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General Committees

Debated on Wednesday 23 January 2019

Delegated Legislation Committee

Draft Ship Recycling (Facilities and Requirements for Hazardous Materials on Ships) (Amendment) (EU Exit) Regulations 2019

The Committee consisted of the following Members:

Chair: Mr Laurence Robertson

† Brown, Alan (Kilmarnock and Loudoun) (SNP)

† Burghart, Alex (Brentwood and Ongar) (Con)

† Docherty, Leo (Aldershot) (Con)

† Donelan, Michelle (Chippenham) (Con)

† Foxcroft, Vicky (Lewisham, Deptford) (Lab)

George, Ruth (High Peak) (Lab)

† Ghani, Ms Nusrat (Parliamentary Under-Secretary of State for Transport)

† Heappey, James (Wells) (Con)

† Hoare, Simon (North Dorset) (Con)

† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)

† Mills, Nigel (Amber Valley) (Con)

Powell, Lucy (Manchester Central) (Lab/Co-op)

† Snell, Gareth (Stoke-on-Trent Central) (Lab/Co-op)

Thomas, Gareth (Harrow West) (Lab/Co-op)

† Trevelyan, Anne-Marie (Berwick-upon-Tweed) (Con)

† Turner, Karl (Kingston upon Hull East) (Lab)

† Warburton, David (Somerton and Frome) (Con)

Katya Cassidy, Victoria Pope, Committee Clerks

† attended the Committee

Tenth Delegated Legislation Committee

Wednesday 23 January 2019

[Mr Laurence Robertson in the Chair]

Draft Ship Recycling (Facilities and Requirements for Hazardous Materials on Ships) (Amendment) (EU Exit) Regulations 2019

I beg to move,

That the Committee has considered the draft Ship Recycling (Facilities and Requirements for Hazardous Materials on Ships) (Amendment) (EU Exit) Regulations 2019.

It is a pleasure to serve under your chairmanship, Mr Robertson. The draft regulations are made under the European Union (Withdrawal) Act 2018, which retains EU-derived legislation in UK law. Section 8 of the Act makes provision for correcting deficiencies in EU-derived legislation that may arise as a result of the UK leaving the European Union.

Ensuring the safe and environmentally sound dismantling and recycling of ships at the end of their operational life has been a concern for a number of years. Many ships are currently dismantled on beaches in Asia, with little regard for human safety or environmental protection. EU Regulation 1257/2013 transposed into EU law key parts of the Hong Kong convention on recycling ships. The main provisions of the regulation have applied since 31 December 2018. They include requirements that EU-flagged ships be recycled at an approved ship recycling facility and that new EU-flagged ships carry a valid inventory of hazardous materials. The provisions apply to ship recycling facilities in the EU and to EU-flagged ships above 500 gross tonnes.

The draft regulations will ensure that the legal framework for ship recycling remains operable when the UK leaves the EU on 29 March 2019, by making amendments to the EU ship recycling regulation and the Ship Recycling (Requirements in relation to Hazardous Materials on Ships) (Amendment etc.) Regulations 2018. They will also amend legislation on waste management and ship recycling facilities to address a number of deficiencies arising from EU exit that would hinder the operation of the UK ship recycling regime.

The EU regulation establishes a European list of approved recycling facilities that must be used for all EU-flagged ships, including UK ships, when they need to be dismantled and recycled. After we leave the EU, it would not be appropriate for the EU to decide where UK-flagged ships can be recycled, so the draft regulations provide for a UK list that will replace the European list for UK-flagged ships. The Secretary of State will have the power to add or remove facilities. However, the UK list will include all recycling facilities on the European list.

Ships typically contain quantities of hazardous materials. The EU ship recycling regulation requires new ships to carry a list of such materials from the beginning of this year, and existing ships to carry such a list from 31 December 2020. Since the 2018 Act will retain in UK law only EU measures that are in force when we leave the EU, it will not retain the requirement under the EU regulation for existing ships to carry a valid inventory of hazardous materials, but the Government will seek to implement that requirement when the opportunity arises. Ships will still need an inventory before they can obtain a “ready for recycling” certificate, which is required when a ship is sent for recycling.

The draft regulations apply to waste management, which is a transferred matter under the Northern Ireland Act 1998. The Government are committed to restoring devolution in Northern Ireland, but time is short. We have therefore, in consultation with Northern Ireland Departments, included provisions in the draft regulations that relate to waste management legislation that applies in Northern Ireland.

The changes made by the draft regulations will ensure that environmental law continues to function after the UK’s withdrawal from the European Union. They will enable the UK to continue to comply with its international obligations, as established by the International Maritime Organisation, and maintain the highest environmental and safety standards. They are fully supported by the Government, and I commend them to the Committee.

It is a pleasure to see you in the Chair, Mr Robertson. The Opposition support the draft regulations, which we recognise will be required as we leave the EU, but there are one or two points that we wish to raise with the Minister. Will she explain the impact on the amount of ship recycling work carried out at the UK-based facilities that are currently on the EU list? What plans have the Government to support ship recycling in the UK once we leave the EU? UK facilities will still want to be able to recycle vessels flagged in the EU after Brexit. How does the Minister plan to ensure that the EU will make sure our yards are listed, and that competition between the EU and the UK is not distorted?

Will the Minister clarify what impact the regulations will have on the statutory responsibilities and duties of UK regulatory bodies, including the Maritime and Coastguard Agency and, indeed, the Department for Environment, Food and Rural Affairs? Finally, in relation to the inventory of hazardous materials and mutual recognition between the UK and the EU, it would be useful if the Minister could clarify whether ships might end up having to submit two applications—one to the EU and one to the UK. I would be happy for the Minister to answer any of those questions in writing.

I thank hon. Members for giving their time and consideration so early this morning. The regulations will ensure that we continue to combat environmental pollution and enforce safety standards in the maritime sector after we leave the European Union. They make changes only to ensure the functionality of EU retained law on the UK statute book after exit day. I am pleased that we seem to have cross-party support for this statutory instrument.

