First, may I associate myself with the heartfelt tributes that have been paid to my hon. Friend the Member for Newport West (Paul Flynn), and I express my sympathies to his family?
We are here to discuss two no-deal statutory instruments appertaining to financial services. Members will be aware that the Conservative Government refused to allow a debate on the Floor of the House about arguably the most significant such SI—the one concerning the markets in financial instruments directive, which was sufficiently complex to require a Keeling schedule. The Government did agree to a recent debate on an SI concerning securitisation, but of course that was not a no-deal SI, and the debate only happened when the
Opposition prayed against the SI. Members may be forgiven for scratching their heads about why the Conservative Government have adopted such a different tactic this time; I am sure Members can come to their own conclusions on why this debate is taking place on the Floor of the House today.
These statutory instruments make provision for a regulatory framework after Brexit in the event that we crash out without a deal. The volume of such legislation is deeply concerning for accountability and proper scrutiny. The Government have assured the Opposition that no policy decisions are being taken as part of the no-deal process. However, establishing a new regulatory framework inevitably involves matters of judgment and raises questions about resourcing and capacity. Secondary legislation ought to be used only for technical, non-partisan and non-controversial changes, because of the limited accountability it normally allows; instead, the Government continue to push through far-reaching financial legislation via this vehicle.
As legislators, we have to get this right. The regulations could represent real and substantive changes to the statute book, and as such, they need proper and in-depth scrutiny. I am slightly surprised to see some Government Members shaking their heads at the idea that we need appropriate scrutiny. It is incredibly important, and in the light of that, the Opposition would like to put on record our deepest concerns that the process regarding regulations in the event of no deal is not as accessible and transparent as it should be.
The rationale for these SIs is preparation for a no-deal Brexit—something that continues to be retained on the table by the Conservative Government despite clear evidence of the harm that that is doing to our economy. Last week in this Chamber, I mentioned the concerning slowdown in growth rates and the shift into recession of our manufacturing sector. The financial sector has not been immune; quite the opposite. As many Members will know, Ernst and Young has created what it calls a Brexit tracker, which monitors the public statements of more than 200 of the biggest financial services companies operating in the UK. As of January this year, the tracker showed that more than a third of the financial services companies that were tracked indicated that they are considering moving or have confirmed that they will move some of their staff or operations outside the UK. As we consider these two financial services SIs, we must reflect on why the current Government continue to retain the so-called option of no deal, especially given that the House has emphatically shown its opposition to such an outcome.
The first SI appears to cobble together three sets of legislative changes to a variety of parent legislation. The Minister, as he always does, made a valiant attempt to present a coherent case, but we are talking about three different sets of changes. As with other SIs that the Opposition have contested, the parent legislation includes primary legislation, not least, as the Minister acknowledged, FSMA. Yet again, we see here the operation of Henry VIII powers.
In connection with that, I note that as of last Thursday, 288 changes have been made to FSMA as part of the preparation for no deal. That is an enormous number of changes to primary legislation, and it has been delivered in a completely piecemeal manner. We have no indication of when Government will present us with a finalised and integrated version of the new no-deal legislation,
coupled with the primary legislation that it amends. Perhaps the Minister, in his concluding remarks, can tell us whether his Department has such an overview and, if so, whether it would be willing to share it with the House and the public so that we can better understand what the financial services regulatory system would look like in the event of no deal.
The explanatory notes for the regulations were truly a masterpiece of the kind we have come to know well from no-deal SIs. I note that Her Majesty’s Treasury uses the crystal mark on some of its documents. I am sorry to speak so bluntly, but HMT would perhaps have done well to use the crystal mark’s drivel detector—its words, not mine—on the explanatory notes. All they did was to list the bits of legislation that were being changed. In no case did they explain why, aside from maintaining that doing so was necessary to address deficiencies. Yet again, we find questionable decisions being taken with no explanation.
Not all the changes in the regulations appear even to relate to the EU. For example, there are changes relating to disclosure requirements and to the Panel on Takeovers and Mergers—in regulation 2—but there is no indication why those changes have been made. Again, definitions are changed, such as that for short selling regulation information, but it is not clear whether that definition will be replaced elsewhere or, indeed, why it had to change in the first place.
