My Lords, these are two out of around 60 financial services SIs being laid by the Treasury under the EU withdrawal Act. They form part of the preparations being undertaken to ensure, in the event that no deal has been agreed when we leave the European Union in March 2019, that a functioning legislative and regulatory environment will continue to be in place for the financial services sector. They deliver on a commitment made last December, when the Treasury announced that it would provide functions and powers to the Financial Conduct Authority in relation to trade repositories, and to the Bank of England in relation to non-UK central securities depositories, to enable them to manage in an orderly manner any cliff-edge risks arising from a no-deal scenario.
Trade repositories and central securities depositories provide services in the UK under EU regulation. Should the UK leave the EU without a deal or an implementation period, trade repositories and central securities depositories would be unable to provide services to UK firms until they had the appropriate permissions under the UK’s domestic regimes, given that the UK would be outside the single market for financial services. The SIs seek to ensure that there will continue to be a functioning regulatory regime and mitigate any disruption in the provision of services in that scenario.
First, I will discuss the trade repositories SI. Trade repositories collect and maintain records centrally on derivative transactions. Derivatives are financial instruments that can be used to hedge against risks such as interest rate fluctuations or asset price volatility.
The European Markets Infrastructure Regulation, known as EMIR, requires all information on European derivative transactions to be reported to trade repositories registered or recognised by the European Securities and Markets Authority. If trade repositories are unable to provide services to UK firms post exit, those firms would be unable to fulfil their reporting requirements under the UK’s regime and the UK regulators would lose access to valuable data used to monitor the UK market for financial stability risks.
The SI therefore introduces a number of measures to mitigate against that risk and ensure a smooth continuation of services from trade repositories to UK firms. First, it establishes a UK framework for the registration of UK trade repositories, while maintaining the same regulatory criteria for new UK trade repository applicants. To do that, ESMA functions relating to registration of trade repositories will be transferred to the Financial Conduct Authority. That includes the mandate to make technical standards specifying the information to be provided by trade repository applicants. The FCA is already familiar with the reporting requirements under EMIR, due to its role in supervising UK firms, which are subject to existing EU reporting obligations. That means that it is the most appropriate UK authority to take on that role.
Secondly, the SI provides powers to the FCA to consider applications ahead of exit day, so that a trade repository can provide services in the UK as soon as possible following exit. Thirdly, it establishes a “temporary registration” regime for eligible trade repositories that will allow them to continue to provide services to the UK by forming UK-based subsidiaries. That provides temporary registration for a period of three years to UK trade repositories that are part of a group containing an ESMA-registered trade repository, the purpose being to allow additional time for their application for permanent registration to be considered by the FCA and to ensure continuity of services to UK firms. To enter the temporary regime, an eligible trade repository must, ahead of exit day, submit an application to the FCA for registration and set up a new legal entity in the UK.
Finally, the SI creates a conversion regime whereby UK trade repositories, currently registered by ESMA, are deemed to be registered by the FCA from exit day. To enter the regime, a UK trade repository must notify the FCA of its intention to be registered ahead of exit day. The conversion regime therefore ensures smooth continuity of services from UK trade repositories to firms.
I turn to the central securities depositories SI. Central securities depositories are financial market infrastructures that keep a record of who owns individual securities, such as bonds or shares. A central securities depository carries out three core functions: trade settlement, registration of share ownership and ongoing delivery of obligations arising from share ownership. The provision of those services is governed by the Central Securities Depositories Regulation, which created a common authorisation, supervision and regulatory framework for central securities depositories across the EU. If non-UK central securities depositories are unable to provide services to UK firms after exit, that would introduce risks to any UK firm using those services and potentially cut off their access to certain financial markets.
This instrument therefore introduces measures to mitigate those risks and ensure a smooth continuation of services by central securities depository services to the UK financial sector. It transfers the various functions and powers currently held by EU bodies to the appropriate UK authorities. Following exit, the powers to recognise non-UK central securities depositories, held by ESMA in the EU, will be transferred to the Bank of England. The European Commission’s powers to make equivalence decisions are being transferred to the Treasury. That is a process of reviewing another country’s regulatory framework, to determine whether it is equivalent in outcome to one’s own regulatory framework. Once the Treasury has deemed a country equivalent, the Bank of England can recognise central securities depositories within that country. That allows them to provide services to UK firms in compliance with the UK regime.
The instrument also introduces a UK transitional regime to allow UK and non-UK central securities depositories to continue to provide services in the UK after exit. To make use of the UK transitional regime, the SI also introduces a requirement for non-UK central securities depositories to notify the Bank of England, before exit day, of their intention to provide services in the UK following exit from the European Union. The Bank of England has sent letters to non-UK central securities depositories to set out the notification process.