The hon. Member for Kingston upon Hull East asked about the UK ship recycling list. I want to remove any concern by confirming that the UK list will be the same as the European one when we leave the EU on 29 March. The two lists may diverge over time as the Secretary of State rather than the EU will decide which facilities can be added to or removed from the UK list. In practice, however, we expect the two lists to remain closely aligned. I shall of course drop the hon. Gentleman a note on all the points he raised.

I am pleased that we can agree that protecting the environment from all kinds of shipping pollution and ensuring that ship recycling is undertaken in a responsible manner is vital to broader Government commitments to environmental standards and shipping safety. I hope that the Committee will agree that the SI is essential to ensure that legislation on environmental protection and ship recycling will continue to work effectively in the UK from day one after exit.

Question put and agreed to.

Committee rose.

Draft Consumer Protection (Enforcement) (Amendment etc.) (EU Exit) Regulations 2018

The Committee consisted of the following Members:

Chair: Sir David Amess

† Baron, Mr John (Basildon and Billericay) (Con)

† Chishti, Rehman (Gillingham and Rainham) (Con)

† Furniss, Gill (Sheffield, Brightside and Hillsborough) (Lab)

† Gibson, Patricia (North Ayrshire and Arran) (SNP)

† Grogan, John (Keighley) (Lab)

† Hair, Kirstene (Angus) (Con)

† Harris, Rebecca (Lord Commissioner of Her Majesty's Treasury)

† Kendall, Liz (Leicester West) (Lab)

† Lord, Mr Jonathan (Woking) (Con)

† O'Brien, Neil (Harborough) (Con)

† Phillips, Jess (Birmingham, Yardley) (Lab)

† Smith, Nick (Blaenau Gwent) (Lab)

† Sobel, Alex (Leeds North West) (Lab/Co-op)

† Tolhurst, Kelly (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

† Tredinnick, David (Bosworth) (Con)

† Twist, Liz (Blaydon) (Lab)

† Wood, Mike (Dudley South) (Con)

Mike Winter, Committee Clerk

† attended the Committee

Eleventh Delegated Legislation Committee

Wednesday 23 January 2019

[Sir David Amess in the Chair]

Draft Consumer Protection (Enforcement) (Amendment etc.) (EU Exit) Regulations 2018

I beg to move,

That the Committee has considered the draft Consumer Protection (Enforcement) (Amendment etc.) (EU Exit) Regulations 2018.

It is a pleasure to serve under your chairmanship, Sir David. This instrument, laid before the House on 4 December 2018, is part of our EU exit contingency planning; it will not be needed should the UK conclude the withdrawal agreement with the EU. Several laws allow for collective redress when infringements of consumer protection laws take place. The first is the consumer protection co-operation regulation, known as the CPC regulation. The reciprocal arrangements set out in that EU law require enforcers to act on requests from their counterparts in other EU member states. They are required to investigate and, if necessary, take action to end infringements of EU consumer law when the collective interests of consumers in other member states are harmed.

The second of those laws is the injunctions directive. The reciprocal arrangements in that EU directive allow enforcers to take action in the courts of other member states to stop the relevant infringements. In the UK, part 8 of the Enterprise Act 2002 implements the injunctions directive, as well as providing the UK’s enforcement mechanism for the CPC regulation. It enables certain UK and EU enforcers to apply for enforcement orders to stop the infringements in question when listed EU consumer laws are being breached—these are known as Community infringements—and the collective interests of consumers are being harmed. Finally, UK enforcers are given the necessary investigatory powers through schedule 5 to the Consumer Rights Act 2015.

In the absence of a deal, after the UK’s exit from the EU, the CPC regulation and the injunctions directive will no longer apply to the UK as we will cease to be an EU member state. In consequence, UK consumer enforcers such as the Competition and Markets Authority will no longer be part of the reciprocal cross-border enforcement arrangements. This instrument therefore revokes the CPC regulation, which would otherwise continue to apply in UK law. Doing so prevents a situation in which UK enforcers would be required to assist their EU counterparts, while EU enforcers would not be under the same obligation. This instrument also amends the Enterprise Act so that EU enforcers cannot apply for enforcement orders in UK courts, preventing a situation whereby EU enforcers would remain able to bring legal proceedings in UK courts under the injunctions directive, while UK enforcers would lose their equivalent right to bring proceedings in the EU.

This instrument does not prevent UK enforcers from co-operating with their EU counterparts: UK public bodies will remain able to share information they hold in their capacity as enforcers under part 8 of the Enterprise Act to assist their counterparts abroad. However, we recognise that cross-border enforcement co-operation to protect consumers would become more limited in a no-deal situation. The instrument also ensures that UK enforcers retain the powers they now have within the UK, and can continue to investigate and address infringements of UK consumer law—including retained EU consumer law—after exit day. Those laws are set out in the new schedule 13 to the Enterprise Act to certify this instrument.

These changes are a necessary use of the powers of the European Union (Withdrawal) Act 2018, and I commend the instrument to the Committee.

It is a pleasure to serve under your chairpersonship, Sir David. It is with deep regret that we find ourselves in a situation in which we are even considering leaving the EU with no deal—a decision that would have enormous political, social and economic impacts on the UK. There is no majority in the House for such a course of action. With 40 years’ worth of intertwined regulation and policies, the proposals introduced by the Government risk cutting the vital cross-border work that is so fundamental to the protections that our citizens enjoy.

Will the hon. Lady give some concrete evidence, rather than speculating, that leaving on WTO terms, on which we trade profitably with the rest of the world, would mean us being unable likewise to trade profitably with the EU, given that all the projections of fear and economic gloom predicted when we simply voted to leave have transparently been proved to be wrong?

I think it has been made clear by many experts, including at the Bank of England, that, should we crash out with no deal in a few weeks’ time, the economy will shrink by about 8%. We are here today to look at spending many millions of pounds.

This is the same Bank of England that predicted economic woe if we voted to leave the European Union, suggested there would be 500,000 extra unemployed people by December 2016, and then had to apologise very publicly for getting it so wrong. I would caution against the hon. Lady quoting the Bank of England, because it got it so wrong last time.

