I beg to move, That the Bill be now read a Second time.
I should begin by paying tribute to my noble Friend Lord Bates for piloting the Bill through the other place so successfully. I am sure that the House will recognise the importance of supporting our financial services industry no matter what the outcome of negotiations on leaving the European Union. The UK’s position as a world-leading financial centre is critical to our prosperity. In 2017, the financial sector contributed £131 billion to the UK economy. It employs over 1 million people across the country, two thirds of whom are outside London, including in the thriving financial centres of Edinburgh, Belfast, Manchester and Cardiff. UK exports of financial services were worth over £77 billion in 2017, which highlights the importance of the sector on the global stage.
I am sure it was an oversight, but in his list of UK financial services centres the Financial Secretary neglected to mention the Yorkshire centres of Leeds and Halifax—of course where the Halifax bank was born—and the many building societies that remain in our area.
I thank the hon. Lady for that very appropriate intervention. She is quite right to mention the local presence of financial services across the United Kingdom.
My right hon. Friend the Chancellor of the Exchequer has already set out the Government’s long-term vision for the future success of the UK’s financial sector, based on world-leading positions in the markets of the future, whether in green finance or in FinTech, and we are pursuing an ambitious global financial partnership strategy to cement our trading relationships with key partners.
However, we also need to ensure that we have appropriate regulations in place, with the right balance between protecting stability and fostering competitiveness. We aim to be the safest and most transparent place to do business, leading the race to the top and always championing high regulatory standards in financial services markets. The Bill will ensure that, in a no-deal scenario, the UK’s regulatory landscape will not fall behind its international counterparts.
The Government have been clear that we do not want a no-deal scenario, but it remains the role of a responsible Government to continue to prepare for all possible outcomes. That includes the event that we reach
The Minister talks about the in-flight legislation and the proposals as they appeared in the other place. When they first appeared in the other place, they were missing a couple of bits relating to the taxonomy of environmentally sustainable activities that would allow companies to green-check their revenue streams, and to new disclosure requirements for asset owners such as pensions schemes, which is of great concern to the Environmental Audit Committee. Can he explain why those two proposals were left off the list? The Bill has now been amended in the other place, but why were they originally missing?
I think this is an example of Parliament carrying out its process and legislation being improved as a consequence. The most important point is where we have ended up. Having listened to the arguments put forward in the other place, the Government chose to embrace the amendments that brought those two particular files into the scope of the Bill.
The Bill provides a mechanism through which the UK will be able to implement in-flight financial services legislation. They fall into two categories. The first category of files relates to those that have been agreed while we have been a member of the European Union, but will not apply or be in force prior to the UK’s exit from the EU on
I am very grateful to my right hon. Friend for giving way. I entirely support the thrust of what is sought to be done here, as does the financial services sector. None of us wish that it should ever be necessary, but given that we are seeking to set out these safeguards, can he help in relation to one matter of in-flight legislation? In clause 3(1)(e), there is specific mention of the inclusion of
“delegated acts under the Prospectus Regulation”.
The financial services sector very much welcomes that being included, because it is important. On the other hand, for another important piece of in-flight legislation, the Securities Financing Transactions Regulations referred to in clause 1(3)(f), there is no use of the words “delegated acts”. It is anticipated that under both examples level 2 legislation, as it is called, might be desirable, so can the Minister help by explaining why the distinction has been drawn in that way?
I thank my hon. Friend for his question. He is quite right, although the reference to the Securities Financing Transactions Regulation is, I think from memory, in clause 1(12), line 35 or thereabouts—the fourth file although the fifth measure in the list, the earlier two being combined. As to the main point on which he seeks clarification, the Bill will bring into effect those measures, as amended or otherwise, by affirmative statutory instrument at the time they are brought in. It will then be a case of the way in which those measures are dealt with in terms of the delegated powers to which he refers.
I thank the Minister for giving way. In his letter to colleagues last week, the Economic Secretary stated that the Bill will allow for the Government to choose to implement only those EU files or part of those files which they deems beneficial for the United Kingdom. The Minister talks about whole or parts of legislation. Is he able to set out which of the files or parts of legislation the UK does not intend to implement, and how they will make the decision about what is or is not beneficial to the United Kingdom?
I would make two points. First, where we will end up with the various files that are the subject of the Bill will, to some degree, be determined by where we end up shortly after or after any no-deal exit. I would imagine that at that point the EU would also wish to be negotiating with us on those measures. Secondly, the files themselves, under the schedule as opposed to clause 1, are being negotiated at the moment. We therefore do not have clarity on the exact form they will take.
The second category of files, as I explained, are those that are still in negotiation. These are files that the UK has, in many cases, played a leading role in shaping, and that could bring significant benefits to UK consumers and businesses. The Bill also allows the Government to domesticate these files, in whole or in part, via affirmative statutory instrument. Given that the UK will not be at the negotiating table when the files are finalised, we will be unable to advocate for the interests of the UK’s financial services sector during those negotiations. The Bill therefore provides the Government with the ability to make adjustments to the files that go beyond the deficiency fixing powers for the agreed files. These powers are clearly defined and proportionate.