The Treasury has been working very closely with the FCA, the Bank of England and industry bodies to draft the instruments. In advance of laying them, the Treasury published the TR instrument in draft along with an explanatory policy note on
I thank the noble Lord, Lord Bates, for his introduction. As usual, I declare my registered interest as a director of the London Stock Exchange. By now we are familiar with the pattern of how powers transfer to the UK regulators and temporary regimes. I will not revisit that. I have just two points regarding these SIs that the Minister might be able to clarify.
I do not need a response to anything on the trade repositories regulations. I just note as new—new in the sense that I have not commented on it before—the way an ESMA-recognised UK trade repository or entity can simply move into the UK regime. That seems a sensible provision.
On the CSDs, the policy note and guidance on the Treasury’s website say that applications before exit will be “subject to existing law” while the application is considered. I wondered whether there could be some elaboration on the difference between that UK law and the onshored CSDR once firms switch to it. What happens at the point of switching, or is this just, as I suspect, splitting hairs and no big deal? That provoked my curiosity and, with other things going on, I did not quite have the energy to work through absolutely every last word and work it out for myself.
Two issues are general to all these SIs, particularly in the context of the no-Brexit—sorry, that is a Freudian slip—of the no-deal preparations, so I take this opportunity to raise them. Last week I showed a letter to the noble Lord, Lord Bates, when we expected to discuss the SIs that are to come later. It was sent to the chair of the Secondary Legislation Committee, explaining that the SIs laid under the EU withdrawal Act will be deferred, amended or revoked by the withdrawal agreement Bill, ready for the end of an implementation period, rather than exit day. My first point is that it is dangerous to think of any of these SIs as just-in-case provisions. Obviously, much of this allocation of powers is a provision for any Brexit scenario, but it would be helpful to know which provisions are likely to be revoked or substantially modified if we go into an implementation phrase. I am not sure we can necessarily do that for these at this point, but it would be useful if it was in the Explanatory Memorandums.
The other point that we have not previously discussed is that since Monday last week we have had the impact assessment. It did not reveal a great deal—there was no new or useful information—but I do not have a clue where the figures of the costs for firms to familiarise themselves with regulations come from. The amounts seem very small indeed. I wonder whether they include the thousands of pages of consultation that the FCA is doing, which is up to about 1,800 pages just on Brexit preparation. For MiFID, one of the largest regulations and which we will deal with later, the familiarisation cost is a mere £1,900. That is a very low charging rate. I cannot see anybody getting much legal advice for that; at London rates that is about two hours. Just for comparison, how long does it take the Treasury to make a complete transcription? It obligingly sent us the MiFID schedules, along with caveats about accuracy. The problem is that the firms that have to familiarise themselves with these new regulations cannot put in caveats about accuracy. Their compliance executives work under the rigours of a senior managers’ regime. There are no short cuts. I do not mean to cast any aspersions on to the hard work being done by anybody in the Treasury. I know that a lot of diligent work is going on, but I do not see how these rather minimal costs can be justified.
My Lords, I will take the statutory instruments in order, starting with the central securities depositories regulations. A characteristic of these SIs is that they tend to have two parts. I wish I had the same interests to declare as the noble Baroness because then I would come to this knowing something about it. Starting from scratch is quite a battle. My analysis of these SIs is broadly that that there is a bit about the transfer of functions and a bit about the transitional provisions. They are more or less in those two groups. The transfer of functions is unexceptionable, except that I am not at all convinced that the Treasury should be solely responsible for the equivalence decision. That is a view that I shall take all the way through. The noble Lord does not have to answer me on this SI because I will bring it up on the last one, by which time a note might have arrived from the Box.
The transitional provision is more complex in all the SIs, but in particular with this one. When you dig into it you discover that apparently there is only one UK CSD and its transition will be little more than a formality, which is good to hear, since these organisations are so important in our lives. Non-UK CSDs have a more complex transition process, but, as far as I understood it, that was okay.
Similarly, the transfer of functions for the trade repositories is straightforward, except for my caveat on the Treasury’s role. I understand that there are five UK trade repositories, covered by paragraph 7.18 of the Explanatory Memorandum. Once again, it looks as though that is pretty well a formality. I found the non-UK TRs transfer regime more complicated, but the one feature I saw is that some new TRs—if they ever emerge—seem not to be fully registered for up to three years. Can the Minister explain why such a long period is necessary?
