Wednesday 23 January 2019
Good afternoon, my Lords, and welcome to the Grand Committee. If there is a Division in the House, the Committee will adjourn for 10 minutes.
Electronic Communications and Wireless Telegraphy (Amendment etc.) (EU Exit) Regulations 2019
Considered in Grand Committee
My Lords, digital infrastructure is central to the future of the UK economy. People now rely on being connected through calls and online services more than ever, whether at home or on the move, while communications networks underpin critical areas of the economy. This dependence will only grow with the deployment of new technologies such as 5G and full fibre, which will support innovative new services across manufacturing, logistics, agriculture and healthcare.
The current regulatory framework has created the right conditions for the improvement of connectivity in the UK. It has brought about regulatory certainty and long-term stability for the sector, creating a balance between robust competition, protection for consumers and innovation. However, that framework derives from an EU regulatory framework consisting principally of a number of directives which have been implemented in domestic law.
The UK’s withdrawal from the EU gives rise to deficiencies in that legislation if we leave the EU without an agreement in place. These regulations address those deficiencies and so provide clarity and certainty for communications providers and for the regulator, Ofcom. That is why this statutory instrument is before the Committee today.
I should make it clear at the outset that this SI is concerned with the core of the regulatory framework, in particular the Communications Act 2003. Other matters of relevance to the sector, such as legislation on cross-border data flows, mobile roaming and spectrum decisions, are addressed by separate instruments.
It is also important to observe that the EU framework has already been implemented in domestic law. We are not concerned here with incorporating swathes of EU legislation into UK law, but with making corrections to ensure that the law continues to function appropriately. Furthermore, the scale of those corrections is limited. While the EU framework aims to establish a harmonised telecoms market, that market is policed by national regulatory authorities in each member state, with the European Commission having only a supervisory role.
This SI is intended to ensure that Ofcom can continue to carry out its existing functions effectively. It does not transfer a plethora of new functions to Ofcom or the Secretary of State.
The Government published a technical notice on 13 September 2018 which set out that,
“irrespective of the outcome of the negotiations between the UK and the EU, we do not expect there to be significant impacts on how businesses operate under the telecoms regulatory framework and how consumers of telecoms services are protected”.
This SI is an important part of ensuring that continuity and certainty.
The domestic telecoms framework establishes key regulatory principles such as: the promotion of competition between operators; the protection of consumers of telecoms services; the efficient use of radio spectrum, and the independence of the regulator and its functions. As I have said, these rules derive from a set of EU directives and regulations which have already been implemented in UK law, predominantly in the Communications Act 2003 and in the Wireless Telegraphy Act 2006.
I have said that this instrument makes mainly minor and technical amendments to ensure the continuation of the regulatory framework. An example of such an amendment is the removal of a duty on Ofcom to ensure that its activities contribute to the development of the European internal market, set out in the Communications Act 2003.
May I continue, if the noble Lord does not mind? My speech is a tightly woven whole, and it might answer some of the questions he is coming to. Later, I will of course answer as many questions as I can.
I will concentrate in the remainder of this speech on those corrections which I expect to be of the most interest to noble Lords. I turn first to the existing requirements on Ofcom to notify, consult or provide information to the European Commission and to other EU bodies.
Ofcom is required to consult with the Commission, the Body of European Regulators for Electronic Communications—BEREC—and the national regulatory authorities of other member states before imposing certain types of regulatory measures. In the case of certain proposed remedies, if the Commission expresses reservations, there is a “standstill” period during which Ofcom must co-operate with the Commission and BEREC. In certain other cases, the Commission can veto the proposed measures.
The Commission’s role is to ensure compliance with the EU regulatory framework and a harmonisation of the approach taken by EU regulators, in order to develop the single market. After EU exit, a power for the Commission and BEREC to scrutinise Ofcom’s decisions in this way will no longer be appropriate, and so this instrument removes these requirements.
Ofcom will continue to need to comply with procedural statutory requirements, including consultation, before it takes regulatory decisions. Once taken, those decisions remain subject to the same scrutiny as today—in particular, the right for affected parties to appeal to the Competition Appeal Tribunal.
EU law also requires Ofcom to provide information to EU bodies. Again, the information requested by EU bodies is generally provided to enable the European Commission to monitor compliance with the European framework or to ensure the harmonisation of measures across the EU. This will not be required when the UK is no longer part of the EU. However, sharing information with the Commission, EU bodies or other regulators in the EU may remain beneficial to the UK after exit—it can help foster co-operation on regulatory matters. That is why this instrument makes amendments which clarify that Ofcom may notify or share information where it considers it appropriate—for example, regarding network security breaches.
Other amendments have been made to ensure the retention of protections for consumers and to enable the regulatory framework to develop in a way that will bring about consistency for industry. In relation to consumer protection, Ofcom has put in place various rules to protect consumers of telecoms services, some of which implement specific requirements of EU law. This instrument makes provision to ensure that Ofcom is able to maintain consumer protection measures which are currently required under the relevant EU directive.
Turning now to corrections that will bring about consistency for industry, Ofcom has existing powers to regulate communications providers with “significant market power”, or SMP. SMP regulation is based on competition law principles, as set out in EU competition law, and enables Ofcom to impose regulatory remedies on providers with SMP to address competition issues in a particular market. This instrument amends the Communications Act 2003 to ensure that, after exit, references to dominance in a market are to be construed consistently with the concept of market dominance in the Competition Act 1998 rather than EU competition law.
This approach ensures that there is a single concept of market dominance across UK competition law post exit. It ensures consistency with the amendments to the Competition Act 1998 which this House approved on 4 December. In other respects, Ofcom’s powers to identify dominant players in the market and to make remedies will remain the same as pre-exit.
Telecoms legislation also includes certain directly applicable EU regulations, which require correction. This instrument revokes the regulations that provide for financial assistance from the EU’s Connecting Europe Facility to support telecoms, including funding to install wi-fi equipment in public spaces. This recognises that this legislation concerns EU funding mechanisms that cannot be retained simply by converting them into domestic law.
In the event of a no-deal exit, UK organisations will no longer be eligible for such funding. However, even if the EU stops making payments to UK organisations delivering CEF-funded projects after exit, the government guarantee will support UK organisations to meet their obligations—including continued project delivery—until completion. The HMG guarantee will also cover successful applications submitted to the EU before exit day but where the award was made after exit.
This instrument also makes corrections to the eCall legislation so that it continues to operate effectively after exit. eCall is an initiative established by the European Commission as part of the intelligent transport system project. It enables a mobile transmission to be sent to emergency services by a vehicle when it is involved in an accident. The eCall legislation refers in parts to technical standards. This instrument confers a legislative power on the Secretary of State to make provision to replace the standards listed. This will enable the standards to be updated, should this be necessary, to ensure continued public safety and effective operation of the eCall technology.
Finally, this statutory instrument revokes the 2009 EU regulation establishing BEREC, the body of national regulators from EU member states. Ofcom is currently a member. The main purpose of BEREC is to ensure the consistent implementation of the EU regulatory framework. BEREC’s membership is therefore limited to the regulators of EU member states. Ofcom will not be a member after exit, but as the UK will no longer be part of the EU regulatory framework, this will not have significant effects on regulation in the UK.
However, the Government and Ofcom agree that it may well be beneficial to have a continued exchange of regulatory best practice with other regulators and an exchange of information about telecoms matters more generally. The new BEREC regulation provides that BEREC participation should be open to third countries where appropriate agreements are in place. Ofcom intends to seek observer status after the UK has exited the EU, in the way that other regulators of states in the European Economic Area and EU candidate countries currently participate.
We are committed to ensuring that the regulation of telecoms markets continues to function appropriately after exit, providing regulatory certainty and the right conditions for continued investment and development. I commend these regulations to the House.
Before the Minister sits down, he said that he would come to my points later but he did not—although I accept that his speech was carefully woven and made a coherent case for the regulations. However, for the purposes of the Grand Committee, by far the most important issues in the Explanatory Memorandum are raised in paragraphs 10.2 and 10.3. These show that there were quite significant differences between the Government and some consultees on the shaping of the regulations and, in particular, whether there should be continuing obligations for consultation and reference in respect of decisions made by Ofcom as regulator, replicating the current powers and role of the European Commission. These look to be significant issues and the Minister did not mention them at all in his remarks. It seems to me to be important for the Grand Committee to understand what the consultation was, why the Government decided not to go with the view that there should be a regime that replicates that of the European Commission and why the Minister believes that we should go with the Government’s view rather than that of the consultees, who, I should say, are not named in paragraphs 10.2 and 10.3 so it is very hard for us to know who they are. Is this a matter on which we should seek further information and debate before we agree this regulation?
I am very happy to answer that; it is a reasonable question. The Government undertook extensive consultation with the telecoms industry, the regulator and other interested groups such as consumer associations. I shall start with the telecoms industry and come to why we should accept what was said.
The Broadband Stakeholder Group assisted us in organising our consultation, which has continued from summer 2017 until now, so it was over a long period, and it counts all the major providers of telecoms and broadband services in its membership: Arqiva, BT, Cisco, CityFibre, EE, Ericsson, Gigaclear, Openreach, Sky, TalkTalk, 3, Virgin Media, Vodafone and Wireless Infrastructure Group, and also from the sector were included Tech UK, INCA, which is the body representing UK alternative smaller telecoms infrastructure providers, consultancies, law firms, the BBC, Avanti, a satellite company, and the Federation of Communication Services. They were all consulted, and, as the noble Lord said, the main area of interest concerned EU consultation. This was discussed from summer 2017 until October 2018.
The main difference is that the function of EU supervision is really to promote the harmonisation of the EU single market. Obviously, that is not appropriate if indeed we leave the EU. The appeals process to the decision that Ofcom will make continues, so the appeals tribunal will still exist and operate in exactly the same way, and so will the administrative court, which enables the telecoms industry to go to judicial review.
In fact, the European Commission has never once vetoed an Ofcom decision, so we do not think it is of huge significance but, as I said, the main reason for not replicating that is that it affects European harmonisation rather than the national regulatory system.
I am very grateful to the Minister, but will he confirm that many members of the stakeholder group disagreed with the line that the Government are taking, which is not to have a continued consultation role with the European Commission? That is an important issue which is not properly brought out in these papers. The reason they did, which I take to be implicit in paragraph 10.2, is that they do not think that Ofcom should have unfettered power to act without consulting appropriate parallel competition regulatory authorities. Specifically mentioned in paragraph 10.2 is the Competition and Markets Authority, but I take it that the European Commission is seen to be a parallel body from that point of view. Will he expand further?
Yes, the body they would appeal to is part of the Competition and Markets Authority; it obviously has a completely different dynamic to the European Commission, which is there to harmonise the single market. It is true that they expressed those views, and it is probably fair to say that the sector would like as many avenues for appeal as possible—it is regarded as a reasonably litigious sector—but it was felt that because that was for harmonisation, it was not appropriate.
I can say that the industry, including that part of the stakeholder group referred to, is keen that the SI should be taken forward, because it wants clarity and a consistent regulatory framework. To that extent, it is happening.
The noble Baroness cannot make an observation unless I give way to her and I am not giving way to her, if she will forgive me.
Will the Minister agree to publish the minutes of the stakeholder group that he has referred to? It seems to me important in our proceedings that we understand what the consultation responses in fact were, as they were clearly at variance with what the Government have done. Will the Government do that before this matter comes before the whole House?
My Lords, following that interesting exchange, I pick up where the noble Lord, Lord Adonis, began, by pointing to what he described as the Minster’s “carefully woven” speech. I confess that I do not quite agree with that definition, as the speech appeared to be a cut-and-paste version of the speech that was given by the Minister in the other place, Margot James, on 7 January. Having gone through that speech, I noticed that odd words were missed out in the noble Lord’s version. In the other place, the Minister thought that there may well be a case for Ofcom remaining involved in BEREC—the word “well” was missing in the noble Lord’s version.
More important, we should recognise that over the last 30 years the industry that we are dealing with, including within it the telecoms industry, has developed from a monopoly situation to a highly competitive market, with annual revenues now in excess of £40 billion. It therefore forms an important part of our economy. Because of the way in which the industry is intrinsically linked to the European Union, there is no doubt in my mind that Brexit will have a significant impact on it, not least because a number of UK providers operate in other member states but have headquarters in the UK. I also believe that Brexit will have a significant impact on the regulatory regime under which those providers operate.
The Minister said, as indeed did Margot James in the other place, that the draft regulations will provide “clarity and certainty” both for the operators and for the regulator. I am somewhat inclined to disagree with that view. Indeed, the technical notice to which the Minister referred, which was issued way back on 13 September last year, explained that, irrespective of the outcome of the negotiations between the UK and the EU, the regulations would not have a significant impact on how businesses operate under the telecoms regulatory framework or on how consumers of telecoms services are protected within the UK. That claim is highly questionable.
Before I turn to those impacts, I want to seek clarification on consultation, the issue that has occupied a few minutes between the noble Lord, Lord Adonis, and the Minister. In the other place, the Minister for Digital and the Creative Industries, Margot James, said:
“All the changes that the draft regulations will make have been considered on a case-by-case basis and discussed with the regulator and stakeholders where possible”.—[Official Report, Commons, First Delegated Legislation Committee, 7/1/19; cols. 3-4.]
One has to assume that she believes that, as the noble Lord said only a few minutes ago, extensive consultation has taken place. The noble Lord told us about consultation with the Broadband Stakeholder Group and listed its membership. Interestingly, he did not mention the other part of the equation, which relates to the telecoms industry. There is a major body—the UK Competitive Telecommunications Association, or UKCTA—which represents very many of the key stakeholders in that field: Virgin Media, Vodafone, AT&T, the Post Office, Sky, TalkTalk; I could go on. If extensive consultation has taken place, one would assume that that key body, UKCTA, has been involved in the discussions. Yet I have received a note from UKCTA—I would be grateful if the Minister could explain whether this is correct—which says:
“UKCTA has not had any advance notice of, or discussions about, the SI despite regular meetings with DCMS, the most recent being on Monday 14th January”.
Can the Minister explain whether what I am told is incorrect, and if it is correct, can he explain why, despite the Government having claimed that there has been extensive consultation, this important body in the industry and the sector has not been consulted? On the impacts of these draft regulations, which the Government say they do not expect to be significantly—
The noble Lord has just raised an extremely important point about consultation. As he knows, in the discussions which the Grand Committee has been having on these no-deal regulations, the issue of inadequate consultation has been a running theme. As we probe beneath the regulations, significant issues of substance come to the fore when the Government tell us that the changes that are being made are technical. In fact, the actual change brought about by this regulation is substantial, because it entirely removes the European Commission from the whole process of deciding on competition issues.
The noble Lord is much closer to this sector than I am, and he has clearly had contact with the UK Competitive Telecommunications Association—I have to confess that I was not even aware of the existence of that body until he mentioned it, which is a huge lacuna in my understanding of public affairs. The noble Lord told us that it had not been consulted but that he has been speaking to it. Can he tell the Grand Committee what its view is of these regulations? Clearly, that is a material point, but it will also be a material point when the House itself comes to consider these regulations, also in the light of the further consultation responses which the Minister has kindly agreed to publish after the meeting of the Grand Committee.
I am grateful to the noble Lord for his intervention. I assure him that I am more than happy to help to resolve the lacuna he has, and I will go even further and share with him a few thoughts that that association has about the draft regulations before us. I will take one particular one, which is its reaction, and the reactions of many other people, to the Government’s claim that the changes envisaged in these draft regulations will not significantly change the protections that are currently enjoyed by consumers of UK telecoms services. That claim is disputed, and I am keen to hear the Minister’s reaction to that, particularly in relation to the fundamental question of who will now supervise the regulator.
The UK regulator is Ofcom, which is probably the most highly regarded regulator throughout the whole of the European Union. It is a regulator in which most of us have great confidence, but from time to time it can make questionable decisions. Within the EU arrangements there are processes which provide for oversight of decisions of all national regulatory authorities, including Ofcom. These processes are covered under Regulation 7, particularly 7(1). As the Minister knows, they ensure oversight of a regulator’s decision by the Commission, and peer review by other EU regulators—in this case by members of BEREC, which the Minister has already referred to: the Body of European Regulators for Electronic Communications.
Post Brexit, the EU checks and balances against bad regulatory decisions will clearly fall away, yet safeguards to ensure regulatory certainty, and safeguards against bad regulatory decisions, are critical to ensuring that businesses in this sector can have the confidence to make major investments. Can the Minister provide a clear explanation of how, under these draft regulations, Ofcom will be held to account post Brexit? Can he confirm that, for instance, the Digital Economy Act, which went through your Lordships’ House some while ago, has weakened the telecoms appeal regime and that all that appears to be left for those who believe that an Ofcom decision is wrong is the judicial review process? As the Minister said, in certain cases there might also be the opportunity to go to the Competition Appeal Tribunal, but in the majority of cases it would appear that we are left with only judicial review, which, as noble Lords know, has undergone some quite significant and worrying changes in recent times. Therefore, does the Minister agree that this is a significant diminution of the protections against bad decisions by the regulator, however infrequently they are likely to occur?