Before this continues, I remind Members that this is not an opportunity for a general debate on whether we should be leaving the European Union. The circumstances of this delegated legislation are very tight, so I remind hon. Members to keep their remarks specifically to the legislation we are discussing.

Time after time, the Prime Minister has been consistent in saying that the Government will ensure that UK consumers will not face any detriment following our departure from the EU, yet the Government’s own analysis in their paper, “Consumer rights if there is no Brexit deal”, outlines that there would be a watering down of consumer rights in the event of no deal. Indeed, consumer rights bodies such as Which? have made it clear that no deal would mean a direct and hard impact on areas including travel, food and energy. The EU system, in which we have been partners for over 40 years, has devised solutions to remove risks in cross-border trade, including a deep harmonisation of substantive standards, enforcement mechanisms and redress mechanisms.

UK consumers rely on the assurance that should they buy a product from the EU, they will be protected in the event that something goes wrong, and that our competition authorities can take action on their behalf or request their European counterparts to do so in their respective countries. This confidence in cross-border trade and protection has resulted in trade flourishing between EU member states, and UK consumers have been protected. The purpose of these draft regulations is to remove current reciprocal arrangements that oblige member states to co-operate in the cross-border investigation of, and enforcement on, infringements of EU consumer laws where the collective interest of consumers is harmed.

Order. There is a Division in the House, so the Committee will stand adjourned for 15 minutes. Should there be a second Division, we will adjourn for a total of 25 minutes.

Sitting suspended for a Division in the House.

On resuming

My remarks on this statutory instrument will be very brief. The SI repeals the consumer protection co-operation regulation in full to ensure that there are no unilateral obligations or rights conferred on or between EU member states and/or the UK after Brexit, in the event of a no deal.

Is it the Government’s policy to ensure that, as far as possible, UK consumers are no worse off after Brexit than before? However, it is also the case that there are no substantial policy changes proposed for UK consumer law in the event of no deal, and after Brexit. My concern is that there are absolutely no guarantees that UK consumer law will continue to evolve and develop to ensure that UK consumers are not disadvantaged and left, over time, with fewer protections relative to their European counterparts. That must be a cause of concern to us all.

Furthermore, I am well aware that the Minister simply cannot guarantee that our rights will not diverge from Europe’s over time, because that is not in the gift of the Minister. That is why this is a matter of concern. We are being asked blindly to step into the unknown. That is the nature of Brexit, deal or no deal, whether we like it or not, regardless of how we voted.

Given the circumstances today, may I throw out for the Minister’s consideration a matter I have written to her about? I thought this might be a timely moment to bring it up. She will be aware there are many areas of concern for the future, but one example that concerns me is that the EU is now set to move on standardising the expiry dates on all gift cards at five years, instead of the mishmash of confusion that we have now.

The Minister will perhaps remember that I have made inquiries. I found that the UK Government are reluctant to examine this matter carefully, despite the fact that the industry is worth billions of pounds in the UK and that the measure would cost the UK Government nothing to implement. This is one simple area where UK consumers will be left behind when such provision is adopted across the EU post-Brexit. I know that the Minister suspects that that may not happen in Europe, but I can assure her that there are definitely moves afoot for it to happen. As the CPC regulation makes clear, it is the “collective interests of consumers” that we need to be protecting.

The reality is that Brexit, with or without a deal, can only—perhaps in moments of self-reflection, the Minister will see this—reduce the UK’s influence and that of UK enforcement bodies. I do not think that is a matter of dispute. She said in her opening remarks that co-operation will continue. I of course very much hope, for the sake of consumers, that that will be the case. No one wants to see a diminution of consumer protection. No one voted for that in the referendum. Whatever they voted for, they were not voting for fewer protections as consumers. However, concerns remain, because the UK will lose the influence that it has in the area of consumer protection, and of course in other areas, as we ironically will be forced to look inwards, instead of outwards, if we are engulfed by the chaos of no deal.

I thank the hon. Lady for her contribution. As a responsible Government, we continue to prepare proportionately for all scenarios, including the scenario that we leave the EU without a deal. That is what this statutory instrument ensures: it revokes provision in the CPC regulation and the injunctions directive that will not be reciprocated by the EU in a no-deal situation.

I recognise the hon. Lady’s concern about the particular issue that she has raised. It is not in the scope of these regulations, but, as she knows, I am more than happy to communicate with her outside this statutory instrument Committee. Importantly, the instrument ensures that, after EU exit, UK enforcers retain powers to continue protecting UK consumers in the case of infringement of UK consumer law. That includes EU-derived consumer law.

What does the Minister think will be the effect on the UK’s influence in European markets, for example? After Brexit, does she think that the UK’s influence on consumer protection will increase or decrease?

The statutory instrument before us talks about UK enforcement, and that, through our UK enforcement agencies, which are already registered under EU law, will be retained under UK law. As always, this Government and our enforcement agencies are committed to the protection of consumers in this country and will do whatever they can, in the event of no deal, to ensure that the relationships with our European neighbours will be maintained as far as possible, but obviously a lot of that will rest with the EU and how it wants to deal with us after EU exit.

The additional point, in answer to the SNP, is surely that we will have control over our own laws more and therefore can even enhance consumer protection within these shores—rather than following on the tails of the EU—and no doubt there will be many areas in which we do that.

I thank my hon. Friend for his comment; he is quite right. There are examples of where UK consumer law is superior to EU law in some elements, and this Government are committed to doing that. We will be able to maintain and, obviously, change our laws. Any EU provider selling into the UK market—whatever the product or services—will still have to comply with UK law and therefore be subject to UK enforcement agencies.

Question put and agreed to.

Committee rose.

