Amendment 120

Financial Services and Markets Bill - Report (3rd Day) (Continued) – in the House of Lords at 9:46 pm on 13 June 2023.

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Viscount Trenchard:

Moved by Viscount Trenchard

120: Clause 78, page 90, line 34, at end insert—“(4A) The Treasury must make regulations under subsection (3) so as to bring section 1 and Schedule 1 into force for the purposes of revoking, within the period of two months beginning with the day on which this Act is passed, the provisions mentioned in that Schedule connected with Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.”Member’s explanatory statementThis amendment ensures that the retained EU Law which replaced the Alternative Investment Fund Managers Directive and associated legislation will cease to have effect no later than two months after the passage of the Bill.

Photo of Viscount Trenchard Viscount Trenchard Conservative

My Lords, I have tabled Amendment 120 in the same form as I tabled Amendment 246 in Grand Committee, and I am again grateful to my noble friend Lady Lawlor for adding her name in support of it.

I confess to having been rather disappointed by my noble friend the Minister’s response when she replied to that debate. She started by reminding the Committee that throughout this Bill the Government are seeking gradually to replace all retained EU law in financial services,

“so that the UK can move to a comprehensive FSMA model of regulation”.—[GC 68.]">Official Report, 25/1/23; col. GC 68.]

She said that the Government were prioritising those areas that offer the greatest potential benefits of reform and mentioned three such areas: the Solvency II review, the wholesale markets review, and the listings review undertaken by my noble friend Lord Hill of Oareford. She provided some statistics which show that the UK is the world’s second-largest global asset management centre, with $11.6 trillion of assets under management, representing a 27% increase in the past five years. My noble friend rightly suggested that the asset management sector is in good health. However, I am bemused that she and the Treasury officials who advise her have already forgotten the controversy over the introduction of AIFMD. She suggested that the Government were not aware of any evidence that reform of the alternative fund sector is a widely shared priority across the sector. She specifically said that it is the Government’s intention to move all retained EU law in the financial services field into the FSMA model and that this will apply to this area too, but not as one of the first wave of priorities.

I agree that reform in the three areas that the Minister recognises as priorities is also a priority, but all of them are more complicated and I do not believe that any of them are candidates for complete revocation without partial replacement. She may remember that I have long advocated the abolition of the unbundling provisions for research contained within MiFID II and have argued for many of the recommendations made by my noble friend Lord Hill with regard to listings. From the beginning, the Solvency II regulations were inappropriate and disproportionately severe for the UK insurance market, many of whose participants believed that they were a deliberate attempt by the EU to damage the London insurance markets. However, none of those pieces of legislation are, in their entireties, candidates for revocation without partial replacement. But AIFMD is such a candidate.

My point is that this Bill is principally an enabling Bill, and it hardly revokes any EU law right away. However, AIFMD was universally resisted by the industry, the regulators, the Treasury and the Bank. It was foisted on us. It is unnecessary, so why do we not get rid of it now? We do not need further consultations on it. It has diverted many small asset managers away from the UK over the years, and the costs and burdens involved in compliance with it are completely disproportionate. Many innovative, so-called alternative strategies are developed by small companies, and I am aware of many that have failed to bring their ideas to market or have been forced to merge with another firm because of these regulations. As I explained in Committee, the motivation for the unexpected introduction of AIFMD was political, driven by French and German allies of Mr Manuel Barroso, who was seeking reappointment as Commission President. Charlie McCreevy, the Internal Market Commissioner at the time, was opposed to the measure.

I wish the Bill had been designed to abolish without delay not just AIFMD but parts of MiFID II, EMIR, et cetera. But AIFMD is the one piece of anti-UK bureaucratic red tape foisted on us by the EU, and more than two years have passed since the end of the transition period. It is depressing that my noble friend suggested that it will, in due course, be replaced rather than revoked. Those who are interested in the story should read A Report on Lessons Learnt from the Negotiation of the Alternative Investment Fund Managers’ Directive by Dr Scott James of King’s College London, prepared for the British Venture Capital Association.

