Report stage (Lords) of the Financial Services (Implementation of Legislation) Bill - Jan 29

My Lords, I thank all noble Lords for their engagement in this Bill not just in Committee on 8 January, when we had an excellent session looking at the Bill to see how it could be strengthened, but also when we followed that up in various interactions with Peers in the gap after that. There was a meeting on 22 January in which we shared some of the ideas at that point, and that conversation has continued. I place on record our gratitude particularly to the noble Lords, Lord Davies and Lord Tunnicliffe, but also to the noble Lord, Lord Sharkey, the noble Baronesses, Lady Bowles and Lady Kramer, and to my noble friends Lord Hodgson and Lord Leigh for their interaction. I also thank the noble and learned Lord, Lord Judge, for his impromptu legal advice in Committee.

 

Amendment 1 has been grouped with an amendment in the name of the noble Lord, Lord Davies, and the convention is that I cannot pre-empt what he will say. I will listen to him very carefully, and will simply move my amendment at this stage and address the concerns and issues raised in the noble Lord’s amendment at the end.

 

Amendment 1 is designed to perform two functions. The first change, as set out in the proposed new subsection (1A)(a), is in response to a recommendation by the Delegated Powers and Regulatory Reform Committee—I again place on record my thanks and appreciation to it for its scrutiny, published in the 42nd report of that committee, under the chairmanship of my noble friend Lord Blencathra. In its report, the committee noted that, for those files listed in the Schedule which are still in negotiation, the justification for the power to adjust is that it is not now possible to know what the final form of that legislation will be. However, the DPRRC noted that the same justification could not be used for files already agreed, and it recommended that the power to adjust be limited only to the files in the Schedule to the Bill. I can now say that the Government are able to implement the DPRRC’s recommendation. These files have been settled while the UK has been an EU member and has been around the negotiating table at all stages with a full voice. We accept the principle that this is settled law that has received UK sign-off and that, as such, an ability to fix deficiencies is more appropriate than one to make policy adjustments.

 

The proposed new subsection (1A)(a) therefore ensures that, for the first category, the Treasury will have no ability to make policy adjustments when these files are domesticated. These files are: the prospectus regulation; articles 6 and 7 of the central securities depositories regulation; article 4(1) of the securities financing transactions regulation; and articles 37 and 38(2) of the markets in financial instruments regulation. Instead, the Treasury will only be able to fix deficiencies in the manner of the current onshoring process under the established terms set out in the EU withdrawal Act.

My Lords, the Minister is to be congratulated on the way in which he has handled this Bill. In Committee, we raised several significant issues and pressed him to consider our arguments carefully. He has certainly done that and has brought back to the House Amendment 1, a position with which we are in agreement.

 

We are mindful of the background that all these efforts are being conducted against. This very afternoon, the House of Commons is struggling to achieve a position, and the Prime Minister hopes to achieve a position in which this Bill will be utterly redundant because we will have left the European Community with an agreement. But it is obviously right that, in an area of such importance to our economy as the services industry, we have legislation in place that takes account of the extremely serious situation that would arise if we left the European Community without a deal.

 

The Bill would, however, play its part in fulfilling the regulatory machinery necessary for the services industry, but without doubt additional work would have to be done at that stage. Given that we have done a great deal to help create European law in this area, it would be remiss if we left the services industry without effective regulation and less equipped than it was while we were part of the European Union, if in fact we leave without a deal.

 

As he would expect, I join the Minister in paying tribute to my noble friend Lord Tunnicliffe, who has played a significant part in examining the Bill and producing insights into what could be done, upon which the Minister has been able to build quite successfully. I also pay tribute the noble Lord, Lord Sharkey. He has stayed involved with the Bill and has offered the best possible advice on a number of occasions. His persistence and insights on these issues have been invaluable, together with those of the noble Baronesses, Lady Kramer and Lady Bowles, both of whom have played a significant part in these discussions.

