My Lords, I thank the Minister for his introduction and I concur with him that these are necessary instruments. I declare my interests as in the register and, in particular, as a director of the London Stock Exchange.
Starting with the EEA passport rights regulations, I fully understand the need for temporary or deemed permissions and some flexibility, but in the longer term there are risk and competitiveness issues to consider, so I shall explore further the time periods and how the policy surrounding them might operate. There are two time periods: two years from exit before a formal application for authorisation has to be made, and three years from exit, extendable, within which the relevant regulator makes a determination. Supervisors can require a formal application to be made before the
two-year period is up, and presumably that could be exercised for a variety of reasons, such as phasing in for size or complexity of entity or for other risk-based reasons. As the Minister has already mentioned, the two-year period is also potentially useful to EEA firms trying to decide what to do, getting used to UK supervision and having time to organise themselves before having to seek authorisation. It can also be that the two years is simply a waiting room until the regulators have the capacity to carry out the authorisation determinations. How is it envisaged that the two-year period will operate? What is the policy? Is it a phasing mechanism? Will the regulators be controlling that phasing? Is it wholly in the hands of the firms that want their passports replaced? Is it expected that everyone will have two years and then there will be a sudden rush of applications; or, as I asked before, will there be some kind of risk-based assessment about which applications must be brought forward in time?
I now turn to supervision, because the entities in the temporary regime will come under supervision. Can the Minister assure us about the regulator’s capacity to supervise and that significant supervision will take place? If it is envisaged that there may be an unmanageable, or at least long, queue for authorisations because of capacity issues, what is the capacity situation with supervision?
Does two years really mean a fixed two years that cannot be extended? I cannot find anything to say that it could be, and there is nothing in the Explanatory Memorandum. But just in case I might have missed something, will the Minister clarify whether the construct of the regulation stating that “Section 55U” of FiSMA “has effect as if” is a good way of keeping the two years unamendable by any power to make changes that might be embedded in FiSMA or anywhere else? I am still learning the tricks of some of the parliamentary drafting that goes on here, and that is quite a good one to remember.
As to the three-year limit allowed for determination of applications, it can be extended, as has already been said. How necessary that is might in part be determined by the policy over the preceding two years. Is extension available only if the regulators do not have the capacity to conclude within three years? I think that is what the Minister said. Has three years been set assuming a rush of applications at the two-year stage, or will an extension be inevitable if that two-year rush happens?
As the noble Lord, Lord Kirkhope, said, it would clearly not be appropriate for the extension to be used on a rolling basis to allow businesses that might not measure up to full UK authorisation standards to continue to operate in a temporary regime because there had been no determination of their application. That is one of the reasons why I share the view expressed by the Secondary Legislation Scrutiny Committee that there is a good case for an extension requiring the affirmative procedure. I do not agree with the reply from the Treasury Minister John Glen in the correspondence. It is not satisfactory to say that some affirmative permission somehow flows from this SI so that the negative procedure is enough at the time of the extension. That might have been the case if the policy on these time periods had been more clearly
elaborated, but it was not. In fact, it seems to be in the hands of the regulators, and if that is the case, then I cannot see how avoiding affirmative procedure is the right way to go. If the Government had set the policy and embedded it in here, that would be different, but this does not include the policy on how it is going to be used.
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A positive case for extension somehow has to be made to Parliament. An important part of the extension process is the report under Regulation 27, made by the relevant regulators to the Treasury six months ahead of expiry of the time period. What arrangements are there for that report to be made available to Parliament in a timely way, not just as background once the regulation has been laid and it is too late? For example, will at least all the relevant Select Committees be briefed?
There are undeniable risks if temporary measures drag on too long, and it could mean unfair competition with domestic entities. It is one thing for UK companies to have to absorb the cost of seemingly more strenuous conditions being applied to them in EU countries, and quite another if there is somehow a lighter-touch temporary regime here at home for competing EU-based companies. I am sure noble Lords will see that there is a prospect for a double whammy to UK companies if they lose out on both sides of that for a significant period.
I will move on now to the central counterparties regulation. The temporary regime has some parallels with the passport regulation, and covers making the Bank of England the regulator and the EMIR recognition and equivalence regime. I acknowledge the wisdom of saying that the Treasury and the Bank of England can get ahead in the recognition and equivalence. That is very important. I repeat the concerns on time limit extension. There is good reason why that should have been made using the affirmative procedure. In some ways, I see even less reason for extending it here because central counterparties are relatively few—they may be important and systemic when they are large, but there are not huge numbers of them. Will the Minister tell me what reasons are envisaged for not being able to get out of the temporary regime and needing an extension? It might be that, despite the best endeavours, the necessary co-operation arrangements have not been put in place for whatever reason?
I am also slightly puzzled by the fact that Regulation 12 says that an application has to be submitted before Brexit, but Regulation 19 says that the game is up if you have not made one by six months after Brexit. Either there is some discontinuity there or I have missed something—which is not impossible when going through lots of these things very quickly.
The final point I want to make is not a question that can be easily answered. One of the criticisms that was constantly made against the EU equivalence regime in the various Brexit reports that came out was that it could be withdrawn with little notice—in fact, they feared that could happen under political influence of the Commission. Can the Minister explain whether such criticism could also be made against the UK regime in due course, bearing in mind that it basically
follows the EMIR regulation, or have the conditions in Regulation 19(7)—that the Bank of England can only withdraw because of financial stability; although that can obviously be used very widely—made it in some way more binding?
Finally, when the Commission was making equivalence decisions under EMIR, it was sometimes quite difficult to fit within the wording of EMIR Article 25(2)(b) because some countries simply do not have regulation and authorisation provisions. These are not the major countries, but nevertheless there may be CCPs. Due to the capital charges that apply to other bodies if a CCP is not recognised, there is an incentive for recognition of CCPs in what one might call less-developed countries in the financial services sense. It then became necessary for the Commission to consider comparable mechanisms and use a very flexible interpretation of the language of the legislation. Indeed, it had to resort to things like looking at the rules of the exchangers that were using the CCPs, with that replacing, if you like, the legal provisions. It raises the question of whether there is any language in the way equivalence is to be done that is drawn so tightly in this statute that it will become inflexible and you will not be able to recognise some of those types of CCPs, particularly where you are referencing the legal constructs that are available in the country. Those legal—in legislative terms—constructs simply may not be there, and you are looking for something else that you have to use to replace them.