My Lords, as this instrument is grouped, I will also speak to the draft Mortgage Credit (Amendment) (EU Exit) Regulations 2019 and the draft Financial Regulators’ Powers (Technical Standards etc.) and Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2019.
The three SIs are part of the same legislative programme under the EU withdrawal Act to ensure a functioning legislative and regulatory financial services regime in a no-deal scenario. These instruments fix deficiencies in UK law relating to the regulation of distance marketing of consumer financial services and the regulation of consumer buy-to-let mortgages. The final instrument ensures that recently adopted binding technical standards continue to operate effectively and that the markets in financial instruments SI effectively addresses deficiencies in retained EU law if the UK were to leave the EU without a deal or implementation period.
I turn to the substance of the first SI, the Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019. This will fix deficiencies in UK law related to the distance marketing of consumer financial services. The UK distance marketing regulations derive from the EU’s distance marketing directive. This requires firms to provide information to consumers prior to the conclusion of a financial services contract at a distance, sets out consumers’ rights of cancellation and provides that consumers who receive unsolicited distance financial services are not subject to any obligation, including to provide payment. The DMD operates on a country-of-origin basis. At present, EEA financial services firms undertaking distance marketing to UK consumers from an establishment in an EEA state are not subject to the UK’s distance marketing regime, on the basis that they are subject to regulation in their home state. Consequently, the distance marketing regulations, as well as relevant FCA rules on distance marketing, currently apply only to firms undertaking activity from a UK establishment. Firms undertaking unregulated activity from an establishment in the UK are subject to the distance marketing regulations, while firms undertaking regulated activity are subject to equivalent FCA rules. However, some distance marketing regulations apply to all activity, whether regulated or unregulated.
In a no-deal scenario, the UK would be outside the single market and the EU’s legal, supervisory and financial regulatory framework. Retained EU and domestic law relating to the regulation of distance marketing of financial services therefore needs to be amended to ensure it continues to operate effectively. This ensures that consumers continue to receive the information they need to make decisions about the financial services products they may seek out.
Broadly, this instrument will maintain the current distance marketing rules set out in the distance marketing directive, but address deficiencies stemming from exit. The draft regulations remove EU references that will no longer have any legal effect following our leaving the EU. More substantively, this SI will expand the current scope, where necessary, of some of the distance marketing regulations. To remedy any potential loss of consumer protection when the UK leaves the EU, the onshored distance marketing regulations will cover certain EEA firms that will operate in the UK post exit under one of the temporary permissions regimes previously debated by this House. The FCA will amend its rules where appropriate to ensure complete coverage of distance marketing requirements to EEA firms operating in the UK post exit. On
I turn now to the Mortgage Credit (Amendment) (EU Exit) Regulations 2019. These concern the regulation of consumer buy-to-let mortgages. Many noble Lords will be familiar with the Mortgage Credit Directive Order 2015, which implemented the mortgage credit directive 2014 in the UK. The order established a national framework regulating consumer buy-to-let mortgage contracts. A consumer buy-to-let mortgage is a loan that can be offered to a borrower letting out their home not for the purpose of business or as an investment. Here, the borrower can be thought of as an accidental landlord. In a no-deal scenario, the UK would be outside the EEA and the EU’s legal, supervisory and financial regulatory framework. The Mortgage Credit Directive Order therefore needs to be updated to ensure the provisions work in a no-deal scenario.
The SI makes three main changes to the regulatory regime for consumer buy-to-let mortgages. First, the responsibility to update the remarks and assumptions that accompany the calculation for the annual percentage rate of charge, the APRC, is transferred from the EU Commission to the Treasury. The APRC is a standardised calculation of cost of credit that provides the borrower with the total cost of mortgage credit over its full term. It is necessary to confer this power on the Treasury to ensure the APRC remains accurate post exit.
Secondly, the SI amends the territorial scope regulated by the current consumer buy-to-let lending so that in future it applies only to lending related to property in the UK and not in the EEA. This will apply to a very small number of loans and will not affect consumer buy-to-let lending relating to land in the EEA that was entered into before exit day, which will continue to be covered by FCA regulation.