I am extremely grateful to the Minister for giving way. As he has outlined, these are powers that would only be used in the event of a no deal. As a Treasury Minister, I would imagine he is probably losing more sleep than most Government Ministers at the prospect of a catastrophic no-deal situation. Will he outline what reporting mechanisms will be introduced by the Treasury for how these powers are used, either by the Treasury or by Treasury-affiliated bodies such as the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority?
I am pleased to report that the Bill, as amended in the other place, allows for reporting in respect of the statutory instruments on a six-monthly basis—that commitment is in the Bill—and that there will be four periods in total. The first period of six months will commence from the moment the Bill receives Royal Assent. The report will both look backwards at the powers that have been exercised up until that point and forwards to those powers that may be exercised in the coming period. As to other organisations, such as the Bank of England, there will be a requirement for annual reporting on the basis of the measures undertaken by those regulatory organisations.
The Financial Secretary is being extremely generous, but it may actually speed things along. Can he help me on one matter relating to the second class of legislation, the level 1 files? He set out a list of files that are included in the second category. Is it intended that that is entirely exclusive? The Bill deals largely with the procedure for dealing with these files. I have in mind, for example, the proposals that are being developed by the Commission on non-performing loans and on business crowdfunding services—again, areas where the UK has had a good deal of input into initial discussions but are not actually listed in the Bill. Is it intended to deal with those? If so, in what way?
I can confirm to my hon. Friend that the list is exhaustive in the terms he was discussing them. In the case of non-performing loans, these matters were considered but it was decided that the number of these in relation to the number within the EU was relatively low and that existing tools that are available were adequate to deal with those particular matters. Hence, that particular issue does not feature within the scope of the Bill.
Changes cannot be made in such a way that the implemented files depart in a major way from the effect of the original legislation. However, the Government will have some flexibility to make adjustments in order to take account of the UK’s new position outside the European Union. As a result of amendments to the Bill during its passage through the other place, the Treasury will be required to publish a draft statutory instrument at least a month before laying it, alongside a report detailing: any omissions from the original EU legislation; any adjustments from the original EU legislation; and the justification for those adjustments.
The Treasury will be further required to publish six-monthly reports on how the power has been exercised and how it will be exercised in the following six-month period. Following contributions in the other place, the Government have also introduced a requirement for the financial regulators, the Bank of England and the Financial Conduct Authority to report annually on their use of any powers sub-delegated to them as a consequence of the Bill.
Having gone through the Bill’s various provisions and outlined its importance both to our future financial stability and to making sure that we are in the right place in the unlikely and undesirable event that we face a no deal, I commend the Bill to the House.
I am someone who believes in Parliament—I believe in it not just as a way to pass the laws under which we are governed and to hold Ministers to account but, crucially, as a way of reconciling the different and competing interests that a complex and sophisticated country such as ours inevitably encompasses. Like many colleagues, I find our politics at the moment increasingly bitter and angry and lacking in respect and empathy for opposing points of view. For me, the House of Commons and, to an extent, the House of Lords have historically given this country the means to have the conversation that it needs to have with itself to begin to resolve differences of this kind.
I say that in opening to explain that it is a genuine source of sadness to me that, so far, Brexit has represented not the return of greater powers to Parliament, but the greatest accumulation of power to the Executive that we have ever seen in peacetime. That reality is before us again today. The Minister has clearly laid out the basis of today’s legislation. We are now so close to our EU exit day without a deal—just 34 working days, to be precise—that ensuring that we have a functioning regulatory system after Brexit is an urgent priority.
Leaving without a deal would be so problematic for this country that it is hard to believe that it has ever been much more than a thinly veiled threat to try to force Parliament into supporting the Government’s rejected Brexit withdrawal agreement. However, we have had to take appropriate steps to ensure that we have a functioning system in the event that that does happen. The Bill transfers significant powers to Government to deal with EU financial legislation that is in flight at our time of departure, meaning that we have been involved to some extent in shaping it but that it does not yet form part of the law applicable to the UK.
It is a welcome change to have the opportunity to substantively debate a major piece of legislation such as this. Until now, the Government have chosen to transpose the existing EU financial regulatory framework through secondary legislation. Ministers, my colleagues and I have now debated dozens of statutory instruments with just a handful of colleagues in the corridors of this place, passing legislation on huge items of EU regulation, containing many thousands of pages. I will spare our colleagues the excitement of referring to each of them in detail, but they provide all sorts of vital consumer protections and market safeguards.
Financial regulations are like the intricate parts of an engine: we do not need to understand them all or even to know about some of them, but we benefit from them being there and we will soon know when they go wrong. The regulations that we have dealt with include those that mandate the provision of clear, succinct information to people before they invest in particular products. They include the protections that ensure that people are not charged exorbitant fees for paying by credit card when they book a flight for a holiday, and those that allow insurers to operate across the UK and the continent, providing products that people depend on to give themselves security and protection. At a macro level, we have dealt with regulations that form part of the package that was designed to fix the enormous flaws in our global financial system that caused the 2008 crisis, including those that specify the bank capital requirements and which put in place the new market infrastructure designed to make derivatives trading more robust and more stable and lower the risk of contagion in a market downturn.