 

We are grateful to the Minister for the way he has handled this Bill. He appreciated the anxieties that we articulated as best we could both at Second Reading and in Committee. He has met the most crucial point of all: that the Government were initially seeking powers for the Treasury that could not be justified. Subsequently, the Delegated Powers and Regulatory Reform Committee came to share that position, as it made fairly clear in a detailed submission to the House. That obviously informed our contribution to the debate. However, the Minister has gone a considerable way to allaying the anxieties that we have expressed about the Bill and I am therefore very much in favour of his amendment.

 

I turn to Amendment 2, to which I am meant primarily to speak. I have only a short comment because there is not a great deal at issue. It again gives me the opportunity to appreciate the efforts of the Minister. We had a useful meeting with him that ironed out all but the narrowest of differences. There is not much in the difference between “significant” and “major” but I am strengthened by some help from the other place. Apparently, in her speech to the House of Commons this afternoon, the Prime Minister said that she would return to Brussels to seek a significant change to the Brexit withdrawal agreement. She did not use the word “major” but “significant”, a word that we are seeking to enjoin the Minister to appreciate. However, I will not press that rather minute point.

My Lords, we welcome all the government amendments to the Bill. We particularly welcome Amendment 1, which greatly improves the Bill’s structure and clarity. As we pointed out in Committee, it was not helpful to try to deal with two different categories of legislation via one mechanism. Amendment 1 puts that right.

 

Proposed new subsection (lA)(a) deals with settled EU legislation now in force in the same way in which Section 8 of the European Union (Withdrawal) Act does and narrowly restricts the adjustments that can be made. Proposed new subsection (lA)(b) deals with legislation not yet in force in the EU but under current discussion—legislation that is in flight. Here the adjustments are less constrained. I note the Minister’s comment that the legislation contained in subsection l(2)(e) dealing with the prospectus regulation may come into force before Third Reading and could therefore be moved at that stage into the proposed new subsection (lA)(a), leaving only the in-flight legislation in the schedule to be covered by proposed new subsection (lA)(b).

 

In their amendment, the Government have significantly tightened the meaning of the previously rather controversial word “adjustments”, as it applies to the in-flight legislation in the schedule. Their amendment sets down what in this context adjustments may and may not do. When it comes to what adjustments may do, the new wording has it right. The changes are,

 

“to reflect, or facilitate the transition to, the United Kingdom’s new position outside the EU”.

 

I think this is close enough to the restrictions in Section 8 of the European Union (Withdrawal) Act. When it comes to what adjustments may not do, the new text states that they may,

 

“not include changes that result in a provision whose effect is different in a major way from that of the legislation”.

 

I am pleased that this is a much tighter restriction than that contained in the original text but I have some concerns about the use of “major”, which is why I have added my name to the amendment in the name of the noble Lord, Lord Davies, which proposes the word significant in place of major. In the ordinary use of those words, “significant” imposes more constraint than does “major”. It seems to be entirely possible for some difference in effect to be significant without in itself being major. An OED definition of “significant” is:

 

“Sufficiently great or important to be worthy of attention; noteworthy”,

 

 

and seems to support this view. Unfortunately the OED also defines “major” as “important, serious or significant”.

 

The real issue is how the word “major” will be interpreted in practice by the Treasury, and probing that is the purpose of Amendment 2. What will it mean when applied in this context? In particular, what tests will the Treasury apply to the differences contemplated in proposed new Section (1A)(b) of the Government’s amendment to determine whether they are major? I would be very grateful if the Minister could set out explicitly what those tests will be.

I shall speak briefly in support of the Government and the clause as drafted, primarily because of the points just made by the noble Lord, Lord Sharkey. When I went to the Oxford English Dictionary to check, I got the results he has just described, but it seems to me that the Government’s choice of word is better than the one now being advanced by the noble Lords, Lord Sharkey and Lord Davies. I urge my noble friend to be of good courage and stick with it.

My Lords, I thank the Minister for a good set of amendments that respond across the piece to concerns that were raised in Committee. I shall probe a little further on what can and cannot be done for the purpose of clarification.