I have already mentioned BEREC, the Body for European Regulators for Electronic Communications, of which Ofcom is currently a highly regarded member. Clearly, at the point when these draft regulations come into force, Ofcom’s position in relation to BEREC will change significantly, and I argue that it will change in a way that will be of considerable detriment to us all.
It would be very helpful to your Lordships if the Minister were to set out his understanding of the likely situation and the relationship that it will be possible for Ofcom to have with BEREC in the future. The benefits of full membership of BEREC are numerous, not least in our having a powerful voice in decisions relating to the EU’s soft-law instruments and, much more importantly, legally binding legislation. In the future, BEREC will be hugely influential in changes to, for instance, the European Electronic Communications Code, the new guidelines on international roaming, net neutrality and very much more. As Ofcom said in a letter to me:
“Even if the UK is not bound to follow EU law, the approach taken at EU level on these issues will continue to be relevant to the UK and to many of the companies we regulate, many of whom also have operations in other EU countries or are subsidiaries of international telecoms groups that have substantial operations in other countries”.
It gives the examples of Telefonica, Three, Virgin Media and Vodafone. Ofcom goes on to say:
“There are also more general benefits from participation in EU networks since they provide a forum in which we can cultivate and sustain bilateral relationships with our EU peers, at both senior and working levels, to exchange experiences and share best practices”.
My Lords, the noble Lord is making a very powerful argument about the weakness of consultation and the problems that will be caused by these regulations. Is he suggesting that Ofcom itself said to him that it was not content with these regulations in their current form and that it is worried about the regime that will apply after a no-deal Brexit? That would be a very serious state of affairs if that were the case.
That would be taking the interpretation of the conversations and correspondence I have had with Ofcom a step too far. I do not think that Ofcom feels that it is its place to comment on the rightness or otherwise of the regulations. However, it is pointing out very clearly that when these regulations come into force, its ability to do the work to the level that it wishes will undoubtedly be diminished because of its inability to influence future EU legislation which will have a significant bearing on companies that operate in this country. Equally—I shall come on to this in a second—its ability to engage in discussion and debate with fellow regulators in this field across the 27 EU countries will depend on what happens now.
I hope that the Minister will agree to extend his remit just a little in this discussion. It would be enormously helpful to hear from him what he understands the situation will be not only in relation to a no-deal Brexit but, if the Prime Minister is successful in achieving her deal, what it will be during the implementation period and then after it. So there are three possible scenarios in which it would be helpful to learn from the Minister how he thinks the arrangements will operate.
It might help him if I shared with him my own understanding of what the situation is likely to be and possibly made his response much briefer, because he could then say that I have got it right. In the debate on 7 January in the other place, Margot James acknowledged that,
“the Government recognise that Ofcom would benefit from the continued exchange of best practice with other regulators, and from the exchange of information about telecoms matters more generally”.
She went on to say:
“Ofcom intends to seek observer status after the UK has exited the EU”.—[Official Report, Commons, Delegated Legislation Committee, 7/1/19; col. 6.]
Can the Minister confirm that this is a huge oversimplification of the process that now applies in the event of a no-deal Brexit? In the past, it would have been a relatively simple matter for Ofcom to seek observer status. Under the rules that applied until December 2018, just a month ago, BEREC could simply have invited Ofcom to have observer status and that would have been fine, but the BEREC regulations have changed and are now very different. I am sure that the Minister will confirm that, under those regulations, the only possibility of Ofcom having even observer status on BEREC is if the European Union has agreed to it. That would require the UK Government specifically to negotiate such an arrangement with the EU. I would be grateful if the Minister could confirm that that is the case, because it is very different from saying that Ofcom will seek observer status. The Government will have to engage positively in negotiations with the European Union to bring that about.
Can the Minister also confirm his understanding of the position of Switzerland? It is a very good example, because its regulator was an observer member of BEREC. With the change in rules in December 2018, it no longer has observer status and the Swiss Government are currently in extensive negotiations with the European Union to see whether agreement can be reached for that to happen—there is no certainty that it will, any more than there will be certainty, for reasons that I shall come on to in a few minutes, about an agreement on this matter being reached between the UK Government and the European Union.
I accept that the Minister is slightly stretching the issue, but I hope that he will confirm that under transitional arrangements of the withdrawal agreement—if the Prime Minister is successful in getting her deal through—the key provision is Article 128 along, in part, with Article 8, which states clearly the UK has no right to participate in decision-making or governance of any EU bodies and no right to attend meetings. During the transition period, there will no opportunity for Ofcom to be involved—with, however, one caveat.
The caveat comes in two parts. It says that there are exceptions: Ofcom may be allowed to pop along for the odd meeting and to participate in discussions but not have a vote, but only in the very limited case where BEREC is discussing a specific case that relates to the United Kingdom or if, by having Ofcom present, it would be beneficial to the EU as a whole. That is a decision for it to make. I would be grateful if the Minister could clarify the point. My understanding is that if the Prime Minister is successful in getting a deal, during the transition phase, the position of Ofcom will be even worse than it would be if it had observer status. That, I believe, would be significantly detrimental to the UK. Post Brexit, if the Prime Minister is successful with her deal, clearly the situation will be somewhat uncertain because it will depend on the interpretation of and success of the negotiations. However, the draft political declaration covers the issue in paragraphs 33 to 35 and 40 to 42. It would be helpful to hear the Minister’s views on how he thinks that this will work out.
My final point is simply this. All of this is dependent on an agreement. Whether we are in the situation of a no-deal Brexit as regards the regulations before us or even if the Prime Minister achieves her deal and we have a transition period with an exit being subject to whatever arrangements have been made, it will all depend on whether the UK has achieved a data adequacy agreement with the European Union. Nothing can happen unless we have one because it is absolutely crucial. I could read out to noble Lords many learned articles about whether it would be possible for the UK to get a data adequacy agreement easily or even to get one at all. For instance, criticisms are already raging about the impact of the investigatory powers legislation, the GDPR regulations, the e-commerce and e-privacy regulations and so on. Whether those will enable us to get a data adequacy regulation or prevent us doing so is very unclear indeed.
I have raised some important points and I look forward to the Minister’s response. Above all, however, he must give us a clear understanding of the Government’s view about the likelihood of us getting a data adequacy agreement. The Minister in the other place made it absolutely clear that if the Prime Minister gets her deal and we have a transition period of almost two years, it will take the whole of those two years to get agreement on data adequacy. She went on to say that if we have a no-deal Brexit, the chances are that getting such an agreement will take even longer. Does that not mean that all of the claims that there will be no significant impact as regards these regulations on people in the UK, both service providers and the regulator, really do not stack up?
The noble Lord has referred to the data adequacy agreement, which is clearly an important issue. What is his understanding of what the impact would be on the United Kingdom if we did not secure such an agreement in the event of a no-deal Brexit? Presumably it will be quite a tall order to get such an agreement in the next eight weeks.
Let me give the noble Lord one example. I said earlier that for Ofcom to become a member of BEREC, it is no longer a case of it going to BEREC and saying, “Please can we have observer status?” It will require a negotiated agreement between the UK and the EU. In my view and those I have spoken to about this, the agreement will not be reached unless we have an adequacy agreement. If the adequacy agreement is going to take at least two years and may not be achieved anyway, then during the whole of that period there is no way of Ofcom performing any role whatever within BEREC, for example.
The noble Lord asked a lot of questions. Underlying it all is the fact that this SI is there in the event of no deal. Of course, it is not surprising that references to and some of the effects of being in the EU are going to change. The essential point of the SI is that telecoms regulation is performed by national regulatory authorities with EU supervision. The issue is whether the supervision element is significant. The whole point of the SI is to make the regulatory system the same after we leave. The noble Lord made a lot of mileage out of whether we would remain a member of BEREC—
Yes, absolutely. I will come on to that because nobody regulates the regulator today.
The noble Lord asked me to go beyond no deal to what happens to our membership of BEREC if we have a negotiated deal with an implementation period. During that period, the UK will no longer be a member state of the EU but, as is set out in the terms of the withdrawal agreement, common rules will remain in place. That is why we expect Ofcom to continue to participate in BEREC in line with the terms of the agreement, in the way that the noble Lord, Lord Foster, mentioned.
I point out to noble Lords that there is every reason to suppose that the EU would want that, because Ofcom is one of the leading telecoms regulators in Europe—if not the leading one. The interchange between Ofcom and other European regulators has been extremely beneficial, not only for them but for this country. There is every reason to think that they would wish to continue that—
I am sorry. The noble Lord is entitled to assert whatever he likes, but I specifically read out a section from the withdrawal agreement, which says, and I repeat, that the UK has no right to participate in decision-making or governance in any EU body of any type and no right to attend meetings. I have given the two caveats: the first relates to any discussion that,
“concerns individual acts addressed to the UK”,
or persons residing or established in the UK; and the second is that the presence of the United Kingdom is,
“necessary and in the interests of the Union”.
It is all very well for the Minister to say that he hopes that it will be perfectly all right and that the EU will have us for other things, but a specific clause in the withdrawal agreement says the opposite.
I was going to read out that exact clause to make my point. If it is,
“in the interests of the Union”,
or where the discussion concerns acts addressed to the UK and its citizens, it provides that the UK will continue to participate in EU agencies and bodies. I think that those two things apply and, as I was saying, the reason why I think that is the mutual benefit Ofcom has. It is a world-leading, well-respected regulator. However, I accept that it does not have the right to do these things. That is not surprising, because we are leaving the EU. Why should it have the right? I think that we have come to stalemate on that point.
The noble Lord mentioned the fact that BEREC rules have changed and that it is not just a question of having been invited to be an observer. He is absolutely right: either there has to be an agreement with the EU as part of a future economic partnership or a bilateral agreement can facilitate it. Under that facility, which the EU has deliberately put in the new BEREC regulations, Ofcom can—under a bilateral agreement—be a member of the board of regulators, the working groups and the management board.
I will move on to data adequacy later. The important issue that both noble Lords mentioned is, crudely put, whether the regulator will still be regulated. The European Commission does not regulate Ofcom. It has a supervisory power, which is principally designed to ensure the consistency of regulatory practices across the EU, in order to contribute to the development of the single market. It is quite understandable that the EU should want to harmonise national regulators to facilitate the single market. Of course, if we leave the EU, that will no longer apply. The role of the European Commission in telecoms regulation is unique and should not be compared to EU scrutiny powers over other UK economic regulators. There is sufficient accountability in the domestic system, because Ofcom decisions can be challenged in the courts—of course, the primary area in which they are challenged is in the statutory appeal before the Competition Appeal Tribunal.
In fact, the withdrawal Act is not a vehicle for policy changes, as I am sure the noble Lord, Lord Adonis, will remind us. We think that, under the terms of the Act, recreating a domestic equivalent for the oversight of Ofcom’s decisions will be considered going beyond what is appropriate to correct the deficiency.
I am grateful to the Minister, but does he not accept that this could be argued both ways? It is clear from reading the materials available to me that one could say that replicating the status quo means having some consultation and appeal role for a competition body above Ofcom, which is the role currently played by the European Commission, or one could take the Government’s view that there should not be such a role. It appears to me that the reason why this has happened is twofold: first, because the whole government mindset is to have as little Europe as possible—as a matter of prejudice the Government do not want any continued consultation role for the European Commission, even if that might be in the best interests of Ofcom and the robustness of our regime, given how intertwined our companies and industries are—and, secondly, because Ofcom would obviously prefer not to have any oversight. Any regulator in Ofcom’s position would much rather not have somebody else marking its homework. It appears that the Government have been unduly swayed by Ofcom in drawing up these regulations, particularly in the light of the observations from the noble Lord, Lord Foster, that key industry groups have not even been consulted.
I do not think that you can argue it both ways. Of course we will not be involved in the EU supervision, given that the whole point of the supervision is to affect the European single market, of which we will not be a part. To set up a completely new supervisory authority, with a completely different function from what it had before, would, I think, be beyond the powers of the withdrawal Act—it will obviously be different if we are not talking about EU supervision to maintain regulatory harmony.
I come to both noble Lords’ points about the consultation, because I do not believe that they are true. The noble Lord, Lord Foster, made a reference to the UKCTA—its members, by the way, are also members of the BSG—and read out the names of a number of companies that are part of the group which facilitated the round tables. There may be a disagreement with us, as my information is that it was asked to at least one of the round tables. It has met DCMS and has had the opportunity to raise concerns about the SI—as he said, it met DCMS only very recently—and of course our technical notice explains some of the problems and issues about telecoms regulation when we leave the EU, so it is not as though it did not mention it. Therefore, some of that body’s members have sat round the table with DCMS; they have been asked. There is no requirement to send the draft SI to industry, but it had every opportunity to contact DCMS and every opportunity to raise it at the meetings that the noble Lord referred to. We have ongoing and good relations with all parts of the sector, so there is absolutely no reason why, if there is a problem, it could not be raised with DCMS. I do not accept that in this case the consultation has been insufficient. We have had regular and continued consultation with the industry, not only with the telecoms sector but also with consumers and Ofcom itself.
I do not think that it is necessary to pursue this; I am merely making a simple request. Given that this body says that it has not been consulted—I entirely accept the Minister’s point that the draft regulations have been published and so it could have read them and perhaps could have come forward and said, “Can we discuss this?”—can the Minister just give the Grand Committee an assurance that it will now be invited to come and have a discussion about its concerns on these draft regulations? Then we can move on.
It is of course a bit late to consult it on the regulations, but we will definitely do so in future. I will try to find out where we have a disagreement on fact—whether it was able to be consulted—and will let the noble Lord know about that. I appreciate his allowing me to move on.
There is an important issue about data adequacy, which the noble Lord, Lord Adonis, mentioned. He asked whether it would happen in the next eight weeks. Of course, what he does not realise is that it cannot happen in the next eight weeks, because you cannot have data adequacy until you are a third country. You will never get data adequacy until exit day; when that will be is another matter. Data adequacy is an important issue. We have said that there will be no restriction on personal data flowing from the UK to the EU; the issue is entirely about personal data flowing from the EU to the UK. What are we doing about it? We have spent a lot of time talking to member states, explaining our mutual interest in having data adequacy. We should not forget that we start from the exact same position, because we have implemented the GDPR. We are therefore in a good position.
The EU has indicated—it has not said it formally—that it will be ready to discuss data adequacy as soon as exit day comes. We are ready to do that, but in the meantime there is a possibility that there will be a gap between when we leave the EU and whenever we get data adequacy. To cope with that gap there are mitigations and ways round it—standard contractual conditions for contracts, for example. We are ramping up the speed of publication and are making industry aware of this. There will be a significant amount of progress on that over the next few weeks. It is always frustrating when you spend time talking to trade bodies—we are talking to about 50 companies a week at the moment, and we will double that—and, despite all that work, people still say that they were not aware of it. We saw that with the GDPR. However, we have a publicity campaign; work is going on to try to make people aware and, for example, to encourage them visit the ICO website, which gives examples of ways to mitigate in case of a gap.
This could also affect government departments and, importantly, public services. There are issues around, for example, data localisation and data that is held in the cloud. If your data is stored on a European database or cloud data server somewhere and that service stops, that could potentially be very serious. There is no indication from the EU that it will take a hard regulatory approach. It could take the same proportionate approach that the ICO took for the GDPR, but that is not guaranteed. We are making preparations to deal with this; for example, we are making sure that all government departments are aware of where their data is and are doing something about it. Even if we do not move it back to the UK, it can be moved to other areas, such as America—we have had good decisions about third countries that have data adequacy arrangements with the EU. This is where we are: we know that there is a problem and we are addressing it, but it is potentially serious if people do not do anything about it before exit time.
On retaining the same level of consumer protection, the consumer protection part of the legislation is established by the general conditions set by Ofcom, which apply to communications providers. This does not alter Ofcom’s powers to set general conditions to protect end users. There is no reason to suppose that it would change consumer protection after exit. I hope that that answers most of points raised by noble Lords.
My Lords, the Minister has done a conscientious job of explaining the regulations and dealing with the concerns raised by the noble Lord, Lord Foster. However, I did not greatly care for the intervention at the beginning by the noble Baroness, Lady Goldie, which sought to prevent me from posing questions to the Minister. I hugely respect the noble Baroness, but it is important to understand what is going on in this Grand Committee. We are making significant changes to the law. It is true that we are doing so in an emergency situation because we have to agree things in the next eight weeks in case the United Kingdom crashes out of the EU without a deal, but we should not minimise the fact that we are making significant changes to the law. Because of the emergency nature of events, we are doing this by means of statutory instruments, but the fact that these are called statutory instruments does not make the changes to the law less substantial.