So far, all these have been debated by up to 17 Members each time in Committee Rooms in the House. The Opposition have requested debates on the Floor of the House on a number of them, all of which have been refused until very recently. Tens of thousands of pages of regulation have simply been ported across in a way that I do not think any Member, on either side of the House, has found fully satisfactory.
The Government have assured Parliament that no policy decisions are being taken as part of this process. However, it is vital that all colleagues are aware that porting across EU regulations into British law does not mean that we have been legislating for the status quo. Sometimes, the very act of taking out a reference to “the European economic area” and replacing it with a British one results in a material change. For instance, a no-deal Brexit would immediately mean that we assess the capital reserves of financial institutions differently, because we would no longer be giving preferential treatment to the sovereign debt of EU member states. Similarly, there would be no limit on the fees applied if a UK citizen used their credit card to buy something from an EU member state after a no-deal Brexit, because the reciprocity that we have now cannot be provided for. This point—that the withdrawal process cannot guarantee the continuity of the status quo—is one that I feel very few people understand, and I cannot stress it enough.
In addition, this process inevitably involves matters of judgment and raises questions about capacity and resourcing. For example, simply substituting “the European Securities and Markets Authority” for “the Financial Conduct Authority” and “the European Commission” for “the Treasury” creates a new relationship between those institutions that has not existed previously. It creates questions about the checks and balances between them, especially when new powers are being bestowed, and about which decisions will instead go to other bodies such as the Bank of England and the Prudential Regulation Authority. These decisions should not be taken unilaterally and simply presented for rubber-stamping in a Delegated Legislation Committee. That is relevant because the Bill effectively sets up the same process, but for the next two years of new financial services legislation.
We are extremely grateful to the Minister and the civil service for taking the time to fully brief us about their approach, but the Opposition plan to vote against the Bill today, and I want to explain the three reasons why. First, as I have touched on, we believe that the Government’s approach is fundamentally undemocratic. Simply diverting the process for the scrutiny of future EU legislation to secondary legislation Committees risks a major democratic deficit.
As we have seen with the no-deal statutory instruments, it is entirely within the Government’s gift as to whether time is granted on the Floor of the House to debate these instruments further. We will effectively be bestowing power on the Treasury to decide our future compliance with EU financial regulation. Given the concerns that the financial sector has about being a rule taker, that is an enormous step to take. When Britain voted to leave the EU, I believe that it was to empower Parliament to debate and make those decisions, not to concentrate them in the hands of a few civil servants and Ministers. Of course, the big change from a sovereign point of view is that, for some of these, we would no longer have had any input at the EU level.
Secondly, the approach of splitting in-flight files and existing regulations into a patchwork of statutory instruments lacks coherence. We are debating the Bill today. Numerous other, related statutory instruments will proceed in Committee this week, one of which we are sitting on tomorrow. We have already discussed some of the legislation referred to in this Bill in Committee, yet the updates on them and the next stages of these directives and regulations are now included in the Bill as being in flight. We need a single overview to identify what the post-Brexit framework will look like. Approaching it piecemeal risks having items fall through the gaps as well as creating clashes and inconsistencies. Significant powers are being transferred to the Bank of England and our regulators, yet there is no single item of legislation that demonstrates the extent and scope of the powers.
To be frank, given that the legislation is itself only a stop-gap, none of us really knows what the Government have planned for financial regulation after Brexit. This opaque and confusing process is inaccessible not just to legislators, but to those outside Parliament. I have received correspondence from two different asset managers in the past fortnight, for example, seeking insight into what is happening in this place regarding the collective investment regime because they have found the SI process so confusing to follow and are worried about the future.
Thirdly, we must acknowledge the systemic importance of what is included in the Bill. Nobody wishes to see a repeat of the events of the global financial crisis in 2008. That is why an extensive package of regulation emerged in the aftermath of the crisis, designed to protect against a repeat of those mistakes. Many of those pieces of regulation had their origins in the 2008 and 2009 G20 summits. There was a co-ordinated global effort, of which we were part, intended to make our financial markets safer and better able to withstand stress, hopefully protecting the public purse in future.
I genuinely hear no appetite for a bonfire of EU regulation when I speak to people in the UK finance sector but, in truth, we simply do not know what the future holds or where pressure may come from to relax or tighten regulations. However, the Bill risks enabling the Treasury to make wholesale changes to our regulatory regime with little recourse available to Parliament to have a say on that, other than through the secondary legislation process, which, as we have all seen, can severely limit the chances for scrutiny. I believe that the current Treasury would approach that process in good faith, but Ministers and Prime Ministers change and we do not know who ultimately will be entrusted with these powers.
Some of the fundamental pillars of the post-crisis financial regime, such as the capital requirements directive V and the bank recovery and resolution directive II, as well as other items of regulation designed to strengthen the financial market infrastructure, are included in the Bill. The capital requirements directive, for example, sets out the asset buffers that systemically important financial institutions must hold and in what ratios. Given the costs involved to banks, these regulations often involve significant negotiation and lobbying. We saw in the US last year that a concerted lobbying effort secured major concessions from the Basel committee on capital requirements. It is simply a fact that such legislation involves the management of large and competing interests, and it does not seem right to the Opposition that the Treasury could be lobbied on such a matter and subsequently implement a statutory instrument that is subject to limited scrutiny compared with primary legislation.