 

Clause 1(1) states that this is about converting,

 

“the provisions, or any of the provisions, of any specified EU financial services legislation”.

 

So the option is still there not to convert it or to convert only parts of it. At an earlier stage, I suggested that that could be adapted. I noticed that when the Minister spoke, he used the word “files” as if the files were all transposed at once, but we must recognise that some things may not be transposed. I believe that is the intention. Here, I should give my usual reminder to the House of my interests as set out in the register, in particular as a director of the London Stock Exchange. In the first set of EU legislation, that which is completed but not yet active, you could still omit some or all of it and do an EU-type adaptation, but you cannot adapt it if you chose to convert it. It has got to be relatively straightforward.

 

For the not yet completed, there is greater flexibility. I have a few little tests of my own to see whether this would be allowed. First, what if you wanted to keep a current provision instead of having a new one? That is quite simple: you probably just leave it out and do not convert it, which falls within what is allowed. If you want to reflect more closely an international standard—let us say that the EU has embellished it in some way—could you do that? I think you probably could because you are still going back to the originating international standard, but it would be interesting to hear what the Minister has to say about that. What if you want to reflect more closely UK market data because it has been calibrated on EU data, by then absent us? I expect most of that happens in technical standards, but it would be interesting to have the Minister’s view on whether the Government could make such a change. I think it would be allowable.

 

What about aligning with alternative provisions made in other major international markets? That would be departing from alignment with the EU into alignment with somewhere else. Let us say that you wanted to align tick sizes with Hong Kong or the US, rather than staying with the EU regime. Would that be allowed? I think that is quite a marginal issue. The Minister does not have to use that particular example, but it would be interesting to know where that would lie in the tests. If you want to avoid disrupting the functioning of UK markets—the sort of comment you often hear—you are probably left with the option of not converting that element.

 

My final test is, what happens about proportionality for SMEs and SME markets? I am not sure how that would work out: if the legislation has not included proportionality, is it reasonable and within scope to put some proportionality in? That measure is probably relatively popular from a UK perspective, so it would be nice to know whether that could be covered.

My Lords, I too refer to my declaration of interest in the Members’ register, which has not changed since I last spoke. Despite my interest, I confess that I had some difficulty understanding all of subsection (1A)(b) of the proposed new section. The noble Lord, Lord Sharkey, read out the easy bit. The difficult bit is the words,

 

“but does not include changes that result in provision whose effect is different in a major way from that of the legislation”.

 

I think I understand the intent, but I am not sure that the words are exactly as another draftsman might have chosen to put it.

 

I am today looking for an assurance from the Minister that the adjustments he proposes will allow the Government the flexibility needed: in particular, if there is a restriction on changes that might be significant or major, that these will not bite where change really is needed if we leave the EU with no deal. As the noble Lord, Lord Davies of Oldham, has said, this legislation will come into play only if we have left without a deal—which nobody in this House seeks as a primary option—and in those unfortunate circumstances, we might need to be as flexible as possible.

 

By way of example, in respect of article 2(e) of the prospectus regulation, the alleviations granted by the EU were a compromise designed to suit all member states’ markets, all of which are very much smaller than the UK’s. The Government should adjust these to make them proportionate to the scale of the relevant UK markets. For example, the threshold below which public offers—an area I am particularly interested in—are exempt from the requirement to publish a prospectus, which is a huge cost, has been set at €8 million. By the way, initially it was agreed to be €2 million, then it went up to €5 million without any issues and then it became €8 million. For the UK market alone, a more appropriate level might be, say, £20 million.

 

The noble Baroness, Lady Bowles, referred to the definition of SME growth markets, which is a very important term. The definition was of course a compromise designed to suit all member states’ markets, and to avoid in some instances classifying members’ entire national stock market as an SME growth market, which would be a bit unfortunate. Perhaps the Government want to adjust this to make it proportionate to the scale of the relevant UK markets, possibly increasing the maximum market capitalisation from €200 million to £500 million.