The changes to the law involved in this one statutory instrument would, in the normal course of events, require primary legislation, with Second Reading, Committee, Report and Third Reading. We would have ample opportunity to engage with the Minister, move amendments and probe issues around consultation and appeal mechanisms and so on, which we have been debating across the Floor. Because of the constraints of the statutory instrument process, all this is being done by means of one statutory instrument, with one debate in Grand Committee and potentially another in the Chamber.
When we went to the Chamber on the venture capital regulations yesterday, I had expected that the Minister, the noble Lord, Lord Bates, would present the regulations to the House in the light of the debate that had taken place in Grand Committee and to reply to that debate. I thought that he would do the same on the interchange regulations; the noble Baroness, Lady Bowles, who is in her place, had raised a lot of significant policy issues on those regulations. But things did not happen at all as I had expected. What happened was that the noble Lord, Lord Bates—
The noble Lord is kind to let me in. I think he is in danger of making a generic speech here. In this SI, we are retaining the status quo in telecoms legislation. We are trying to maintain EU law, which has been implemented in UK law. I accept that there are changes—for example, the European Commission is mentioned in relation to supervision—but obviously those changes will result from our coming out of the EU. I do not accept that, in this case, we are making substantive changes. I suppose that one area that one could argue we are changing is giving the Secretary of State powers to amend regulations so that the eCall system works. That is clearly to everyone’s benefit who drives or travels in a car. That is one area where we are possibly giving the Secretary of State more powers, but I do not accept that there is a whole swathe of legislation that normally would have required to be made through primary legislation.
I am grateful to the Minister for that intervention, but I note that the issues raised in paragraphs 10.2 and 10.3 of the Explanatory Memorandum indicate that significant players in the industry do not accept the statements that he has just made. They do not accept that this is the best way of transposing the status quo into a new regime following a no-deal Brexit. On the contrary, as I will explain in a moment, they think that the Competition and Markets Authority should have replicated the existing role of the European Commission, but the Government decided not to do that. I accept that the Minister has said what he said in good faith, but what he said is not the view of a large number of players in the sector.
My Lords, the problem with this situation is that we do not know what happened in the consultation, because nothing has been published. Let me read out what paragraph 10.1 says, so that it goes on the record. Under the heading “Consultation outcome”, it says:
“Informal consultation has been undertaken with Ofcom, whose views have been taken into consideration in development of the instrument”.
In the case of informal consultation, nothing is published. Indeed, I am anxious to read the letter that Ofcom sent to the noble Lord, Lord Foster, because it will be the only thing that has come out in public saying what Ofcom actually thinks. For the process of making the law, the right course to pursue would have been to have had a formal consultation, with Ofcom’s formal view, but the Government did not do that. At the moment, we are legislating in the dark.
Ofcom has been consulted all along. It worked with DCMS in drafting the SI. It is keen to retain its independent status. It will not come out and say, “This is a joint DCMS/Ofcom SI”, but it has been consulted all the way along. It was instrumental in the drafting of the SI.
I do not for a moment expect that Ofcom should be required to agree. On the contrary, it is the job of the Government and Parliament to decide what the law and the regulations will be. However, it is our responsibility as parliamentarians to be fully informed about what the stakeholders think. Nothing has been published. The consultation with Ofcom has been informal. We have no details of the consultations referred to in paragraph 10.2. The noble Lord, Lord Foster, told us that the UK Competitive Telecommunications Association, which some of us had never heard of before, was not consulted. The Minister says that it was consulted. This issue of what in fact happened is still not resolved across the Grand Committee. The whole situation is unsatisfactory.
To complete the broader point that I was making in respect of the noble Baroness, Lady Goldie, I do not think it reasonable to curb the rights of noble Lords to question Ministers on fundamental changes to the law of the kind that are being proposed simply because it is inconvenient to the Government, but that is what the noble Baroness and other Ministers have sought to do.
I thank the noble Lord for allowing me to intervene. I am interested in his surmise, because he gave me no opportunity to say why I wanted to intervene. In fact, there was a procedural issue to be addressed by the Chairman. I say to the noble Lord that there are rules, practices and courtesies in this House, which are listed in the Standing Orders and detailed in the Companion, whose purpose is to ensure that opportunities exist for full debates on important issues such as this. I would merely have observed earlier that the noble Lord should be careful not to stray into repetition, which Standing Orders do not permit, and be careful not to be accused of speaking on multiple occasions. I think I am not alone in being unclear about whether he is currently making a speech or another intervention. I merely ask him to observe the courtesies which everyone else in the House tries to observe for the mutual benefit of the House and all Members.
I am very grateful for the noble Baroness’s explanation but I do not believe that I was in any way infringing the courtesies of the House in seeking to question the Minister. The job of a Grand Committee is to elicit from Ministers information which is relevant to our consideration of these matters. However, we do not have the equivalent of a Committee stage in which we can propose amendments and hear explanations from the Government, which can then be questioned, so the only mechanism that we have in Grand Committee is to ask direct questions before the Minister sits down. Therefore, I do not accept for a moment that I was infringing the courtesies, the Standing Orders or the reasonable procedures of the House.
Unfortunately, it has become a pattern in Grand Committee for Whips to seek to curb proper debate and discussion. They are trying to railroad through these significant changes to the law with the minimum debate and the minimum questioning possible. I absolve the Minister from any intent to refrain from giving information, because he has been very forthcoming.
My Lords, I would be delighted to write to the noble Lord when his next lot of SIs are due to come before the Grand Committee and ask him for more information, but until I have heard the explanation and his account, it is often difficult to know what questions one wants to ask. I should observe that at the moment we are having these statutory instruments at the rate of about 20 to 30 a week, so, although I take my duties as a Member of the House very seriously, it would not be possible for me to correspond with Ministers in advance of each of them in a way that would be productive, given that we are going to debate them in any event.
I am not sure whether the noble Lord meant that as a serious contribution to the debate. I cannot think of anything that I would find more felicitous than engaging in correspondence with the Minister, so I would be happy to do that hereafter.
I sense that we will return to the issues raised in paragraphs 10.2 and 10.3 of the Explanatory Memorandum when the regulations go to the Chamber. The Minister has already undertaken to publish the relevant minutes of the Broadband Stakeholder Group and it is important that we have an opportunity to take account of those before these regulations go to the House. If the Minister does not mind my saying so, we will need to have resolved what consultations have taken place with the UK competitor telecoms authority and its members, and having that information before the House would be useful too. That is important to enable the House to make a judgment on the issues raised in paragraphs 10.2 and 10.3. Perhaps I may read to the Grand Committee what is said there:
“Some stakeholders expressed concerns that removal of the requirement for EU consultation on certain Ofcom proposed regulatory measures (and in particular the Commission’s ability to require Ofcom to withdraw its proposed measure in some circumstances) … amounted to loss of a valuable check on Ofcom’s decision-making. Those stakeholders proposed that an equivalent function be recreated domestically (for example, requiring the Competition and Markets Authority to approve certain of Ofcom’s proposed measures”.
The Minister has just said that doing that would involve a change in the status quo. However, the contention of stakeholders in the sector is that, far from constituting a change in the status quo, it would transpose an equivalent function to the one currently performed by the European Commission once we leave the European Union. To me, the issue set out in paragraph 10.2 is significant, and the noble Lord, Lord Foster, who is much more knowledgeable about the sector than I am, made the concern of the sector a significant part of his remarks.
I entirely agree with the Minister that the Government should not be expected to give a veto to telecoms companies and other stakeholders which is in any way unreasonable. I accept that; as a former telecoms correspondent for the Financial Times, I am only too aware of the market power of those bodies, and it is important to have strong regulators. I am not saying that those telecoms companies and interest groups are necessarily right—the Government might be right not to give further supervisory powers to the Competition and Markets Authority that would lead to further appeals, litigation and huge expense to the public—but my concern, which goes to the whole procedure of dealing with these no-deal regulations, is that this is an important issue. I think that the Minister would accept that it is a pretty significant issue in terms of the construction of the regulatory regime. This decision has been taken on the basis of no formal consultation, and the views of stakeholders have become apparent to your Lordships only during this debate and were brought up particularly by the noble Lord, Lord Foster.
That is not right. That is why the Explanatory Memorandum specifically mentioned their views. It is not that the noble Lord has found them at the last minute, because he was citing the very Explanatory Memorandum that told him that there were opposite views, which we disregarded for reasons with which I think he agrees.
Let me correct myself. The Minister is quite right that the Explanatory Memorandum mentions that at paragraph 10.2. However, all it says is “some stakeholders”, so there is no explanation of who those stakeholders were. The noble Lord, Lord Foster, brought out who they were and why they hold those views. For our next consideration of this measure, we need to know more about which stakeholders expressed the views in paragraph 10.2 and why they did so, so that we can form a view as to whether the Government’s judgment, which is that there should be no role for the Competition and Markets Authority, is correct or whether the right approach would have been to have given some supervisory role to the CMA, as is envisaged by the stakeholders in paragraph 10.2.
This may help the noble Lord and cut down on the time. I have been told that we will continue to consult the industry on the scrutiny of Ofcom’s draft regulatory decisions, but we do not believe that this SI is the vehicle for such policy changes—because that is what they are. I committed to the noble Lord, Lord Foster, that I would outline the people whom we had consulted. I take his point about a formal consultation; we decided not to do that, but that is not to say that there has not been extensive consultation, which I have agreed to make clear. I hope that the noble Lord will accept that we will continue to consult on that, but will not do it through this SI.
I fully accept what the Minister said. He has been very forthcoming in making further information available to noble Lords. It would be very useful to us to have that further information before these regulations go to the House. We need that further information so that we can form a judgment on whether the Government’s decision as to how they will frame the regulatory regime after 29 March, if we crash out of the EU, is correct or whether it would have been appropriate to have in domestic arrangements some function equivalent to that performed by the European Commission; for example, by requiring the CMA to approve certain of Ofcom’s proposed regulatory measures. I hope that the Minister will be able to make that information available to the House so that we can form a judgment when this regulation comes to the House.
My Lords, I suspect that all present will be delighted to hear that I do not intend to detain your Lordships for very long. This has been a clash of the Titans, and a lot of material has come out from the noble Lords, Lord Foster and Lord Adonis, and the Minister’s responses. Having read diligently the papers that I had and highlighted the questions which concerned me, I find, alarmingly, that they have all been dealt with. For that reason, and hearing the question about repetition, I shall not go over the ground again.
However, I would make one or two observations, perhaps from a different angle. For example, I note at the beginning of the Explanatory Memorandum the number of Acts of Parliament and other measures that have had to be gone through with a tooth comb to produce 10 pages of minutiae—which in their totality are more than minutiae—affecting legislation in the way that the noble Lord, Lord Adonis, says. I would like to know as a point of information how many hours have been spent on teasing out these details in order to produce this one statutory instrument. On page 2, it deals with minor affairs and states that it must not be confused with other statutory instruments which will soon come through. It beggars belief that all this lies ahead. I read The Pilgrim’s Progress when I was a young man. The slough of despond and the swamp of despair are lurking and waiting for us before we will get to the celestial city.
We will have to have a consultation about that in order to find out who forms which view about Dante’s Inferno.
There are two focal points to my remarks. I wanted to ask about the data adequacy agreement but the Minister has answered that. I also wanted to ask: who regulates the regulator? I was very interested indeed to read about Ofcom. While I in no way have the level of expertise of other noble Lords who have spoken, just reading the text—I know how to do that—what hit me between the eyes begged questions: is this regulation or supervision? Are we talking about harmonisation? I have sat in on several debates to try to gauge what is happening in consideration of these statutory instruments and I am beginning to form the view that between where we are now and where we expect to be if all goes according to plan, in several instances there will be a lessening of the oversight and direction that we have currently through our membership of the European Union.
For example, I listened to the debate on nuclear safeguarding yesterday. I was not convinced by either the debate or the material I read that the concerns being expressed would be adequately met. It was a similar case as regards non-native invasive species. Again, I was left with questions which may be answerable: I am not an expert in these fields. However, simply because we are under pressure to agree to these statutory instruments, we must not go on driving them through in such a way that in the end the accumulation of feeling about what we are achieving is that we are making too much haste and should have a bit less speed. I know that there are just 70-something days and the pressures that we are under, but in the end we will have to live with what we decide now.
All of those Acts of Parliament were carefully gone through. I have just one brief observation to make about Ofcom because the others have been made. Most of my consideration was on paragraph 10, but I will not cover that at all. However, in paragraph 7, I find that again and again what Ofcom is required to do while we are a member of the European Union “may” turn into something later. The indicative mood turns into—what? Is it the optative or is it the subjunctive? The word “may” allows itself to be interpreted either way. The optative reflects the mood of wishful thinking while the subjunctive reflects the mood of doubtful assertion. I am truly interested in knowing whether Ofcom’s different field of endeavour and focal points amount to it having the same quality and weight of oversight that it currently enjoys and whether the subjective element which is being introduced by the verbs I have described allow for a different way for it to operate or a different mood to be generated. I do not know, because the words do not allow me to make a deduction and I have certainly not heard this mentioned or dealt with in our discussion thus far.
I said that I would not detain noble Lords for long and I shall not. I am normally an optimistic person and I end my short interventions by saying that I look forward to the next one. However, I sit down on this occasion in a more desultory manner, not sure that I do.
I am sorry that the noble Lord is not looking forward to my reply—he would not be the only one. Let me answer some of his points.
He asked how many hours have been put into the production of the SI. I cannot tell him exactly, but we have been working on it for about 18 months to allow for the engagement of stakeholders and other government departments and the appropriate legal checks. The consultation might not be to everyone’s liking in the sense that it was not formal, but it was real and I shall share some more information with the Committee about who turned up. It was real and, for the reasons that the noble Lord, Lord Adonis, gave, we may be vindicated in our decision not to include another regulator on top of Ofcom. I think I have covered that.
When the noble Lord, Lord Griffiths, talks about whether it is regulation or supervision and a lessening in oversight, the point to bear in mind is that telecoms have always been regulated by national regulators. The EU Commission has a very particular role in this connected with EU matters—namely, the single market. It is obvious that if we are no longer in the EU and the single market, not only will that supervisory function not be performed by the EU because we will not be in it but there will not be a harmonisation problem.
I said that I would not intervene but I am intervening. The Minister is well aware that the financial consequences of telecoms companies, for example, in the UK, which do not abide by regulations imposed by the European Union will be significant. Even following Brexit, there will be huge impacts, one upon another. Therefore, to suggest that Ofcom does not have to have regard to that is just wrong.
I may have missed the noble Lord’s point. The regulatory framework set up through EU directives and regulations has been implemented in UK law and is administered and regulated by the UK. It will change, so in certain cases we have provided that Ofcom, the regulator, will bear in mind the current status of EU directives but in future will have the liberty to move away from them, which is only to be expected because we will not be in the EU. Therefore, we have taken account of EU law as we are trying to maintain the existing regulatory framework, although I accept that in future we might move away from it. The noble Lord, Lord Foster, says that it is changing. It is, and the basis of this SI is that we are leaving the EU, so there is change.
The noble Lord, Lord Griffiths, asked about paragraph 7 of the Explanatory Memorandum: why Ofcom may exchange information with the EU Commission or BEREC. The reason is that it will be given the option to do so if it is in the best interests of this country. It would be perverse to deny it the option to do that, so we are giving it that power. Both noble Lords rightly made the point that it will not, ex officio, be a member of BEREC. We expect it to be either an observer or a member of the various groups that I mentioned, and we hope that it will be. Whether it is or is not, we think it would often be in the regulatory interests of this country to exchange information. I think it is extremely likely that it would do so and I am sure that regulatory information will flow the other way. It is the subjunctive, I feel, in answer to the noble Lord’s question.
I am grateful for the consideration of the instrument and expect a very brief further discussion—consultation, possibly—later; I have made commitments on that. We think that the amendments contained in the SI are essential to ensure legal clarity, to reduce litigation risk and to protect consumers. Beyond that, we have agreed on the necessity for the regime to exist to correct deficiencies in retained EU law. On that basis, I hope that noble Lords will be able to approve the consideration of the regulation.
The Question is that the Motion be agreed to. As many as are of that opinion will say “Content”; to the contrary “Not-content”.
Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018
Considered in Grand Committee
My Lords, this statutory instrument, laid under the EU withdrawal Act 2018, is part of the legislative programme that the Treasury is undertaking to ensure that there continues to be a functioning legislative and regulatory regime for financial services in the EU. The statutory instrument has been debated and approved by the House of Commons. The SI will fix deficiencies in UK anti-money laundering law to ensure it continues to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the Act, providing continuity by maintaining existing legislation at the point of exit.
