Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Collective Investment Schemes (Temporary Recognition) and Central Counterparties (Transitional Provision) (Amendment) Regulations 2024.

My Lords, in moving this order, I shall speak also to the Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Regulations 2024.

The regulations we are introducing today will ensure that the regulatory framework for financial services is aligned with the UK’s needs following our exit from the European Union. They ensure that UK businesses and individuals can continue to access the products and services they need, even where these originate from outside the UK, and that UK authorities have appropriate control over which firms can access our markets. They also ensure that the statute book is clear, comprehensible and relevant to our domestic market.

I turn first to the instrument on collective investment schemes and central counterparties. UK investors and firms rely on a wide range of financial products and services to meet their needs, ranging from individuals saving for a rainy day all the way to multinational corporations needing to settle multi-million pound transactions. In a highly international industry, many of these products and services originate from outside the UK. Ensuring continued access for UK investors and businesses is therefore critical to the continued functioning of our economy. This instrument deals with two such areas of global market access: the ability of collective investment schemes or funds to market to UK retail investors; and the ability of overseas central counterparties to provide services to UK firms. I shall now speak to each of these in turn.

The Government previously introduced a new route for overseas funds to become recognised for marketing to UK investors—the overseas funds regime. In July this year, the first equivalence decision under this regime came into force. This means that certain retail schemes from the European Economic Area will be able to market to UK investors on an ongoing basis. Funds from the European Economic Area had been able to passport freely into the UK prior to the UK’s exit from the European Union; a temporary regime was introduced to allow these funds to continue doing so. These temporary arrangements were due to end in December 2025.

The overseas funds regime represents a more permanent solution. However, it will take time to transition the more than 8,000 funds with temporary access to the new regime. Therefore, this instrument extends the temporary regime for a further year, until 2026, to allow for a smooth transition and avoid any cliff-edge risks. It is important that the temporary regime continues to work as intended for those funds still using it—namely, those funds not in scope of the Government’s equivalence decision. At the same time, the temporary regime should wind down in an orderly fashion. This means that funds in scope of the equivalence decision should be directed towards the overseas funds regime and, if they fail to apply or become recognised under that route, they should lose their ability to market freely to UK investors.

Finally, this instrument removes references to regulations made under the insurance distribution directive from the Financial Services and Markets Act 2000 (Qualifying Provisions) Order 2013. These provisions gave the Financial Conduct Authority powers to investigate and remedy breaches relating to the insurance distribution directive that are no longer required now that the directive no longer applies in the UK.

The amendments made by this instrument may be technical, but they are important in bringing the statute book up to date. Failing to make them could cause confusion about the relevance of EU law to domestic regulation. These SIs make technical changes that are necessary to ensure that our statute book remains up to date and adequately reflects the UK’s exit from the European Union. They also make important provision regarding the provision of services into the UK, either by ensuring that UK firms and investors can access the products and services that best suit their needs or by giving UK authorities appropriate control over when certain services can be provided. I hope that the Committee will join me in supporting these regulations, and I commend them to the Committee.

My Lords, I will be relatively brief because these are highly technical instruments, but there are some comments that I would like to make.

I shall start with the collective investment schemes and central counterparties order and begin with collective investments schemes. I ran this one by my noble friend Lady Bowles of Berkhamsted, who is the ultimate guru in our party on collective investments schemes and, I suspect, one of the experts on them within the House, and her report was “It’s absolutely fine, let it go”, so I will happily take that position on the necessary tidy-up of the changes in the language for collective investment schemes.

However, the second part of that order is far more interesting and raises some questions, about not the language but the broader issue of central counterparties and the hint that this regulation may contain. Everyone in this Room understands that central counterparties became an instrument for countering the fallout of the 2008 financial crash when liquidity seized up across the financial services sector because, within that huge area of derivatives—I think derivatives outstanding typically exceed something like $60 trillion at any one time—the outside world did not know who owed what to whom and therefore who was at risk from which failure and whether there would be domino effect. Indeed, liquidity then seized up and we went from a contained financial crisis into a wholesale financial crisis. Now, vanilla transactions and derivative arrangements that go beyond the vanilla pass through central counterparties so that there is a middleman, if you like, that can hold the risk so that if one party fails, the counterparty takes the risk, not the person who holds the mirror transaction on the opposite side.

I think everyone has always recognised—I could quote Andy Haldane, but I have done it too often before—that, in a sense, the central counterparty is an accumulation of risk. One could almost think of it as an unexploded bomb. Serious levels of risk are contained with the central counterparty and, if anything goes awry, the shock to the financial system would be global. The Committee will know that many of the counterparties share common ownership. They may look like completely separate organisations, but they feed back and the same parties, in a sense, make up their various memberships and ownerships. Cross-contamination is always a huge risk when dealing with central counterparties.

