My Lords, I will speak to these two instruments in the order they appear on the Order Paper. I found these two instruments difficult to understand and therefore have consumed considerable
intellectual effort in actually understanding them, which has left very little effort in reserve to produce an elegant speech. I would like to thank two officials: Greg Stump, for his tutorial on the CCPs, and Richard Lowe-Lauri, for his tutorials on the passporting. I have to say that the disadvantage of having an excellent tutorial is that all the questions I could have asked have largely been answered, so I will not be making a very long speech.
One of the biggest problems in understanding the instruments is that they, particularly the one on passporting, refer frequently to the Financial Services and Markets Act, which we all know as FiSMA. I do not have available a fully amended version of it to refer to so I want to ask the Minister something; I definitely do not want a reply because he will have to take this back to the ranch. Some years ago, a precedent was established when a 50-page Bill came from the Commons and left the Lords 150 pages long—it involved introducing bail-ins, et cetera—and the Treasury was good enough to provide an electronic copy of FiSMA, fully amended. That made understanding what the revisions of the instruments were doing much easier. I request formally that the Treasury does that again. Clearly the Government have a fully amended copy of FiSMA available on their machines because otherwise the creation of the instruments would be virtually impossible.
The regulations on passporting seem very simple. Basically, they say that an EEA CCP can continue trading in the UK, initially under a temporary recognition before moving into permanent recognition. It is as simple as that. As I understand it, this cannot be done unilaterally because moving CCPs into a full recognition environment will be dependent on memoranda of understanding with the host nations of those CCPs. I would value confirmation of that if it is true. Even in an extreme no-deal scenario, there will still need to be international understandings between nations in that situation.
There is no reciprocity in the instruments, as I read them. We have a situation where we are saying to EU CCPs, “Please carry on as before”, and to UK-based CCPs, “We have secured nothing to allow you to continue your business in Europe”. In the case of CCPs, not continuing on a reciprocal basis will be very difficult for both Europe and ourselves. I believe that there is some discussion in Brussels about there being reciprocity, even in a no-deal situation. I would value any news the Minister may have on the development of such a reciprocal understanding.
In the event of a loss of recognition by a foreign-based CCP, it is not clear what the enforcement mechanism would be. For instance, would the loss of recognition mean that trade contracts would become ultra vires or lead to a very messy situation? The statutory instrument contemplates the loss of recognition but does not set out how that would be managed. I would value anything that the Minister might be able to tell me about what would happen.
Equally, my understanding of the passporting instrument is, once again, that it is extraordinarily simple. It means that EEA firms can carry on trading in the United Kingdom in virtually the exact same terms as they do now. In other words, a no-deal
situation has no negative consequences for non-UK firms because the mechanism for a more or less automatic granting of temporary authorisation, and then the transition to permanent authorisation, is set out in this instrument. The converse is not there; as far as I can see, it does nothing for UK firms. The Minister may put me right on this but, as far as I know, there are no effective World Trade Organization rules for services that would allow UK firms to trade in Europe.
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I have only one or two small questions on the instrument, if my one-line précis is substantially accurate. First, some of these foreign firms are covered by the Financial Services Compensation Scheme—the FSCS. Customers of those firms in the United Kingdom therefore have that protection. Can I be assured that with a temporary—and subsequently fully—authorised firm, such protection as consumers now have will continue uninterrupted as we go through exit day into, perhaps, a temporary period and a more permanent period? Again, the instrument seems silent as to what happens if a firm, having been in a period of temporary authorisation, is subsequently denied it permanently if it is found to be lacking in some way. What would be the consequence for UK customers? Would they in fact find that their investments or trades, or whatever services are provided by these financial firms, are in some way at risk?
The sequence of events if there is no deal, which we all hope will not happen, will in some bizarre way end up as an audit of passporting because its concept, as I understand it, is that each member nation of the EU has equivalent and appropriately powerful rules for regulation. Those rules and regulations can be accepted by other members of the EU as sufficient to allow trading across borders. This would imply that any firm trading in the UK now through a passport ought to be trading at such a standard that it would, beyond reasonable doubt, expect to be authorised. I would value any comments that the Minister might have on that concept.
Other noble Lords have spoken about the extension being for 12 months at a time. I am sure the Minister will try to assure us that these extensions will happen only in exceptional circumstances, but they always are exceptional circumstances. I suspect that those from the 17th century, when the Army went from being a standing army to being authorised every year by a vote in Parliament, would be surprised to find the practice still happening today—which it does, because I have to vote on it every year. I fear that “12 months at a time” could go on for many years. For that reason, I support the general request that this should be under an affirmative procedure, not a negative one.
The question about regulators’ resources is also very valid. I believe that in a year, the PRA makes authorisations that are in single figures and, although I cannot remember the figure I have been given, that the number of firms that might be under its purview could be something like 70.
My other concern is about the Bank of England. My understanding of the instrument is that the Bank of England will have supervisory responsibilities towards
these firms from exit day. I assume that will include supervision for what I think is called the reform and resolution regime—that is, how you manage a bank that is going broke. I know that the Bank of England has a significant directorate that looks after that for UK banks. Presumably it would pick up a similar responsibility. Can the Minister assure us that all features of supervision for which the regulator has immediately become responsible, as I understand it, will be properly resourced?
I do not know whether I am getting this wrong, but this seems to me to be the most significant SI in the financial sector that we have had so far and that it is not likely to be overtaken by a more significant one. It says that in a no-deal situation the UK capitulates on the matter of international financial services. It creates a regime where EU and EEA firms carry on trading more or less as if nothing had happened and it implies that the UK cannot trade in Europe as it does today. As far as I can see, there are no mechanisms to allow it to trade. I hope that I am wrong, that out of the hat comes a rabbit and that the Minister will say there is a WTO rule or something like that, but I do not believe that is so. I think the situation is catastrophic. Perhaps I am over-exaggerating. Perhaps it is really not a big problem. Lots of eminent politicians for whom I do not have natural sympathy have expressed how wonderful no deal would be. I think this is the classic example of where no deal would be really bad for the industry. What is the Government’s estimate of the effect of no deal on financial services in terms of employment, tax revenue and the health of the economy? Aside from these instruments, because presumably the Government are, as we speak, working flat out to secure a better deal for financial services, what is the Government’s aspiration in this area? What position do they hope to reach to make up for the lack of reciprocity in this deal? Will it be a fully reciprocal situation where UK firms will have the same privileges as EU firms have trading in the UK?