Turning to the substance of the SI, many noble Lords will be familiar with existing anti-money laundering legislation. The money laundering regulations set out the requirements on regulated firms to combat money laundering and terrorist financing. Further, the EU Funds Transfer Regulation specifies what information must accompany electronic transfers of funds. Finally, the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations established the Office of Professional Body Anti-Money Laundering Supervision within the Financial Conduct Authority in early 2018. Anti-money laundering legislation is designed to combat illicit finance, while minimising the burden on legitimate businesses.
In a no-deal scenario, the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework. Therefore, these three pieces of anti-money laundering legislation would need to be updated to reflect the new position of the UK, and to ensure that the provisions work properly in a no-deal scenario. The changes primarily affect the financial services sector, but the impact will be minimal and we have engaged with industry extensively to ensure that affected firms are aware of the changes that we are making. These draft regulations will make the following changes to the UK’s anti-money laundering regime.
First, this SI will equalise the regulatory treatment of European Economic Area member states and “third countries” for correspondent banking relationships—that is, when one bank provides banking services on behalf of another bank. Currently, UK financial institutions apply enhanced due diligence measures to correspondent banking relationships with financial institutions outside the EEA. However, these measures are not required for intra-EEA relationships.
This SI will equalise the regulatory treatment, meaning that enhanced due diligence will be required for all correspondent banking relationships. This change better aligns with the Financial Action Task Force standards on the issue, and the existing practice of many UK institutions, which already apply enhanced due diligence because of the risks associated with correspondent banking relationships. The SI will also equalise regulatory requirements on the information about the payer and payee accompanying electronic transfers of funds. Therefore, UK payment service providers will be required to provide higher volumes of information accompanying transfers into EEA member states and other countries. These changes are being made to reflect the UK’s new position outside of the EU’s regulatory framework.
Secondly, this SI will transfer from the Commission the responsibility to make technical standards, which specify the additional measures required to be taken by credit and financial institutions with branches or subsidiaries abroad, to the Financial Conduct Authority. These standards are of a type similar to those currently made by the FCA, in an area where they have technical expertise. Therefore, the FCA is the appropriate body to take on this responsibility. The transfer of this power is necessary because the relevant standards are currently made by the European Commission.
Thirdly, this SI removes the obligation for certain UK persons to have regard to guidelines published by the European supervisory authorities. The UK will be outside the EU’s regulatory framework, so it would be inappropriate for UK persons to be legally required to have regard to these guidelines. Firms will continue to be required to have regard to guidance developed by UK supervisory authorities and industry bodies, thereby maintaining the same strong standards to counter money laundering and terrorist financing.
Finally, the current money laundering regulations require certain information to be communicated to EU institutions. These provisions will be removed, as they would no longer be appropriate once the UK is no longer a member of the EU. The House of Lords Secondary Legislation Scrutiny Committee queried the change in requirements to transmit information to EU institutions, and whether the FCA would be co-operating with its counterparts in other countries to combat illicit finance. However, the changes to information-submission requirements made by this SI relate to specific duties to provide information directly to EU institutions, such as the national risk assessment of money laundering and terrorist financing.
Legal obligations to submit this information would be inappropriate once the UK leaves the EU. It is important to emphasise that UK supervisory authorities, including the FCA, will continue to co-operate extensively and make information available to overseas anti-money laundering authorities in relation to firms which have offices within the UK. Therefore, UK authorities will continue to make use of international co-operation to detect, prevent and investigate money laundering.
The Treasury has been working very closely with the FCA in the drafting of this instrument. It has also engaged extensively with the financial services industry on this SI, including UK Finance and relevant trade associations, and will continue to do so in relation to other SIs within the onshoring programme. Last November, the Treasury published the instrument in draft, along with an explanatory policy note to maximise transparency to Parliament and industry. The Treasury considers the net impact of business to be less than £5 million, so a full impact assessment has not been carried out.
In summary, this Government believe that the proposed legislation is necessary to ensure that the UK’s anti-money laundering and counterterrorist financing regime operates effectively, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations.
My Lords, I hope it will be all right for me to intervene in this matter. As a former Member of the European Parliament, I had something to do with the fourth anti-money laundering directive and the high standards required by it and I would like to ask my noble friend one or two questions.
First, we have been obliged to operate enhanced due diligence only to countries outside the EEA, and post-Brexit we will find ourselves required to deal with all countries equally—in other words, with enhanced due diligence in all cases. I know my noble friend has just referred to the fact that many UK institutions apply this enhanced approach already and that the Financial Action Task Force recommends those standards but I would like to inquire of him as to the position regarding others. He said “most institutions” but I believe quite a considerable number do not wish to apply enhanced due diligence in countries where we are satisfied that the standards are common in the EEA and, of course, in the EU. I am rather worried about this and the obligations that it will now put on institutions which they did not have before. I think it is quite a significant change.
Secondly, I am interested in the issue of information. When payment service providers transfer funds outside the EU, there is a need for higher levels of information. I am concerned that, once again, post-Brexit we will require of UK PSPs a much greater volume of information accompanying the transfer of funds into all the EU states as well as those outside. Again, I wonder about the extent of those obligations and the amount of information. Is my noble friend aware of how that extra information should be obtained and what it would consist of? Can he advise me now or write to me if he cannot?
Thirdly, although it is not mentioned in this measure at all, I am quite curious as to whether any of these things will affect the status of so-called politically exposed persons. Currently, as noble Lords know, the term covers quite a large number of people, particularly those who have had a connection overseas—as they put it from this country—with receipts of moneys or involvement in business affairs. I wonder whether by bringing this back into this country and no longer being obliged to apply the rules that applied before, this will then recategorise or decategorise large numbers of people currently designated as PEPs and therefore subject to a very much higher level of scrutiny by our financial institutions.
I know that this is not a policy change as such but clearly this measure is a big change to obligations and procedures. There must be some costs attached and quite a lot of organisations may not be ready to carry out these new responsibilities in terms of the due diligence or, indeed, provision of information. Is my noble friend satisfied that, in the consultations and discussions that have taken place so far, our institutions are satisfied that they will be able to cope with this in the timescale we have?
My Lords, I have a lot of common thought with the questions that the noble Lord, Lord Kirkhope, has raised, so I do not need to go into detail. I have no problem with, if you like, the way the handle has been turned on the routine adaptation but, again, the question comes of whether it was right to follow the symmetrical approach, so that immediately the EEA is in the third-country pot, or whether there could perhaps have been a transition that made it a little easier. This is not to say that in the longer term that is not the right destination, but I am not sure about a “big-bang” switchover. I, too, wonder what will happen under the Part 3 heading, “Customer Due Diligence”. Will this be another excuse for banks to extract life histories from an awful lot of people, quite a few of whom reside in this House?
Those of us who are former Members of the European Parliament ought, I suppose, to declare an interest; we tend still to have residual bank accounts and such things there. I should talk about this because the same rules apply to those bank accounts as apply to UK bank accounts. Whereas from the UK banks I get 20 pages to fill in, including, as I said, a life history and everything since the year dot, I seem to get one page from a bank in Belgium, which is under the same ruling. I would quite like to know how many of these rules are consequences of the legislation and how many are consequences of gold-plating or uncertainty among our banks. It is, in a sense, an identity thief’s charter when you have to fill in all this information, along with copies of your passport and everything else, and upload it while unsure of where it is going; or you can take it into your branch. Anything that helps with regard to that would be useful to know.
In this case, there would have been an argument for being asymmetrical for at least a little while. I regret that that opportunity was not taken, but I do not believe anything has been done that offends, as such, against what one is supposed to do under the EU withdrawal Act.
My Lords, perhaps I should say a couple of words about where we find ourselves with these SIs. As Her Majesty’s loyal Opposition, I do not want our participation in this process to be misinterpreted in any way as an endorsement of a no-deal exit from the EU; I cannot think of a worse outcome than no deal to the chaos that we find ourselves in. However, we have to accept that, given this chaos, which has to be laid at the Government’s door, there is a real possibility that we will stumble out of the EU without a deal. While the Government seek to make contingency plans for this, by bringing in front of us what one might call no-deal instruments, we will do our duty of scrutinising them as best we can.
So far, the Government seem to have played by the rules. In my view, the rules are set out first in the European Union (Withdrawal) Act 2018, but also in paragraphs 7.1 through to 7.9—which are identical in all Explanatory Memoranda that come from the Treasury. I believe they say that there will be no new policy introduced except where necessary to achieve the transition.
I diligently read through the Explanatory Memoranda. I fear that I did not read the instruments with as much care, because, frankly, I would not know how to start. A lot of them relate to other documents and getting up-to-date, amended copies of them is difficult, so I have to judge an instrument on the basis of the Explanatory Memorandum. All it basically does is say that EEA countries become third countries. It then goes on to make the consequential changes, which involve transferring various responsibilities. In relation to this instrument in particular, it also defines high-risk countries, which I can see is important.
I have only two questions. The problem with these memoranda is that the authors know what they are talking about, whereas the reader does not know what they are reading about. Having staggered through the document, when I got to paragraph 2.12, I became exhausted. I shall read what I think is the offending passage:
“The standards are to specify what additional measures are required to be taken by credit institutions and financial institutions with branches or subsidiaries abroad, when national law outside the UK does not permit group-wide policies and procedures to be implemented that are at least as strong as those that are required by the MLRs”.
I hope that the noble Lord can make some sense of that.
My only other comment is on the tone of the memorandum—this is true of other memoranda, but I shall centre on this one for the moment. The obligation to report to EU institutions is removed, and one can see why that is perfectly logical. However, money laundering is an international crime with an enormous impact on ordinary citizens, relating particularly to terrorism and to their wealth, because of the crimes committed and their impact on the economy. It is crucial that, even if we are daft enough to leave the EU without a deal, international co-operation continues. It is not just about taking the law where it is now; it is about the law needing to develop as criminals become cleverer and do different things, and we understand more about what they are doing and what action and international co-operation are necessary.
These regulations are brought before us as no-deal SIs and will be commenced on exit day. It is clear what role they will have if it is a no-deal exit, but if a deal is done and we enter a transition period and then come to the end of it, what will happen to this statutory instrument? Will it be repealed or will it be paused? The answer to that makes a big difference to its impact. If the instrument is merely paused, we are making law for the future. If it is repealed and we essentially start from scratch as part of the negotiation in the transition period, and if sanity then reigns and we complete a deal, this SI will not matter; we will be looking at longer-term ways of managing the problems to which it relates.
My Lords, I am grateful to all noble Lords who have taken part in this debate, particularly my noble friend, with his background as a Member of the European Parliament.
I agree with the noble Lord, Lord Tunnicliffe; in so far as the Government do not want no deal, we do not expect no deal, and we accept entirely that it will be much better to make progress. He also asked what would happen to this SI if, as I hope, there is a deal. The answer is that the withdrawal Act would switch it off, and it could subsequently be either reintroduced or possibly amended in the light of whatever agreement we came to during the transitional period.
I will read out the exact words in my brief: “Are these SIs for a no-deal scenario only? This legislation would not come into effect in March 2019 in the event of an implementation period, which will be delivered through a separate piece of legislation”—as I think I said—“through the EU (Withdrawal) Bill. It could be amended to reflect an eventual deal on the future relationship or to deal with a no-deal scenario at the end of the implementation period”. I hope that that is not too far from what I initially said. Alternatively, it could be delayed until the end of the implementation period with the possibility of repeal or amendment, depending what happens. The answer to the noble Lord’s direct question is that if there was a deal, it would be, in my words, switched off, or, in the words that I have just read out, it would not come into effect, and the withdrawal Act would be the vehicle through which that happened.
My noble friend Lord Kirkhope mentioned the burdens on banks. It is important to focus on the fact that we are talking about relationships with correspondent banks with regard to the standards he referred to. As I understand it, at the moment there are two standards: one for inter-EEA banks and the higher one for outside. In future, there will be one standard, so to some extent it will be slightly easier for the banks. As I said at the outset, in many cases, the banks already provide the higher standards—the enhanced due diligence—even where they do not have to.
In response to the points my noble friend made, which were also made by the noble Baroness, Lady Bowles, we plan to have some transitional arrangements. I hope that they will help both my noble friend and the noble Baroness. We have announced plans to grant the regulators a temporary power to phase in these new requirements that would apply to firms in a no-deal exit. This power must be exercised by the regulators in accordance with their statutory objectives, as set by FiSMA. This is a sensible measure to ensure that the firms have the time they need to adjust in an orderly way to the changes brought about by Brexit. The regulators will be seeking industry views on where it would be appropriate to phase in new requirements. However, the short answer to my noble friend is that it is no longer appropriate to treat the EEA differently, so we must either reduce all the standards or enhance them. We have chosen to enhance the standards, which, as I said, meets the higher standards that I think we would expect in any case.
So far as politically exposed persons are concerned, this statutory instrument will not affect the regime for them following exit. My noble friend was rightly concerned about the effect on business and the financial services sector. We believe that the SI will have a minimal effect on businesses across the sector. As I said when I spoke at the beginning of the debate, we consider that the net impact on businesses will be less than £5 million a year. Picking up again on the point made by my noble friend, we understand from the FCA and industry that in practice this already takes place because of the risk that firms associate with correspondent banking relationships. As such, this will lead to minimal increased costs to businesses beyond the status quo.
I turn now to payment services providers which again were mentioned by my noble friend. They will also be legally required to provide a greater volume of information to their EEA counterparts in connection with the cross-border transfer of funds than is currently the case, thus equalising the requirement across third countries. We understand from the industry that this takes place already and any changes will require firms to expand their existing IT systems to firms with which they transact.
On the information requirements concerning the electronic transfer of funds, which was a point I made earlier, HM Treasury has communicated that it will bring forward measures to give the FCA some flexibility to phase in changes to the regulatory requirements on firms under the EU withdrawal Act. They will use the powers to waive or modify some requirements to allow for a smooth transition to the post-exit regulatory regime.
When there is a change, will there be any kind of notification for businesses and others? One of the biggest problems that, if you like, completely innocent people can experience when they are transferring money is that it gets suspended somewhere while further checks are made. That is more likely once we have gone into a third-country regime than being in the EEA. If you are transferring money for the purchase of a property or something significant for your business with a contract attached, to suddenly find that your money has been delayed by several days or a week can mean that you are in breach of the contract. Because of the particular way in which the money laundering rules operate, we are not allowed to warn people because of the risk of warning the potential money launderer. People should at least be aware that the rules are switching because that would be useful to know in order to build in some certainty. I am thinking in particular of businesses. They will have to realise that they must send money with time to spare.
I am grateful to the noble Baroness. The last thing we want is to have any turbulence at the point of transition or to have legitimate transactions held up. The FCA will be consulting with the banks and payment services providers concerned, particularly in the light of the transitional arrangements that I mentioned earlier. Of course they have known for some time that these changes are on the way so that they have been able to prepare for them. However, one of the consequences of what I have just said is that there does not have to be a sudden switchover on 30 March or 1 April because the Treasury and the FCA will be introducing transitional arrangements. There will be due warning before any change takes place.
The concern of those of us who have been involved over the years with these anti-money laundering directives is the way they have been implemented in different member states. This country has always been more than diligent about making sure that any directive we have prepared in Brussels has been implemented to the nth degree over here. In doing so, the FCA has been used in a way that I believe has meant that a lot of financial institutions have gone further than was necessary not only for their own economic convenience as much as anything else but also because we in Britain have been more draconian in terms of implementation as the anti-money laundering directives have been developed, in particular this fourth one. The whole point is proportionality; in other words, it is important that we have now introduced more balance to the way in which we hope that the fourth directive will be implemented in member states. However, yet again in this country the FCA and our own financial institutions have been more than zealous in their activities.
My noble friend suggests that we should always look for higher standards, but standards should not always be equated with obligations. The obligations we have placed upon our consumers and others in this country are very strong indeed. I hope that the FCA will not use the proposed flexibility and more room to manoeuvre to go in the wrong direction because that would put us at a massive disadvantage economically.
My noble friend will know that when we leave the EU, the obligation that we already have will be transferred. Thereafter, looking to the future, we will no longer be bound by EU regulation, so the opportunity for gold-plating them will not exist; we will be in control of our destiny. I am sure that my noble friend would not want in any way to water down the robust regime we have in this country to deal with money laundering, terrorist financing and the rest. We must get the balance right, which is what I think my noble friend was saying.
I intervene on that point because there is surely a contradiction. Surely when we leave the EU, the opportunity for the state to gold-plate—take present regulations and make them progressively more difficult—will be unfettered. The Minister has to convince us that, given that freedom, it will not be misused.
The noble Lord has repeated what I meant to say: at the point of transfer, the existing EU regime is on our statute book. We will no longer be bound by future directives so there will not be the opportunity to gold-plate: we will be master of our own house. Having said that, I am sure that the noble Lord and my noble friend would not want in any way to water down the tough regime we have against money laundering and terrorist finance, but we will be in control of our destiny rather than having to implement directives.