It is for these reasons that our reservations outweigh our understanding of the need to pass the Bill. We very much want a strong and successful financial sector after Brexit, but we reiterate that the best way of ensuring that we have that is to negotiate a deal that the House is willing to vote for. We acknowledge that in the event of no deal a whole raft of emergency legislation would need to be passed, but at present we cannot sign up to handing over these powers to the Government without any guarantee about how they will be used. It is our intention, therefore, to oppose Second Reading and divide the House.
It is a pleasure to be in the big room today, rather than up in a small Committee Room, debating these important issues of financial regulation.
I would like to correct the Financial Secretary slightly. He mentioned lots of cities but not my home city of Glasgow and its contribution to financial services. It was a shocking omission, not least because I am sitting across from him and because of its importance to Glasgow and to Scotland. Scotland’s financial sector outstripped London’s last year when it came to jobs growth. It grew by 6.6%, to 161,000 employees in Scotland. Many of my constituents, as well as others across Scotland, rely on the sector for their jobs and businesses, as do many secondary businesses.
The financial sector is also important because of the increased tax base it brings to Scotland. All citizens in Scotland benefit from the funding for public services to which the financial services sector contributes. It makes up 8.9% of the Scottish economy and provides a crucial source of funding for schools, hospitals and local government. It is vital that the sector is allowed to continue to flourish and that the appropriate regulatory safeguards are upheld to ensure we do not see a repeat of the 2008 financial collapse.
It is important to understand the context in which the Bill is operating. The in-flight legislation is part of regulatory reform that resulted from the 2008 crisis and its purpose is to prevent history from repeating itself. We in the SNP cannot allow any watering down of regulation as a result of Brexit, and I am concerned that the Bill may be too broad and sweeping and could leave gaps that could be exploited by those who wish to do so.
I appreciate that we are, in effect, doomsday planning here this afternoon in the event of a no-deal Brexit but, as we see with the continuing chaos in the UK Government, that doomsday clock is getting a good deal closer to midnight every day. Applying rushed legislation to a bad scenario will not help matters. We need to get this right and, if there is not time to get it right, the Government must face the reality of the situation we face. It is within their power to avoid a no-deal Brexit by extending article 50 and ruling out a no-deal Brexit until adequate protection is in place.
There is a good deal of vagueness in the Bill—this point was made in the Lords and has been made again today—because it grants UK Government Ministers worryingly wide scope to legislate. Clause 1(1)(a) grants the Treasury the power to make provisions “corresponding, or similar, to” provisions in EU financial services legislation. Which is it—is it corresponding or similar to? The phrasing leaves space for policy changes beyond the scope of what secondary legislation should be able to do.
Clause 1(1)(b) gives the Treasury powers to make adjustments to the specified legislation it considers appropriate. What criteria are being used to scrutinise and judge the appropriateness of a policy? The wording also leaves the door open for unscrutinised discretion on the part of Ministers and organisations that they may delegate these powers to. The standard is not good enough, given the importance and impact of the Bill and what it is trying to achieve.
The Bill gives Ministers wide latitude to make policy changes using delegated legislation. That conflicts with the position laid out in the EU withdrawal Act, which prohibits such changes because they greatly reduce the opportunity for Parliament to scrutinise policy. The Government have acknowledged that passing legislation without a substantive debate in Parliament is undesirable. We cannot allow this to slip past.
There is a legitimate concern that the Bill leaves scope for regulators to diverge from European technical standards, which could ultimately contribute to the undermining of the EU principle of equivalence. Many businesses rely on meeting these requirements to access EU markets. The Financial Markets Law Committee has raised that issue directly with the Treasury, along with wider concerns about the potential market uncertainty caused by the unreliable nature of British technical standards as a result of this legislation. The Treasury has attempted to address some of those concerns in its policy note, which outlined the safeguarding mechanisms for the Bill, but sadly those still fall woefully short of what is expected.
Subjecting SIs to the affirmative resolution procedure is no substitute for bringing primary legislation before Parliament because there is no scope to amend them. The Treasury has also committed to engaging with key stakeholders, but, as the Opposition spokesperson mentioned, if previous efforts are anything to go by, this is not reassuring. We have all sat in Delegated Legislation Committees where it feels like the only stakeholder engagement is asking the opinion of a select few. We cannot ignore the needs of businesses and the wider public at such a precarious time.
More care should be taken to gather the experiences of the business community and the wider population before making decisions that could impact on them. It has been difficult throughout this process to gather evidence because statutory instrument Committees cannot take evidence, and we will not be taking evidence on the Bill either, meaning that we will lack the ability to scrutinise this in many different respects.
It has been said many times inside and outside the House that leaving the EU is the will of the people. That is definitely not the case in my constituency or the rest of Scotland, which voted 62% to remain, but even if it were, I would find it difficult to accept that people who voted for Brexit want this—there are gey few Brexiteers here today trying to defend this policy. Tory Ministers are being given unfettered power to legislate with no parliamentary scrutiny, which is way outside any mandate the Government feign to have.
