Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 — House of Lords, 2019-02-18
Topic: Domestic Commerce
Michael Bates (Conservative, Centre-right): My Lords, this SI is an important part of the Treasury’s programme of legislation under the European Union (Withdrawal) Act 2018. It will address deficiencies related to the EU’s equivalence framework for financial services, and will make provisions for elements of the UK’s stand-alone equivalence framework for financial services, in a scenario where the UK leaves the EU without an agreement Many noble Lords will be familiar with the EU’s framework for equivalence. EU legislation allows the European Commission to determine that a country outside the EU—often termed a third country—has a regulatory and supervisory regime in a particular area of financial services that is equivalent to the corresponding EU regime. Granting equivalence is a key component of financial services regulation and supports cross-border activity. Equivalence decisions can reduce or eliminate overlaps in regulatory and supervisory requirements, thus decreasing regulatory burdens on firms. Some equivalence decisions provide improved prudential treatment, or facilitate the exchange of services. This can lead to increased competition, which benefits firms and consumers, while protecting financial stability Before making equivalence decisions, the Commission will undertake an assessment and may ask the European supervisory authorities for technical advice to support it. As an EU member state, any equivalence decisions made by the Commission currently have effect in the UK. In a no-deal scenario, the UK would be outside the EU’s equivalence framework. The Government place significant importance on having a functioning, stand-alone equivalence regime which will support our future relationship with the EU and other financial centres with which we want to build stronger partnerships Noble Lords will be aware that other Treasury statutory instruments which have completed their passage in Parliament have already transferred some equivalence responsibilities from the Commission to the Treasury, and functions from the ESAs to the UK financial regulators. Through these SIs, the Treasury has maintained the same substantive criteria that the EU uses to judge equivalence The SI does three main things to support a stand-alone UK equivalence framework in the event of a no-deal exit. First, it replaces the functions given to the ESAs with functions for the UK financial services regulators and creates an obligation for the Treasury and the UK regulators to enter into a memorandum of understanding that sets out how they will support equivalence assessments Secondly, the SI corrects deficiencies in existing equivalence decisions made by the Commission—for example, replacing references to the "Union" with references to the "United Kingdom". Fixing these decisions is important to minimise disruption for some UK firms with businesses in equivalent third countries, and for some overseas firms which currently rely on these decisions Thirdly, the SI creates a temporary power for Ministers to make equivalence and exemption decisions for EU and EEA member states by direction for specified equivalence regimes listed in the SI. This is separate from the permanent arrangements for making equivalence decisions, which will become available only after exit and will require regulations subject to the negative resolution procedure. This temporary power is needed to prepare for the particular circumstances we would face if we left the EU without a deal As an EU member state, the UK has not previously needed powers to determine whether the EU is equivalent. However, in a no-deal scenario it will be important for the Treasury to have powers to make such decisions in time for exit day, to respond quickly and effectively to any risks to the financial system and to avoid disruption for firms and markets. To illustrate why these powers are required, I point the House to the European Commission, which has published several draft legal Acts granting certain technical exemptions to UK public bodies in a no-deal scenario. The Government would grant similar exemptions for relevant EU bodies in such a scenario, and this SI contains the powers to allow such exemptions to be put in place by exit day To ensure transparent use of the temporary power, this SI will oblige Ministers to lay directions before Parliament and to publish them. Noble Lords may have seen that the Treasury Select Committee wrote to the Economic Secretary to the Treasury on 7 February asking if 12 months was long enough for this power, given that other transitional regimes in financial services have been passed with longer periods. The Treasury’s response to the committee, published last week, emphasised that this power was needed only to mitigate the risks around exit. The Treasury expects that the permanent mechanism for taking equivalence decisions by regulations, subject to the negative resolution procedure, will be ready soon after exit day. As a result, the Treasury judges that 12 months is sufficient for this power The Treasury has worked closely with the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority in drafting this instrument. The Treasury and the regulators have also ensured that the resources are in place to take on these functions. The Treasury has engaged the financial services industry and will continue to do so. The regulators and key industry stakeholders have expressed support for the provisions in this SI as necessary to mitigate disruption and to provide legal certainty about the UK’s equivalence system This Government believe that the proposed legislation is needed to ensure that the UK has an operable equivalence framework in a no-deal scenario. The powers it contains are needed to ensure that the Treasury and UK regulators are properly equipped to respond if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations and I commend them to the House.