Draft Market Abuse (Amendment) (EU Exit) Regulations 2018 Draft Credit Rating Agencies (Amendment, Etc.) (EU Exit) Regulations 2019

The Committee consisted of the following Members:

Chair: Philip Davies

† Braverman, Suella (Fareham) (Con)

† Day, Martyn (Linlithgow and East Falkirk) (SNP)

† Dodds, Anneliese (Oxford East) (Lab/Co-op)

† Glen, John (Economic Secretary to the Treasury)

† Graham, Luke (Ochil and South Perthshire) (Con)

† Jayawardena, Mr Ranil (North East Hampshire) (Con)

† Knight, Sir Greg (East Yorkshire) (Con)

† Masterton, Paul (East Renfrewshire) (Con)

† Merriman, Huw (Bexhill and Battle) (Con)

† Pearce, Teresa (Erith and Thamesmead) (Lab)

† Shuker, Mr Gavin (Luton South) (Lab/Co-op)

† Smith, Jeff (Manchester, Withington) (Lab)

† Spellar, John (Warley) (Lab)

† Umunna, Chuka (Streatham) (Lab)

† Vickers, Martin (Cleethorpes) (Con)

† Walker, Thelma (Colne Valley) (Lab)

† Whittaker, Craig (Lord Commissioner of Her Majesty's Treasury)

Ian Bradshaw, Committee Clerk

† attended the Committee

Thirteenth Delegated Legislation Committee

Wednesday 23 January 2019

[Philip Davies in the Chair]

Draft Market Abuse (Amendment) (EU Exit) Regulations 2018

With this it will be convenient to consider the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.

It is a pleasure to serve under your chairmanship again, Mr Davies. The Treasury has been preparing extensively for a range of outcomes in the context of the UK’s withdrawal from the EU, including a no-deal scenario. The draft regulations form part of the necessary work to ensure that there will continue to be a functioning regulatory and legislative regime for financial services if the UK leaves the EU with no deal and no implementation period.

Although explanatory memorandums are not technically part of regulations, it is important that they be accurate and up to date in all respects. Will the Minister confirm that that is the case? In particular, will he confirm that the first sentence of paragraph 7.1 of both memorandums is still Government policy? It states:

“The UK will leave the EU on 29 March 2019.”

I am happy to confirm that point—I wondered what my right hon. Friend was going to come out with.

As part of the programme that I have set out, the draft regulations will address legal deficiencies in retained EU legislation relating to market abuse and credit rating agencies. They are important for regulating market conduct practices and safeguarding market integrity. Their approach aligns with that of other legislation laid before Parliament under the European Union (Withdrawal) Act 2018, providing continuity by maintaining existing legislation at the point of exit, but amending deficiencies where necessary and introducing transitional provisions to ensure that they work as effectively as possible in a no-deal context. I shall first outline the 2018 draft regulations and then turn to the 2019 draft regulations.

Market abuse can involve a range of illegal practices relating to financial markets, including unlawful disclosure of inside information, insider dealing and market manipulation. MAR—the EU market abuse regulation, which came into effect in 2016—prohibits market abuse practices, thereby increasing market integrity and investor protection and enhancing the attractiveness of the EU securities markets for capital raising. It gives EU regulators powers and responsibilities to prevent and detect market abuse; the Financial Conduct Authority is the regulator that currently enforces it in the UK. MAR applies to financial instruments traded on EU trading venues, as well as market abuse that concerns such instruments anywhere in the world.

The 2018 draft regulations will make amendments to MAR and related legislation to ensure that the UK continues to have an effective regime to regulate market abuse once it leaves the EU. In line with our general approach of onshoring EU legislation by transferring powers and functions in the remit of EU authorities to the appropriate UK institutions, they will transfer powers from the European Commission to the Treasury, including the ability to make delegated Acts related to market abuse, and from the European Securities and Markets Authority to the FCA, enabling the FCA to make binding technical standards.

The FCA has consulted on its proposed changes to its binding technical standards, and it will continue to enforce the market abuse regime in line with its current role as part of the EU framework. That approach reflects the FCA’s extensive experience, expertise and capability to continue in that function post exit. I remind the Committee that it has 158 full-time employees working on Brexit—an increase from 28 in March 2018—and that in a few months it will publish its plans for the year 2019-20.

Furthermore, the statutory instrument retains the existing scope of MAR, so that it continues to apply to financial instruments traded on both UK and EU trading venues, as well as to conduct anywhere in the world that concerns these instruments. That means that the FCA will continue to be able to investigate, prohibit and pursue cases of market abuse related to financial instruments that affect UK markets, as far as is possible in a no-deal scenario. The scope has been limited to the UK and EU, and is not worldwide, given that markets in both jurisdictions are highly integrated due to the current arrangements.

The SI also retains exemptions in MAR—and amends the scope of the exemptions to UK-only—that relate to certain trading activities that cannot be enforced against the regulation[Official Report, 5 February 2019, Vol. 654, c. 1MC.] They include exemptions on monetary and public debt management activities, buy-backs and stabilisation, and accepted market practices. Power will be conferred on the Treasury to extend the exemptions related to monetary and public debt management activities. That power is currently held by the Commission.

In addition, the SI retains references to emission allowances. That will allow UK firms to continue to participate in secondary market trading under the emissions trading scheme, despite the UK leaving it, and will enable the FCA to continue to monitor and enforce against UK-registered emission allowance market participants.

Additionally, the SI removes co-operation requirements between the UK and EU counterparts. The UK will no longer be obliged to share information related to market abuse with the EU, given that there would be no guarantee of reciprocity. However, the FCA will still be able to respond to information requests from third-country regulators; indeed the existing domestic framework for co-operation on information sharing with countries outside the UK already allows for that on a discretionary basis.

Finally, the SI will make further amendments to retained EU and UK legislation, including EU legislation that amends MAR, to ensure that it is operable in a UK-only scenario; to the Criminal Justice Act 1993 to remove references to directly applicable EU regulation; and to the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 to ensure that the UK’s market abuse regime works effectively once the UK leaves the EU.

Will the Minister make it his business to ensure that credit rating agencies share information appropriately not only with each other and with regulators, as necessary, but with consumers? Too often, they are inaccessible to consumers, and consumers cannot even write to them to have the appropriate information registered with them. Will he make it his business to sort that out or to impart that to the FCA?

Sitting suspended for a Division in the House.

On resuming

To pick up from where I left off, the best solution would be for my hon. Friend the Member for North East Hampshire to write to me about his specific concern. I will look into it thoroughly and get back to him as quickly as possible.