The Bill makes a mockery of the leave campaign promises of taking back control, because this Parliament and each of us as MPs will have less control than we had before. It allows for the creation of new laws via statutory instruments, but these will be adjusting or augmenting primary legislation passed not by this House but by the institutions of the EU. The Chair of the Treasury Select Committee made an excellent point in her letter about the measures in the Bill that will allow the Government to choose to implement only those EU files, or parts of those files, that they deem beneficial to the UK and to make adjustments to legislation to fix deficiencies and take account of the UK’s new position outside the EU. That sounds like a policy choice—choosing to implement only those files, or parts of files, deemed beneficial to the UK. It would involve the Government deciding which files are beneficial to the UK and so allow them to do what they said they would not do.
After Brexit, the UK Government will have no seat at the European table, as these in-flight directives proceed, on issues that will impact on businesses across these islands. Weirdly, we are delegating scrutiny of these policies to the EU when we are not going to be members any longer. We have heard in delegated legislation Committees about how the UK is a great leader in financial services with great expertise, and we have heard how influential and involved our officials have been in making regulations for financial services—the Economic Secretary referred to this in his letter—but this influence is being chucked away for glib slogans on the side of a bus.
We will be losing influence on matters that will disproportionately affect financial services in this country, adopting legislation from another jurisdiction that we have chosen actively not to be a part of and then leaving it up to the Treasury to decide what we take and what we leave, and perhaps not even the Treasury—perhaps the Financial Conduct Authority or some other organisation whose work we are even less able to scrutinise. It is completely unacceptable, and I see no Brexiteers here willing to defend it—not one bit of it. Where are they now?
The UK Parliament, and our own elected representatives in this place, will not have a say in the detail. We are passing into the hands of Treasury officials the ability to determine the position at some point in the next two years. If we want to continue to operate in the EU market, we will have to comply with those rules. Nothing, absolutely nothing, that we introduce—deal or no deal—will be as good, as seamless and as hassle-free as the passporting deal that financial services have now, while the UK is a full member state of the EU. The Treasury cannot deny that fact.
Scotland has worked hard to get to where we are now. In Edinburgh, in Glasgow and in places throughout Scotland, financial services firms are working hard, investing and doing so much to promote their talents. There is no doubt in my mind, and in the minds of the hundreds of constituents who have emailed me, of their concerns about Brexit. They believe that things would be better all round if the Government acted in the best interests of the country, and revoked article 50.
I strongly agree with Jonathan Reynolds. The principled position is to oppose the Bill. The Government are taking plenty of powers unto themselves, which is outrageous in the context of “taking back control” and all the other glib utterances that we heard at the time of the EU referendum. They say, “Just trust us, and it will be fine.” I am sure I can trust them, and perhaps it will be fine, but we cannot be assured of that. We should not give up our own role as Members of Parliament, which is to scrutinise all these matters.
It is a pleasure to follow Alison Thewliss, who made an excellent speech.
Today’s debate has focused on Brexit and financial services. I want to focus on why the Bill is so vital to our budding green finance industry, what the EU is doing to promote green finance and what our own country is doing in that regard, and what the Government can do to end uncertainty for an important and growing part of our economy. I shall refer to the sixth and seventh reports of the Environmental Audit Committee, “Greening Finance: embedding sustainability in financial decision making” and “Green finance: mobilising investment in clean energy and sustainable development”.
In 2015, the United Kingdom signed up to the Paris agreement on climate change and the UN’s global goals for sustainable development, which set out ambitious targets to transform our world. In the three years since then, we have learnt much more about climate science. As was made clear in a report published by the Intergovernmental Panel on Climate Change in October 2018, if we are to avoid the catastrophic effects of uncontrolled climate change we shall need radical and unprecedented changes in all parts of the economy, which will require trillions of pounds—or dollars—to be invested in clean energy and cleaner transport infrastructure.
I pay tribute to the Government for some of their work in that regard. The Bank of England’s Task Force on Climate-related Financial Disclosures looked into strategy, risk and targets. The Government then set up the Green Finance Taskforce, whose report made a series of recommendations, one of which was that the Government should establish a sovereign green bond to kick-start investment. The Government have yet to respond to that report, but I hope they will do so soon. We have seen the green growth strategy, and, in the City of London, $22 billion of investment has been raised in seven currencies for more than 72 green bonds. I fear that the Bill could potentially disrupt some of the progress that we are making, and interfere with London’s place as a centre for green finance.
We have done well in our own country. We have moved quickly to decarbonise the power structure. However, we have done very little to deal with our agricultural and transport-related emissions, and almost nothing to decarbonise our heating emissions. When people tell me that things will be easier, I always ask, “How are you going to transform 31 million gas boilers over the next 10 years?” According to the IPPC’s report, we have just 12 years in which to tackle damaging carbon emissions. We need to think big, and think globally, if we are to rise to that challenge.
My Committee’s inquiry found that the privatisation of the Green Investment Bank and the reduction in European Investment Bank lending following the referendum may have played a part in the 56% reduction in investment in green energy projects in the UK. We could not work out whether that was a blip or a trend, but I look forward to seeing this year’s figures and finding out which it was. Our “Greening Finance” report states that climate change poses material threats to our economy, our investments and, of course, our pensions, which provide the funding for these companies.