 

Outside of article 2(e), I have mentioned at earlier stages of the Bill some issues relating to CSDR settlement discipline which are perhaps inappropriate and, in some cases, highly damaging to the unique, quote-driven liquidity provision of the UK’s SME market. I hope that I have satisfied the noble Baroness, Lady Kramer, that short selling in those markets is not damaging or dangerous to the UK economy. This would not apply to EU-based dealers, thus putting UK market makers at a competitive disadvantage because it would apply to them.

 

I hope the Minister can assure me that the Government will retain the power to have the flexibility needed to allow the UK to set its own rules for our financial services market, which is very different from the EU’s. I appreciate that this provision applies only in respect of in-flight rules but it sets the tone, and hereon in we will want to create our own bespoke laws, which may well diverge from the EU’s but will be more appropriate for our market. Rather than just hanging around hoping for some small alleviations in the circumstances of a no-deal Brexit, we really will need to act in a way that suits us in these areas.

My Lords, I am very grateful not to be the Minister, who has to respond to my noble friend Lady Bowles and the noble Lord, Lord Leigh. I can see that it is a challenge and I hope that if I talk for a few minutes, it will give the Box a little more time to get notes to him.

 

I think that the House knows that my underlying question has always been how we draw the line so that we know when it is appropriate for change to be carried through by an SI and when it should come to this House as primary legislation, particularly in this field. What happened in the weeks and months immediately following a no-deal exit would shape whether we were in a position to maintain access to the EU market for our most significant industry—the services sector—and indeed for the economy as a whole. I think that in the changes he has made the Minister has got us to a better place and to a much clearer understanding of the Government’s intent. If he wanted to split the difference, he could say “major or significant” and deal with the problems all in one go.

 

I want to say how much I appreciate the listening that the Minister did and how much we appreciate the listening, thought and effort that his officials put into responding to the queries and issues that we raised. It gives me the feeling that we in this House, including the Government, are all essentially on the same page in understanding the significance of the period that would follow no deal and how carefully and sensibly we would have to approach regulation in the financial services area because of the potential knock-on impacts and unintended consequences, which could be extraordinarily severe.

 

With that sense that the Minister understands when an issue should be brought to the House because it is a fundamental change of policy and critical to an underlying key sector of the economy, and when it is an issue that can rightly be dealt with under a statutory instrument, I can say that I am very happy with the changes that have been offered and, again, I thank the Minister for them.

I thank noble Lords for their contributions. I particularly thank the noble Lord, Lord Davies, for moving his amendment and giving us the opportunity to comment. I very much concur with the noble Baroness, Lady Kramer, about how the officials have engaged in this process. I do not know whether it is appropriate to refer to them on the Floor of the House but I will do so anyway. I think that they too found it a very useful interaction. This Bill is beginning its journey through the legislative process in your Lordships’ House, and the ability to shape and craft it so that it will have been improved by the time it leaves this House will make the job of the other place, which has quite a lot on its plate at the moment, a little easier.

 

I also agree with the tribute paid by the noble Lord, Lord Davies, for the work being done by officials and, indeed, by UK Members of the European Parliament and the industry on shaping EU financial regulation over the years to make it effective and proportionate.

 

I believe that the intent behind the noble Lord’s amendment and behind the noble Lord, Lord Sharkey, putting his name to it was to give the Government an opportunity to put further flesh on the bones of what is meant by “major” and “significant”. They will become the new version of “corresponding” and “similar”, which we discussed in Committee. I do not want to hark back to that debate; instead, I shall focus on these key words. I will put some remarks on the record and then turn to the point made by my noble friend Lord Leigh.

 

It is clearly important that we find a way of limiting this power appropriately, and I am very grateful for the proposal in Amendment 2, moved by the noble Lord, Lord Davies. However, the noble Lord’s amendment could have the unfortunate and unintentional effect of rendering the power and therefore much of the Bill almost unworkable. The reason the Government settled on the term “major” rather than “significant” in drafting this amendment was the greater clarity provided by the term “major”.