Reverting to the point that the noble Baroness made, the FCA does not expect firms or regulated entities providing services within the UK’s regulatory remit and other stakeholders to prepare now to implement the changes from exit day. The FCA is engaging with the industry extensively to ensure smooth and effective implementation of the changes.
The noble Lord, Lord Tunnicliffe, asked me about paragraph 2.12 of the Explanatory Memorandum. The SI confers power on the FCA to make certain technical standards in an area in which it has technical expertise. The transfer of power is necessary because the relevant standards are currently made by the European Commission. The technical standards specify what additional anti-money laundering measures are required to be taken by banks with branches or subsidiaries abroad. These measures include policies and procedures to counter money laundering and terrorist financing, and must be at least as strong as those required by the UK money-laundering regulations.
For example, if a UK bank has a branch abroad in a country that does not have anti-money laundering and terrorist financial requirements as strict as ours, the parent bank must ensure that the branch applies measures equivalent to the UK regulations. If the law of the country in question does not permit such measures, the UK parent bank must take additional measures to handle the risk of money laundering and terrorist financing effectively. The FCA will be able to make technical standards specifying what additional measures such a parent bank may take and the minimum action needed to handle those risks.
The noble Lord also asked about high-risk third countries and how the list will be updated. On exit day, the EU high-risk country list will be onshored and form part of retained EU law. Subsequently, references to the list will be static rather than dynamic, meaning that updates that the EU makes to the list will not flow through into UK law. The list will evolve only as amended by UK law. The Sanctions and Anti-Money Laundering Act 2018 gives the UK power to maintain a list of high-risk jurisdictions in connection with which enhanced due diligence needs to be performed. Updates to the list will be made through the affirmative procedure. Therefore, they can come into force before parliamentary approval but will then cease to have effect if both Houses do not approve them within 28 days of their being made. Parliament will have scrutiny on updates, while allowing updates to be made quickly to reflect changing circumstances in third countries. There will be a significant increase on current levels of scrutiny as Parliament has no direct influence over updates to the list at the moment.
Finally, the noble Lord asked how we would co-operate with the EU on anti-money laundering efforts once the UK leaves. National anti-money laundering authorities will continue to make use of international co-operation to detect, prevent and investigate money laundering. There is a legal gateway in the regulations that provides that UK supervisory authorities must take such steps as they consider appropriate to co-operate with overseas AML authorities. Moreover, the political declaration agreed with the European Union contains a statement of mutual intent that the future relationship should cover money laundering and terrorist financing. This includes commitments to put in place arrangements for effective and swift data sharing, allowances to support law enforcement, measures for practical co-operation between law enforcement authorities and agreements to support international efforts to prevent, and fight against, money laundering and terrorist financing.
I hope that I have answered the points that noble Lords have made.
Market Abuse (Amendment) (EU Exit) Regulations 2018
Considered in Grand Committee
My Lords, as this instrument has been grouped I will speak also to the Credit Rating Agencies (Amendment) (EU Exit) Regulations 2019.
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 continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the EU withdrawal Act to deliver this and a number of debates on these SIs have already been undertaken in both Houses. The SIs being debated today are part of this programme.
These SIs will fix deficiencies in UK law relating to market abuse and credit rating agencies to ensure that they continue to operate effectively post exit. Both SIs will be critical to ensure good market conduct practices to protect market integrity. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context.
Market abuse involves numerous illegal practices in relation to financial markets. Such practices include insider dealing, market manipulation and the unlawful disclosure of inside information. In 2016, the EU implemented the Market Abuse Regulation which empowered EU regulators and the Financial Conduct Authority in the UK, to prevent and detect market abuse. MAR aims to increase investor protection and market integrity, thereby enhancing the attractiveness of EU securities markets for capital raising.
The regulation applies to financial instruments traded on EU trading venues and worldwide market abuse that concerns these instruments. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The MAR therefore needs to be updated to reflect this and to ensure that the provisions work properly in a no-deal scenario. These draft regulations will amend the MAR to ensure that the UK sustains an ability to prohibit market abuse and to enforce against it effectively post exit.
Firstly, the EU-wide scope of MAR will be retained by this SI, so it will continue to capture financial instruments traded on both UK and EU trading venues and global conduct that impacts these instruments. A UK and EU scope accounts for the deeply integrated relationship between the financial markets in each jurisdiction due to current arrangements in the EU. This is necessary so that the FCA can continue to investigate, prohibit and pursue cases of market abuse that relate to financial instruments in EU markets that impact on UK markets if EU regulators are unable or unwilling to do so. If this provision were not in place, the FCA would not be able to enforce against market abuse on EU trading venues, and would subsequently not be able to protect the integrity and reputation of UK markets.
The SI retains an aspect of the MAR in references to emission allowances. As a result, UK firms will still be able to partake in secondary market trading under the EU Emissions Trading System even though the UK will leave it. This amendment also provides the FCA with the ability to monitor and enforce against UK-registered emission allowance market participants.
Exemptions in the MAR that relate to certain trading activities which cannot be enforced against the regulation are also retained by this SI and amended to a UK-only scope. These include exemptions on buy-backs and stabilisation, monetary and public debt management activities, and accepted market practices. The SI also transfers the power to extend exemptions relating to monetary and public debt management activities from the Commission to the Treasury. Furthermore, the SI transfers functions and powers from EU institutions to equivalent UK bodies in line with the general approach when onshoring EU legislation. In particular, it transfers powers such as the ability to make binding technical standards from the European Securities and Markets Authority to the FCA, which will continue to enforce the UK’s regime, given its substantial experience and expertise. The FCA has consulted on its proposed alterations to their binding technical standards. Moreover, the SI transfers powers from the European Commission to the Treasury; the Treasury will, for example, be able to make delegated Acts relevant to market abuse.
Moreover, further amendments to retained EU and UK legislation will be made by this SI, such as removing references to applicable EU regulation in the Criminal Justice Act 1993, as well as in the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016 and EU amending legislation relating to the MAR so that the UK’s market abuse framework continues to operate efficiently post exit.
Finally, this first SI deletes co-operation obligations between UK and EU authorities. There will no longer be any requirement for UK bodies to share information with the EU, with no guarantee of reciprocity in respect of market abuse, although the FCA will still have the ability to respond to requests for information from overseas regulators and UK authorities will seek to maintain, where possible, current mutually beneficial co-operation arrangements with EU counterparts. Existing UK regimes for information sharing and co-operation with other countries already permits this on a discretionary basis.
I turn now to the credit rating agencies SI. A credit rating is used to assess the creditworthiness of a financial instrument or entity, which is often referred to as regulatory purposes. In 2009, as a result of the financial crisis, the EU introduced the Credit Rating Agencies Regulation, hereafter referred to as CRAR. It provided ESMA with the ability to supervise credit rating agencies, known as CRAs, with the aim of implementing further regulation over the sector.
CRAR and related legislation will be amended by this SI to ensure that the UK continues to have an effective regulatory environment to supervise CRAs once the UK has left the EU. First, the instrument will transfer powers from EU authorities to UK bodies. Powers will be transferred from the Commission to the Treasury so it is able to determine third country regimes as equivalent, consistent with the transfer of powers relating to equivalence in SIs that have previously been debated in your Lordships’ House. This enables the certification process whereby third country CRAs with no affiliation to those based in the UK will be able to issue ratings in the UK for regulatory use. Moreover, ESMA’s power to supervise and undertake enforcement action against CRAs will be transferred to the FCA under the new UK framework. The FCA will also be transferred responsibility for assessing third country jurisdictions relating to the endorsement process, enabling third country CRAs that are affiliated to those based in the UK to endorse ratings into the UK.
I note that this provision was drawn to the special attention of the House by the Secondary Legislation Scrutiny Committee Sub-Committee A in its report published on 9 January. The FCA is the appropriate body to regulate CRAs, given its current regulatory role in market operations and in protecting the integrity of these markets, and it has the necessary resource capacity to effectively carry out its new function.
When my noble friend says that the FCA has the necessary resource capacity, does that mean that it could do it if it had the money and resources to do it—in other words, if it were intellectually able to do it—or does he mean that it already has the financial and staffing capacity to do it?
The FCA has been consulted about these regulations. If there were a no-deal scenario, I am advised that it has the necessary resource capacity to effectively carry out its new function. Perhaps I can deal in more detail with my noble friend’s question now.
As I hope I said, the FCA has dedicated the necessary resources to account for the additional work through its 2018-19 business plan, and it will ensure that its considerable experience and technical expertise in regulating the financial services sector is reflected in its new supervisory role in relation to the CRAs.
I am sorry to trouble my noble friend again but who will pay for this? The resources of the FCA are, to a large extent, raised through various kinds of costings. I declare an interest, as set out in the register, as the chairman of PIMFA. Who will pay this bit of its budget?
My Lords, the chief executive of the FCA, Andrew Bailey, has said that he expects to hold FCA fees steady for a year or so, assuming that there is an implementation period. However, the FCA is able to increase its fees should it need to increase its income in the event of no deal.
They will continue to have to pay a fee, so to that extent there will be no change, but instead of it going to ESMA, it will go to the FCA.
Furthermore, the SI will require firms to establish a legal entity in the UK to register with the FCA, in accordance with the current policy under CRAR. The SI provides the FCA with pre-exit powers so that it is able to begin registering firms, and the instrument will also establish three regimes to allow for FCA registration to smooth the transition from ESMA supervision to FCA supervision. First, UK-established CRAs will be able to convert their ESMA registration into one with the FCA through the conversion regime. Secondly, newly UK-established legal entities that are part of a group of CRAs that have a registration with ESMA will enter a temporary registration regime if they have submitted an advance application to the FCA which has not yet been processed. Thirdly, certified CRAs established outside the EU will, through the automatic certification process, be able to notify the FCA of their intention to extend certification to the UK.
The SI will also enable credit ratings issued by a CRA established in the UK, with an FCA registration, to be used for regulatory purposes in the UK. The instrument will also enable credit ratings issued before exit day by EU firms that register, or apply for registration, with the FCA to be eligible for regulatory purposes in the UK for up to a year.
In addition, in relation to appeal rights, given the new enforcement rules provided to the FCA, references to EU institutions will be replaced with the appropriate UK bodies. The Upper Tribunal will now be responsible for appeal requests that have been made as a result of an FCA decision, and the FCA’s warning and decision notice will apply to this SI also.
The Treasury has been working closely with the FCA in the drafting of these instruments. Both bodies have continuously engaged with CRAs and taken on board their views where possible when deciding on the direction of the instrument to ensure that the market is informed of its policy intention. The Treasury published the instruments in draft, along with an Explanatory Note for each, to maximise transparency to Parliament, industry and the public ahead of laying.
In summary, we believe that the proposed legislation is necessary to ensure that market abuse is effectively prohibited and credit rating agencies are appropriately supervised, and that the relevant legislation will continue to function appropriately if the UK leaves the EU without a deal or implementation period. I hope that noble Lords will join me in supporting these regulations.
My Lords, the first thing that I noticed on page one of the draft instrument is that it says this is done not just under the EU (Withdrawal) Act but under the European Communities Act, but it does not tell us which bits are which. If you are trying to go through and ask whether this corresponds to the rules laid down in the EU (Withdrawal) Act, you do not know, because the rules under the European Communities Act are not exactly the same. I do not find any difficulty in what has been done here, and I have come across this before in other statutory instruments. But I think it would be good practice when you are doing it with powers in lots of different places if the relevant bit of the instrument were to say which the enabling power was instead of putting it in an anonymous way. But then, I am still learning about how these things are done in the UK.
I accept the points made by the Minister about what I call the symmetry point: that some bits here need to be retained, extending into EU territory, if I can put it that way, so that we know what is going on. Emissions trading is one example of that. Perhaps I should declare an interest on the register—the usual London Stock Exchange Group plc issue. How will we get information back into the UK from, for instance, the trading of UK instruments on exchanges in the EU? This is the other side of the trading obligation. If the EU says that you can trade only on recognised exchanges—there are exchanges that, for example, trade UK-listed shares—that means that, unless there is some kind of deal done, people will theoretically want to trade in the EU rather than the UK, or they will want to cut off trading in the EU so that they own the trade in the UK. We have concentrated on that when talking about trading obligations; we have not talked about what happens to the information from the trading venues that remain in the EU.
I am sorry that I had not thought this out previously; it just occurred to me while the Minister was speaking. This is something for the regulators and, probably, the Government to look at as we move forward and work out what the EU is going to do in respect of exchanging information with us. The exchanges provide data to the FCA so you can see whether there is any funny business going on; it is one of the methods of detection, as you can see spikes and so forth that might indicate something strange.
Another question on symmetry is that I wonder why we have bothered, in new paragraphs 5 and 5A on page 11 of the regulation, to list all the European organisations that still have exemptions. One of the things I did from time to time in the EU, perhaps a little mischievously, was to take out the list of all the bodies that did not have to come under market abuse regulations. As I have said more than once, central banks can do things that, if anybody else did them, would be called market abuse. Generally speaking, we allow central banks to do that.
There is a general provision for certain public bodies and central banks of third countries. If the EU is now a third country, why bother to state that the Treasury can make particular exemptions for member states, the ESCB, members of a federal state, the Commission, the European Investment Bank, the European Financial Stability Facility and the European Stability Mechanism? Why not just treat them as generic public bodies? This gives the EU special treatment. Yes, one might want to prepare a list, but was this just a short cut? If we were going to compact these things down for the long term and if we were going to treat the EU as a third country, why list all EU bodies but not other third-country bodies? I am not sure that I would have put them on the face of the regulations, just for the sake of it. Those are all the issues that I wish to raise at this point.
My Lords, I want to make a couple of fundamental points. First, my noble friend uses the word “equivalent”, but of course this is not equivalent. It is equivalent only in the sense that it applies to Britain; therefore, immediately, it is not the same thing. He may say that this is chopping logic, but I think that it is important for us to underline that when you take into British law what has been up to now European law, you assert your control over what happens here but you deny the fact that you had some control over what happens over the whole area. That, therefore, is not equivalent. It may be what people want, but I doubt that people who voted to leave understood the details. Indeed, none of us did until we started to go through it—what I say is not in any way insulting to either side. The fact is that this is much more complex than we thought.
The effect, which I think is important, is that we say of many of the things that we are talking about, “These institutions are international. We are still part of Europe, in the sense that we are working in this space. Therefore, we are going to try, even if we leave the European Union and even if we do so without a deal, to have arrangements that will overcome these problems”. Then my noble friend says, “We will do these things on a discretionary basis”. The problem with a discretionary basis is that it is exactly that. There will be occasions when the British Government—or the FCA—do some of these things and occasions when they do not. My concern is that, by translating where we are now into a national position and not an international position, as far as the financial services industry is concerned—I have declared my interest—we introduce a degree of randomness that we do not have at the moment. At the moment, we know when these things happen. Under the regulations, we will not know, because it will be at the discretion of the British Government to decide what things they will do in common and what things they will not.
The second thing to say is that this is entirely one-sided. We are saying that we will take these powers over the things that we have control of, but we have no deal under which we can get the information and no deal on things over which we have partial control. The noble Baroness who just spoke is absolutely right. There is a real issue about information. How will we know some of these things? If we leave the European Union and do not have information in common, there will be things that affect us which we will not know unless we have a deal which allows—and not only allows but makes—the European authorities to be in a position to tell the Government or the FCA the information that they have.
The third important thing is the whole question of who pays the bill. I am very much relieved by the Minister’s assertion that, for example, credit agencies will pay a fee, as they do at the moment, and that that fee will come to the FCA rather than to the European authorities. But it is important for him to recognise that there is already considerable unhappiness about the unaccountability of the FCA for the charges that it makes. There is no way of monitoring the charges which the FCA makes—no superior court to go to. There is a constant problem with the FCA because many of its charges seem, to those of us who represent people who have to pay them, to be unconnected either with the rise in the cost of living or indeed with the services that are provided. The difficulty with bringing everything back into this country is that there is nowhere to appeal to. The FCA is entirely under its own decision-making process, and says, “We have got enough money, but if we don’t have enough money, we’ll just raise the tariff”. I want to know from the Minister when we will have a situation in which even a group of people with whom I have no very close relationship—namely, the credit rating agencies; indeed, I have some pretty serious complaints about them—ought to have some opportunity to complain about the price that they are charged. I do not see any reference to that, nor indeed has the Minister mentioned it altogether.
