Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019

Motion to Approve

Moved by

That the draft Regulations laid before the House on 22 January be approved.

My Lords, as this instrument is grouped, I will speak also to the draft Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019. As with the previous instruments we have just debated, these SIs are part of the same legislative programme under the EU (Withdrawal) Act that aims to ensure that, if the UK were to leave the EU with neither a deal nor an implementation period, there would continue to be a functioning legislative and regulatory regime for financial services in the UK.

Gibraltar holds a special place within the British family, not only because of our shared history, which stretches back over 300 years, but also because of the priorities and values we share today. The UK Government are committed to maintaining our close relationship, and this will remain unchanged following the UK and Gibraltar’s parallel withdrawal from the EU. In March 2018, at the joint ministerial council with the government of Gibraltar, the UK Government guaranteed that Gibraltar financial services firms’ access to UK markets will continue as it currently is until 2020, in any scenario. These instruments deliver on the commitment made at that council.

In a no-deal scenario, both the UK and Gibraltar would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. Since the current market access arrangements between UK and Gibraltar are, in part, underpinned by the EU framework, without these SIs the UK-Gibraltar framework would also be disrupted. These SIs update existing UK legislation and make amendments to other EU exit legislation to make special provision for Gibraltar and to ensure that UK legislation relating to Gibraltar works properly in a no-deal scenario.

The first SI, the draft Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019, deals primarily with the Financial Services and Markets Act 2000 (Gibraltar) Order 2001, known as the Gibraltar order. This legislation, along with Section 409 of FiSMA, modifies EU passporting rights to allow market access for authorised financial services firms between the UK and Gibraltar. This applies to a range of authorised firms and, importantly for Gibraltar, includes those in the insurance industry. As a result, since this domestic legislation is derived from EU law, in a no-deal scenario, passporting arrangements between the UK and Gibraltar will become deficient.

The draft regulations amend domestic legislation, including the Gibraltar order and Section 409 of FiSMA, to retain the existing passporting framework between the UK and Gibraltar after we leave the EU until at least 2020, in line with the Government’s previous commitment. These provisions are therefore sunsetted and will cease to have effect on 31 December 2020. Currently, EEA firms passporting into Gibraltar can also onward passport into the UK, and vice versa. Consistent with the general removal of EEA passporting provisions in the event of leaving without a deal, the SI also removes provisions enabling this level of access. This will have no impact on UK or Gibraltarian firms.

With regard to these regulations and the previous ones, as they are quite complicated and relates to the transitional period, if there is one, can the Minister clarify what would happen to these two SIs if there were an agreement under the rapid withdrawal Bill that would have to be passed if there is an agreement? Would these SIs remain as they are now, if carried tonight, or would they have to be wholly or partially suspended?

As regards the other SIs we have been dealing with, we have been saying that in the event of no deal, there would not be an implementation period. If there were a deal—we all hope there will be—there would be an implementation period, and at the end of that period, potentially some of the SIs could come into effect if they were still relevant. However, the point I was making was on the specific commitment that the Government have given to Gibraltar to work up a special arrangement which we hope will be in place before that period, and if it is not in place before that period, there would be the potential to extend these provisions for one year at a time. That is where we are at the moment. Perhaps I will say some more about that, if it would be helpful to the noble Lord, in winding up in response to the debate.

Specifically, these provisions ensure that UK-based firms, Gibraltar-based firms, Gibraltar trading venues and provisions related to arrangements between the UK and Gibraltarian regulators continue to be treated in UK law as they were before exit day. These broad savings provisions also allow the rights or obligations that are dependent on the function of an EU body to instead be performed by the appropriate UK regulator or the Treasury.

Finally, the legislation makes minor amendments to the PRA’s existing powers of intervention over Gibraltarian insurers operating in the UK. This will allow the PRA, where necessary and appropriate, to address risks of disruption that could threaten the financial stability of the UK. No changes are being made to the FCA’s powers in relation to Gibraltar-based firms.

The Treasury has been engaging closely with the Government of Gibraltar on the legislation and they support the approach taken in these SIs. It has also been engaged with the Prudential Regulation Authority and the Financial Conduct Authority in the drafting of the SIs and shared with the financial services industry drafts of the SIs ahead of their publication. On 19 December 2018, the Treasury published the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations in draft form. On 7 February, the Treasury also published the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations in draft form, with an updated explanatory policy note on the two Gibraltar SIs. The Government of Gibraltar are also undertaking their own contingency preparations for Gibraltar’s withdrawal from the EU in order to ensure that UK firms currently operating in Gibraltar retain their market access in the event of leaving without a deal and to maintain the current regulatory arrangements.

Before concluding, I draw the House’s attention to an error which has been discovered in the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019. Unfortunately, mistakes happen from time to time and, where they are found, it is important that an explanation is put on the record. Shortly after the SI was laid, a small typographical error was discovered in the regulation at 10(3) which inserts a new regulation 4C into the Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019. Paragraph (2)(a) of this new regulation refers to the,

“UK law which implemented or the Solvency 2 directive”,

whereas, of course, it should read the “UK law which implemented the Solvency 2 directive”. This typographical error will be corrected before the SI is made.

In summary, the Government believe that the proposed legislation is necessary to ensure that Gibraltar-based financial services firms can continue to passport into UK markets after exit, as they do now. It would ensure that existing regulatory treatments in relation to Gibraltar continue to function effectively after exit day, if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting the regulations. I beg to move.

