My Lords, 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 EU withdrawal Act to deliver this. A number of
debates on these SIs have already taken place both in this House and in the House of Commons. This SI is part of that programme. It will fix deficiencies in retained EU legislation relating to packaged retail and insurance-based investment products, or PRIIPs, to ensure that it continues 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 it where necessary to ensure that it works effectively in a no-deal context.
I turn to the substance of the SI, which amends the PRIIPs regulation. PRIIPs are investment products offered to retail investors and considered as an alternative to, for example, depositing cash in a savings account. They include financial products such as investment funds, life insurance policies that have an investment element, derivatives and structured investment products. As such, PRIIPs are primarily sold by asset managers, insurers and banks.
The EU PRIIPs regulation introduced a standardised disclosure document called a key information document, or KID, to be provided when a PRIIP is advised on or sold to retail investors. It came into application on 1 January 2018. The PRIIPs regulation aims to make it easier for retail investors to compare similar financial products by requiring certain information about the product, such as the risks, performance scenarios and costs, to be disclosed in a standardised way on the KID. In a no-deal scenario, the UK would be outside the EU and outside the EU’s legal, supervisory and financial regulatory framework. The retained PRIIPs regulation therefore needs to be updated to reflect this and to ensure that the provisions work properly in a no-deal scenario.
First, the SI amends the territorial scope of the retained PRIIPs regulation to reflect the UK’s withdrawal from the EU. Currently, the EU regulation applies to any firms that manufacture, advise on or sell PRIIPs to investors in the EU. This SI ensures that, after exit day, the retained PRIIPs regulation will apply only to those firms that manufacture, advise on or sell PRIIPs to retail investors in the UK.
Secondly, the PRIIPs regulation contains an exemption from its requirements for certain securities issued or guaranteed by EEA public sector bodies. This SI expands the exemption, so that such securities issued by public sector bodies in the UK or any other third country are covered within the exemption. This is to ensure that no new securities are captured in the scope of the PRIIPs regulation in the UK on exit day, and that the UK treats EEA member states and third countries equally.
Moreover, the current regulation contains an exemption from its requirements for all Undertakings for Collective Investment in Transferable Securities funds until 31 December 2019. UCITS funds are a common type of retail investor fund and must be domiciled in an EEA state. Both UK and EEA-domiciled UCITS are sold widely in the UK and are subject to a specific disclosure framework set out in the UCITS directive, separate to the PRIIPs disclosure framework.
The instrument maintains this exemption for both UK and EEA UCITS until 31 December 2019. This is to ensure that both UK and EEA funds are able to
continue to adhere to the existing disclosure framework for UCITS until the exemption ends. Furthermore, the SI transfers the functions carried out by EU bodies under this regulation to the relevant UK authorities. Following exit, EU bodies will have no mandate to carry out such functions in the UK. The instrument corrects this deficiency by transferring the functions of the European Commission to the Treasury, and the functions of the European supervisory authorities to the FCA. Powers to make and correct deficiencies in binding technical standards are also transferred from the ESAs to the FCA. This is in line with the approach taken across financial services legislation.
Finally, this SI deletes provisions in the retained PRIIPs regulation that will become redundant once the UK leaves the EU. It deletes certain powers for and references to EU regulators and EU member states, as well as administrative sanctions powers for national regulators which have already been brought into UK law and granted to the FCA through UK implementing legislation: the Packaged Retail and Insurance-based Investment Products Regulations 2017. The instrument also removes obligations in the PRIIPs regulation for the FCA to co-operate and share information with EU counterparts, as this obligation would not be appropriate after exit day. The FCA will instead be able to use existing domestic provisions for co-operation and information-sharing under the Financial Services and Markets Act 2000, to share information with EU authorities.
The Treasury has been working very closely with the FCA, and has engaged with industry bodies in the drafting of this instrument. On 22 November 2018, the Treasury published the instrument in draft, along with an explanatory policy note to maximise transparency to Parliament, industry and the public ahead of laying. The Government recognise the issues raised by industry regarding problems with the underlying PRIIPs regulation and KIDs. I fully recognise the significance of these issues. However, the EU withdrawal Act does not give the Government the power to make general policy changes to retained EU legislation. We can use the powers only to fix deficiencies arising from the UK’s exit from the EU.
However, the FCA has taken action in relation to issues with the PRIIPs regulation to date. The FCA launched a call for input in July 2018, to seek input from firms and consumers on their initial experiences of the requirements introduced by the PRIIPs regulation. This call for input closed for responses on 28 September 2018 and the FCA is in the process of reviewing all responses. It expects to publish its feedback statement in quarter 1 this year.
In summary, the Government believe that the proposed legislation is necessary to ensure that the disclosure framework for PRIIPS continues to function appropriately if the UK leaves the EU without a deal or an implementation. I hope noble Lords will join me in supporting these regulations, which I commend to the House.
Amendment to the Motion