Thirdly, the SI amends the rules for consumer buy-to-let foreign currency mortgages. A foreign currency mortgage is a loan denominated in a different currency from that of the borrower’s income or assets.
This SI provides lenders which lend to UK borrowers with a consumer buy-to-let foreign currency mortgage with the option to meet the requirement to protect borrowers from exchange rate risk by allowing borrowers to convert their loan into pounds sterling. Currently, the 2015 order prescribes that where a lender protects a borrower from exchange rate risk by allowing borrowers to convert the loan into a different currency, that currency must be the currency of the EEA state where the borrower is resident, or the currency in which the borrower holds their main income or assets. Once the UK leaves the EU, pounds sterling will no longer be an EEA currency, and so this provision has been made to ensure that a UK borrower with this type of loan can continue to convert their loan into pounds sterling. On
Turning to the final statutory instrument in this group, the draft Financial Regulators’ Powers (Technical Standards etc.) and Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2019 include two components. The main component follows on from the Financial Regulators’ Powers (Technical Standards) (EU Exit) Regulations 2018, debated and made in October 2018, which transferred responsibility for fixing deficiencies in the level 2 binding technical standards—BTS—to the UK financial services regulators. This instrument transfers responsibility for new binding technical standards that have been adopted by the European Commission since the previous SI was laid to ensure that these can also be fixed ahead of exit day. The second, smaller, component of this SI makes minor amendments to the Market in Financial Instruments (Amendment) (EU Exit) Regulations 2018, which were debated and made in December 2018, to ensure that the regulations operate as intended post exit.
A significant volume of the financial services legislation being brought on to the UK statute book by the European Union (Withdrawal) Act consists of EU level 2 binding technical standards, which run to between 7,000 to 8,000 pages. Binding technical standards do not take policy decisions but set out the requirements that firms need to meet to implement policy set in out in higher EU legislation. The European supervisory authorities are currently responsible for developing and drafting binding technical standards, which are then adopted by the European Commission.
The financial regulators’ powers SI debated last October delegates the European Union (Withdrawal) Act power to fix deficiencies to the UK financial services regulators, so that they can ensure that onshore technical standards operate effectively from exit day. The SI sets out the procedure and requirements that the regulators must follow for amending future technical standards. The SI listed all EU binding technical standards that were in force at the point that the SI was laid. However, since the 2018 regulations were made, further binding technical standards have been adopted by the Commission. The European Union (Withdrawal) Act will bring these new binding technical standards into UK law at exit day. Responsibility for fixing any deficiencies in these new binding technical standards needs to be transferred to the UK regulators.
This SI therefore adds new binding technical standards to the schedule of the financial regulators’ powers SI, bringing them into scope of those regulations. It adds binding technical standards relating to the benchmarks regulation, the European long-term investment funds regulation, the market abuse regulation, the bank recovery and resolution directive and the capital requirements regulation. In addition, this SI makes minor amendments to the markets in financial instruments SI. I hope that that is clear.
This SI replaces an erroneous reference in a provision relating to the carrying out of controlled functions under the Financial Services and Markets Act 2000; corrects a typographical error and certain cross-references; and removes a provision which relates to the “host Member State”. These corrections do not change the policy intent or effect of these regulations. While all legislation laid under the European Union (Withdrawal) Act has gone through the normal rigorous procedures, these minor drafting issues were picked up during further checks after the legislation was laid. This SI therefore ensures that the markets in financial instruments SI will function as intended in a no-deal scenario.
The Treasury worked very closely with the regulators in drafting these three instruments, and has also engaged extensively with the financial services industry and will continue to do so. The regulators will also be undertaking public consultation on the deficiency fixes they propose to make to the technical standards covered by this SI.
In summary, the Government believe that the proposed legislation is necessary to ensure that regulation of consumer buy-to-let mortgages and distance marketing of consumer financial services continues to function appropriately if the UK leaves the EU without a deal or an implementation period; that recently adopted binding technical standards continue to operate effectively; and that the markets in financial instruments SI effectively addresses the deficiencies in the retained EU law if the UK were to leave the EU without a deal or an implementation period. I hope noble Lords will join me in welcoming these regulations. I beg to move.