My last point is, simply, that of course everything therefore comes into the hands of the Treasury. That is what happens when you nationalise what was and should be an international effort. Everything is decided by the Treasury. When people talked about “taking back control”, what that actually means here is that the Treasury takes back control. I see no opportunity for anybody outside the Treasury to be able to oversee the decisions that are made here. I say to the Minister that I am not at all sure that that is a very cheerful future. It seems that there was a great deal to be said for the much more open way in which the European Union deals with these matters. It is a much more transparent system than the system that we have in this country. One of the pieces of truth which I am afraid has been lost in the debates about Brexit is that in many areas, the European Union has been much more willing to discuss, much more open and much more transparent. We are going to lose all that, and I do not see anything in the Minister’s speech—admirable though it was—that indicates that the Treasury will open itself up to a more transparent system and provide opportunities for people to complain, argue and to know what the details are, and I see no sign that the same will happen with the FCA. This is therefore a further closure of the mechanisms of the financial world, and less transparency and openness. I am sorry that the Government have not taken this opportunity to say, “When the time comes, if we leave the European Union, we will start on a process of opening these things up”. I realise it cannot be part of this SI because it would change the nature of the legislation but I would like to hear something of the willingness of the Treasury to mimic, to some extent, the openness of the European Union, which we are now going to lose.
My Lords, perhaps I can start by posing the same question on these two SIs as I did before. Are they no-deal only SIs or ones that will be switched off? I am entirely happy for the Minister to reference his previous reply, if that is, in fact, the reply he will give. I have tested these SIs as best I can on the basis of paragraphs 7.1 to 7.9 of the Explanatory Memorandum. Noble Lords will have read these points before as they are the same in every Explanatory Memorandum. They basically say that new policy will not be introduced except where necessary.
Largely speaking, I have found nothing to complain about. However, there were one or two areas I did not understand. I start with the Explanatory Memorandum on the first SI, on market abuse. In paragraphs 2.7 and 2.8 once again I think the problem is that the author knew what they were talking about and I do not. The first sentence of paragraph 2.8 says:
“The decision to keep instruments admitted to trading or traded on EU venues, rather than amending to a UK only scope, was taken because of the close relationship between UK and EU markets”.
I hope that the Minister might expand on that because I find the language of that paragraph, in particular, extraordinarily difficult to understand.
On international co-operation, we have had one reply. I want to press the noble Lord further. We hope that the outcome of this—no matter how badly we do it—is that we are still in this international market and therefore working together not just with the EU but with the rest of the world. As I understand it at the moment, we effectively work with the rest of the world keeping abuse regulations, in particular, up to date through the channels of the EU. How will that be replaced? The abuse regulations, in particular, clearly have to be kept up to date.
The remaining thing to say about the first SI is that it should not be in front of us because of the absurd paragraph 12.5 in the Explanatory Memorandum that says we are going to have an impact assessment but not until we have agreed the instrument. As we know, the noble Lord, Lord Bates, took some stick on that—I think that would be the right term—and your Lordships might moderate that stick by some useful comments. I do not know.
Moving on to credit rating agencies, I have a couple of questions. One is, once again, due to my failure to understand. I did get O-level English—I am not that bad, I hope. My understanding of the three bullet points in paragraph 7.12 of the Explanatory Memorandum diminished as I read through them. In particular, I have no idea what this means:
“The Automatic Certification Process will enable Certified CRAs established outside the EU to notify the FCA of their intention to extend certification to the UK. Like the Conversion Regime, these notifications must be made before exit day”.
I do not know what a “Certified CRA” is.
Finally, paragraph 7.15 covers enforcement and makes reference to criminal actions. It also makes reference to sections in FSMA, which would be a joy if I had an up-to-date copy to check them against. What I would like to be reassured about—or not if it is not true—is whether credit rating agencies are subject to the requirement to have a senior management regime where the clarity of roles is such that if a criminal prosecution was to take place, as referred to in this paragraph, that prosecution could be directed at an individual.
My Lords, I am grateful to all noble Lords who have taken part in this debate and I notice that neither the noble Baroness, Lady Bowles, nor the noble Lord, Lord Tunnicliffe, have any fundamental objections to the detail of the SIs before us. I shall try to deal with the points they have made, along with those made by my noble friend. I was asked why the European Communities Act is mentioned. The answer is that the ECA powers are used to make consequential amendments to the Criminal Justice Act 1993 and the UK Market Abuse Regulation 2016. The European Communities Act is mentioned because it is the parent rather than the withdrawal Act.
My noble friend raised a number of points that go slightly wider of the mark. I would just say to him that it is a consequence of leaving the EU—like him, I campaigned to remain—that we can no longer influence what he described as “over there”. I used the word “equivalence” because what we are trying to do is make sure that if and when we do leave, the regime in this country is as equivalent as it can be to the regime when we were in the EU. Likewise, he talked about discretion. Indeed, we will not have the discretion that we have at the moment to influence what happens in the EU as a direct consequence of us having left.
Both my noble friend and the noble Baroness, Lady Bowles, raised the question of how we get information from the EU. In terms of ESMA and EU regulators co-operating and sharing information with the FCA, it will look to make use of the existing arrangements in the Financial Services and Markets Act 2000 to co-operate and share information which should be in the interests of both parties. We hope that that will continue. I was asked why we have bothered to keep paragraph 5 in the MAR SI, which is the list of EU institutions. We have omitted these exemptions from the UK MAR to achieve symmetry with the EU, but we recognise that after exit we may achieve or negotiate closer links, in which case it would be desirable to reinstate the current position if it was reciprocated or desired. I was also asked why we have exempted EU bodies under MAR. The UK and the EU markets are highly integrated, a point made by the noble Lord, Lord Tunnicliffe, and the relationship between them means that the exemptions may also be necessary for EU institutions interacting in the UK market.
My noble friend raised the issue of FCA fees. He will understand that those are not within the scope of the EU withdrawal Act powers or indeed within this statutory instrument. However, I hope that he was reassured by what I quoted from the chief executive, Andrew Bailey. He expects FCA fees to remain steady for a year or two, assuming that there is an implementation period.
The noble Lord, Lord Tunnicliffe, asked why the scope of this SI covers financial instruments in both UK and EU trading venues. I think the answer is that there is a very close relationship between the UK and EU markets and the scope provided by this SI ensures that the FCA will continue to have the ability to investigate and pursue cases of market abuse related to financial instruments which affect UK markets. UK companies may have instruments that are quoted not in London, but in Europe. If there were abuse there, it could affect the integrity of the UK market. This means that the FCA could take action where activity in a financial instrument, which was traded on an EU venue, impacted on UK markets. We want to maintain the current levels of integrity and confidence that UK markets currently hold. The impact assessment—
We would expect the EU regulators to intervene and investigate market abuse in an EU trading venue of a UK-related instrument. We would expect it to take the lead. The provision in the SI is for what I hope is the unlikely event that they decide for whatever reason not to intervene, but that we feel there is a need to investigate market abuse because it is having an impact on UK markets. That is why that particular power is as I have said.
To return to the lack of an impact assessment, we did ship a bit of water yesterday. We recognise the importance of having impact assessments available to inform these debates. Treasury Ministers are doing everything they can to make these available as soon as possible. They are in discussions with the Regulatory Policy Committee to improve the impact assessments and enable them to complete their review of them. We hope to publish the relevant impact assessment next week.
I omitted to congratulate the noble Lord on getting out an impact assessment on the final SI—the credit rating business. Because it came out, I was foolish enough to read it; it is interesting that the numbers showed a cost to the industry of £11.4 million. I did not really understand what that meant—whether the figure was big or little. It is obviously £11.4 million, but do these people make hundreds and thousands of millions of pounds such that it is nothing or will it be a significant cost to them?
It is a very good question, and the answer is that we do not have the exact information as to the exact turnover or number of people employed in the CRAs. I will make further inquiries and see if I can shed some light on that. I might get some in-flight refuelling.
When my noble friend sheds some light on that, would he be kind enough to explain something which is often hidden in this? I do not quite understand why there is an additional cost if we are to do the same thing, only locally, because they must have been paying somewhere else. Could my noble friend make sure that we have an answer that shows which bits are, if you like, real additions and which are a replacement for somewhere else? That is all I want to know.
Seeing whether one can net it off is a very good question, and I will see whether we can do that—I probably cannot do it on my feet.
To revert to the point made by the noble Lord, Lord Tunnicliffe, about how the £11.4 million cost to the credit rating agencies relates to the size of the industry, we expect credit rating agencies to incur an estimated £10,000 per firm for changes to IT systems and £60,000 per firm for reporting requirements. This is for the five firms that the FCA expects to enter the regime. On top of that, there are familiarisation costs. Perhaps I could write to the noble Lord with more information, seeing whether we can net it off, as my noble friend has just said, by looking at what they have to pay at the moment.
The answer to the noble Lord, Lord Tunnicliffe, about the status of this SI, if there is an agreement, is the same as in the last debate. The SIs would be delayed and may then be repealed or amended as appropriate, depending on what deal we actually do.
The noble Lord asked for an explanation of the third option of paragraph 7.12 of the Explanatory Memorandum. This relates to credit rating agencies’ pre-exit applications to the FCA. All credit rating agencies will need to register with the FCA in order to establish legal entities in the UK following exit. Firms can complete this registration through the automatic certification process. Basically, if you have a credit rating agency which is located outside the EU but which has registered with an EU credit rating agency, it can apply to have that certification extended to the UK in a sort of passporting arrangement.
The noble Lord, Lord Tunnicliffe, asked about the senior management structure of credit rating agencies and whether individuals could be held responsible. It is a good question. The senior managers and certification regime does not currently apply to credit rating agencies; I think that one of the reasons is that they do not actually handle customers’ money, which of course banks and other agencies do. Regulation 22 of the SI applies Section 400 of the FiSMA, which provides that if an offence committed was with the consent or connivance of an officer of the body corporate, or due to neglect on its part, the individual as well as the corporate is guilty of an offence.
Finally, on international co-operation, the MAR SI amends Part 8 of the FiSMA to facilitate international co-operation between EU and non-EU regulators and the FCA. There are existing co-operation provisions for cases of market abuse that we will seek to rely on. Related to that, both the Treasury and the FCA will continue to co-operate internationally with the EU to facilitate identification and enforcement of market abuse, and we are confident that the FCA and HMT can continue this co-operation despite no longer being part of the EU.
Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019
Considered in Grand Committee
Merchant Shipping (Recognised Organisations) (Amendment) (EU Exit) Regulations 2019
Considered in Grand Committee
My Lords, the draft regulations that we are considering will be made under powers in the European Union (Withdrawal) Act and are needed if we leave the EU in March without a deal.
Recognised organisations, or ROs, play an important role in ensuring that ships are built and maintained to operate in compliance with standards on safety and the prevention of marine pollution. They carry out these functions on behalf of maritime nations. In the UK, the Maritime and Coastguard Agency delegates about 85% of its survey work to ROs.
Globally, the International Maritime Organization develops rules on ROs. The IMO’s Recognized Organizations Code entered into force in 2015. The code contains criteria against which ROs are approved, authorised and assessed, and gives guidance on how flag states should monitor ROs.
The EU has adopted legislation to harmonise the way in which member states implement those IMO requirements. Under EU legislation, member states may delegate the inspection and survey of ships to EU-recognised ship inspection and survey organisations, or EU ROs, by authorising them to act on their behalf. At present there are 12 EU ROs. Six of them have been authorised to act on behalf of the UK. The Maritime and Coastguard Agency intends that these six ROs would remain authorised by the UK and be recognised as UK ROs following our exit from the EU.
The MCA regularly meets UK-authorised ROs and has kept them informed of these proposals. They have raised no objection and understand why the changes are needed to ensure that the UK continues to have a functioning statue book for the approval of ROs.
EU Regulation 391/2009 and related legislation established a system for approving ROs; criteria for assessing RO performance, which is based on IMO criteria; monitoring measures and remedial measures if ROs are underperforming, including fees and penalties and, finally, the removal of RO status.
The European Union (Withdrawal) Act retains in UK law EU directly applicable legislation, such as that on ROs. It makes provision in Section 8 to correct deficiencies in such EU legislation as arises from the UK leaving the European Union. We need to amend that retained EU legislation on ROs for the legislation to function correctly in the future. The regulations will therefore amend EU Regulation 391/2009 and subsidiary EU legislation, and they will make the changes needed to adapt an EU system for ROs to one that can function as a UK system after exit. The regulations will change references to “Member State” and “the Commission” to “Secretary of State” or “the United Kingdom” where appropriate, and they will change definitions and other wording to reflect the UK’s position outside the EU. Redundant reporting requirements have been removed.
Powers have been transferred from the European Commission to the Secretary of State in relation to standards for RO performance and to keep up with changes in the minimum performance criteria for ROs, especially in the light of IMO changes. In addition, the powers of the Commission to regulate in Article 14 of Regulation 391/2009 have been transferred to the Secretary of State. This will enable the Secretary of State to legislate in order to establish criteria to measure the effectiveness of the rules, performance and procedures of ROs and criteria to determine whether an RO’s performance is an unacceptable threat to safety and the environment. The Secretary of State will also be able to legislate to make and amend rules for imposing fines and penalties and ultimately for withdrawing recognition, and rules for interpreting the minimum criteria for ROs.
The regulations include provision to ensure that ROs that are, immediately before exit day, both recognised by the EU and authorised by the UK continue to be recognised after we leave. These ROs will become recognised directly by the UK and will continue to be authorised by the UK through new agreements to be put in place with the ROs before exit day. That will help provide ROs with certainty and clarity. Another transitional provision will ensure that ROs continue to maintain an independent quality assessment certification entity.
Commission Decision 2009/491 relates to using data from port state control inspections of ships to assess the work that ROs do. The regulations make changes to the decision to replace an EU procedure with powers to amend criteria for using port state control data. Article 8(1) of Regulation 391/2009 provides for assessment of ROs every two years by the Commission and the member state that put forward an RO for approval. The regulations retain the two-yearly assessment but transfer responsibility for it to the Secretary of State.
The regulations also transfer powers to review fines and penalties from the European Court to the UK courts by way of a statutory appeals procedure. Finally, they remove provisions relating to derogation from certain provisions of international law in Article 13(2) of Regulation 391/2009 and Commission Implementing Regulation 1355/2014. In the case of the latter, this has been revoked. The EU introduced these derogations on the basis that they appeared to be incompatible with EU law. We do not regard the provisions as incompatible with UK law and, as the UK did not lodge objections to them in the IMO, any attempt to derogate from them would be in breach of the UK’s international law obligations.
These regulations will be accompanied by Merchant Shipping Notice 1672. This provides information to the industry on the standards that ROs apply and on requirements for recognising, authorising and monitoring ROs. This shipping notice has been drafted and will be issued once the SI has been passed.
I should also mention Directive 2009/15, which governs the relationship between flag states and ROs. The UK implemented the directive administratively through formal agreements between the MCA and each RO. The directive will not be saved in UK law after exit. However, the MCA will put in place new arrangements with each RO when the regulations come into force. These will be very similar to the current arrangements between the MCA and the ROs but will reflect the changes made in these regulations.
The changes made in these regulations are needed to ensure that the law on recognising, authorising and monitoring ROs continues to function after the UK’s withdrawal from the European Union. This will enable the UK to continue to comply with its international obligations to ensure the safety of ships and the prevention of pollution. I beg to move.
My Lords, these regulations involve ship inspections. The four sets of regulations this afternoon will lead me to repeat myself on a couple of occasions because the same themes come through in each one. All of them have safety issues at their core. The current EU-based system will be replaced with a UK-only system. As I understand it, it will continue to work within a system of international standards and the new legislation will retain existing criteria for the recognition, authorisation and monitoring of ROs: so far, so good. But ships move about and currently we have obligations to report to the EU to share information. How will this sharing happen effectively in future? Most of our ships will be sailing through EU waters at some point in their journey and many of the ships that visit our shores are EU ships. We need to know how that information is going to be shared in the future because of the safety implications.
The inspection of ships, both UK and foreign ones, is a key issue for the safety of ports. Therefore, I was quite surprised to read that there has been no formal consultation. Reasons were given on each of these SIs why there was no formal consultation. If you take the SIs together they are a pretty significant bundle of legislation and would be worth consultation in the round, if not as individual pieces of legislation.
It states in the Explanatory Memorandum that the Secretary of State will be given power to make subordinate legislation. Can the Minister clarify whether this will be an affirmative or a negative procedure?
Finally, the list of ROs we have been provided with makes for interesting reading. I do not in any way pretend to be an expert in these issues. Can the Minister enlighten me as to how this list is drawn up? How is this rather disparate list of organisations there and how do we change it? What are the criteria for changing it if we want to? I would be grateful for some information on that.
I thank the Minister for presenting this instrument. I have no great problem with it but I lack a little bit of understanding. The first thing I would like to be clear on is whether this is a no-deal instrument, that is, something that needs to be processed quickly because it is necessary if we fall out of the EU without a deal—which in my view and that of my party would be the least satisfactory outcome. I can see that the instrument does its work in the event of a no deal; I am not so clear about what happens to it if there is a deal. Will it be repealed or will it be paused? Will it continue to exist? The Minister may find it efficient to answer that question referring to all four statutory instruments if it is the same answer.