Let me turn to the 2019 draft regulations. A credit rating is used to assess the creditworthiness of an entity or financial instrument for regulatory purposes. CRAR, the credit rating agencies regulation, was introduced after the financial crisis in 2009 to ensure that EU bodies—in this case ESMA—could supervise credit rating agencies in a suitable way. The draft regulations will amend CRAR and related legislation to ensure that the UK continues to have an effective framework to regulate credit rating agencies once we have left the EU.

First, the draft regulations will transfer supervisory and enforcement powers from ESMA to the FCA to ensure that the FCA can effectively supervise credit rating agencies and enforce the new UK regime, as well as becoming responsible for the regulatory functions relating to the endorsement process. I should note that this provision was drawn to the special attention of the House of Lords in the 9 January report of Sub-Committee A of the Secondary Legislation Scrutiny Committee. It is a sensible provision, given the FCA’s role in regulating the operation of markets and safeguarding market integrity; it will enable the FCA to assess whether a third country’s regulatory and legal framework is as stringent as the UK’s, thereby enabling credit rating agencies in the third country that are affiliated with a UK-based credit rating agency to endorse ratings into the UK for regulatory use.

Secondly, the SI will transfer equivalence powers from the European Commission to the Treasury, which will enable the Treasury to determine whether a third-country regime is sufficiently aligned in its regulatory outcomes to be declared equivalent and allow for the clarification process, allowing unaffiliated CRAs in third countries to issue ratings in the EU for regulatory purposes. That is consistent with the transfer of equivalence powers across other areas of retained EU law in SIs that have already been debated in this Committee.

Thirdly, the SI will enable credit ratings to be used in the UK for regulatory purposes, should those ratings be issued by a CRA established in the UK with an FCA registration. The instrument will also allow for a transitional period of one year to enable credit ratings issued prior to exit day by EU firms that register or apply for registration with the FCA to be used for regulatory purposes in the UK. Furthermore, the SI sets out that firms are required to establish a legal entity in the UK to register with the FCA.

There are three types of registration regimes that will smooth the transition from ESMA registration to FCA registration: the conversion regime, which will enable UK-established CRAs to notify the FCA of their intention to convert their ESMA registration; a temporary registration regime, which will allow newly established legal entities in the UK to operate in the UK if they are part of a group of CRAs with ESMA registration; and an automatic certification process, which will allow certified CRAs established outside the EU to notify the FCA of their intention to extend certification to the UK. As part of the additional powers granted to it, the FCA will receive pre-exit powers to begin the preparatory work for registering CRAs before exit day.

Additionally, references to EU institutions in relation to appeal rights will be replaced with appropriate UK bodies. Given the new enforcement powers given to the FCA, where its warning and decision notice will apply to CRAs, a right to appeal such actions has also been provided. The relevant UK body will be the upper tribunal.

Finally, further amendments to UK legislation are made. The Financial Services and Markets Act 2000 is amended to enable the FCA to charge fees in relation to its new supervisory functions in respect of CRAs, as well as ensuring that the FCA is exempt from liability for damages relating to its new supervisory functions.

The Treasury has been working closely with the FCA and the Bank of England and engaging with industry bodies on both instruments. They have both been published in draft form, accompanied by an explanatory policy note, to maximise transparency to Parliament, industry and the public before being laid before Parliament.

In summary, the Government believe that these SIs are necessary to ensure that the regulatory regimes relating to market abuse and credit rating agencies work effectively if the UK leaves the EU without a deal or an implementation period. I hope colleagues will be able to join me in supporting the regulations, and I commend them to the Committee.

It is a pleasure to serve in this Committee with you in the Chair, Mr Davies. I am grateful to the Minister for those helpful explanatory remarks.

Of course, the Minister and I are here once again to discuss two 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. 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.

As I mentioned yesterday in relation to another statutory instrument, the Committee takes place in the context of a Government refusal to allow debate on the Floor of the House concerning the exceedingly complex MiFID transposition legislation, and just a couple of days following a Division on statutory instruments to implement a customs union with our Crown dependencies, with little to no indication of how that would interact with our future customs relationship with the EU27. The prospect of no deal looms large, given the Government’s refusal to rule it out, so we must recognise that, on 29 March, instruments considered by delegated legislation Committees such as this 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 substantial change to the statute book; they need proper scrutiny and in-depth analysis.

I take the hon. Lady’s point, but is it not a bit rich to go on about the necessary scrutiny when half the people on her own side have not turned back up after the Division?

I do not know why other hon. Friends are not here. I am sure they will be coming back soon. It may be because they have been informed that another vote is just about to happen. I apologise if my remarks have to be cut in half as a result, as the Minister’s were.

Yesterday, in another Committee, I had a long discussion with the Minister about why an impact assessment had not been produced for the statutory instruments we were considering. I am grateful to him for the clarification he gave me earlier, but although we have an impact assessment for one of the instruments this Committee is considering—the credit rating agencies regulations—we do not have one for the market abuse directive and market abuse regulation transposition regulations. Yesterday, I and other hon. Members indicated our frustration at being required to be prepared to pass legislation without having been provided with an impact assessment, and that remains the case.

I note the comments by the right hon. Member for East Yorkshire about the details of the explanatory memorandum. In yesterday’s Committee, it was intimated in the explanatory memorandum that an impact assessment had been produced. The Minister generously said he had left that statement in the explanatory memorandum to draw the Committee’s attention to the fact that there was not an impact assessment. That was a valiant attempt to explain the situation, but it is my understanding that we have the same situation with the MAD-MAR regulations. I hope that is resolved as soon as possible. We need those impact assessments to be able to understand the potential impact of this significant legislation.

As the Minister explained, the two statutory instruments we are considering relate to important elements of the post-crisis financial architecture. With the Committee’s permission, I will discuss them in reverse order and begin with the credit rating agencies regulations. Regulations were introduced at EU level following credit rating agencies’ failure properly to assess the riskiness of complicated financial instruments—not least those structured finance products, such as collateralised debt obligations, that were backed up by sub-prime mortgages—in the run-up to the financial crisis. We all know the impact of what occurred then, when credit rating agencies were improperly regulated or, indeed, not regulated.

