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House of Lords Hansard
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Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019
11 February 2019
Volume 795

Motion to Approve

Moved by

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To move that the draft Regulations laid before the House on 15 January be approved.

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My Lords, as with other instruments we have debated today, these have been laid under the EU withdrawal Act. This instrument is part of the Treasury’s legislative programme to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning UK legislative and regulatory regime for financial services.

In December 2017, the Treasury announced that legislation would be brought forward to establish a temporary permissions regime enabling EEA firms operating in the UK to continue their activities here for a limited period after withdrawal. At the same time, it was also announced that legislation would be brought forward to ensure that contractual obligations not covered by that regime could continue to be met, helping protect the interests of UK customers of EEA financial services firms. The legislation setting out the temporary permissions regime for firms that passport under the Financial Services and Markets Act 2000 was debated and passed by this House last autumn, in the form of the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.

Separately, legislation for temporary regimes for non-UK central counterparties, EEA payments and e-money institutions, and trade repositories has also been debated and passed by your Lordships’ House. This instrument therefore delivers on the second commitment: to ensure that those financial services contracts not captured by the temporary permissions regime can continue to be serviced. It similarly ensures continuity for customers of financial services providers that do not enter other temporary permissions regimes, or that exit these temporary regimes without full UK authorisation or recognition. Specifically, this instrument makes provision for passporting EEA firms, non-UK central counterparties, EEA payments and e-money institutions and trade repositories to wind down their operations in an orderly manner. It will apply to those firms that no longer wish to operate in the UK, and to those that exit the temporary regimes without permission from UK authorities to carry on new business here. The approach taken in this instrument aligns with that of other statutory instruments being laid under the EU withdrawal Act. It delivers on the Treasury’s commitments and is vital to the financial services sector and its UK customers.

Turning to the substance of the instrument, many noble Lords will be familiar with the EU law that allows EEA firms, non-UK central counterparties and trade repositories to provide regulated services in the UK on the basis of being authorised in their home member state, or recognised or registered by the relevant EU authority. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. Once the EEA frameworks providing for passporting rights, recognition of central counterparties and registration of trade repositories fall away, we will need to avoid widespread disruption to the provision of financial services, which would ultimately affect UK businesses and consumers. This instrument inserts provisions into the existing temporary regimes to allow for orderly winding down of existing contractual obligations or services, providing continuity and certainty for UK customers of those firms that do not enter the temporary regimes, or that exit them without full UK authorisation, recognition or registration.

Specifically, these draft regulations establish four distinct run-off regimes related to four different temporary regimes, covering EEA firms passporting under the Financial Services and Markets Act 2000, non-UK central counterparties, EEA payments and e-money institutions, and trade repositories. This instrument is necessary to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. The temporary regimes which have been established go a long way towards mitigating the risks of disruption and uncertainty. Without the additional wind-down provisions, however, some UK businesses and consumers could nevertheless see disruption to their existing contracts or services.

In these provisions, we are giving firms that will not be permitted to carry out new business in the UK enough time to allow most existing contracts to reach their natural conclusion, while also providing sufficient time for firms to make alternative arrangements for any long-term obligations. This instrument will allow firms with pre-existing contractual obligations to continue to meet these obligations, providing certainty and fairness to both providers and users, and showing that the UK remains open for business and that it takes legal certainty and business continuity seriously.

The Treasury has been working very closely with the Bank of England, the PRA and the Financial Conduct Authority in drafting this instrument. It has also engaged with the financial services industry, which has supported this measure, and will continue to do so. On 17 December, the Treasury published the instrument in draft, along with an explanatory policy note to maximise transparency to Parliament and to the industry.

The measures in this instrument are a pragmatic response to ensuring service continuity if the UK leaves the EU without a deal. The importance of the provisions in this instrument is reflected in the announcement of December 2017, which made it clear to the industry well in advance of exit day that the Treasury would put forward legislation to deliver these regimes.

In summary, the Government believe that the proposed legislation is necessary to ensure that existing contractual obligations can continue to be met, thereby avoiding disruption and losses for UK businesses and consumers in the event that the UK leaves the EU without a deal or an implementation period. I hope that this explanation is helpful and that noble Lords will join me in supporting this measure, which I beg to move.

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My Lords, I thank the noble Lord, Lord Bates, for his introduction. Just in case, I will declare my interest as a director of the London Stock Exchange Group plc; obviously, this would not affect the exchange, but I guess that it could be relevant to some of our competitors. Perhaps it would have been useful if we could have had one of those flow diagrams like the ones you make when you are trying to create your algorithm, to see the way through this. I will try to do that in my own little way, but it will have to be with words.

It seems that any passporting firm that provides services at the moment can continue by going into the temporary permissions regime, and then it can either become authorised or can bounce out of that regime because it will not go for a permanent authorisation; that has been contained mainly in things that we have dealt with previously. When we come to this provision, which is quite useful, those that are not intended to continue to be authorised indefinitely can either go into the supervised run-off, which does what it says on the tin in that they continue to be supervised here, or they can go into the contractual run-off, which relies on their home member state because they do not have an entity here. So you go into the supervised one when there is a branch here and you go into the contractual one if you do not have a branch here. That is clear.