My Lords, I take great pleasure in returning to the Front Bench to debate Treasury matters, albeit now in a shadow capacity. Although I do not have current interests to declare, I hope that my past experience as Commercial Secretary to the Treasury and as a member of the EU Financial Affairs Sub-Committee will stand me in good stead. Until 2022 I served as a non-executive director of a challenger bank and, of course, I have served in business more generally. I thank the Minister for her clear explanation of these two instruments and their obvious complexities. I am glad of the opportunity to work with her across the House and I look forward to hearing the answers to the observations made by the noble Baroness, Lady Kramer, especially about risk.

Our investment schemes and central counterparties are without question the backbone of the United Kingdom’s financial services industry. They enable our country to attract global capital, support pensions and, ultimately, benefit people and businesses up and down the country. As the Minister said, it is important that the rules and regulations are not needlessly bureaucratic. The removal of EU recognition is welcome. We now have domestic arrangements for oversight and I believe we should not be double-banking, so I am in a slightly different place to the noble Baroness, Lady Kramer, on that.

I wish to make two wider points. I am particularly grateful to the Minister for including a de minimis impact assessment with the first SI. I note that it has also been through the better regulation unit. I have always been a huge supporter of impact assessment and wider cost-benefit analysis of all legislation, but I have two questions. Can the Minister confirm that it is the policy of the new Government to require de minimis assessments of this kind on all SIs—unless the impact is negligible, as with the insurance distribution SI? She can perhaps answer for the Treasury today. I note from GOV.UK that her ministerial role also relates to business regulation more widely. Although she may need to write, I would appreciate a wider answer, as such a requirement would help deliver value for money across government and limit the negative effect on growth of new regulation.

I thank both noble Baronesses for their comments. I very much welcome the noble Baroness, Lady Neville-Rolfe, to her new role—I am sure that she will carry it out extremely well. I am pleased to hear that the noble Baroness, Lady Bowles, approves of something we are doing, for a change. Getting approval from her takes some doing, so it is good to hear.

The noble Baroness, Lady Kramer, made some more serious points, which I will have a go at addressing. First, she asked whether risk was being compromised here. We agree that we do not want to deregulate in this area; if anything, the UK Government have committed to maintaining and strengthening our high standards for CCP regulation. Of course, the Bank of England regulates these firms anyway, in accordance with its financial stability objective, so there are checks and balances already in place. We do not believe that risk is being compromised. On equivalence being a unilateral decision for the EU, we have been clear that we are committed to high standards and that we do not believe this SI gives the EU any cause for concern or reason not to extend CCP equivalence further.

The noble Baroness, Lady Kramer, asked about the role of ESMA. Of course, a variety of circumstances could lead to ESMA withdrawing EU recognition from overseas CCPs. These circumstances may not always be relevant to the UK; therefore, UK authorities may not wish to take similar action. This might be the case if, for instance, ESMA withdrew recognition because it had not agreed co-operation arrangements with other relevant national authorities. Whatever the reasons for withdrawing, the Bank is able to remove a firm from the TRR, if it deems that the CCP presents a financial security risk.

The noble Baroness also asked whether insurance companies would fall outside the regulatory perimeter. There is no policy change here. Premium thresholds will be denominated in sterling rather than the euro. The current exchange rate was used, with denominations rounded to the nearest £25; this is just to make it easier and clearer for people using the services. We will keep the operation of these thresholds under review, but this measure was simply to make the process more simplified.

My question about the impact assessment was actually about the de minimis impact assessment. Proper impact assessments have to be done at about £10 million, or whatever the level now is, but I was congratulating the Minister on having done an impact assessment for something that was in effect smaller. I would like to know whether that will be adopted by the Treasury, which I think has an interest in it, and whether it will be adopted more broadly by other departments. Perhaps the Minister could follow up on that, especially on the broader point, given her role on legislation.

As for the point about the plan going forward, it would be good to know whether there is a published source of what is still to come and what amount of time that will take. People will be very glad to know that we are nearly at the end of this process of bringing in our own regime on financial services, so that our excellent sector can feel that the roundabout has stopped and that it can get on with serving Britain. London is still such an important centre for financial services, and I am very keen to support the Government in supporting that.

I thank the noble Baroness for that question. I can confirm that it is standard practice for the Treasury to produce de minimis impact assessments—I have got a nod from the team behind me, so I say that with some confidence.

The noble Baroness asked about the next steps for repealing assimilated law. The Government are committed to securing the benefits that the repeal and replacement of assimilated law can bring, creating a more agile and responsive regulatory regime. That means progressing work on files such as the European market infrastructure regulation and alternative investment fund managers directive. To be more specific, we will write to the noble Baroness to clarify any further information that we have on this. With that, I hope that noble Lords will approve the regulations.

Motion agreed.