My Lords, as this instrument has been grouped, I will speak also to the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019. 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 Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already been undertaken here and in another place. The SIs being debated today are part of this programme and have been debated and approved in the other place.
These SIs will fix deficiencies in UK law on investment funds to ensure they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.
Turning to the substance of these instruments, noble Lords may remember previous debates relating to alternative investment funds and their subcategories on 16 January. Those instruments, along with these being debated today, will ensure there is a functioning legislative and regulatory system for investment funds in the UK. The first instrument focuses specifically on the regulation of Undertakings for Collective Investments in Transferable Securities, commonly known as UCITS, which are funds aimed at retail investors. The second instrument relates to long-term investment funds, a
further subcategory of alternative investment funds that promote long-term investment, such as in infrastructure and small and medium-sized enterprises. In a no-deal scenario, the UK would be outside the EEA and the EU’s legal, supervisory and financial regulatory framework. Retained EU and domestic law relating to the regulation of UCITS and long-term investment funds needs to be updated to reflect this.
I will begin with the collective investment schemes regulations. First, this instrument removes references to the Union and to EU legislation that will no longer have legal effect, replacing them where appropriate with references to the UK and UK legislation. It removes obligations to co-operate with EU authorities and defunct references to the EEA passporting system. However, as set out in FSMA and other legislation, it maintains the ability for co-operation between authorities which may be in the interests of both the UK and the EEA.
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Secondly, this instrument maintains a standalone UK regime for UCITS. This includes ensuring that UK funds use firms for depository and management services that are incorporated in the UK, and re-labels UCITS in the UK as “UK UCITS”.
Thirdly, like many other instruments this instrument includes a temporary regime for funds. It will allow an EEA UCITS that is currently marketed into the UK under an EEA passport, and subsequent new sub-funds of an existing umbrella fund, to be marketed to UK investors in a similar manner to before. This regime will last for up to three years, although, if judged necessary, the Treasury may lay a statutory instrument to extend the temporary period for up to 12 months at a time, following an assessment by the FCA and a Written Ministerial Statement to both Houses. In order for funds to continue to be marketed into the UK after the temporary permissions regime, they will be directed to gain permissions as with any other third-country fund. The process for gaining this permission is outlined in Section 272 of the Financial Services and Markets Act 2000. The Government have committed to reviewing this process and will bring forward any necessary legislation in due course.
This instrument will transfer powers from the EEA bodies, such as the European Securities and Markets Authority—ESMA—to UK bodies such as the Financial Conducts Authority—the FCA. For example, the power to make binding technical standards will be transferred to the FCA. This is considered appropriate, because the FCA, as the UK’s national competent authority within the EEA, is already responsible for supervising investment funds.
Finally, this instrument makes an amendment to a similar instrument, the 2018 regulations on alternative investment fund managers. This will bring forward the commencement date relating to the temporary marketing permissions regime for alternative investment funds, which will allow the FCA notification window to operate as intended.
I move on—if my voice permits—to the long-term investment funds regulations. These funds are a further sub-category of alternative investment funds. The take-up across the EEA has been low, with no such funds set
up in the UK by the end of 2018, according to the FCA. However, in line with the Government’s approach to European legislation, this regulation ensures a functioning framework for long-term investment funds. This instrument maintains the existing investment rules for long-term funds. It addresses deficiencies, for example by removing references to European institutions and replacing them with UK bodies. It will also create the UK-only label “long-term investment funds”.
As always, the Treasury has been working very closely with the Financial Conduct Authority in drafting this instrument. It has also engaged the financial services industry, including TheCityUK and the Investment Association, on this SI and will continue to do so. In particular, I note that the funds industry has reacted positively to the Treasury’s preparations. In December, the chief executive of the Investment Association, which is the main industry body for investment funds, noted:
“In a possible no deal Brexit, HM Treasury’s commitment to remain open to international funds ensures that the UK will remain a world leading asset management centre and that UK savers will continue to have access to a full range of investment opportunities”.
In November and December the Treasury published these instruments in draft form, alongside Explanatory Notes to maximise transparency to Parliament and industry. The impact assessment for the collective investment schemes regulations has also been published recently.
The Government believe that the proposed legislation is necessary to ensure that there is a functioning investment funds framework in the UK, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting these regulations. I beg to move.