My Lords, the Minister’s reply puts me a little on trust in that, until I read Hansard tomorrow, I am not too sure I will be able to follow the detail with sufficient accuracy. I was somewhat appalled as I was thrust back to my old tutorial days as a rather vulgar split infinitive came right in the middle of one of the denser parts of the Minister’s text. But I know that he has set out to meet the challenges that we have put in our questions to him, so I will more than give him the benefit of the doubt—I beg leave to withdraw my amendment.

My Lords, I again thank noble Lords for their contributions and in particular my noble friend Lord Hodgson. Our debate on the previous grouping focused on what limitations would apply to the power under this Bill. This grouping looks at the complementary subject of reporting to ensure that the Government are as transparent as possible in the exercise of the power. The Bill, as introduced, placed a duty on the Government to publish a report annually on their exercise of the power. It was clear in Committee, however, that there was some room for improvement. I am again grateful and indebted to noble Lords from across the House for their work in Committee and in the period between Committee and Report.

 

I turn to Amendments 3, 4 and 5. The noble Baroness, Lady Bowles, proposed that, where adjustments or omissions are needed when implementing the files, the Government should publish a report beforehand setting this out in detail to make sure that Parliament has sight of this, and can consider the merits of the proposals. Given the exceptional nature of the Bill and the powers being sought, it can only be right that the Government are clear with Parliament and the industry about how they intend to implement these files. The Government therefore propose introducing a new requirement, as set out in Amendments 3 and 4. These would ensure that, before laying any statutory instruments before Parliament under the affirmative procedure, the Government must first publish a document detailing the proposed text of the regulation with an accompanying report. The report would have to outline what, if anything, has been omitted from the original EU legislation, where there had been any adjustments to the original EU legislation, and provide justification for these adjustments.

 

As I noted in Committee, the three-month requirement could risk being too long. The essence of this Bill is the speed with which it will allow the UK to keep its regulation up to date and responsive to the uncertainty of a no-deal scenario. The amendment therefore proposes a one-month deadline. However, the Government will of course commit to publishing these documents earlier where possible.

 

On Amendment 5, in Committee my noble friend Lord Hodgson suggested a more regular reporting cycle than the yearly proposal in the Bill as introduced, and that these reports should set out the Government’s reasoning for why any adjustments might have been necessary. I again reassure noble Lords that it was always the Government’s intention to set out such a justification. This underpins the spirit behind the proposed new subsections (8) and (9) in Amendment 5. This requires the introduction of a more regular requirement for the Treasury to report—now every six months. It requires the Government to specify both how the power has been exercised over the previous six-month period and how they intend to exercise it over the coming six-month period.

 

This change has the further benefit of clearing up an inconsistency helpfully highlighted by the Delegated Powers and Regulatory Reform Committee in its 42nd report. Previously, the reporting deadlines were set out on calendar dates, whereas the power was to be commenced with reference to “exit day” as defined in the European Union (Withdrawal) Act. This amendment now tidies up the drafting to ensure that the reporting periods are set with reference to the commencement of the power itself. I again convey my thanks to the Delegated Powers and Regulatory Reform Committee.

 

Finally, proposed new subsection (9A) in Amendment 5 responds to the suggestion from the noble Lord, Lord Adonis, and the noble Baroness, Lady Bowles, in Committee. Here we propose to introduce the same requirement for the financial regulators—the Bank of England and the Financial Conduct Authority—to report on their exercise of any powers sub-delegated to them through the Bill. This follows the model established in the EU withdrawal Act. We agree that it is right that, as they will be implementing much of the legislation contained in this Bill, Parliament and the public should be kept informed of how their functions are being discharged.

 

I hope these amendments demonstrate the extent to which we believe it is vital that Parliament can properly assess and consider legislation taken forward under the Bill. These amendments on reporting, alongside clearer limitations of the power itself, substantially improve the safeguards that apply to the Bill. I hope these will provide the reassurances that I know the Committee sought.