My Lords, I will be exceedingly brief because, again, this falls into the category of necessary changes to regulation in order to keep a reasonable consistency in the relationship between the Gibraltarian and UK financial markets. I accept that but I have to say: poor Gibraltar.

There is a three-way relationship between Britain, Gibraltar and Spain. A recent tax treaty between the UK and Spain requires Gibraltarians sourcing their business primarily in Spain to pay Spanish taxes. I suspect that some in Gibraltar are slightly stunned by it but realise they have to accept it. The complexity of the relationship outside the EU is far from being resolved.

As the noble Baroness, Lady McIntosh of Pickering, said earlier, unfortunately impact statements only test the actual cost of a particular regulation and then compare it with what would happen if there was no regulation. They never compare the cost between implementing no deal and remaining in the EU. This is where the big number lies, not only for the UK, but very much for Gibraltar. So it is crucial to do anything we can at this point to try to minimise the impact. This regulation is a small part of it. I cannot see how the whole Brexit strategy—deal or no deal—can ever benefit Gibraltar or give it a future which is anything like as prosperous as the one it had in a remain context.

My Lords, I want to ask a question which follows on from the intervention of the noble Lord, Lord Beith. First, I am still a little at a loss as to how these years work, compared with other SIs. I do not quite understand what would happen if we had a deal and a transitional period. The noble Lord raised something which needs to be explained.

Secondly, I agree with the noble Baroness, Lady Kramer, that it would be wrong to allow these two SIs to pass without reminding the House of the serious effects of Brexit on this particular connection of the United Kingdom. The more we talk about these and the more you unwind it, the more it becomes quite clear how ridiculous the whole process is. I know it is not suitable for my noble friend to comment on this, but I wish only that our Benches were filled with those who think that Brexit is good idea so that they could listen to the realities of what happens if you leave the European Union—let alone without a deal. As usual, none of them is present to listen to the serious effects of Brexit. It is rather like trying to talk about climate change. You never have the climate change deniers present to see what the science is actually about. The House might like to note the non-existence of those who think that Brexit is just a matter of getting there and doing it at once. The people who stand outside with little notices about the WTO clearly have never worked out what becoming dependent on WTO rules means.

Thirdly, of course we have to pass these two SIs. Without them, were we to leave the European Union without a deal, things would be even worse than they need be, but we must not do it thinking that this is going to make things easier. Gibraltar is a sharp instance of the damage that could be done. Will my noble friend explain a little more about the discussions that have been held with the Gibraltar Government and particularly his reference to the Gibraltar Government making their own arrangements should there be Brexit without a deal? What are these arrangements and how do they interrelate with this SI? I do not think that many Members of this House have detailed knowledge of the kinds of things which Gibraltar would have to do were we—and they—to leave the European Union without a deal. It would be helpful to the House if my noble friend would delineate what exactly it is that they have to do and what their powers and responsibilities are in parallel with the two SIs with which we are concerned this evening.

My Lords, we have no objection to these two SIs, but I have two or three brief questions. The position is summed up in the Explanatory Memorandum to the first set of regulations, paragraph 7.21 of which surprised me. It states:

“The UK government will work closely with the government of Gibraltar to design a long-term permanent framework”.

My impression until I got to that sentence was that the provisions here would change the situation into a stable framework. I would be grateful if the Minister could give us a feel for the extent of difference between the UK system and the system in Gibraltar that means that this bespoke framework is needed, and particularly what will happen if it is not agreed by the end of 2020.

The Minister can respond in writing to my second comment if he would like to do so. I refer to the first bullet point in paragraph 7.15 on the second set of regulations. This is really a cry of anguish because one has slogged through so many of these SIs and has to read every one, and then one reads this final sentence:

“This framework will not apply to the automatic recognition procedure of resolution actions between the UK and Gibraltar”.

I do not have the faintest idea of what that means and not the faintest idea of how to find out what it means. I ask the Minister as a matter of sheer curiosity what it means, and I will accept a letter.

I thank all those who have participated in the debate. Let me try to put a little more flesh on the bones of this process for the noble Lord, Lord Beith, and my noble friend Lord Deben. In the event of no deal we will be left without the necessary legislative framework because the European Communities Act will have been revoked and therefore the body of law will not apply in the UK. We need to make sure that we onshore the current law so that we get a measure of continuity. If that applies to the UK, of course it also applies to Gibraltar. The Gibraltar Parliament has therefore also had to pass its own version of the EU withdrawal Act and is having to go through the process of the onshoring regime, which is what we are doing here. We are in a sense being treated as two sovereign entities.

Let me put a little more structure on to my initial answer to the noble Lord, Lord Beith. As set out in the White Paper on the EU withdrawal agreement Bill, the Bill will amend the European Union (Withdrawal) Act 2018 so that the conversion of EU law into retained EU law will take place at the end of the implementation period instead of on exit day. While the UK remains subject to EU law and before the conversion of EU law into UK retained EU law, there is no requirement for most instruments relating to our exit from the EU to be in force. The intention is therefore that the EU withdrawal agreement Bill will contain provision to delay all relevant SIs that enter into force on exit day until the end of the implementation period. The Bill will also ensure that Ministers can revoke or amend SIs as appropriate so that they effectively deal with any deficiencies arising from the end of the implementation period.

My Lords, that is helpful and it is in the language that we have heard used for other statutory instruments. What it does not tell us is whether these two instruments are among those which can be wholly dispensed with or set aside during the transition period, or whether they will be partly in force even if there is a deal.