Arguably, credit rating agencies also facilitated the very sudden downgrade of the credit ratings of a number of countries, which obviously had a significant impact on their ability to borrow and on the cost of their doing so. If the Government continue on their current trajectory and we leave the EU without a deal, it will be essential that we do not dilute the regulatory framework for credit rating agencies in the UK, and that any ratings used for regulatory purposes, such as assessing capital adequacy, are robust.

With that in mind, I have a number of questions about the credit rating agencies regulations. First, I would like to push the Minister a bit more on the FCA’s capacity to deal with the new tasks and powers assigned to it by the draft regulations. I believe he said that the FCA now has 158 staff working on Brexit, but of course the draft regulations give it significant new powers with respect to criminal sanctions and investigations. Many of us may feel that such an extension of its role would have been better dealt with through primary legislation. I will come back to that, but there remains an issue with the FCA’s capacity to exercise those no-deal powers.

Yesterday, the Minister maintained that resourcing had not been raised with him at his last meeting with the head of the FCA. The Minister stated previously that the FCA would be able, in extremis, to garner additional resources by raising its levy on market participants. If there is a no-deal Brexit, markets may be operating in conditions of extreme uncertainty and considerable turbulence, so they may not greet an additional levy request from the FCA at that moment with unadulterated joy. I hope the Government are considering that point and what might happen if the FCA needs additional finance but its request is contested by market participants.

Secondly, under the draft regulations, the FCA will have the power to develop regulations relating to credit rating agencies. I am concerned about the scope of the draft regulations and whether they really fall within the powers provided by the withdrawal Act. In particular, regulation 3 states:

“The FCA may make such rules applying to credit rating agencies…(a) with respect to the carrying on of a credit rating activity, or (b) with respect to the carrying on of an activity which is not a credit rating activity, as appear to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives under Part 1A of the Act”—

the Financial Services and Markets Act 2000. That seems a very broad power: it appears to empower the FCA to add to the corpus of law developed by the EU in its regulations on credit rating agencies. It is unclear where the justification for such a power lies. Is it provided for by the withdrawal Act deficiency powers? If so, will the Minister indicate under exactly which circumstances he envisages the power being used? I think the Committee needs that information before it can approve the draft regulations.

I also have a question about co-operation. As the Minister outlined, the draft regulations will remove any obligation to co-operate in processes intended to ensure appropriate regulation of credit rating agencies. Again, that seems like a policy decision rather than a technical one. For example, although in theory it would be possible to participate in the European ratings platform from outside the EU, that appears not to have been envisaged— the draft regulations do not provide the mechanisms to allow even the possibility of it. It would be helpful to understand why not.

Lastly, I am a bit confused by the manner in which the draft regulations have been presented. For example, the background information in the explanatory memorandum focuses on the use of credit ratings for regulatory purposes, but of course the EU’s regulatory machinery for credit rating agencies also imposes a large number of requirements on the agencies themselves, including many requirements to prevent any kind of conflict of interest. They are not allowed to provide advisory services or rate financial instruments without sufficient high-quality information on which to base their ratings, and they have to disclose their models and methodologies and publish an annual transparency report.

There are also a number of requirements that relate to directors on boards. Those goals have not been referred to; I assume that that is because they were already dealt with in the 2009 credit agencies regulation, but I hope that the Minister can confirm that. On my reading, the purpose of the 2009 regulation was to set out the means of implementing those requirements, rather than to provide a level 1 justification, as it would be called in EU parlance.

I have a related concern that it could be difficult to perform functions that relate to the internal operations of CRAs outwith the regulatory colleges that operate at EU level. It would be helpful if the Minister indicated whether, in his view, those controls will be maintained adequately without such co-operation.

Let me move on to the 2018 draft regulations, which implement what is colloquially known as MAD-MAR. MAD-MAR II was implemented in 2014—

Sitting suspended for a Division in the House.

On resuming

I had just begun to discuss the second SI, which implements what is colloquially known as MAD-MAR—the market abuse directive and the market abuse regulation. As I mentioned, MAD II was implemented in 2014 and contained provisions on insider dealing and the unlawful publication and communication of inside information and market manipulation. As well as empowering national regulatory authorities to investigate and deter those activities, MAR widened the scope of MAD, strengthening the regime for commodity and other derivative markets and banning the manipulation of benchmarks such as LIBOR and reinforcing regulators’ powers.

I have two questions about the instrument. As with the other, it “removes co-operation requirements”—to use the Minister’s terms—but it does not provide a clear legal basis for that co-operation to continue. I am rather concerned about that in the context of the many regulatory developments in that area, particularly where technology is radically changing the channels and methods of communication within financial institutions.

As I am sure the Minister and anybody else who has been covered by those regulations will be aware, a large number of records need to be held by any market participant who needs to disclose on potential insider information for five whole years under MAD-MAR. That includes a list of all people who might be receiving insider information, as well as a record of the conversation that might have relayed that information. If conversations are not recorded, minutes are required. Even the format of those minutes is stipulated in a template set out by ESMA, so the requirements are very detailed. There are various stipulations in the event that minutes are not agreed within five business days and so on and so forth.

An issue with that process is the emergence of modern, Snapchat-type applications, which maintain no record of any conversation. I know that the EU was grappling with that matter and that ESMA is aware and vigilant about it, but I am not aware of any legislative changes to deal with it. I hope that the Minister can assure us that he will work with the FCA to ensure that any undermining of the MAR provisions through the use of new technology would be dealt with firmly, and that he feels satisfied that the FCA would be sufficiently empowered to do so.

Finally, it would be helpful if the Committee had a bit more information about how the Government intend to operate the system of notification of issuers when the issuer is not registered in the UK. Under MAD-MAR, the issuer would need to notify the competent authority of their home member state if they are not from the jurisdiction in which they operate. How will we ensure that issuers, many of whom will be from the EU27, are doing so under this new approach?

It is a pleasure to serve under your chairmanship, Mr Davies. I am grateful for the other two Front-Bench spokespersons’ positions.