I have subjected the Explanatory Memorandum as best I can to the generic test of whether it includes any necessary policy change. I could not find any areas of such change, but, as a result of studying the statutory instrument, I realised that I did not understand the role of the IMO. Can the Minister develop a little further what the role of the IMO is with respect to us and the EU now and what it will be after exit day? In particular, where does the IMO create regulations which are mandatory for the United Kingdom?
I thank noble Lords for their consideration of these regulations. As I said, they will ensure continuity for ROs and the shipping companies which rely on their services and make no changes to the way in which ROs operate or to their relationship with the MCA.
The noble Baroness, Lady Randerson, raised safety, which is of course a priority. We are currently a member of the European Maritime Safety Agency. We want to continue our close working with the EMSA after we leave the EU. The political declaration recognised that the EMSA and the MCA should continue to share data in a future relationship. In the event of no deal, we still hope to continue that relationship, but it will be subject to negotiations. Where the MCA may need to cover a role currently played by the EMSA, it has contingency plans for doing so.
No formal consultation on this statutory instrument was done, as the noble Baroness pointed out. The MCA has a close working relationship with the ROs. It authorises them, meets them regularly and has discussed with them the content of the instrument. As I said, they recognise that the aim of the regulations is to maintain the status quo as far as possible. The regulations will have no impact on the working of ports. We have had no specific discussion with ports on the regulations, but obviously we do that as part of our wider work on EU exit.
On the Secretary of State’s powers, secondary legislation that amends the criteria that ROs must meet to continue to enjoy recognition, the system of fines and periodic penalty payments or any withdrawal of recognition is subject to the affirmative procedure. Secondary legislation on interpreting the criteria for assessing RO performance and the effectiveness of their rules or amending the criteria for use of port state control inspection data for assessing unacceptable levels of performance by ROs is subject to the negative resolution procedure.
On how we approve ROs, the list is slightly disparate, as the noble Baroness pointed out—I had not seen it myself before getting to know these regulations. There is an EU list and, from it, the UK recognises six ROs. The MCA enters a formal agreement with each RO acting on behalf of the UK and assesses those ROs periodically. It is a long-standing list, but it is possible to change it and if people wish to apply, we will certainly consider that.
In response to the points made by the noble Lord, Lord Tunnicliffe, this applies to all the regulations we will be discussing today and perhaps tomorrow. It is a no-deal SI. During an implementation period, the SI will not be needed because the withdrawal agreement provides that EU law should continue to have the same effect in the UK as in the EU during that period. The EU withdrawal agreement Bill will be introduced as soon as possible and, as we set out in the White Paper, we will make provision to defer, revoke or amend any SIs that are made but then not needed during an implementation period if a deal is secured. The same applies to the rest of the SIs that we will be discussing.
On the relationship between recognised organisations, the EU and the IMO, we have authorised six ROs which are recognised by the EU. The relationship between the UK and the ROs will not change and there will be no change in the relationship between the UK and the IMO. The ROs will carry out the same inspections and surveys on UK ships as they do now. The only changes are to reflect the UK’s status outside the EU; for example, the EU will take over responsibility for monitoring and assessing its authorised ROs.
The IMO sets the global framework for maritime safety and security and the prevention of marine and atmospheric pollution by ships. Its recognised organisation code contains those criteria and the UK is a signatory to the IMO convention that implemented the RO code. The difference, I suppose, is that, while the relationship between the UK and IMO will stay the same, there will not be that relationship with the EU; at the moment, ROs are approved or recognised at EU level. Since the IMO conventions came in, the EU has harmonised them; we will be removing ourselves from that harmonisation and recognising ROs ourselves. After exit, decisions on recognition of new ROs and evaluations of the performance of existing ROs, which were previously made by the EU, will now be made by the Secretary of State. There will be no change in our relationship with the IMO.
I hope that I have answered all the questions; if not, I will follow up in writing.
Ship and Port Security (Amendment etc.) (EU Exit) Regulations 2018
Considered in Grand Committee
My Lords, these draft regulations will be made under the powers conferred by the European Union (Withdrawal) Act 2018. The regulations make appropriate amendments to ship and port security legislation following the conversion of EU Regulation 725/2004 into domestic law on exit day.
The UK maritime sector is thriving. We are one of the largest flag states, have one of the largest ports industries and attract significant investment. We lead the world in many areas of maritime business services, education and research. These regulations will make necessary and appropriate amendments to existing ship and port security legislation so that the current regime of protective security on board ships and at UK ports continues to operate effectively following the United Kingdom’s withdrawal from the European Union.
International agreements and European legislation form the bedrock of the well-established regime of ship and port security which currently exists in the UK. The UK is a contracting party to the IMO’s Safety of Life at Sea (SOLAS) Convention. In response to the perceived threats to ships and port facilities following 9/11, the International Ship and Port Facility Security (ISPS) code was adopted under SOLAS. This code established a range of protective security measures which are required to be put into practice on ships and at ports, to protect vital infrastructure and people from acts of terrorism or violence.
The code is set out in two parts. Part A includes a number of mandatory provisions for signature states. Part B contains measures which were intended as guidance for states to consider implementing, aimed at enhancing the security of ships and port facilities. In 2004 the convention and code were given a basis in EU law by Regulation (EC) 725/2004. This regulation provided for the harmonised implementation of the convention and ISPS code both within and across EU member states. It made the provisions of Part A and certain specific elements of Part B of the ISPS code mandatory for implementation within all EU member states. That EU regulation is directly applicable in UK law but was further implemented, in so far as it was necessary to do so, in domestic legislation by the Ship and Port Facility (Security) Regulations 2004.
The 2005 ports security directive further complements the security measures introduced by the EU regulation by expanding the area of a port which is subject to a protective security regime. The directive was transposed into UK law by the Port Security Regulations 2009 and 33 separate designation orders which define the boundaries of ports across the UK. The existing legislative regime ensures that proportionate security measures are in place on board ships and at the UK’s maritime ports.
On withdrawal day, the regulation will be converted into UK legislation. To ensure that the retained EU law functions effectively, a number of changes are required to the text of Regulation (EC) 725/2004, the Ship and Port Facility (Security) Regulations 2004 and the Port Security Regulations 2009. The changes are being made to ensure that the existing regulatory framework of ship and port security continues to operate. The policy behind these changes is that in the UK there should be no practical change to, or noticeable impact on, how the industry operates an effective protective security regime on a day-to-day basis.
Most of the changes which are being made are relatively minor. Some involve the restatement of retained EU law in a clearer or more accessible way to make it fit for purpose within domestic legislation. These draft regulations remove from the legislation inappropriate language or phrases, such as “Member State” or “the Commission”, which will no longer be appropriate, and they also remove obligations placed on the UK by virtue of it being a member of the EU—for example, to provide particular information to the Commission.
The draft regulations also revoke Regulation (EC) 324/2008 which established procedures across the EU for the Commission to conduct inspections of UK ships and ports. Inspections of UK ships and ports by Commission inspectors will be neither required nor appropriate following EU withdrawal, when the Department for Transport and the Maritime and Coastguard Agency will continue to deliver the well-established programme of ship and port inspections to ensure that the required security standards are being met.
The draft regulations also include provision for three more detailed but equally necessary corrections to the existing legislation. First, they amend Article 3 of Regulation (EC) 725/2004 in relation to domestic vessels. The amendment remedies a deficiency and makes the law more accessible by including a specific reference to the categories of domestic vessel that fall within the scope of the EU regulation. This does not alter or impact on current administrative practice or the categories of domestic vessel to which the legislation currently applies or on how the vessels are required to comply with this legislation.
Secondly, the draft SI includes a provision to enable the direct application of future amendments made to the ISPS code. That will allow the legislation to keep in step with future changes and ensure that the UK meets its international obligations. The current text of Regulation (EC) 725/2004 already allows for the legislation to remain in step with any changes that are made at the international level to SOLAS and the ISPS code. The purpose of the amendments made by this draft SI is to allow the retained EU legislation to continue to remain in step with the UK legal framework.
However, as part of this provision, the Secretary of State will have the power to exclude any such change relating to international shipping by the making of regulations—something that is currently done by the Commission—if it is determined that there is a manifest risk that implementation would lower the standards of the UK’s maritime security regime. Any future regulations made in this regard by the Secretary of State would be subject to the negative parliamentary procedure.
Finally, the Port Security Regulations 2009 contain references to Section 2(2) of the European Communities Act 1972, which will no longer be in force on exit day. To fix this deficiency in the legislation and to ensure that the Secretary of State can continue under that legislation to define or amend the boundaries of particular ports, these draft regulations rely on powers within the European Union (Withdrawal) Act to confer on the Secretary of State powers to continue to update or amend that existing suite of legislation. This power would be used, for example, when a port boundary changed or new ports came into existence.
The amendments made to the Port Security Regulations 2009 will ensure that the Secretary of State can continue to discharge all his statutory duties. Not conferring this power on the Secretary of State would effectively create a situation where the existing legislative regime would be frozen in time and any required updates could not be made because the current legislation only provides for this to be done through an order made under Section 2(2) of the 1972 Act.
The power to make regulations conferred on the Secretary of State in the draft regulation will maintain the effectiveness and operability of the current ship and port security legislation following EU withdrawal. The power will ensure the continued discharge of the Secretary of State’s existing obligations as set out in the Port Security Regulations 2009, and will be exercisable in the same manner and subject to the same conditions as prior to EU withdrawal.
Changes which are made to this legislation will be subject to the negative parliamentary procedure as they were before when the changes were made under Section 2(2) of the European Communities Act 1972. The consequence of not having this power is that the existing port security regime will cease to operate effectively following EU withdrawal, which could present risks to security.
In conclusion, the draft regulations are intended to make changes which will ensure that the current legislative regime for ships and ports is able to operate effectively and continues to meet the UK’s maritime security requirements following EU withdrawal. I beg to move.
I thank the Minister for her explanation. The EU regulations behind this provide a standardised regime of protective security for port facilities and the surrounding area, and this SI also covers inspections. It replaces the EU system with a UK system that mirrors the EU one, and in doing so, there is one crucial change: it removes the obligation to provide information to the European Commission. I am sorry to ask again: how will we co-ordinate and share information with the Commission in the future?
The SI says that the MCA will continue to carry out inspections to ensure that ships and ports meet required security standards. Can the Minister say who will set down those standards and require them in the future and how we will align them internationally so that our standards are as good as those of the rest of the world? Since this is an attempt to mirror the EU, how will the Government adapt to changes that the EU makes so that we do not put ourselves at a disadvantage with our current EU partners?
Can the Minister also say what liaison there has been with the devolved Administrations on this? It is not clear from the Explanatory Memorandum. The devolved Administrations have an important role in port administration. We do not want to confuse people totally; the idea that you would have a very different set of standards if you put into the port of Holyhead rather than the port of Liverpool would be deeply unsatisfactory and confusing. The SI gives the Secretary of State power to amend port security regulations by the negative procedure, and the Minister drew attention to that. However, perhaps I did not hear correctly or fully; could she say why the affirmative procedure is not being considered?
The EU can block amendments to the ISPS code if they might lower maritime security standards. This power is now given, in this SI, to the Secretary of State, once again by the negative procedure. We do not want to see lower standards. I am concerned about the danger that we might get out of step with the EU on the highest standards which are set by it and that we might do so simply by default. That is because the Secretary of State would exercise the power through the negative procedure and we would not be given the opportunity to scrutinise it.
This is a serious issue as regards safety and it is important that we are given the opportunity to scrutinise it. I personally would prefer the affirmative procedure, but I will listen carefully to what the Minister has to say.
My Lords, once again I thank the noble Baroness for introducing this instrument. I have subjected it to my standard test: is it the minimum policy change required? I also have to admit that I did not understand the overall framework, but that is my fault. I know about aeroplanes and trains, but the sea is a mystery to me. What I have picked up from the instrument is that SOLAS with its ISPS code is an international convention. Is it the case that the international body hands down specifications and requirements that it has previously put through the EU and in the future will make directly to the UK? Are such directions and recommendations mandatory for the UK except as excepted by this instrument?
My Lords, I thank noble Lords once again for their consideration. As with all of these SIs, our EU exit is not going to mean that co-operation with EU member states on matters of national security will cease. We will continue to work with the EU and our international partners where appropriate on all matters relating to maritime security.
As regards the devolved Administrations, port and ship security is not a devolved matter, but as the noble Baroness has pointed out, there are ports across the United Kingdom so we have engaged with the devolved authorities in Scotland, Wales and Northern Ireland on the proposals in this draft SI and they have been supportive of them.
I turn now to SOLAS and the ISPS code. The UK is a contracting party to the Safety of Life at Sea convention, which is an international convention. The International Ship and Port Facility Security code was adopted under SOLAS. That code has established a range of protective security measures which should be put into practice at ports. Following that, the EU regulation made the provisions in Part A and specific elements in Part B mandatory for all member states, which I went through in my opening speech. Following the conversion of EU law into UK law, they will be directly applicable.
Perhaps I may ask a question as a point of clarity. I have some trouble in seeing what the role of the EU is now if SOLAS hands down a set of rules and we are a contracting state. Are we not required to do that by virtue of being a contracting state whether the EU is there or not? The only role that emerges from this is the ability to reject a rule if it comes under the conditions set out. That was previously exercised by the EU but in future it will be exercised by the Secretary of State. I do not see, other than in a role of co-operation, what the EU’s role is now. I do not see what “taking it away” actually means.
I suppose the role of the EU is that we currently implement the requirements under EU law. Following the withdrawal Act we will implement them under UK law rather than EU regulation. The standards will stay the same: the international standards will automatically go through legislation. We will accept the standards apart from the exception that the noble Lord pointed out.
The noble Baroness asked about negative and affirmative procedures. The negative one is appropriate because the regulations can be made only to prevent standards of security being lowered by the international amendment.
The existing legislative regime for the security of ships in ports, as I said, was based on UK regulation and the EU regulation-implemented parts of ISPS and the SOLAS convention. After withdrawal, all existing European legislation that is currently applicable will become part of the UK statute book.
I hope that I have managed to address the points made by noble Lords but if have failed to do so I will follow up in writing. Perhaps I will follow up in writing just to set out more clearly the exact relationship between the SOLAS convention and the UK and further to clarify the negative procedure point.
The current legislative and protective security regimes operate effectively and the draft regulations will simply make appropriate changes that will become the retained suite of protective ship and port security legislation when the UK exits the European Union. I hope that noble Lords will join me in supporting these regulations. I beg to move.
Merchant Shipping and Other Transport (Environmental Protection) (Amendment) (EU Exit) Regulations 2018
Considered in Grand Committee
My Lords, as well as speaking to these regulations, if it is convenient I will speak also to the draft Ship Recycling (Facilities and Requirements for Hazardous Materials on Ships) (Amendment) (EU Exit) Regulations 2019. The regulations are made, for the most part, under the EU withdrawal Act. The Act retains EU-derived legislation in UK law. It also makes provision in Section 8 to correct deficiencies in such EU-derived legislation that arise from the UK leaving the EU.
There are some changes made under Section 2(2) of the European Communities Act. These update references to an EU directive on sulphur emissions from ships and correct an out-of-date reference to the EEA agreement in the Transport and Works Act 1992.
Turning to the regulations themselves, both make changes to ensure that legislation on environmental pollution continues to work after we leave the European Union. The environmental protection regulation makes changes in three areas of legislation on transport and the environment—specifically to legislation on air pollution controlling sulphur dioxide emissions from ships; legislation on substances used to prevent the fouling of ships’ hulls, and transport and works legislation in relation to environmental impact assessment.
The amendments in these regulations are technical. There are no policy changes, and there is no reduction in the environmental standards or, indeed, the obligations to which the UK is currently subject. The regulations will change references to “Member State” and “the Commission” to “Secretary of State” or “the United Kingdom” where appropriate. The regulations change definitions and other wording to reflect the UK’s position outside the EU.
I turn to the control of sulphur emissions from ships. Noble Lords will be aware of the importance of action on air pollution. The UK supports the IMO’s new global limit for sulphur emissions from ships, which comes into force on 1 January 2020. The UK has recently published a clean air strategy, which aims to cut pollutant emissions in half by 2030 and my department has also established the Clean Maritime Council, where key stakeholders are encouraging the development of green technology. We are planning to publish a clean maritime plan this spring, which aims to reduce both pollutant and greenhouse gases from shipping.
These regulations make changes to The Merchant Shipping (Prevention of Air Pollution from Ships) Regulations 2008 and Commission Implementing Decision 2015/253. The changes are made only to ensure that the legislation remains operable, and the regulations will ensure that the UK continues to recognise methods of abating emissions of airborne pollutants that are approved by EU member states. They also ensure that recreational and pleasure craft will continue to benefit from certain exemptions in respect of diesel engines.
