Exiting the EU (Financial Services) — House of Commons, 2019-02-25
Topic: Domestic Commerce
John Philip Glen (Conservative, Centre-right): I beg to move, That the draft Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, which were laid before this House on 31 January, be approved 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 statutory instrument being debated today will fix deficiencies in the Financial Services and Markets Act 2000, commonly referred to as FSMA, and subordinate legislation made under FSMA, which are an important part of the UK’s regulatory framework for financial services A key function of this legislation is to define the "regulatory perimeter" that sets out the activities and financial institutions that are in scope of UK financial services regulation. In a no-deal scenario, the UK would be outside the EU’s supervisory and regulatory framework, resulting in deficiencies in the existing legislation. Specifically, many provisions in the legislation set the scope of regulated activities based on firms being authorised and operating across the single market, or by referring to definitions in EU law, which will no longer be workable after exit As Members will be aware, the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, which Parliament has approved, begin the process of removing legislative provisions that facilitate passporting in the UK, as well as providing for a temporary permissions regime allowing EEA firms to continue their activities for a limited period after exit day, giving them time to become UK-authorised While the SI being debated today does not alter the underlying policy of the UK’s legislative framework for financial services, many of the proposed changes in it are necessary to complete the task of removing passporting-related provisions and to define the UK’s regulatory perimeter as a regime operating outside the EU. Many of the definitions of regulated activities in FSMA, and in the Regulated Activities Order 2001 made under FSMA, include the EEA in their scope and rely on definitions in EU law to operate. To reflect the UK’s new position outside the EU, the SI will amend the territorial scope of those definitions where needed, so that they apply only to the UK after exit As well as setting the general regulatory perimeter, FSMA and subordinate legislation contain some specific provisions that are important to the UK’s regulatory regime. For example, provisions in FSMA specify certain important functions for which authorised firms must obtain approval from the Financial Conduct Authority or the Prudential Regulation Authority, under either the approved persons regime or the senior managers and certification regime. FSMA currently exempts EEA firms from elements of those UK conduct regimes, which would no longer be safe or appropriate once the UK is outside the EU’s single market. The SI therefore removes this exemption for EEA firms Some of the changes proposed in this SI are also necessary to ensure that UK regulators can continue to carry out their statutory functions. As I have mentioned, this SI will complete the process of removing passporting-related provisions. This will mean that some firms and fund managers may face new requirements as result of these necessary changes. The SI therefore creates some transitional arrangements to mitigate disruption to those EEA firms and their consumers. For example, some of these transitional provisions relate to certain financial instruments, financial documents or contracts that have been issued or entered into pre-exit, ensuring that they continue to operate effectively after exit for an appropriate period Even with the specific transitional arrangements we are making in this and other onshoring SIs, firms will still be faced with a large volume of regulatory changes that they will need to adapt to in a no-deal scenario. This could cause significant disruption to the financial services sector and consumers immediately after exit, and firms will need more time to adjust to these new requirements. To prepare for this scenario, this SI creates a temporary transitional power that allows the UK regulators to defer or modify changed requirements for firms This temporary power is designed to replicate the adjustment time that firms would have if the implementation period in the proposed withdrawal agreement were ratified. For that reason, the temporary transitional power would be available for two years from exit day. Any directions made under the transitional power would therefore expire at the end of that two-year period, after which firms would have to comply with all new requirements in legislation. The UK regulators are best placed to decide how to phase in onshoring regulatory changes, working with the firms they supervise and using their supervisory judgment. I am particularly grateful to the members of the Treasury Committee, who took the time to scrutinise this temporary transitional power in the recent hearing that took place on 29 January. I am pleased that the Committee acknowledged the need for the temporary power, with the Chair concluding that "although this is unprecedented, these powers are needed in order to make sure our financial services sector works, whatever might happen" The Treasury has been working closely with the regulators in the drafting of this SI. It has also engaged industry on the SI through a cross-sectoral working group with representatives of the financial services sector. That group is chaired by TheCityUK and has representation from a number of different trade associations and law firms. Industry has expressed support for the provisions in this SI and welcomed the proposed transitional arrangements as prudent and pragmatic Before I conclude, I would like to draw the House’s attention to two minor mistakes that have been discovered in the SI and the explanatory memorandum that accompanied it. Unfortunately, mistakes do happen from time to time, and where they are found it is important that an explanation is put on the record. Shortly after the SI was laid, a small typographical error was discovered in regulation 202(2)(a); it refers to the "Prudential Regulatory Authority", whereas of course it should read the "Prudential Regulation Authority". A correction slip will shortly be made to put that right In preparation for this debate, a minor inaccuracy was discovered in paragraph 2.55 of the explanatory memorandum. This SI removes the exemption from the requirement for a financial prospectus to be approved by the Financial Conduct Authority if it has been approved in another European economic area state. This amendment is correctly explained in paragraph 2.55, but the paragraph also says that the SI makes transitional provision for prospectuses approved by an EEA regulator before exit day. Although there will be such a transitional provision, it is not made in this SI; it is made in the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, which were debated in the other place on 18 February and in this House on 19 February. I apologise for the mistake, but hope the House will agree that this is a very minor mistake that does not alter the substance of the explanation provided in the explanatory memorandum. However, I will be re-laying the explanatory memorandum to ensure that the mistake is corrected In summary, the Government believe that the proposed legislation is necessary to ensure that there is a functioning legislative framework for financial services regulation in the UK after exit.