Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019.

My Lords, as the Committee will be more than aware, Parliament has now approved well over 50 EU exit SIs for financial services. That includes three miscellaneous provisions SIs, which are sometimes necessary to make isolated deficiency fixes that do not fit easily into more thematic instruments. These miscellaneous SIs have sometimes been used to correct minor errors in or omissions from earlier exit legislation. This instrument makes some such changes and updates some earlier exit provisions to account for the Article 50 extension. As I have explained to the House previously, the errors in our exit legislation have been minimal. Of approximately 1,300 pages of financial services instruments, miscellaneous instruments have accounted for only 60, with these miscellaneous instruments used only partially to correct errors.

However, this instrument also makes substantive changes to earlier exit legislation in two key areas: first, to the contractual continuity and temporary permissions regimes for payment services; and, secondly, to transitional arrangements for financial benchmarks. These changes are not to correct errors but to strengthen our readiness for exit. We are continually reviewing our exit arrangements to ensure that they are as robust as they can be. In these two areas, we decided it is right to do more to protect UK consumers of payment services and to prevent disruption to firms and markets that rely on financial benchmarks.

An important aspect of our no-deal preparations is the temporary permissions regime, which will enable European Economic Area firms that operate in the UK via a financial services passport to carry on their UK business after exit day while they seek to become fully UK-authorised. We have also introduced run-off mechanisms via the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, which were made on 28 February, for EEA firms that do not enter the temporary permissions regime or that leave it without full UK authorisation.

Part 3 of this instrument supplements provisions for the temporary permissions and contractual continuity regimes for EEA payments and e-money firms through changes to underlying payment services and e-money legislation and previous EU exit SIs. A review of this legislation has identified a limited number of provisions that require amending by this SI to ensure that these temporary regimes are as robust as possible. The amendments fall into two categories. The first is to ensure that EEA firms in contractual run-off can continue to carry out various payment-related activities as intended. This will include provision of payment and e-money services by EEA credit institutions such as banks. The second category applies to the temporary regimes for EEA payments and e-money firms. These amendments clarify and make more explicit the full range of permissions and obligations of firms that enter these regimes. For example, the amendments make explicit that an EEA firm in a run-off regime can legally redeem outstanding electronic money, making it clear that it can return any balance on an account to UK e-money holders. In a limited number of areas, the instrument makes FCA powers more consistent with the powers it has with respect to credit institutions in the run-off regimes, for example by making explicit that the FCA may publish a register of firms in contractual run off. These changes ensure that the FCA has proportionate powers to take action to protect UK consumers.

My Lords, I thank the Minister for this introduction and also for sharing with us a draft of his speech. I appreciate that he us trying to be as helpful as possible, because this House is of course not involved in the various consultations. It is industry that gets the benefit of that. A point that I have made about when we get into non-Brexit legislation in future is that I think we need to have more consultation at the same time as industry.

As this is a financial services matter, I declare my interests as in the register. As the Minister said, this is a miscellaneous provisions SI, which have been thankfully rare from the Treasury. I repeat what we have said before: in general, the Treasury has done a very good job of converting the EU legislation into UK law and following a formula that we can generally see on all the documents as they come forward. I agree that it adds clarity and is a useful extension to previously defined transition periods.

I broadly welcome the provisions, in particular regarding the contractual run-off. It seems a very useful provision for the FCA to be able to list firms that are in contractual run-off, and it is very useful for consumers. I do not expect consumers to be wandering around the FCA website—I might do that and it is hard enough for me—but there are various consumer-oriented organisations, some of which make useful broadcasts to alert consumers to things.

They would find a use for that kind of information in circumstances where a consumer needs to be alerted: for example, if some provision is coming to an end or if the time is right for them to have to switch away from a provider that will not continue forever. It says that the FCA “may” do this; this is one of those occasions where I wish it said “shall”, because I regard this as essential and hope it is written with that spirit in mind.

I welcome the clarity on and extension to the transition period for third-country benchmarks. Benchmark regulation is still relatively newly within the regulatory perimeter—in fact, anywhere in the world. It is something on which the EU has largely been in advance of regulation elsewhere, so it is actually quite new for third countries to have to grasp the fact that they may need permissions and other approvals around their own benchmarks. For that reason I thought that the time provided previously was too short, so I welcome the longer extension. I do not consider this soft; it is highly necessary.

I notice that the conversion date in Regulation 20(2)(a) for those already in the system is 31 December 2019, the three months, I think, for an application for registration or authorisation of an existing EEA entity, benchmark or something of that nature. I query the wisdom of writing a date in. “Three months after exit day” might have been more sensible, in case there is a delay to get some kind of deal, particularly one to 31 December 2019—I suppose that if that fell through we would have to reamend, although I hope that that is a circumstance we do not have to entertain.

I kind of welcome the clarifications around equivalence. It is always difficult if you say, “Saying we are equivalent on Solvency II relates only to Solvency II and not other things”, because there is a great deal of entanglement. There will be bits to do with MiFID and bits to do with other things that have either amended, imported or applied Solvency II. Where there are explanations regarding this, to say, “Just Solvency II” could lead people astray. You have to make it clear whether, if you are finding them equivalent on Solvency II, that means that any related bit to do with some other obligation somewhere else that you have to do if you are an insurance company has also been taken account of. Again, that is where the web of legislation, made more complex by the way in which we have imported and amended it, and the absence of checklists and correlation tables about what is where, will make it very difficult for industry and any practitioner to follow. It will also be quite difficult for those seeking equivalence decisions. I have no objection to what is being done, but I fear that on equivalence and clarification it will need revisiting at some point in a more generic way.