As I recognise the significance of the regulations in the event of the worst-case scenario, I will not be opposing them. I have some concerns, however, that moving away from the EU will make regulation more difficult and may add to the red tape that businesses face, with companies having to pay heed to numerous historic regulations in both EU and UK law. That would be detrimental. I have said before on many occasions that the effort we are expending on such regulations could be better used in other areas, but I understand why we need them. I would be grateful to the Treasury and other Departments if there were more advance on these SIs.

I am extremely grateful for the comments from the hon. Members for Oxford East and for Linlithgow and East Falkirk. I shall try to respond to the points raised in detail.

The hon. Member for Oxford East raised five substantive points on the credit rating agencies. The first referred to the impact assessments, whose importance I recognise. I will not go over the full discussion that we had in Committee yesterday, but for the benefit of this Committee, I confirm that I will make the assessments available as soon as possible. I am in discussions with the Regulatory Policy Committee to get the impact assessments completed to its satisfaction. It quite rightly has exacting standards, with which I am keen to fully comply. I can commit to publishing the impact assessments when they are ready; I hope that will be next week, in time for the SI we have scheduled for next Wednesday. That is my expectation at this point.

The hon. Lady also mentioned FCA resources—I will not repeat the numbers that I gave earlier—and said that the powers in certain areas appear to go beyond ESMA’s powers. Why has that been deemed necessary? The FCA has powers deemed necessary for a wide range of firms. It is appropriate that those powers are consistent and that the FCA exercises them in accordance with its statutory objectives. The obligations on CRAs under the UK regime will remain aligned with those in the EU.

A point was also raised about fees. Andrew Bailey, the chief executive of the FCA, has said that he expects to hold FCA fees steady for a year or two, assuming an implementation period. Obviously, if it were necessary to increase those resources in a no-deal situation, that cost would have to be borne. That is why the Government’s position is that we are seeking to secure a deal. This whole programme of SIs—all 53 of them for financial services—is a precautionary measure.

The hon. Lady raised the issue of co-operation arrangements between the UK and the EU post-exit. After exiting the EU, the UK will no longer be obliged to undertake co-operation and information sharing with EU authorities. We will remove that legal obligation but UK authorities will continue to establish ambitious co-operation arrangements with our EU counterparts. The hon. Lady’s deep expertise in this area is testimony that we in the UK have led much of the sharpening of the regulations within the EU.

The FCA will look to put in place alternative arrangements for co-operation and information sharing with ESMA and EU regulators. The FCA and ESMA have publicly stated their ambition to agree a memorandum of understanding in relation to CRAs. That is what we anticipate and it is confirmed in ESMA’s statement of 9 November 2018.

The hon. Lady also raised an issue around the relationship to the 2009 regulations of the FCA. It would be appropriate for me to reflect and write to her with more detail. I emphasise that the point of these SIs is to hold regulations steady before and after exit in the circumstances of no deal. I make the general point that if we have no deal, the obligation on the Government to come forward with a whole range of additional regulation in financial services would be immediate and significant. Clearly, what we are doing here is transferring the appropriate powers for continuity at the point of exit. We are not saying that that will be the final state.

The hon. Lady raised two significant points with respect to the market abuse statutory instrument. On the point about the co-operation requirements being removed, I do not need to say more than I have already. The aspiration to have an ongoing, positive dynamic is there but, of course, in an unplanned no-deal scenario, we cannot anticipate the degree of co-operation. We would seek to be proactive in driving that and there is obviously a desire from market actors for us to achieve that. Changes made by the SI, and existing gateways for the FCA sharing confidential information, will enable the FCA to continue to co-operate and share information with ESMA and EU regulators, where we choose to do so.

The hon. Lady wanted to know whether UK authorities will build co-operation arrangements for their UK counterparts. I think I have covered that. Memorandums of understanding are being negotiated between regulators and we hope to reach an understanding on those before the end of March. We cannot do that unilaterally, but progress is being made.

What is the impact on EU issuers? There will be a change for EU issuers with financial instruments admitted to trade or trading on UK trading venues. UK MAR requires EU issuers with financial instruments admitted to trading or traded on UK trading venues to provide such notifications and reports to the FCA. That will mean that EU issuers with financial instruments admitted to trading or traded on UK trading venues will need to send reports to the FCA and their home regulator.

The hon. Lady has deep knowledge of this subject and has set out the considerable burden that that would place on the FCA. As I say, that is unavoidable at this stage, but obviously we would need to do some more work following exit in this no-deal scenario. I am grateful for the comments of the hon. Member for Linlithgow and East Falkirk, and I reiterate that the Government’s objective is to secure a deal, but, in the absence of that, this is none the less a comprehensive piece of work. We are working hard to secure the impact assessments and a fully functioning regulatory regime in the instance of no deal, which I and the Government believe to be wholly undesirable.

I hope that that adequately responds to the questions on both those statutory instruments. I think I have demonstrated that there is a need for these provisions to be made and passed by this Committee. I acknowledge the enduring concern about impact assessments; I accept that we are not in the optimal place, and I can only say that I am doing all I can to meet the appropriately exacting requirements of the RPC. I can do no more at this stage. I ask for the Committee’s support for these regulations.

Question put and agreed to.


That the Committee has considered the draft Market Abuse (Amendment) (EU Exit) Regulations 2018.

Draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019

Motion made, and Question put,

That the Committee has considered the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019.—(John Glen.)

Committee rose.

