My Lords, the Treasury has been undertaking a programme of legislation, through SIs introduced under the EU withdrawal Act, 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 SIs made before 29 March covered all the essential legislative changes that needed to be in law by exit to ensure a safe and operable regime at the point of exit. While the deficiency fixes covered in this SI are important, it was not essential for them to be in law at exit, as long as they could be made shortly after. This SI will help ensure that the UK regulatory regime continues to be prepared for withdrawal from the EU. The approach taken in this SI aligns with that of previous SIs 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.
This SI has four components. First, an important aspect of our no-deal preparations is the “temporary permissions regime”, which enables EEA firms operating in the UK via a financial services passport to continue their activities in the UK for a limited period after exit day, allowing them to obtain UK authorisation and complete any necessary restructuring. We also introduced a run-off mechanism via the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, made on 28 February, for EEA firms that do not enter the temporary permissions regime or that leave the regime without full UK authorisation.
This SI does not amend the design of these regimes but introduces an additional safeguard for UK customers of firms that will enter run-off. Specifically, it adds an obligation on firms that enter the contractual run-off regime—part of the run-off mechanism established by the Financial Services Contracts Regulations—to inform their UK customers of their status as an exempt firm and of any changes to consumer protection. This ensures that EEA providers must inform their UK customers if, for example, there are changes to consumer protection legislation in the firm’s home state or in the EEA that affect UK customers. Part 3 of this SI introduces similar obligations for electronic money and payment services firms in the contractual run-off.
The second component of this instrument concerns the post-exit approach to supervision of financial conglomerates. An EU exit instrument fixing deficiencies in the UK’s implementation of the financial conglomerates directive was made on 14 November last year. As part of the EU exit instrument made on 22 March this year, which makes amendments to the Financial Services and Markets Act, Parliament approved a temporary transitional power giving UK regulators the flexibility to phase in regulatory changes introduced by EU exit legislation. As part of work to apply this power, the regulators proposed that, in certain circumstances, changes to the supervision of financial conglomerates should be delayed in order to give affected firms time to reach compliance in an orderly way. To achieve this, a transitional arrangement needs to be introduced to the FiCOD regulations in respect of the obligations on the regulators to supervise financial conglomerates.
The Treasury and the regulators engaged with industry on the temporary regimes and on the approach to phasing in onshoring regulatory changes in order to minimise disruption for firms. TheCityUK, with representation from a number of different trade associations and law firms, expressed support for the approach to transitional arrangements, describing them as “prudent and pragmatic”.
Thirdly, this SI makes a clarificatory amendment to the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018. Here, the drafting approach resulted in the FCA having only the implicit power to cancel the temporary deemed registration or authorisation of an EEA-authorised payment institution or EEA-registered account information service provider that is providing account information services, which lacked the insurance cover currently applicable to EEA passporting firms conducting this activity. This instrument makes this cancellation criterion explicit.
Finally, this instrument makes corrections to earlier EU exit SIs. All the legislation laid under the EU (Withdrawal) Act has gone through the normal rigorous checking procedures. However, as with any legislation, errors are made from time to time and it is important that they are corrected.
Certain provisions in the Financial Services Contracts Regulations 2019 relating to the run-off regimes incorrectly referred to “EEA fund managers”. These references are now removed, as EEA fund managers will not be able to make use of these regimes. In the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019, made on 20 February, references to “European long-term investment funds” were not fully replaced with the term that will be used for UK-only funds. In the Capital Requirements (Amendment) (EU Exit) Regulations 2018, made on 19 December last year, a redundant paragraph on EU member state flexibility in the liquidity coverage delegated regulation was not deleted as it should have been. This SI corrects these drafting errors.
As I explained in my opening remarks, it was not essential for the additional measures and corrections covered by this instrument to be in law by the original exit day of 29 March, and that is why this instrument has not been considered by your Lordships earlier. Now that the Article 50 process has been extended for six months, we can ensure that these provisions are in
place and that the UK’s regulatory regime will continue to be prepared for withdrawal from the EU in all scenarios. I hope that noble Lords will join me in supporting these regulations. I beg to move.