My Lords, I will speak on behalf of my noble friend. The Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the EU withdrawal Act to deliver this, and a number of debates on these SIs have already been undertaken here and in another place.
This SI is part of this programme, and has been debated and approved by the other place. The SI will fix deficiencies in UK law on regulations for money market funds to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit, but amending where necessary to ensure that it works effectively in a no-deal context.
The European regulation on money market funds relates to their establishment, management and marketing. These funds invest in highly liquid instruments—such as Treasury bonds—and provide a short-term, stable cash management function to charities, local government, businesses and other financial institutions. They are predominately used by investors as an alternative to bank deposits. The regulations were introduced as part of the response to the 2008 global financial crash, to preserve the integrity and stability of the EU market, and to ensure that money market funds are a resilient financial instrument. This is achieved by having further rules on prudential requirements, governance and transparency for operators of money market funds.
Money market funds are structured as either an Undertaking for Collective Investment in Transferable Securities or alternative investment funds. Consequently, they are required to comply with regulations that apply to UCITS or alternative investment funds. The regimes for UCITS and AIF managers have been separately amended to reflect the UK leaving the EU by the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 and Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019, which were made on Wednesday
First, this draft instrument removes references to the European Union which are no longer appropriate, and to EU legislation which will not form part of retained EU law. These references will be replaced, to refer to the UK and to relevant domestic and retained EU legislation. Secondly, in line with the general approach taken in other instruments, this SI will transfer functions within the remit of EU authorities to UK institutions. All functions exercised by the European Commission will be transferred to the Treasury. These relate to creating rules on standards for money market funds, such as their liquidity and quantification of credit risk.
All functions exercised by the European Securities and Markets Authority will be transferred to the FCA. The FCA will become responsible for technical standards on how funds should stress test their funds, and for two operational powers to establish a register and reporting templates for money market funds. The FCA, as the UK’s regulator for investment funds and the current national competent authority for money market funds, has extensive experience in the asset management sector and is therefore the most appropriate domestic institution to take on these functions from ESMA.
As previously stated, money market funds must be structured and regulated as UCITS or AIFs. This instrument makes provision to ensure that EU money market funds are able to use the temporary marketing permissions regime, which lasts for three years, as legislated for in the regulations for collective investment schemes and alternative investment fund managers. Following an assessment by the FCA and submitting a Written Ministerial Statement to both Houses, the Treasury will be able to extend this by a maximum of 12 months at a time. The temporary marketing permissions regime will allow for EEA money market funds which are currently marketed into the UK, and any subsequent money market fund structured as a UCITS sub-fund, to be able to continue to market into the UK as an MMF for up to three years after exit day.
This instrument amends the scope of the regulation to apply to the UK only, with the effect of only allowing the marketing of UK-authorised MMFs, or MMFs managed by UK fund managers. However, additional amendments maintain the eligibility for EEA MMFs with temporary permissions to continue to market in the UK at the end of the temporary marketing permissions regime period, if they gain the required permissions to market as a third-country fund under existing UK domestic frameworks.
Money market funds structured as UCITS will be required to gain authorisation under Section 272 of the FSMA, while for those structured as AIFs, their managers will need to notify under the national private placement regime.
The UK currently has a very small domestic market of money market funds, so these provisions address the cliff-edge risks that could arise as a consequence of defaulting to a UK-only market. This will ensure that UK investors can continue to access their investments and to have a choice of money market funds to use for cash management.
The Treasury has worked closely with the FCA in drafting this instrument. It has also engaged the financial services industry. This has included engagement with the Institutional Money Market Funds Association, which is the main industry body for money market funds. The House should be aware of remarks by its secretary-general, Jane Lowe, who stated:
“We believe the current draft SIs deal adequately with current EU legislation and consider that the dialogue between HM Treasury and industry was helpful to identify and iron out issues that arose”.
To summarise, the Government believe that this SI is needed both to ensure that the regulatory regime for money market funds and their operators works effectively, if the UK leaves the EU without a deal or an implementation period, and to ensure continuity for the UK investors they serve. I hope that noble Lords will join me in supporting this instrument. I beg to move.