There are three climate-related financial risks. There is the physical risk posed by more heatwaves such as the one that we experienced last year, more droughts, which will threaten the water industry, wildfires, which we have seen in the Arctic and in California, extreme rainfall, rising sea levels, and flooding. That risk will affect investment in food, farming, infrastructure, house building and insurance. In a 4° world, my Committee was told, the insurance market would cease to exist. London’s position as a global insurance centre would be destroyed, and the jobs along with it. There is also the risk posed by the transition to the green economy. Companies that do not make a timely low-carbon transition could face costly legal or regulatory action, and some will be left behind by innovative firms with cleaner, greener, more efficient technologies.
Issuers—banks, insurance companies, asset managers and owners, and a range of other financial institutions—must assess and report climate-related financial risks. That is particularly important in relation to pension funds. I welcome the National Employment Savings Trust, but by the time a young person auto-enrolled in the scheme retires, we could be living in a world racially transformed by climate change and society’s response to it. According to the latest Met Office prediction, in a high-emissions scenario our summers will be 5° warmer than they are now. That has implications for the water that we drink and the homes in which we live.
It is vital that our pensions, investments and savings are able to weather those changes, which is why my Committee called on the Government to introduce mandatory reporting of climate-related financial risk. We also wrote to the chairs of the 25 largest pension funds asking them what they were doing to mitigate that risk. We think that improved reporting would help to divert more capital to more sustainable ends, because what gets measured gets done. That would increase investment in the new green infrastructure that we need, and would mean that our savings did well while also doing good. We are pleased that the Government have clarified the fiduciary duty of pension trustees in trust-based schemes, which will come into force on
Let me now turn to why the Bill matters in relation to sustainable finance. I asked the Minister—and I was grateful to him for giving way—about “in-flight” legislation. The EU has proposals for financial services legislation that would promote sustainable finance. It is debating proposals for a framework for low-carbon benchmarks which would allow investors to harmonise their portfolios with the Paris agreement on climate change. The benchmarking is important, because only by seeing what is happening in other companies can investors work out whether they are doing well or badly, and make the strategic changes that may be necessary. It is also discussing the possibility of a taxonomy of environmental sustainable activities which would allow companies to “green-check” their revenue streams, and new disclosure requirements for asset owners such as pension schemes, as well as asset managers, banks and insurers. My Committee had called for that.
When the Bill was introduced in the other place, I was disappointed to note that the EU proposals for benchmarks and disclosure requirements were not included in the list of “in-flight” legislation in the schedule. The Minister said that this was Parliament doing its job and amending legislation, but it is not clear to me whether those proposals were left out accidentally or deliberately. Do we think that we are already doing those things so brilliantly that we need not bother to pursue the proposals? The Minister has not made that clear.
I welcome the amendments made in the other place to include all the EU’s sustainable finance proposals. However—this is important—the Government have no obligation, but only the option to adopt those valuable measures. Will the Minister reassure the House that the Government will adopt them, and that the UK will not fall behind when it comes to EU action on sustainable finance? If we diverge from the EU’s regulations on sustainable finance it would harm large financial institutions with investment in green financial products in Europe. It could harm our budding sustainable investment industry. We are at the moment a world leader in finance; we know the difficulties Brexit will cause to be faced across our economy, but we have the opportunity to be a world leader in sustainable green finance and we must not let that opportunity pass us by.
My hon. Friend Jonathan Reynolds set out very clearly and comprehensively the problems with this Bill in his opening remarks. I do not want to repeat them all, but I will summarise the core reasons why the official Opposition cannot support the Bill.
The Conservative Government often mix their metaphors when presenting their Brexit process. This Bill, for example, part of what the Government have described as an onshoring process, is presented as dealing with those so-called in-flight measures that have not yet landed. In my brief remarks, I want to explain why many of us are confused about the identity of the pilot of this plane, quite how far and fast the plane will go, and indeed whether it should be on the runway in the first place. I suppose that it is at least a relief that the Transport Secretary is not in charge, given last weekend’s revelations.
First, who will decide which parts of in-flight EU legislation will be implemented? This is straightforward for those Bills that have already been passed at EU level but not yet implemented—those taxiing on the runway. In that case, the Bill commits itself to implementation in the UK, not least given that UK Ministers and MEPs would have been fully involved, one would hope, in all aspects of that legislation, with Government only able to fix deficiencies in that legislation.
The picture is, however, far less clear for legislation still under discussion at EU level, and thus to a certain extent still up in the air. In that regard, we are informed that this Bill will enable
“the Government to choose to implement only those EU files, or parts of those files, which it deems beneficial to the UK”.
They will be able to
“adjust the legislation as it is brought into domestic law to fix any deficiencies or, in the case of files still in negotiation, to ensure that it reflects the UK’s position outside of the EU.”
