My Lords, prior to the end of the transition period, the Treasury undertook a significant programme of legislation, introducing more than 65 statutory instruments under the European Union (Withdrawal) Act 2018. As noble Lords will know, these SIs covered all the essential legislative changes that needed to be in law to ensure we had a coherent and effective financial services regulatory regime at the end of the transition period.
This statutory instrument amends a transitional regime created in an earlier financial services EU exit instrument. It is intended to ensure that the transitional regime continues to provide continuity for UK firms, as was originally intended. The instrument, broadly speaking, concerns insolvency-related protections that are provided to systems under the EU settlement finality directive, or SFD. In this instance, these systems are financial market infrastructure such as central counterparties, central securities depositories and payment systems, which provide essential services and functions relied on by the financial services sector.
Prior to the end of the transition period, if an EEA-based system was designated under the SFD it received specific protections in insolvency law. For example, where a designated system had received funds or securities from a system user—for example, a UK bank—those funds and securities could not be clawed back in the event of the UK bank being subject to insolvency proceedings. Importantly, this framework ensured that these vital elements of the financial plumbing were not at risk when individual members were in insolvency procedures. Now that we have left the EU, providing such insolvency protections is sometimes also a requirement for UK firms’ continued membership of these systems. Designation is therefore important, as it facilitates the smooth functioning of, and confidence in, financial markets.
Under the SI that we are amending today, a UK framework was established for designating any non-UK system so that it can receive settlement finality protections under UK law. It also established a temporary designation regime to provide settlement finality protections for a period of three years to existing designated EEA systems that intended to submit an application under the UK’s framework. The purpose of temporary designation is to allow time for applications to be processed by the Bank of England, while ensuring continuity of access for UK firms to relevant EEA systems.
However, there is a requirement in the temporary designation regime for EEA systems to submit an application under the UK framework by 30 June 2021; they will otherwise lose UK insolvency protections. This instrument amends the consequences for EEA systems failing to submit an application by this deadline. Instead of immediately losing settlement finality protections under the temporary designation regime, EEA systems will retain protections for an additional two years. This ensures that UK firms using those EEA systems have sufficient time to put mitigants in place should access to those systems be impacted.
The Treasury has worked closely with the financial services regulators in the drafting of the EU exit instruments amended by this instrument. We have also engaged extensively with the financial services industry on the instrument to which this SI relates. I also note that the Secondary Legislation Scrutiny Committee has reported on this SI as an instrument of interest.
In summary, the Government believe that the proposed legislation is necessary to ensure continuity for UK firms following the end of the transition period. I hope noble Lords will join me in supporting these regulations. I beg to move.
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