My Lords, I thank the Minister for listening to everything said in Committee. There really is little else to say other than that he has taken on board three of my amendments. I am very pleased to see them there. I accept that he has cut down the timescale in the pre-legislative report, if I can call it that, to one month from three months because it might be necessary to do things more rapidly.

 

If I can pick out a theme from the several speeches I made before, it is that Parliament should not be surprised by what the Government intend to do and do. This suite of amendments, including the more frequent reporting suggested by the noble Lord, Lord Hodgson, makes it very clear: we are told before and afterwards. In fact, we might be told before twice by the two reports—the generic one, if I might put it that way, and the precise one. We will also know where things are so that the diligent individual, possibly when dealing with things in the Moses Room in Grand Committee, will not have to search around wondering where things have or have not gone.

 

I thank the Minister. He has served me and us very well in this.

My Lords, I add my thanks to my noble friend and his officials for Amendment 5, which in large measure answer the points I tried to raise in Committee. I am extremely grateful to him and to the Government.

 

An epochal event such as Brexit will obviously require a certain degree of statutory flexibility. That is why I support the principle of the Bill, but that does not mean that the powers under it should be exercised below the radar. I am therefore extremely grateful to my noble friend for having set the reporting periods, when he made it clear that it is not just a question of reporting: it is a question of why it is being used, as well as that it has been used. That is important to maintain confidence.

My Lords, with that provocation I say to the noble Lord, Lord Hodgson, that perhaps we should look at the quality of enforcement. I would far rather that we had too many warning signs, but captured a large part of the wrongdoing, than missed major wrongdoing because there were so many options where people could avoid early warning signs. I suspect we have an enforcement problem, and often in this House we have heard that echoed. It sits entirely outside what we are dealing with today. For goodness’ sake, let us be very wary of the seductive argument that where we fail to enforce we should not even investigate.

My Lords, I support Amendments 3, 4 and 5. They are the product of ideas from all parts of the House: from the noble Lord, Lord Hodgson, and particularly from Lib Dem Members. Amendment 4 strikes me as a very important innovation. Other parts of the Administration may want to ponder what should be done here, because while it will all be down to the Government how they use it, it creates a mechanism by which we get will close to being able to amend an SI. Clearly, no great measures are going to fall because we have no great power to influence them and we all know that we are not going to vote on such SIs.

 

However, to be able to discuss an SI with the Government—obviously not on the Floor of the House but perhaps by approaching Ministers on particular issues—before it is laid would be an important step forward. Proposed new paragraph (b)(ii) and (iii), inserted by Amendment 4, is also important for making how such an SI is generated much more structured. I hope this will give real transparency to SIs, which can at times be very complex. I end by thanking the Minister for his efforts on the Bill and almost by celebrating, for want of a better term, the extent to which we have been able to come to consensus.

I thank the noble Lord, Lord Tunnicliffe, for his last intervention. In effect, I think he was saying that in the way we have been working together we have perhaps somehow pioneered a new way of approaching financial secondary legislation. I am pleased that he feels that.

 

I am grateful to my noble friend Lord Hodgson for his support for the amendments. He was tempting the noble Baroness, Lady Kramer, to rehearse the vigorous and full debate which took place in Committee on these provisions. Perhaps I may step out of the middle simply to reiterate that the Bill is not the Government’s proposed long-term solution for all financial services legislation. The Government will take forward their proposals for a sustainable, long-term model in due course, when there will be lots of opportunities to discuss the important issues which have been raised.

My Lords, I again thank noble Lords for their contributions. The noble Lord, Lord Sharkey, made a contribution in Committee in which he expressed concern about the omission of some files from the Schedule and Clause 1. At Second Reading and in Committee the omission of two sustainable finance files, which complete the EU’s sustainable finance package, was raised. I am pleased to confirm to the noble Lord and the House in general, and to the sustainable finance industry, that the Government are happy to add these two files to the Schedule via this amendment. I thank him for pointing that out and I beg to move.