I hope that, this time, I may receive a slightly more positive response from my noble friend. That would be taken by many in the industry as a sign that the Government really are now determined to do what we were promised: replace the cumbersome EU financial services regime with one more suited to our needs and that will ensure that the City holds, and builds further on, its position as the world’s most successful financial centre, ensuring the resumption of the growth in the economy that is so badly needed. I beg to move.

Photo of Baroness Lawlor Baroness Lawlor Conservative 10:00, 13 June 2023

My Lords, I support my noble friend Lord Trenchard’s Amendment 120, to which I have added my name and which I spoke in favour of in Committee. He then spoke of the history of this legislation, which was unintended by one EU commissioner and then pushed through, for matters of politics, by his successor under José Manuel Barroso: Michel Barnier, who saw it as part of the plan for a banking and monetary union for the EU—a plan that the UK was and is not part of and has no intention of joining.

The whole UK financial sector accounts for 8% of our economy—the same proportion as in the US and Canada—whereas financial services account for only 4% of the two major economies of the EU. The ironic thing about this legislation is that 75% of alternative funds were in UK businesses then, and the funds account for that sort of proportion in our own sector today.

My main concern is that this diverse sector, which has flourished in the UK under UK law, remains under an opaque legislative system. EU regulation is unpredictable and the EU’s system, with the precautionary approach, seems to cover every eventuality but in practice it can fall short. It often favours big players over small and nimble entrepreneurs and the challengers. There is little certainty about transactions in advance, and little predictability as to how the regulators will judge.

We spoke about this in respect of the whole sector in Committee, but it is important for the alternative funds industry in particular. If we move, we need to move away from the way of thinking into which our regulators have crept. They have absorbed this precautionary approach to regulation from the EU—as well they might, after two decades.

I was glad my noble friend suggested that the hope —the intention—is that we will end EU law, but I stressed then, and would like to stress again, the importance of ending the thinking about precaution and hesitation in grasping the opportunities once we are out. That is very important for the regulators in this sector.

I shall just give a few examples. We have in English law an approach to business which, given the principle of contractual autonomy, means that the law honours contracts and contractual arrangements. It does not rely on the subjective principle of good faith, which creates uncertainty for practitioners about the expected moral and other standards of behaviour. In German civil code, parties must observe good faith in both negotiation and in performance of contracts but, without a definition of good faith in German contract law, things are uncertain.

The other aspect of UK law that I think is good for the sector is that it is flexible. This is a very flexible sector, and the judiciary’s ruling, interpreting and developing of law through its application to specific cases in different sectors moves with the times and adapts to innovation—the new structures and transactions of a fast-moving business. But that cannot happen under the rule books or their architects, the courts, or indeed in the thinking, because courts, by contrast, are not subject to the constraints of the legislative process and can react and achieve change more effectively, and this judiciary is recognised globally to be wise, deeply knowledgeable and authoritative.

I took heart from the Minister’s assurance in Committee, and again during the first day of Report, about the intention to revoke all EU laws and replace those that were considered necessary with—I use her words—an “appropriate replacement” before eliminating any aspect of the legacy. But perhaps I could ask her to think again about AIFMD. Waiting for an “appropriate replacement” sounds more like Whitehall-speak for regulation of the type that has been absorbed and reflected by our regulators under the Treasury in recent decades. Perhaps this piece of legislation could be used as a pilot for ending something that, as the noble Viscount said, was not wanted by the sector, and which the Committee warned could have dangerous repercussions for the UK’s role in global markets and in dealing with America. Because of that, there are very good reasons to let it go, because it is not a consumer-facing industry; it is for the sector itself. It can only be to the good if this sector is set free without any replacement, so that it can benefit under the benefits of UK law.