How exactly they might do so, and what that reflection might encompass is left unclear. Nicky Morgan, Chair of the Treasury Committee, rightly raised this earlier in an intervention on the Minister, and I am disappointed that she did not receive a sufficiently clear response to that question; I will return to that point later. Indeed, there is no indication here that that deviation from EU practice will even be flagged up to this place, let alone go through a different decision-making process as a result. Instead, it is expected that, as usual with this Government, sadly, statutory instruments will be used. Clause 1(1)(b) even states that the Government can make
“any adjustments the Treasury consider appropriate”,
a power that was initially open-ended but that, quite rightly, was amended in the other place.
The point remains that it will be difficult for Parliament to be aware of any deviations from EU practice. The Conservatives may well respond by stating that industry would be quick to point them out. Frankly, I am grateful for industry’s engagement with this process, to the extent that it has been able to input, and it is essential that, as mentioned by my hon. Friend the Member for Stalybridge and Hyde, we preserve our strong and successful financial services sector, and our regulations must reflect that. However, I reiterate a point I have made before: there is no organisation in the UK with an explicit mandate to promote financial stability and the consumer interest in financial services, a role which is filled within the EU by the Finance Watch. It is unsurprising therefore that Finance Watch has put on the record its concerns that the current approach to Brexit could be used as a means to undermine financial regulation, pointing to, for example, the Chequers agreement’s phraseology of the UK pushing for greater liberalisation of financial services, investment and procurement markets post Brexit.
The second reason to reject the Bill concerns its peculiar status among the rest of the so-called onshoring process. The flight path here is bedevilled with interactions with numerous other legislative processes, from those embedded in the 40 statutory instruments that have already been laid before Parliament to the additional 20 yet to go, and with only 34 working days between now and 29 of March, as rightly underlined by my hon. Friend the Member for Stalybridge and Hyde.
By contrast, with the extraordinarily rushed process being adopted here, the Government’s powers under this Bill can be exercised for up to two years—yes, two whole years after Brexit. That is in a context where the Government have no clear plan for financial services regulation post
Of course we had a good example of the deficiencies even within this Bill, as rightly pointed out by my hon. Friend Mary Creagh, in relation to the legislation governing environmental indicators and reporting, which was initially missed off the schedule. I pay tribute to her for raising this essential issue of green finance and greening finance and how it was initially missed out of these proposals.
I found the Minister’s response to Robert Neill rather peculiar; I note that the hon. Gentleman is no longer in his place, but I felt he made an important point. He asked whether the UK would keep in step with emerging provisions from the EU, such as in the area of non-performing loans. The Minister suggested in response that alignment in this Bill was rejected due to the content of those proposals, when his Bill, however, was presented as inclusive of all financial services legislation that was in-flight aside from those elements that we had specifically opted out of, such as those relating to banking union, which we do not participate in of course and which is presumably the real reason why non-performing loans legislation is not included here.
My hon. Friend the Member for Wakefield highlighted in her remarks the non-scientific nature of the assessment by this Government of which measures will be deemed in-flight or otherwise. We have had no indication of the criteria to be used for that from Government. The discussion we have had, albeit in this brief debate, has pointed up that all we have as a Parliament currently as an indication of this Government’s approach to regulating financial services in the future is this Bill and the no-deal SIs—no overall plan, no indication of how the different pieces fit together, and above all no clarity around how we will be able to keep in step with the EU27 in relation to emerging issues like green finance and cryptocurrencies.
It is my understanding that there was significant challenge from my party in the other place, and in fact changes were made, including for example a clearer indication of the circumstances under which those adjustments could be made by the Government. Initially that was very open-ended, but we supported and pushed for much more clarity on that. We would have liked to have seen change in other areas, and perhaps clarification in additional areas. We have not had that, however, which is why it is necessary to oppose the Bill at this stage.
Finally, this legislation is of course only required because of the Conservative Government’s recklessness in persisting with a commitment to keep no deal on the table, as rightly underlined by Alison Thewliss. We have seen very clearly today from the preliminary estimates of GDP growth for the final quarter of last year how this determination to prioritise ideology over national interest is harming our country. The contribution to GDP from business investment was negative for the fourth quarter in a row; that is a clear sign that uncertainty surrounding the Government’s Brexit strategy is acting as a real drag on the economy. The construction sector actually contracted this quarter, and after two consecutive quarters of negative growth, the UK manufacturing sector sadly is now officially in recession. So 2018 had the worst annual GDP out-turn since the then Chancellor’s disastrous 2012, and economists are forecasting that even worse could well come.
The flight into the buffers that would be represented by a no-deal Brexit is still being countenanced. Any responsible Government would take that plane off the runway once and for all.
I thank all Members for their contributions to the debate. As my right hon. Friend the Financial Secretary to the Treasury set out earlier, the Government do not want a no-deal scenario, but our job as a responsible Government is to prepare for all possible outcomes, including reaching
I refer the House to my entry in the Register of Members’ Financial Interests. The Economic Secretary to the Treasury will be aware of our exchanges in Committee regarding EU regulations as they relate to key information documents and how KIDs are adversely affecting the assessment of investment trusts. The trade bodies oppose them, including the Association of Investment Companies, which has suggested that the investors’ response to them should be to “Burn before reading”. Can the Minister report back on his deliberations with the Financial Conduct Authority, which has been rather slow out of the blocks? Ultimately, it is the Government’s responsibility to get this right.