I thank the noble Lord and the noble Baroness for their scrutiny of the statutory instruments. I will respond first to the noble Baroness, Lady Bowles, who asked about the difference between the current system and the onshoring SI. Before the CSDR, the recognised clearing house regime under the FSMA applies. After exit and the end of the transition regime, the onshored CSDR regime, which is more extensive, applies for any CSD.
The noble Baroness asked for more detail on how that process will work. The Bank of England sent a letter to non-UK CSDs, setting out the process through which CSDs may notify the Bank of England to enter a transitional regime following the UK’s withdrawal from the EU. The process is proportionate and straightforward, with questions we do not expect to be onerous for CSDs to answer. Non-UK CSDs are encouraged to indicate to the Bank of England their intention to notify from the point at which they receive the letter—so the letters have been sent. The Bank of England will treat these indications as notifications at the point that the legislation is made. We are therefore confident that non-UK CSDs will be able to make these notifications in good time. One specific element is that a non-UK CSD will continue to be subject to the existing requirements under the FSMA until the Treasury has made a decision on jurisdiction. Once that happens, these CSDs will be required to provide an application to the Bank of England six months after the Treasury decision. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit.
The noble Baroness asked about the familiarisation costs included in the regulations. I was looking at the algorithm in Annexe 5 and she made some points about that. I am happy to confirm that the familiarisation costs in the impact assessment cover only these instruments. They do not include FCA consultations or the broader impact of leaving the EU—just the specific provisions in this SI.
May I go back to the point about when CSDs switch from being under the present UK regime to being under the new regime? It seems a bit peculiar. Is it the situation that while they are currently running under the UK regime, once they start to run under the onshored CSDR there will be an equivalence decision and they will then be under a tighter, more extensive regime? It seems very strange that as soon as you have recognised a country as having equivalence, you then require more rather than less—or have I misunderstood something?
I certainly would not suggest that the noble Baroness has misunderstood anything. I will work my way through the pile: I have a feeling that I will have an answer for her very shortly.
She asked what would be amended if there were an implementation period. The legislation would not come into effect in March 2019 in the event of an implementation period. It would be amended to reflect the eventual deal on the future relationship, or to deal with a no-deal scenario at the end of the implementation period. Amendment would depend on agreement being reached with the EU.
The noble Lord, Lord Tunnicliffe, asked if was appropriate that the Treasury is the only body responsible for equivalence decisions. The Treasury takes the role of the Commission in equivalence decisions, but will be informed by advice from the FCA as necessary. As to why the regime will last for three years, the TRRs provide sufficient time for the FCA to be satisfied that the new TR fully meets the requirements set out in the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories SI, of which he and I have fond memories and which was published on
The noble Lord, Lord Tunnicliffe, asked specifically about the transitional regime for central securities, and the noble Baroness, Lady Bowles, also referred to it. The transitional period is intended to allow non-UK CSDs to continue to provide services in the UK after exit. UK CSDs that have applied for authorisation prior to exit day will be automatically entered into the transitional regime. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit. Any non-UK CSD that fails to notify the Bank may be subject to public censure. A non-UK CSD that has notified the Bank and entered the transitional regime can continue to provide CSD services in the UK on the current basis for a certain period. For a CSD that has made an application for recognition to the Bank of England, that period ends when the application is decided. For a CSD in a jurisdiction that the Treasury has determined to be equivalent and that has not made an application to the Bank of England, that period extends to six months after the Treasury’s equivalence determination. I think that is a partial answer to the question raised by the noble Baroness, Lady Bowles.
The noble Lord, Lord Tunnicliffe, also asked why the Government are not bringing into UK law the settlement discipline regime. Certain CSDR provisions on settlement discipline do not come into force until after exit day. As a result, they cannot be considered retained EU law and are beyond the scope of the European Union (Withdrawal) Act 2018. Returning to the question asked by the noble Baroness, Lady Bowles, she said that it seems strange that once a country has been found equivalent, more is required of that CSD. Equivalence is a decision on the alignment of another country’s regulatory regime. This is a decision of the Treasury. The recognition of a specific CSD is a more technical decision at the level of that CSD, and that is made by the Bank of England.
Before the noble Lord sits down, I am fascinated to know what “public censure” looks like.
Of course, that would be what the regulators engage in in the rigorous upholding of the rules that govern activities in their respective areas, whether it is the Bank of England, the Financial Conduct Authority or the Prudential Regulatory Authority. Any reprimand of any shortcoming they observe would be regarded as a matter of public censure.
I am grateful to noble Lords for their comments. I commend both these SIs to the House.