The regulations remove a requirement to report to the European Commission, which would be redundant as it only applies to EU member states. Instead, there is a new requirement on the Secretary of State to publish an annual report on compliance with sulphur standards for marine fuels. We have removed references to SafeSeaNet, a database operated by the European Maritime Safety Agency. However, even in a no-deal situation, the UK will continue to provide and receive information on ships that are not complying with IMO air pollution rules. We will receive that information through our participation in the Paris Memorandum of Understanding on Port State Control.
The second area of legislation which these regulations change is in relation to the ban on the use of certain harmful chemical compounds—known as organotins—from use in ships’ anti-fouling systems. Anti-fouling paints and coatings, which inhibit the attachment of unwanted organisms to ships’ hulls, improve the fuel efficiency of ships, but the organotin compounds in some anti-fouling products have been shown to be very damaging to marine life. They have been banned under international and EU legislation.
The regulations before the Committee make changes to three pieces of legislation on anti-fouling substances: The Merchant Shipping (Anti-Fouling Systems) Regulations 2009—SI 2009/2796; EC Regulation 782/2003 on the prohibition of organotin compounds on ships; and Commission Regulation (EC) No. 536/2008. As well as correcting deficiencies such as references to member states, the regulations transfer Commission powers to amend references to international law on governing the use of anti-fouling systems to the Secretary of State.
Finally, the regulations also introduce technical changes to the environmental impact assessment provisions of the Transport and Works Act and procedural rules. They will allow the UK to continue to take a co-ordinated and streamlined approach to producing an environmental impact assessment. For example, they will, as now, avoid the need for certain information to be collected twice. The Welsh Government have been consulted on the changes to these provisions and given their approval for these regulations to be laid. These changes update references to an EU directive on sulphur emissions from ships and correct an out-of-date reference to the EEA agreement in the Transport and Works Act 1992.
I turn now to the ship recycling regulations. 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 protection for the environment.
EU Regulation 1257/2013 transposed key parts of the Hong Kong convention on recycling of ships into EU law. The main provisions of the regulations have applied from 31 December 2018—so only very recently—and include requiring EU-flagged ships to be recycled at an approved ship recycling facility, and new EU-flagged ships to 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.
These regulations will ensure that the legal framework for ship recycling remains legally operable when the UK leaves the EU. They will do this by making amendments to EU Regulation 1257/2013 on ship recycling, and to three Commission implementing decisions. The regulations also amend SI 2015/430, the 2015 UK ship recycling regulations. Finally, they amend Northern Ireland legislation on ship recycling facilities and waste management licensing. The draft regulations address a number of deficiencies arising from EU exit which would hinder the operation of the UK ship recycling regime.
The current EU regulation establishes a “European list” of approved recycling facilities which all EU-flagged ships, including UK ships, must use when they need to be dismantled and recycled. When we are no longer in the EU, without a deal we will have no influence on who is included and removed from the European list. This instrument will require UK-flagged ships to use an approved ship recycling facility on a new “United Kingdom list”. This list will replace the European list for UK-flagged ships, and the Secretary of State will have the power to add facilities to or remove them from the list in the future. The UK list will include all recycling facilities that are on the European list when we leave the EU.
The regulations will set up a new procedure for ship recycling facilities to apply for inclusion on the UK list. They will also allow the Secretary of State to change legislation in line with international requirements—for instance, when the Hong Kong convention on ship recycling comes into force.
On the inventory of hazardous materials, ships typically contain quantities of hazardous materials, and the EU Ship Recycling Regulation requires new ships to carry a list of those hazardous materials from the beginning of this year. Existing ships also need to carry a list from 31 December 2020. However, the EU withdrawal Act retains in UK law only EU measures that are in force on the day we leave the EU. This means that the requirement in the EU regulation for existing ships—that is, from 31 December 2020—to carry a valid inventory will not be retained after we leave the EU.
The Government will look to implement this requirement at the earliest opportunity. As my officials confirmed to the Secondary Legislation Scrutiny Committee, 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. Furthermore, ships calling at EU ports will continue to need to carry an inventory after the measure comes into force in the rest of the EU in 2020.
As with other exit legislation, the regulations will change references to “Member State” and “the Commission” to “Secretary of State” or “the United Kingdom” where appropriate. The regulations change definitions and other wording to reflect the UK’s position outside the EU and the EEA, and the requirement to make reports to the Commission is removed. The regulations will allow the Secretary of State to amend various documents, including those required when a facility outside the UK applies for inclusion on the UK list.
This instrument applies to waste management, which is a transferred matter for Northern Ireland under the Northern Ireland Act 1998. Although the Government are committed to restoring devolution in Northern Ireland, in consultation with Northern Ireland departments the Government have included provisions in these regulations in relation to waste management legislation that applies in Northern Ireland.
These provisions relate to land-based waste permits for ship recycling facilities, and they update the legislative references from “the European List” to “the United Kingdom List”. This is required to maintain UK-wide consistency, enabling the inclusion of Northern Ireland in the post-Brexit UK list regime.
The changes made in both the environmental protection SI and the ship recycling SI ensure that environmental law continues to function after we leave the European Union. That will enable the UK to continue to comply with its international obligations as established by the International Maritime Organization and maintain the highest environmental and safety standards. I beg to move.
My Lords, we have been getting on rather swimmingly with these SIs, but I regret to say that I have rather more to say about these two, particularly the ship recycling regulations.
I start with the environmental protection SI. This is a very important piece of regulation because of the extremely high levels of air pollution from shipping. It deals with the sulphur content of fuels and anti-fouling systems, which can also be seriously environmentally damaging. It also deals with the frequency of sampling and the reporting procedures.
There is a complex description of the legal application of these powers. I am concerned that there might be a danger of the constituent Administrations of the UK getting out of step and of ship operators getting confused if the requirements vary between the UK countries in a way that they do not at the moment because of the streamlined EU system. Therefore, there is a concern that, once we leave the EU, the legislation will diverge.
Paragraph 7.3 of the Explanatory Memorandum says that where a UK project might have a significant environmental effect on an EU member state, we will continue to consult that country before granting permission. Can I please have clarification from the Minister that the consultation will be with the individual EU country and not with the European Commission?
Paragraph 7.6 refers to removing redundant references to EU databases and, specifically, SafeSeaNet, which we will no longer have access to, while ensuring that its role is replicated in the UK. How do we replicate it if we do not have access to it? How can you replicate it when we do not have access to the database? What are we replacing it with and what are the resource implications of doing that work ourselves and simply repeating what the EU is already doing? The Explanatory Memorandum states that the Welsh Government were consulted, but what about the other devolved Administrations, because some, but not all, of the provisions in the SI apply to them?
Underlying all this is the fact that we are leaving the world-leading standards set by the EU and a new limit will come into force in 2020—the Minister referred to that. It will apply to ships using the North Sea and the Channel. Will that still apply to us after we leave the EU—do the Government intend that it should apply to us? Crucially, what will happen about the Irish Sea? As I understand it, it does not apply at the moment in the Irish Sea. Will the Irish Sea be subject to the new limits? Obviously, it is a sensitive area where ships from Northern Ireland and the Republic of Ireland are sailing in effectively the same waters. Will they be subject to a different regulatory regime?
Turning to ship recycling, the EU regulation that the SI deals with is the basis for improving environmental and safety standards for recycling EU-flagged ships and has led to the creation of an approved European list. This is a very important SI, because the facilities on the list can be anywhere in the world. There are seriously environmentally damaging ship-recycling facilities in some parts of the world. The procedures they use are unsafe, with a major impact on human health. Inspecting and approving them to create a European list is an onerous and complex business with a massive cost. Are the Government seriously saying that we will repeat that inspection process, with all the onerous and costly implications?
The EU regulation also restricts what hazardous materials—for example, asbestos and PCBs—can be installed on ships and ensures that they have an inventory of such materials. The UK’s MCA, Health and Safety Executive and the Environmental Protection Agency deal with the country concerned about this. As usual in this legislation, the status quo will continue to apply at first, but this SI is different from the others we have considered this afternoon. This is not just the usual expensive mirroring of what already exists in the EU. It will be very expensive, but it is not a mirroring.
This is more than just establishing a procedure for updating, although that it is important, because this is an area where standards change and, fortunately, standards have been rising. Paragraph 7.3 of the Explanatory Memorandum specifically says that, although:
“Initially, the UK list will be similar”,
in the name of giving,
“UK flagged ships the widest choice … It establishes a new procedure allowing ship recycling facilities worldwide to apply for inclusion”.
So it is clear; there is planned divergence here and absolutely no guarantee on maintenance of standards. This is one of the first glimmers of what some hardline Brexiteers have been urging: a new world where standards are lower, and costs are lower as a result.
There is another thing that concerns me about this regulation: paragraph 6.3 of the EM points out that it will create a gap around the requirement for ships to carry a valid inventory of hazardous materials. It says that primary legislation is being explored on this, but will we have it by 29 March? If not, when might we get it?
Paragraph 7.5 of the EM raises a serious issue about the Northern Ireland statute book. The EM was clearly written—as, therefore, was the SI—a very long time ago, because it says:
“With exit day less than one year away”—
if only. This has been sitting around on the shelves gathering dust for a long time. But even having been written all those months ago, it says that,
“the window to prepare Northern Ireland’s statute book … is narrowing”.
Although I do not expect the Minister to tackle this issue now, perhaps she could write to me about it. A serious general issue has been raised here: the people of Northern Ireland are in a policy lacuna and have been for years. Nothing happens there to modernise or deal with policy problems. Their hospitals and schools are administered by the Civil Service and they do not have the attention to policy problems that there should be in a properly governed, devolved situation. That is my general concern about what this specific comment raises; it does not relate only to the issue of ship recycling.
One specific question comes to me on this point: will Northern Ireland continue to benefit from remaining a member of the EU list—that is, going back to ship recycling-approved places—in the event of the backstop coming into force? I thought about this for a long time to see whether I had understood it. There is a genuine question mark here. Will the list be different in Northern Ireland if the backstop is in force because we have a no-deal Brexit? After all, why are we looking at all this unless we are considering a no-deal Brexit?
Once again, I did not see any reference to consultation with the Scottish and Welsh Administrations. I would like to know that they have been consulted and informed. I will be grateful for whatever answers the Minister can provide at the moment but I would be happy for her to write to me on other issues.
My Lords, I thank the Minister for presenting these two SIs. I also thank the noble Baroness, Lady Randerson, for her points. She has stolen most of my best lines and, in light of the hour, I will try not to be too repetitive. I hasten to add that I am very happy to hear all her questions answered but please disassociate me from anything to do with Northern Ireland.
We seem to be in a rather different position here. On virtually everything we have discussed today there has been a pretty sound EU position that we are just trying to transfer across. My sense is that we do not have a pretty sound EU position when it comes to these instruments. Therefore, how we manage the future and how these instruments impact on the future are extremely important.
I will be brief. The first instrument covers sulphur standards, anti-fouling and environmental impact standards. The overwhelming, important one is the issue of sulphur dioxide pollution. I hope the noble Baroness can give some response. It seems to me that it has to be international. When the gas is released, it will go where it goes. Therefore, we need to understand how decisions about the concentration of sulphur in fuels are managed, the areas of the world that are covered and the testing techniques—particularly the position about the Irish Sea, which seems to be an anomaly. There is also the matter of agreeing standardisations for abatement technologies for sulphur dioxide. Once again, those sorts of issues really need international agreement. Can the Minister give me some feel of the situation we will be left in if we leave the EU without an agreement and this instrument becomes applicable?
In passing, I would also like to mention SafeSeaNet. It seemed a wacky sort of title so I googled it. It is clearly a very important facility and without it it is difficult to see how we can discharge the responsibilities we take over, particularly in sulphur standards.
The anti-fouling part of this seems relatively straightforward and I do not have any questions on it. I am not entirely convinced that the environmental impact assessment is a consequence of leaving the EU. It seems to me that the Government are tidying up pieces of domestic legislation and perhaps smuggling it through. I am sure I have misunderstood that but I feel a duty to ask the question.
Finally, the points raised by the noble Baroness, Lady Randerson, on ship recycling are very important. In the past this has been a dreadful area of activity in the world. The EU initiative is a commendable step forward in tidying it up. It is very important to understand how we will be involved in the future. I hope the Minister will be able to assure us that we will go into this new era—if we are forced into it—on the front foot to get these standards improved and, what is more, to continue to participate with other countries to make sure they are international standards so the whole world can share the benefits of proper controls.
I thank noble Lords for considering these draft regulations. I will attempt to answer as many questions as I am able to and will follow up in writing if I do not get to any. I absolutely agree with the noble Lord’s point that these environmental measures are needed across international boundaries. That is why we are seeing international action through the IMO, such as the higher global sulphur standard, which comes into force next year. We will continue to play a leading role in the IMO in the development of those environmental measures and also continue to co-operate with other countries on the enforcement of such measures through our membership of the Paris MoU on port state control.
We support the new global limit on the sulphur content of fuel of 0.5% on 1 January 2020. The UK, along with other states, is assisting the IMO to develop best-practice guidelines for ship owners and operators and all suppliers. Since 2015, ships inside the emissions control area—the North Sea and including the English Channel but not the Irish Sea—have been limited to 0.1% sulphur unless they use an exhaust gas cleaning system or alternative fuel. Under our recent clean air strategy, we are considering options for extending that current emission control area in the North Sea to other UK waters such as the Irish Sea. The UK’s position on sulphur standards, and the inspection regime, will not be changed by EU exit. We have committed to taking further action on that in the clean air strategy.
The standards and testing regimes for the future are agreed at the IMO—again, that will not change after we leave the EU. Other organisations such as fuel suppliers and the International Organization for Standardization will be involved in those discussions—as will the UK. There are separate EU targets for the number of ship inspections and fuel samples which member states need to take annually, and which we have retained.
The instrument provides for the continued recognition of the emission abatement methods approved by EU member states, and most equipment is approved at the IMO level. Member states are allowed to trial new and innovative technology which does not have the formal approval of the IMO; in practice, we expect most systems of emission abatement technology to be built to meet the IMO type requirements, which we would follow.
I note the question from the noble Baroness, Lady Randerson, about whether the consultation would be with member states or the Commission. The consultation mentioned in paragraph 7.3 relates to the consultation on the environmental impact of projects being consented under the Transport and Works Act, and I confirm that the requirement, where a project could impact another member state, is to consult with the appropriate authorities and bodies of the individual countries concerned, not the Commission.
On SafeSeaNet, which both the noble Lord and the noble Baroness referred to, we will continue to share data. Through the Paris MoU THETIS system, countries share data from port inspections. Currently, we send data to THETIS through the EMSA SafeSeaNet system. In a no-deal scenario, the MCA will simply send the data directly to the THETIS system. That is why we have removed references to SafeSeaNet from the regulations. We will absolutely continue to share IMO compliance information through THETIS.
The noble Lord referred to environmental impact assessments, which are outside the EU withdrawal Act. I will say a few more words about that in an effort to explain our actions. The two minor amendments being made under powers other than the EU withdrawal Act are under Section 2(2) of the European Communities Act, and the amendment to Section 6(A) of the Transport and Works Act 1992. That updates an out-of-date reference to the EEA agreement, and we need to make that correction now using the power under the ECA Act before it is repealed under the EU withdrawal Act, so these are consequential amendments.
Consultation is slightly different with the Welsh and other devolved Governments. That is because some of the regulations in the environmental protection regulations amend the transport and works legislation. That was originally made in 1992 and is applicable to England and Wales only and operates in areas which are now devolved. As such, we have been required to consult with the Welsh Government. The rest of the instrument is UK-wide but, as I said before, we are in regular contact with the Scottish Government on all SIs, including this one.
On the new UK list for recycling facilities, both the European and the UK list have the same standards on accepting new facilities and have the same criteria for approval. We expect the two lists to remain closely aligned on that. It is possible that new ship recycling standards, if the EU brought them about and the UK wanted to mirror them, could be replicated through the pollution powers in the Merchant Shipping Act.
On the question of Northern Ireland, the legislation does not make any changes in relation to cross-border requirements after we leave the EU and therefore, in a backstop scenario, there would be a UK list rather than the EU list. I believe that the backstop would apply only to the land border in this situation and there would be no impact on operations there.
We think that UK shipyards will continue to be on the European list of ship recycling facilities after we leave the EU. The noble Baroness pointed out that there were other non-EU member states facilities on the list. Turkish and US yards are listed as non-EU recycling facilities.
I think that I have covered most of the points but I will go through my response and the questions raised carefully to make sure that I have covered them all. This SI is intended essentially to ensure that the legislation on environmental protection and ship recycling continues to work effectively from day one of exit, and I hope that it will receive noble Lords’ support.
Ship Recycling (Facilities and Requirements for Hazardous Materials on Ships) (Amendment) (EU Exit) Regulations 2019
Considered in Grand Committee
Committee adjourned at 8.01 pm.