aid (Amendment) (EU Exit) Regulations 2019.
It is a pleasure to serve under your chairmanship again, Sir Henry. The draft regulations form part of the Government’s preparations for the possibility of the UK leaving the EU without a deal. They will provide clarity to citizens and lawyers in the event of a no-deal outcome.
The draft regulations relate to EU directive 2003/8/EC, the EU legal aid directive, which creates reciprocal rights and obligations across member states. The directive’s application is limited to civil and commercial matters; it applies to cross-border disputes in which an individual domiciled or habitually resident in an EU member state requires legal services in relation to proceedings in another member state or enforcement of a decision or authentic instrument in another member state.
In a no-deal scenario, we would not benefit from any reciprocity from other member states in that context. The draft regulations will therefore remove the legislation that implements the EU legal aid directive, which will no longer apply to the United Kingdom. As a result, individuals domiciled or habitually resident in an EU member state who require legal services in relation to proceedings in England and Wales or Northern Ireland, or who wish to enforce a decision or authentic instrument in England and Wales or Northern Ireland, will be subject to the same scope, means and merits requirements as those domiciled or habitually resident in England and Wales, Northern Ireland or third countries.
After EU exit, legal aid provision for those domiciled or habitually resident in the UK who participate in proceedings in an EU member state will fall to each member state’s particular legal aid framework. Repealing the legislation that implements the EU legal aid directive will ensure legal certainty and clarity on legal aid entitlement. In addition, we will avoid a unilateral arrangement under which those domiciled or habitually resident in EU member states are treated more favourably than those domiciled or habitually resident in the United Kingdom or third countries.
The draft regulations will make a number of small technical amendments to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and the Access to Justice (Northern Ireland) Order 2003. References to “enforceable EU rights” will be amended to refer to “retained enforceable EU rights”; the term will be defined with reference to rights retained in domestic law by operation of the European Union (Withdrawal) Act 2018. This will enable the proper functioning of the exceptional case funding frameworks in England and Wales and Northern Ireland and, under LASPO, provision of foreign legal advice.
The draft regulations will also make some procedural amendments, one of which relates to whether an applicant for controlled work needs to attend a legal provider’s premises in person. At present, it is not necessary for an individual who is seeking legal aid for controlled work in England and Wales to attend a legal provider’s premises in person if they are present in or reside in the EU, if they cannot attend for good reason and if they can authorise someone to attend on their behalf. The draft regulations will change the exception so that those who reside within the EU will now be required to meet the same criteria that those who reside in third countries are expected to meet when they apply for controlled work and are not present in the UK.
A further amendment relates to licensed work. Again, those who reside within the EU will now be required to meet the same criteria that those who reside in third countries are currently expected to meet when they apply for licensed work and are not present in England and Wales.
The draft regulations will make provision for transitional arrangements for certain live matters under the repealed or amended legislation at the time of EU exit. Those matters will continue to operate under the same rules as before.
I should highlight the limited application of the draft regulations. In 2017 there were only 27 cross-border applications made between England and Wales and central authorities in other EU member states, of which 20 were from EU residents seeking legal aid in England and Wales. Although it is not possible to estimate precise amounts, we expect that any implications for the legal aid fund will be considerably small. In addition, a number of legal aid applications that are in scope as a result of the EU legal aid directive may have been made directly to the Legal Aid Agency or providers, not via central authorities, and it is not possible to identify those cases. Officials at Northern Ireland’s Department of Justice have confirmed that, although applications under the EU legal aid directive are not centrally recorded for statistical purposes, it has established that an estimated three applications were made in the last two years.
This SI is necessary in order to correct deficiencies in legal aid legislation in England, Wales and Northern Ireland that arise from the UK’s exit from the EU, including LASPO, the Access to Justice (Northern Ireland) Order 2003 and subordinate legislation. The Scottish Government are separately taking forward any required amendments to legal aid legislation. This legislation will simply enable us to continue going forward without the reciprocity that we have previously enjoyed and will not be afforded in the future. I commend the draft regulations to the Committee.