My Lords, I will be brief thanks to my noble friend Lady Bowles, who takes all the pressure and burden off my shoulders. I thank her very much. I also thank the Minister for his clarity and advance notice of his speech. I want to bring up a couple of issues. As with my colleague, it seems to me good sense to follow the tactic of contractual run-off. That that was not in one of the earlier SIs was probably an oversight given the volume that the Treasury has had to deal with, and I do not think that anybody can raise too many eyebrows at that.

I want to focus a little more on the third-country benchmarks, because I wonder whether that really was an oversight. The UK may have assumed that third countries would stand in line so that, on the first possible day that they could have a discussion on recognition of benchmarks, they would be knocking at our door and begging to be able to go through the process. It has been a rather salutary experience to find that many countries have not been all that concerned about standing in line to make sure that they continue to be able to use London for a wide range of their activities—most of them are exploring alternative markets fairly vigorously and with quite a bit of enthusiasm. Making it easier and taking away some uncertainty for a period of three years therefore makes great sense, but I suspect that the initial thought was that London was so necessary to everybody that it could not be replaced by anyone in any way and consequently did not have to think carefully about providing the opportunity now covered by this SI.

That brings me to the issue of equivalence which the Minister mentioned, although I know it is not essentially embedded in this SI. He said that the UK almost from the moment we leave—if Brexit happens—would begin potentially to diverge. Different interpretations and different rules might come under the umbrella of Solvency II, but their UK life would be different from that for the 27 countries within the European Union. That is one of the things that worry me more than anything else. While all these measures focus on the UK discussing how it will allow EEA firms to continue to use London, the real issue is whether UK-based firms can continue to service clients across the EU, because that is obviously where the overwhelming majority of the client base is.

My Lords, I welcome the Minister to the Moses Room. I do not know whether he has done any propositions here before, but I hope he is not overwhelmed by the number of Peers in attendance.

The Liberal Democrats are blessed with people who understand this industry. I am afraid that the Labour Opposition is blessed with me; I do not know the industry and have had to slog through the Explanatory Memorandum to try to understand what it is all about. I note the Minister’s praise of the Treasury staff and others involved in its creation. As a constant critic of Explanatory Memorandums, I also extend praise, because slotting together these 58 SIs must have been a dreadful task. Nevertheless, I fall back on reading the Explanatory Memorandum and hope I add some rigour to the exercise by insisting on explanations where the plain language has failed to get the information across to me.

The first issue I raise is in Regulation 1(2) itself, which says:

“This regulation and regulations 2 to 7”,

et cetera,

“come into force the day after the day on which these Regulations are made”.

By my understanding of the “made affirmative” process, that means they are actually in force now—I stand to be corrected on this. One of the problems we have had all the way through is that this is a so-called no-deal SI, so what happens to the parts of the regulations which are now in force if in fact we get a deal? Will they be repealed, when and by what mechanism?

Plunging into the Explanatory Memorandum itself, the first place I paused was paragraph 2.5. Here, there is an amendment to FSMA,

“so that the Financial Conduct Authority … can, if necessary, be exempt from consultation requirements where an urgent change to BTS is needed to protect UK consumers. The ability of the FCA to make urgent rule changes, where necessary to protect consumers, is an important crisis management tool in the UK regulatory framework”.

The next area I tripped up on was in paragraph 2.7, when I was happily reading through the document. Clearly there was a problem, and here was a solution. The end of paragraph 2.7 says:

“A review of this legislation has identified a limited number of provisions which should be amended in order to ensure these temporary regimes operate as intended from exit day”.

That seemed to me a pretty sensible idea, until I read the explanation over the page, at paragraph 2.9(i), which states that the regulations,

“ensure that relevant funds of payment service users and e-money holders continue to be prioritised above the claims of other creditors as they are currently, in the event that these firms enter a UK insolvency procedure”.

That seems to me, as a non-expert, to be a pretty significant impact on insolvency law. Am I right that it amends or influences the appropriate insolvency law, and is it accepted that this is quite a significant impact? It seems entirely sensible and I cannot quibble with it; I just worry that it is a little paragraph in an instrument that amends an instrument, and so on. Have all the implications been taken into account, or is it a more straightforward situation that there was some ambiguity and it is merely eliminating that to a minimum of ambiguity?

Later in the document, paragraph 2.16 introduces the MAR, which is about market integrity and investor protection. Clearly this is very important. I do not understand how the MAR works. It seems that it must relate to criminal law, because any insider trading and so on presumably has a criminal consequence. But the paragraph goes on to specifically explain that this removes any ambiguity as to whether overseas territories are involved. First, I do not understand who the overseas territories are; I knew the definition once, but I would like it repeated just to clarify things in my own mind. Secondly, do we have the appropriate law to intrude into overseas territories to make sure that the MAR has the right impact?

On the benchmark issue, Liberal Democrat colleagues have drawn out the issue in paragraph 2.25 of the poor rate at which other authorities have sought to administer. I too shuddered a little at this. Is it an indicator that London will have a diminished status after a no-deal Brexit? Is our feeling that Europe cannot manage without London justified? This is the first direct reaction to it, and it is almost as though the importance of London is being ignored.