Photo of Lord Moylan Lord Moylan Chair, Built Environment Committee, Chair, Built Environment Committee

My Lords, I will speak only briefly in support of my noble friend Lord Trenchard. It was commonly known, and widely reported in the newspapers at the time, that following the financial crash of 2008, the EU, which has always had its doubts and scepticism—indeed, hostility—about what it referred to as Anglo-Saxon finance, withdrew the indulgence that it had previously shown towards the City of London as part of the European Union and started to enact legislation that was injurious to the City of London, and quite deliberately so, to the annoyance of the Chancellor of the Exchequer at the time, George Osborne, who was reasonably open about his opposition.

This instrument, the alternative funds directive, was the prime example of that, although there were others. It contributed significantly to the fact that there was much more support for Brexit in the City of London than people often wanted to admit at the time, or have admitted since, because they understood that that oppositional turn had taken place and the tide was now flowing against the City. So I agree with my noble friend that it is very difficult to see why, now that we have the opportunity to remove it, we continue not to do so year after year—and there are other examples of that.

I also support the remarks of my noble friend Lady Lawlor. There is a prevalent idea—and not just in financial legislation—that, as we get rid of European Union legislation that we no longer need, we need to replace it with legislation that almost replicates what the European Union was doing. A prime example of that outside the field of financial services is the Procurement Bill, a massively complicated piece of legislation replicating European Union legislation, almost in great detail. In fact, the procurement legislation of the European Union—which was obviously designed for 28 states, not simply for the United Kingdom—was there largely to deal with problems embedded in a history of municipal corruption, which were manifest in various European states but, I am glad to say, of which the United Kingdom has a long, proud history of being pretty free, with one or two exceptions. It was not necessary to replicate it in the detail in which it was done.

There are genuine concerns, certainly among those of us on this side of the House, that insufficient dispatch is being brought to getting rid of injurious legislation that we inherited from the European Union but can now get rid of, and that there is a mentality that the right way to get rid of something is, in effect, simply to re-enact something very similar after a period of consultation. I have great sympathy with what my two noble friends said, and I hope that the Minister, when she replies, will be able to give them some comfort.

Photo of Baroness Penn Baroness Penn The Parliamentary Secretary, HM Treasury

My Lords, I am afraid that, as my noble friend Lord Trenchard set out, his amendment has not changed since Grand Committee and neither has the Government’s response, which he so adeptly summarised on my behalf. We are not able to support the amendment for those reasons.

While I recognise all three of my noble friends’ strength of feeling on this issue, it is important that we do not inadvertently damage the UK fund sector or its access to international markets. However, I reinforce the Government’s commitment to revoking all EU law in financial services—but with prioritisation and process. I hope that all three of my noble friends will take heart from the fact that we are on the last amendment on Report and near the end of the process by which we can see the Bill on the statute book. We can then begin the process of the revocation of EU law and its replacement—or perhaps not, depending on the individual circumstances—with an approach that is guided by what is best for the UK and our financial services sector, to support growth in that sector and across the whole country. That is something that we can all support as a result of the Bill. I hope that my noble friend is able to withdraw his amendment.

Photo of Viscount Trenchard Viscount Trenchard Conservative

My Lords, I thank my noble friend for her reply. I am slightly more reassured than I was by her reply in Committee. I nevertheless do not feel that she yet recognises the very clear point that this regulation was hugely controversial and was opposed by everybody involved in the financial services industry—there were no supporters of it. I am afraid that we have become rather inured to operating under it, but I can assure her that there are still very large sectors of the asset management industry that would be delighted if the Government would show that this is a priority area for revocation when she gets going with the job of revoking EU law and replacing it with a more reasonable UK-friendly alternative regime.

I thank my noble friend for her response. I also thank all those still in the Chamber for their patience in sitting here right to the end and sharing in this final amendment. I beg leave to withdraw my amendment.

Amendment 120 withdrawn.