It is a pleasure to serve under your chairmanship, Sir Henry. As the Minister has explained, this regulation will repeal a 2003 directive that was designed
“to improve access to justice in cross-border disputes by establishing minimum common rules relating to legal aid”
for cross-border disputes over family, commercial and civil matters, which are obviously important issues that need to be dealt with properly. As the Minister has outlined, a cross-border dispute is defined as
“one where the party applying for legal aid in the context of the directive is domiciled or habitually resident in a Member State other than the Member State where the court is sitting or where the decision is to be enforced.”
In practical terms, this is relevant for individuals who are domiciled or habitually resident in an EU member state and require legal services for proceedings in other member states, or who wish to enforce a decision or an authentic instrument in another member state.
Although it is acknowledged that some of the provisions in this regulation are procedural in nature, there is one substantive provision that will have a massive impact on access to legal aid by removing paragraph 44 of part 1 of schedule 1 in LASPO. When this statutory instrument was discussed in the other place, Lord Thomas of Gresford said that the current framework
“provides predictability and certainty for citizens and businesses”
“judgments and orders obtained will be recognised and enforced…as is the case now.”—[Official Report, House of Lords, 15 January 2019; Vol. 795, c. 191.]
Those benefits were recognised in the Government’s 2017 paper, “Providing a cross-border civil judicial cooperation framework”. Paragraph 7 stated:
“This framework provides predictability and certainty for citizens and businesses from the EU and the UK about the laws that apply to their cross-border relationships, the courts that would be responsible, and their ability to rely on decisions from one country’s courts in another State.”
An important feature of civil judicial co-operation at present is the mutual provision of legal aid. The legal aid directive sets minimum common rules relating to legal aid in order to improve access to justice in cross-border disputes. It applies to all such disputes over civil and commercial matters, but particularly to family law—the disposal of assets and access to children, especially across borders. This provision was incorporated into English law by LASPO, and its purpose is to ensure that people domiciled or habitually resident in EU member states are not treated more favourably after we leave the European Union than those who reside in England, Wales and Northern Ireland. EU residents who require legal services in relation to proceedings in our courts, or who wish to enforce an overseas judgment, will no longer have a right to legal aid for matters within the scope of the EU directive.
The statutory instrument uses the Henry VIII powers in section 8 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 to revoke the legislation implementing the European Union directive in UK domestic law. As far as we can ascertain, the statutory instrument would prevent European Union residents from seeking legal aid for exceptional cases that are not normally within the scope of UK domestic legal aid, but where not providing it would be a breach of retained enforceable European Union rights. Can the Minister tell us whether, after Brexit, EU residents will be able to apply for legal aid in the ordinary way for cases involving children across borders in an English court, for example, and whether legal aid would be granted if the ordinary tests of merits and means were satisfied? Does domicile or residency in the European Union disqualify an applicant who applies for legal aid in the normal way?
One of our many concerns is that the Government have not properly planned for reciprocal justice arrangements after we leave the European Union. That failure could have very damaging consequences for the people who rely on those arrangements, including those resolving complex family law cases. There are concerns across Parliament, including on the Justice Committee, that the Ministry of Justice has provided little detail or certainty about how co-operation on justice will be managed after we have left the European Union. In October, the Chair of the Lords EU Justice Sub-Committee wrote to the Lord Chancellor to set out a number of the Sub-Committee’s concerns about the impact of the Government’s handling of the Brexit negotiations on judicial co-operation, warning about the
“‘profound and damaging’ impact of a no-deal Brexit on the UK’s family law system and those that these courts seek to protect”.
