Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019

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.

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.

My Lords, we have allowed my noble friend Lady Bowles to go off to her committee today so I am afraid that there is somebody on these Benches with a far less-detailed knowledge of the intricacies of the relevant pieces of legislation. That may be of some relief but she will be back on future occasions so the respite is only temporary.

We have no objection to these two SIs, although I would like to probe around them a little. Clearly the UK Government should make this move because, frankly, EEA UCITS with a presence here in London suddenly fleeing because of a lack of temporary permissions would be a hole beneath the waterline for the future of fund management in London. The measure is absolutely necessary. The vast majority of those funds have said that if they had to go back and apply again as third countries for third-country permissions to keep their existing funds in place, they would prefer to exit. That is the situation with which we are dealing so the Government’s move is appropriate.

However, noble Lords will be aware that a great deal of money has already fled London. Two or three weeks ago, EY provided a report setting the number of assets to have left the City, primarily funds, at around £800 billion. With the latest Barclays announcement, that takes the number to about £1 trillion, which is a reasonable amount of assets under management to have left because of Brexit. So that everybody understands, I say that this is not about people being disloyal or unpatriotic. One of the companies involved, Somerset Capital Management—co-founded by Jacob Rees-Mogg—domiciled two recently launched funds in Dublin, apparently because of the demands of various clients. Clearly, a great deal of the movement out of London has been client-led.

That is a problem because conglomeration is a very powerful factor in driving this industry forward. Losing something like £1 trillion of funds under management and finding that many players are playing double-handed, with a presence in both London and somewhere else—typically in Dublin but perhaps in other places in the EU 27—puts into doubt a future never before doubted: that London would dominate in this area. Did I understand correctly from the Minister—and do I understand correctly from reading the instrument—that the transitional arrangements described are simply to provide continuity for existing London-domiciled EEA UCITS? Has there been any assessment of the likelihood of new funds to open choosing London for their headquarters? Has there been any assessment of whether the limited reach of the regulations means that, if we leave on 29 March, funds to open later in the year are far less likely to be London-domiciled because they will have to apply through a third-country process? I would be interested to understand that.

I think I can help the noble Baroness on that. There are no UK-based funds of this nature but there are some based in the EU—about five—that market into the UK. Those are the ones that will be able to apply for a temporary passport.

I find that very helpful and I thank the Minister for saying that.

I thank the Minister for introducing this statutory instrument but I repeat my concern that we are considering such instruments at all. I and my party feel that the Government should have given a commitment that we would not have a no-deal exit; day by day, there is growing evidence that such an exit will be disastrous for our country. I will say no more on that but try to process these SIs on their merits against—how shall I put it?—the strict limitation that we are assuming a no-deal situation and recognising that things have to be done to achieve that.

The Treasury, I assume to be consistent, has reproduced the same eight paragraphs in all the Explanatory Memorandums. Paragraph 7.4, which I will repeat, says:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation”.

It is against that test that I spent my time studying the Explanatory Memorandum. It seems to do all the right things: it creates a new name; it says that passporting dies; and it goes on to offer a temporary permission regime. This regime may last for up to three years, or three years and 12 months, or three years and 24 months, or perhaps for ever. One has to view the SI in the light of that regime.