Perhaps most worryingly, we see yet again a shift away from EU requirements, which suggests that these measures are potentially going beyond direct transposition and instead diluting existing provisions. For example, the wording of one article of the EU regulation on short selling and certain aspects of credit default swaps—sorry, that is not a lovely name to pronounce—is amended from “shall, where possible” to “may”. From my reading, the amended provisions relate to the obligation to liaise with third countries concerning the identification of where shares are traded, but it is not clear why that obligation should be watered down. There is a similar change to the 2014 market abuse regulation, where “shall, where necessary” is altered to “may”. It appears that the UK’s co-ordination with non-EU countries and its relations with the EU27 are being altered through these measures. The withdrawal Act does not provide the authority to do that.
The Minister appeared to suggest that this was to do with the exchange of confidential information and that we needed to have a different process. Surely, however, there are different ways of responding to the issue; there could have been measures in this legislation to deal with the problems and to ensure that information was appropriately guarded against anybody who might use it in an inappropriate way. However, we do not have that; instead, we have these provisions, with no explanation why.
Relatedly, there is no clear indication of the process to be used to determine which countries might be chosen for the conclusion of disclosure agreements mentioned by the Minister, or of the process required for those agreements. I absolutely agree with the point made by the hon. Member for Aberdeen North (Kirsty Blackman). Obviously, she was referring to the overall import of these regulations, but there are other ambiguities about timing. When it comes to the conclusion of disclosure agreements, does the process have to be completed by exit day? If it does, has that process started? If it has
started, on whose authority has it started? Presumably, it is not the authority of this House. In addition, it would be helpful to understand why the Government have decided to follow a bilateral approach, rather than one that might have been integrated, with an integrated disclosure agreement that could have been signed with the European Securities and Markets Authority.
Finally, we are again informed that an impact assessment has not been conducted on this instrument, even though the explanatory memorandum states that there has been engagement with relevant stakeholders concerning the SI. It would be helpful if the Minister provided further details about that engagement.
Let me move now to the Money Market Funds (Amendment) (EU Exit) Regulations 2019—I will just talk about MMFs from now on. Obviously, the regulations are intended to implement the EU’s MMF regulation of 2018. As described by the Minister, that regulation was intended to make money market funds more resilient against disturbances in the financial markets, reduce the risks of runs in the markets, limit cross-border contagion and improve investor protection. That regulation immediately applied to new MMFs, from July of last year, but it came into practice for existing MMFs very recently—just last month. I will not go into all the details of the use of MMFs, but I would just add charities to the list the Minister talked about—there are a number of different bodies that use these funds.
The process of creating the regulation was led by a UK Labour MEP in the European Parliament, Neena Gill. As many Members may be aware, the process was controversial; it was not entirely straightforward, and there was huge debate about whether the UK should exactly follow the US approach or not. There was a lot of scepticism about whether the system of MMFs, in and of itself, should be encouraged. Many have described it as a system of shadow banking, because of its relative lack of transparency.
As with other SIs tabled by the Government, there are a number of problems with this legislation. First, it provides a new definition of money market funds that is arguably circular. It describes them as
“instruments normally dealt in on the money market which…satisfy…Article 2a(1)”
of the regulation. That is quite a different approach from the one taken by the EU, even back in the days of the Committee of European Securities Regulators. Before ESMA was created, there was an inclusive list of activities that would lead to classification as an MMF. A different approach is taken here.
Secondly, again as with other pieces of no-deal financial services legislation, there is no indication why and how the FCA, in particular, is meant to adopt the regulatory approach suggested in this SI. Regulation 6 provides it with the power to regulate MMFs, but without explaining how that will impact on its existing activities. The Minister intimated the different kinds of activities that the FCA will have to take on as part of this process, but they are very onerous. Just in relation to reporting templates, ESMA produced a 135-page report after consultation with stakeholders about what should go into those templates. I assume that similar levels of detail might be required for the FCA. This will not be a light-touch area to move into. Again, there is a lack of clarity about the extent of industry consultation on this SI.
As has often been the case with these SIs, we have had some rather strange throwaway comments in relation to this SI. The guidance accompanying it states that it does not include provisions that may be necessary to ensure Gibraltarian financial services firms can have continued access to UK markets in line with the UK Government’s statement in March 2018 and other provisions dealing with Gibraltar more generally. It also says that, where necessary, provisions covering Gibraltar will be included in future SIs. Does that mean that provisions for Gibraltar should have been covered but that there just was not time to consider them properly, or is there a procedural reason why they are not covered here? Again, will we need an omnibus SI at some point covering regulatory arrangements for Gibraltarian financial services?