The civil judicial co-operation framework that I referred to earlier on, which was issued by the Government, was found by the Lords EU Justice Sub-Committee to contain little detail on how the Government’s aims for co-operation would be achieved, and noted that
“a worrying level of complacency has taken hold in the Government that assumes that we can leave the EU without alternatives in place and that other international arrangements will fill the void left by this important EU legislation.”
It is in that context that we express concern that the provisions in the statutory instrument could begin to undo the existing legal framework without yet having an agreed replacement in place. That is a risky approach that would be avoidable were it not for the Government’s failure so far to secure comprehensive agreements on future co-operation in justice matters. The Lords EU Justice Sub-Committee is not alone in noting that. The matter was raised in two debates in Westminster Hall last year, which focused generally on judicial co-operation post Brexit, not only for legal services but for our judicial and civil relationships.
The statutory instrument does not come with a clear explanation, which is another concern expressed by the Lords. The Government’s failure to plan properly for reciprocal justice arrangements could have damaging consequences for people who rely on such co-operation. Earlier, I asked whether European Union residents could apply in the ordinary way for legal aid for UK courts post Brexit in cases of children across borders, for example, and whether that aid would be granted subject to means and merit tests. No answer has been given. I would be grateful if the Minister gave us some facts and figures about which applications for legal aid might be accepted. It is well known that the Law Society has indicated its concerns to the Ministry of Justice about the provisions and the problems that they may cause. For those reasons, we will vote against the statutory instrument.
I will make three points: two relate to the SI and the third is more global. First, it is extremely disappointing that, in opposing the regulations, the Opposition will not enable us to provide for a smooth transition by ensuring that our statute book is fit for purpose if we leave the EU without a deal.
Secondly, I am very disappointed by the suggestion from my friend, the hon. Member for Bolton South East, with whom I work very well, that the regulations will have a massive impact. What we are doing with the legislation is simple: we are ensuring that, as we leave the EU, its member states do not receive preferential treatment vis-à-vis other third countries. Under World Trade Organisation trade terms, we are not allowed to give preferential treatment to one portion of the world. We are ensuring that we do not give a more favourable position to EU member states. Under the SI, as with all the SIs introduced by the Ministry of Justice, individuals from those member states will still be able to get the same treatment as EU nationals in this particular provision of legal aid. They will still be able to get legal aid under the same conditions as our residents under LASPO, as long as the matter for which they are claiming is in scope and subject to means and merits.
Thirdly, the hon. Member for Bolton South East made a very broad point about other matters not relevant to the statutory instrument. We will debate those matters in due course. She mentioned the important point of civil jurisdiction and the enforcement of judgments, for which another SI will be introduced. She also mentioned family law. We, like the EU, think it is extremely important for us and the EU to get a deal to ensure that we have a reciprocal arrangement on family law. Indeed, a reciprocal arrangement on family law is one of the areas of mutual interest that the EU has identified and that it is willing to negotiate within a future framework. The matter under discussion, however, is a no-deal scenario.
May I remind the Minister that it is extremely disappointing that her Government are still leaving the prospect of a no-deal situation over us? That is irresponsible and she should be concerned about that. My hon. Friend the Member for Bolton South East raised legitimate concerns about British nationals who will continue to live in the EU. The Minister needs to focus on that. Thinking simply in terms of WTO rules is not appropriate because British nationals will still live in other countries, and in that context, we will need partnerships that allow them to have access to justice.
The best way to protect the citizens whom the hon. Lady talks about is to ensure that we have a deal. The Prime Minister’s deal will allow us an implementation period to negotiate the very points that the hon. Lady identifies. One of those points is an agreement in relation to families, on which we would be able to get a reciprocal arrangement in future.
Does my hon. Friend share my surprise that the shadow Minister, the hon. Member for Bolton South East, did not vote for that deal, especially given that 58.3% of people in Bolton voted to leave the European Union? The only way that we can guarantee that it will happen is to get the deal over the line.
That the Committee has considered the draft Civil Legal Aid (Amendment) (EU Exit) Regulations 2019.