I am happy to respond to my hon. Friend’s intervention. I acknowledge his expertise in this area and his excellent article in the Investors Chronicle this week. I would point out that, just last summer, the FCA issued a call for input and sought industry views on the next steps for packaged retail investment and insurance products—PRIIPs. That consultation closed on
Let me turn to the substantive thrust of the concerns raised in the debate. The first relates to the desirability of no deal. As I have said, we do not want a no-deal scenario, but we need to be responsible and to plan for all eventualities. Our priority remains getting approval for the deal that we have negotiated with our European partners, which will deliver on the democratic choice of the British people.
Turning to the other preparations, we have now laid 50 statutory instruments before Parliament. The allegation from the hon. Members for Oxford East (Anneliese Dodds) and for Stalybridge and Hyde (Jonathan Reynolds) was that there had been no coherence to the Government’s work, but as the hon. Lady will know, we will have had 53 statutory instruments. We have more debates tomorrow and on Wednesday, and I think several more next week. We are addressing the deficiencies in all the major EU files and the relevant domestic legislation. This will ensure that we have a functioning financial services regime at the point where we leave the EU in a no-deal scenario. Our aim throughout this work has been consistently to minimise disruption for firms and their customers and to provide a smooth transition when we leave the EU.
Alison Thewliss made a point about the breadth of the power in this legislation. We have worked hard to ensure that this is a clearly defined power and that changes cannot be made such that the implemented files depart in a major way from the original legislation. However, the Government will retain some flexibility to make adjustments to take account of the UK’s new position outside the European Union. The amendments proposed by the Government require the Treasury to publish draft SIs at least one month in advance of laying, as well as a report detailing where there have been omissions and changes and giving the justification for those changes. We believe that the report will allow parliamentarians to scrutinise the changes before the SIs are laid. If the UK were forced to take on EU legislation either in whole or not at all, it is likely that we would be able to domesticate very few of these files in good time, so even the positive aspects of the reforms would be delayed. This is a pragmatic measure to deal with the reality of a very undesirable situation, and our approach has been endorsed by the industry, with which we have engaged in the preparation of the Bill.
The Minister talks in his letter about how things are deemed to be beneficial for the UK, but he and I will have very different opinions on what would be beneficial for the UK, or indeed on whether Scotland should be part of the UK, so how can he say that that is not a policy decision?
We are talking about a no-deal scenario, which we cannot fully anticipate or set out in legislation. However, there would be a full discussion and additional legislation in those circumstances.
For the benefit of the House, I want to clarify the industry engagement that has been undertaken on this Bill. The Treasury engaged with industry ahead of the introduction of the Bill, and the financial services industry has been expecting many of the files for some time. For example, the industry will be generally supportive of the changes that will be implemented with the European market infrastructure regulation regulatory fitness and performance programme—EMIR REFIT—file, which introduces changes to regulations for clearing and reporting requirements, to make them more proportionate and to provide further clarifications. We have been engaging to deliver what the industry expects.
With respect to accepting EU laws after exit, the Bill is not about accepting such laws wholesale. We will be able to implement only those pieces of legislation that are beneficial to the UK, because we will be able to choose the files, or specific provisions within those files, that we are going to implement. For those files that we have already agreed at EU level but not yet implemented, we will be able to fix deficiencies similar to what was done in relation to the European Union (Withdrawal) Act 2018. For those files on which negotiations will be ongoing at the point of exit, we will be able to make some adjustments to them to take account of the fact that we will not be around the negotiating table when they will be finalised.
Moving on to the model for financial services regulation more generally, the Government of course recognise that this legislation should apply only for an interim period while we consider a sustainable, longer-term approach that balances the need to ensure appropriate parliamentary oversight of financial services legislation after leaving the EU with the need to maintain the flexibility and competitiveness of our regulatory regime. That is why the model in the Bill would apply only for a temporary, non-extendable two-year period post exit, specifically in a no-deal scenario, and to specified EU files only. The Government will take forward our approach for a sustainable long-term model in due course.
Turning to the points made by the hon. Member for Wakefield, the UK has publicly led on the development of sustainable finance, as she set out, and the Government are committed to the sustainable finance agenda and are a leader in green finance. That is why we have included these files in the Bill. We recognise that the files form part of the EU’s response to the Paris climate change agreement and the UN sustainable development goals. The Government support the aims of the files and do not consider them harmful to industry at their current stage of development. As such, we were pleased to add them to the schedule to the Bill, and we thank the noble Lords who recommended their inclusion.
I stress again that this legislation involves a temporary measure, with the delegated power limited by a two-year sunset clause and subject to the affirmative procedure in each and every instance of its use. Following constructive engagement in the other place, the Bill is clearer about the power contained within it and has much stronger reporting requirements than at its introduction.
I thank all right hon. and hon. Members for their contributions to this debate. I am sure that we can agree on the importance of continuing to support the UK’s world-leading financial services industry in any future scenario. I look forward to discussing the Bill further in Committee, and I commend it to the House.
Question put, That the Bill be now read a Second time.
The House divided:
Ayes 293, Noes 248.