Draft Air Services (Competition) (Amendment) (EU Exit) Regulations 2019

The Committee consisted of the following Members:

Chair: Sir Henry Bellingham

Abrahams, Debbie (Oldham East and Saddleworth) (Lab)

† Afolami, Bim (Hitchin and Harpenden) (Con)

† Beresford, Sir Paul (Mole Valley) (Con)

† Cunningham, Mr Jim (Coventry South) (Lab)

Eagle, Ms Angela (Wallasey) (Lab)

† Foxcroft, Vicky (Lewisham, Deptford) (Lab)

† Fysh, Mr Marcus (Yeovil) (Con)

† George, Ruth (High Peak) (Lab)

† Hendry, Drew (Inverness, Nairn, Badenoch and Strathspey) (SNP)

† Johnson, Dr Caroline (Sleaford and North Hykeham) (Con)

† Jones, Graham P. (Hyndburn) (Lab)

† Mercer, Johnny (Plymouth, Moor View) (Con)

† Norman, Jesse (Minister of State, Department for Transport)

Percy, Andrew (Brigg and Goole) (Con)

† Pursglove, Tom (Corby) (Con)

† Stewart, Iain (Milton Keynes South) (Con)

† Turner, Karl (Kingston upon Hull East) (Lab)

Matthew Congreve, Mariam Keating, Committee Clerks

† attended the Committee

Fourteenth Delegated Legislation Committee

Wednesday 23 January 2019

[Sir Henry Bellingham in the Chair]

Draft Air Services (Competition) (Amendment) (EU Exit) Regulations 2019

I beg to move,

That the Committee has considered the draft Air Services (Competition) (Amendment) (EU Exit) Regulations 2019.

It is a pleasure to serve under your chairmanship, Sir Henry. The draft instrument will be made under the powers conferred by the European Union (Withdrawal) Act 2018 and will apply if the UK leaves the European Union in March without a deal. Although we strongly believe that leaving with a deal is the best outcome for the UK and the EU, it is the Government’s duty to make reasonable preparations for all scenarios. That includes ensuring that there is a functioning statute book, irrespective of the outcome of negotiations. The regulations are of a very minor and technical nature.

The effect of section 3 of the 2018 Act is that any direct EU legislation in force and applicable on exit day will automatically become part of the UK’s statute book. That includes Regulation (EC) 868/2004, which is intended to provide protection for Community air carriers against injury caused by subsidisation and unfair pricing practices relating to air services between EU member states and third countries. However, as Members may be aware, that EU regulation has never been used and is currently in the process of being replaced. The instrument we are considering today therefore simply makes the corrections necessary so that the version of Regulation (EC) 868/2004 brought into UK law by the 2018 Act is in principle legally operable after exit day.

The EU regulation sets out the process and requirements for imposing redressive measures—in practice, fines or tariffs—where it has been demonstrated that subsidies or unfair pricing practices by third-country bodies and air carriers on routes between EU member states and third countries have caused injury to the EU aviation industry.

Turning first to subsidies, under the EU regulation, subsidies are deemed to exist where a Government or regional or other public body of a third country has transferred funds, forgone revenue or provided services or goods beyond basic infrastructure. The same applies if that Government or regional or public body has made payments to a funding mechanism or has instructed a private body to do so.

Turning next to unfair pricing practices, the EU regulation sets out that such practices are considered to exist in relation to specific routes where non-Community carriers benefit from a non-commercial advantage and charge air fares that are sufficiently below those offered by competing Community air carriers as to cause injury. The provisions in the regulation for imposing redressive measures apply to unfair pricing practices only where these go beyond normal competitive pricing practices. The regulation sets out factors that should be considered when comparing airfares, which include: the actual price at which tickets are offered for sale; the number of tickets available at the allegedly unfair price; any restrictions and conditions attached to these tickets; the level of service provided by all carriers operating the air service in question; and the actual costs of providing the services.

Where an investigation has determined that the subsidies or unfair pricing practices in question have caused injury to the EU aviation industry, the EU regulation sets out that redressive measures can be imposed. These measures can be either provisional, for a maximum period of six months, or definitive. The EU regulation envisages that any redressive measures would be imposed by means of a regulation and enforced by member states.

The level of the measures should be set so that they offset the benefit from which the non-Community carrier has benefited and should be less than the total amount of any subsidies. Any measures imposed to offset unfair pricing practices should not exceed the difference between the fares charged by the non-Community carrier and the fares offered by the Community carrier. Definitive measures should remain in force only for the length of time necessary to offset the subsidies or unfair pricing practices that are causing injury.

The draft instrument makes only minor corrections to the retained EU Regulation (EC) 868/2004 to ensure that the regulation continues to be legally operable after exit day. The substantive requirements for assessing whether there has been subsidisation, unfair pricing practices or injury to industry remain exactly the same. The changes made by the instrument are intended primarily to ensure that the scope of the retained EU regulation is correct once the UK has left the EU. Amendments made by the instrument include, for example, the substitution of references to “Community” with references to the “United Kingdom”.

The draft instrument has a number of effects. The retained regulation applies where there has been injury to the UK aviation industry instead of the Community industry. Instead of applying where there are unfair pricing practices by non-community air carriers on certain routes to and from the EU, the retained regulation will apply where non-United Kingdom air carriers have engaged in unfair pricing practices on certain routes to or from the UK. Similar changes apply in relation to the subsidisation provisions in the retained EU regulation. The instrument also transfers functions currently carried out by EU institutions to appropriate bodies in the UK. The European Commission, for example, is currently tasked with carrying out investigations covering subsidisation and/or unfair pricing practices. The draft instrument transfers that function to the Civil Aviation Authority.

Finally, the draft instrument transfers the function of imposing provisional or definitive redressive measures. As the EU regulation sets out that that should be done using a regulation, the draft instrument also sets out that any provisional or definitive redressive measures would be imposed by the Secretary of State through regulations. I want to make it clear that we do not expect to use those powers, but if we do, in order to allow parliamentary scrutiny and debate, any such regulations must follow the affirmative resolution process and be approved by both Houses of Parliament.

We continue to work hard to achieve a positive future relationship with the EU and to ensure that the UK’s aviation framework in law remains operable in a no-deal scenario. I commend the regulations to the Committee.

It is always a pleasure to serve under your chairmanship, Sir Henry. As the Minister said, the draft instrument will retain Regulation (EC) 868/2004 in UK domestic law. It permits the Civil Aviation Authority to initiate proceedings where there is evidence of anti-competitive practices, by countries other than the UK, that adversely impact on the United Kingdom. Although, as the Minister said, that EU regulation has never been used, we recognise its importance and support the draft statutory instrument.

I am very grateful to the Opposition for their support for the instrument. I am very glad that we can bring this small but important change into law with their support.

Question put and agreed to.

Committee rose.