My Lords, I shall be exceedingly brief. That the third of these SIs is basically to correct deficiencies in earlier SIs underscores how complex all this is. Obviously we have no objection to correcting errors in earlier SIs. Again, I do not have objections to the first two SIs, on distance marketing—which sounds like cold calling—and buy-to-let credit. My head was spinning when trying to read them but they seem to be logical under the circumstances. But is there something that is not there or that I have misunderstood? In both circumstances, many British people and continental Europeans live their economic lives beyond country borders. They have done so particularly in the context of the EU because we have been part of a single market and a European family.
Many people who think of themselves as not financially sophisticated have economic activities which go beyond the boundaries of the EU; for example, they might have a property in Spain that they let, investments in different countries, or pensions arising from periods of work. There are all kinds of complexities. Do I understand from reading these SIs that the problem that is not resolved is what happens if there is a dispute or an insolvency? Is it that the legal mechanisms that would have been in place with full membership are no longer available and that these SIs have been unable to on-board any mechanism for dealing with disputes, insolvencies and those kinds of issues? If such were to arise, would the UK resident, for example, with a buy-to-let mortgage for a property somewhere in the 27, have to prosecute their case through that country’s national court system, rather than being able to do so as part of the unified ECJ umbrella, and therefore face a series of difficulties which cannot be corrected through SIs?
I say this because we talk constantly of continuity but it seems that there might be partial continuity with discontinuity embedded in it, particularly around the areas of dispute and insolvency. I could be wrong and I stand to be corrected.
My Lords, we have no objection to any of these SIs. I have read them through as far as I was able, and they seem to be logical.
The distance marketing SI particularly caught my attention, because many citizens are subject to distance marketing that perhaps they do not really want. I note that the Explanatory Memorandum at paragraph 7.30, “Criminal offences”, states that various failures to abide by the rules of the regulation we are creating will be a criminal offence and that those guilty of it will be,
“liable, on summary conviction, to a fine not exceeding level 3 on the standard scale”.
I have a dilemma because, on the one hand, I am going to say that that does not sound very threatening, especially if you are a large firm—I think this relates to firms as well as to natural persons—and I would value it if the Minister would write me a letter on that. I also recognise that, if the SI sought to change that, I would argue that it was smuggling through a policy change. I am not suggesting that it should, but can the Minister clarify whether this is genuine consumer protection that firms fear or whether the punishments for offences are too low to be impactful?
My Lords, having spent the past six months with the noble Lord in Grand Committee and here, I can assure him that the last thing I would ever attempt to do is to try to smuggle through some policy under his astute watch, because I would never succeed—and we would never attempt it, of course.
The noble Baroness, Lady Kramer, made a good point on this. It gives me an opportunity to put some additional remarks on the record—I know she was talking particularly about buy-to-let properties, but the principle will hold. By extending the scope of the distance marketing regulations to EEA firms in a temporary permissions regime, we are ensuring that UK consumers will continue to be protected by appropriate distance marketing regulations. Firms in the temporary permissions regime will be seeking authorisation, and it is therefore in their interests to comply with the UK’s marketing regime—that is not the answer. I am sorry about that. I will get an answer for her. I absolutely got what she was asking.
Picking up on the point made by the noble Lord, Lord Tunnicliffe, on direct marketing, illegal cold calling into the UK happens frequently. We know that Nigeria is often the major source of illegal cold calls and illegal contacts through emails and so on. One of the frustrations for UK authorities has always been that they cannot enforce against such illegal calls because they are at a distance and they have no locus. Will an equivalent situation arise after leaving the EU so that, if there are inappropriate or illegal cold calls into the UK from an EU-based entity, there will be no mechanism for enforcement against them? If that is the case, that might be something we need to think about.
I touched on that in my introductory speech and said how they would be treated. I could do a good follow-up letter on dispute resolution, consumer protection and seeking redress in the context of these SIs, which may have wider applicability. If that is acceptable to the noble Baroness and the noble Lord, I will do that.