However, I wonder what is going on when you might start to yo-yo between one and the other. It says that you can go from the SRO into the CRO; I suppose I could understand that if the branch closed down, so that it was going to be doing it remotely—is that how it is envisaged? What would cause the regulator to move it from the SRO into the CRO? Obviously, if there is a branch and you are in a run-off, there may come a point at which you say, “Hey, I want to close this branch and disappear”—so that seems to be one reason why you might need it. I was not quite clear why you might want to go the other way, from the CRO into the SRO, if there is no entity here to regulate—I cannot see that a branch would be invented. I could not quite understand why one would go in that direction.

Then there seemed to be a carve-out of some of the more important organisations, such as fund managers, trustees and depositories, and I can understand that they have to go into the temporary permissions regime—I agree with that. We are then probably dealing here on the markets side with smaller organisations. However, I was not quite sure how long they could be hanging around for. It says that it could be five years after entry into the regime; then it says that that is whether they enter on exit day or enter after having been in the TPR. So if they have been in the TPR, which is a year but which can keep on being extended, is there an end stop? Could some of these be hanging around for about 10 years, if the TPR was extended a few times and then they went into the SRO and the CRO for another five years? That seems a long time; I would have thought that five years for the combination might have been enough.

I was thinking that when of course I got to the parts such as those on the trade repositories and CCPs, where the PRA is in charge. There it is a much stricter regime, and quite rightly so, because you are looking here at market infrastructure and potentially bigger effects. However, there it will be a non-extendable period of one year or, in the second scenario, if they have been in the temporary permissions previously, the recognition may be adjusted—but, again, it will be no longer than one year. So it looks like they have been thinking around the problem I have related with regard to the market side of things. So that was in sharp contrast. My only concern was for how long as a maximum an organisation could be in the TPR and then in one of the run-off situations, because it does not make that clear.

Apart from that, I have no particular comment, and obviously it seems to be a very sensible provision to have made for the benefit of the stability of business that is going on in the UK. It would be very welcome if we knew that there was reciprocity in the rest of the EU for this, and it would be even better if we did not have to do it at all—but I suppose it is making the best of things in the circumstances.

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My Lords, I have just one quick question to follow on from the comments of my colleague, who is so much better versed in this than me. It struck me that we seem to have one timetable proposed by the FCA and a different one proposed by the PRA, without an awful lot of logic as to why one takes one approach and the other takes another. Are these two regulators working completely independently and sending over their various paragraphs that then get incorporated into the statutory instrument, or is there some coherent framework? If the regulators are not working together, what can we do to make sure that they will, because it will be complicated enough for business without trying to work out which regulator is thinking which way. I would assume—I do not know—that some entities find that they face both regulators. Why the difference under the new rules that each regulator is bringing forward?

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My Lords, it may have been exhaustion, but when I got to this SI, I concluded that it was all really quite straightforward. Having listened to the previous speeches, I am not so sure.

The SI seems to be summed up in paragraph 2.8, and it seems to me to be about run-offs in various areas. As far as I could see, the promises in paragraph 2.8 were carried through in the references to the various areas.

I, too, have some second-order questions about why the time limits were different, but I must admit that I comforted myself with the sure and certain knowledge that if any of them became in the least bit difficult, the Government would introduce an SI to change them anyway, so I did not overburden myself with that.

Paragraph 12.6 states that an impact assessment will be published alongside the Explanatory Memorandum. It has escaped me if it has, so I should be grateful if the Minister would tell me whether one has been published. If it has, I suppose it is my responsibility to find it; if it has not, a further apology on this matter will be gratefully received.

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I thank noble Lords for their questions. It might be for the ease of the House to know that I have the advantage—I think—of having a flow diagram in front of me. It must be one that I can release; I am sure it is. It has something printed on the top which probably tells me that it should not be released, but I am happy to make this diagram available. I do not want to reopen the debate about whether the Official Report should be able to capture diagrams and schemes; that would be a heresy that would cause a debate way above my head and pay grade, so I shall stay way out of it. I will circulate that diagram to noble Lords and place a copy in the Library. I will also, if I may, write in detail on the points raised by the noble Baronesses, Lady Bowles and Lady Kramer. Perhaps the same letter could be used to do that.

On the points raised by the noble Lord, Lord Tunnicliffe, about the impact assessment, I can confirm that one was published on 8 February. On the point made by the noble Baroness, Lady Bowles, about the maximum time for extension of terms, the regime can be extended by no more than five years at a time.

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I think 8 February was Friday, and I do not do Fridays.

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But the noble Lord was just telling us how he was working over the weekend. He does Fridays, Saturdays and Sundays. The Opposition Chief Whip is here, so he should not undersell himself. He is one of the most diligent Members of this House. We will certainly look at that point.

On why the CCP regime is non-extendable, the Bank will remain in close contact with CCPs to inform them of expectations during the run-off period. This task is expected to be manageable, given the relatively small number of CCPs that can be expected to be in a run-off.

The noble Baroness, Lady Bowles, also asked under what circumstances a firm may be moved from a supervised to a contractual run-off. The FCSR makes provisions allowing a firm to be moved from the contractual run-off to the supervised run-off and vice versa. For this to happen, a regulator would have to consider the matter specified by the FSCR, including whether the move is necessary for the protection of consumers. Only the regulators can move a firm between the SRO and the CRO; firms cannot choose whether to move.

I appreciate that there will be other points relating to this but, as I have given a commitment to write to noble Lords, I will conclude my remarks there for the time being, and commend the regulations to the House.

Motion agreed.

House adjourned at 7.45 pm.