“(2) The first requirement is that the scheme funder is a body corporate or a partnership that is a legal person under the law by which it governed.
(3) The second requirement is that the scheme funder only carries out activities that relate directly to Master Trust schemes in relation to which it is a scheme funder or prospective scheme funder.
(3A) The Secretary of State may make regulations providing for exceptions from the second requirement.
(3B) The regulations may include provision excepting a scheme funder from the second requirement—
(a) where the scheme funder meets additional requirements specified in the regulations (such as requirements relating to a scheme funder’s financial position, its financial arrangements with the Master Trust scheme in question or its business activities);
(b) where the scheme funder applies to the Regulator and provides the Regulator with information specified in the regulations, or such other information as the Regulator may require in order to satisfy the Regulator that the Master Trust scheme is financially sustainable.”.
This amendment gives a power to the Secretary of State to make regulations providing for exceptions to the requirement that a scheme funder must only carry out activities directly relating to the Master Trust scheme (or schemes) for which it is a scheme funder.
With this it will be convenient to discuss the following:
Amendment 26, in clause 11, page 7, line 7, at end insert—
“(i) This should not apply to insurance companies regulated by the Financial Conduct Authority”.
This amendment would not require Master Trusts to be separate legal entities from any business where that business is regulation by the Financial Conduct Authority.
Amendment 34, in clause 11, page 7, line 11, leave out subsection (b) and insert—
“(b) either the only activities carried out by the body corporate or partnership are activities that relate directly to the Master Trust scheme, or if the body corporate or partnership carries out activities other than those defined as “restricted activities”.”
This amendment allows for exceptions to the requirement that a scheme funder must only carry out activities directly relating to the Master Trust Scheme for which it is a Scheme Funder.
Government amendment 4.
Amendment 35, in clause 11, page 7, line 21, at end insert—
“(7) The Secretary of State may by regulation define “restricted activities”, these regulations must set out activities that a scheme funder cannot engage in to minimise risk of losses or liabilities which might deplete or divert its financial resources.”
This amendment makes provision for the Secretary of State to define “restricted activities” by regulation, including a list of specific activities restricted, in order minimise risk of loss by Master Trust Scheme Funders.
Clause 11 requires a scheme funder to be a legal person who carries out only activities that directly relate to the master trust. The policy intention is to ensure that the financial position of scheme funders, and their financial arrangements with master trusts, are transparent and clear to the regulator. That will enable the regulator to make an assessment of the scheme’s financial sustainability when deciding whether to authorise the master trust, and will support the regulator’s ongoing financial supervision of the scheme, post-authorisation.
In debate in the other place, and in representations received from stakeholders, the concern was raised that the scheme funder requirements would lead to costly corporate restructuring and so might undermine the supporting of master trusts through the other lines of business that some master trust providers carry out. The Government amendments would make two changes to the scheme funder requirements in clause 11 that we believe address this issue. The first would allow an entity to be a scheme funder and, therefore, carry out activities in relation to more than one master trust, and also carry out activities, such as due diligence, where it is considering becoming the scheme funder of a new master trust scheme. The second would provide a power for the Secretary of State to create exceptions to the requirement for the scheme funder’s activities to be limited to the master trust. Scheme funders who meet the requirements that are to be prescribed in regulations will be able to carry out activities unrelated to master trusts—for example, providing shared services to other schemes.
We hope that this easement will minimise disruption to existing corporate structures and shared service arrangements. In addition, enabling scheme funders to carry out activities in relation to more than one master trust may facilitate consolidation in the market by making it easier for a scheme funder to rescue a failing master trust.
The first regulations made under the power under clause 11(3A) are to be subject to the affirmative procedure; subsequent regulations will be subject to the negative procedure. That is obviously to provide the necessary scrutiny in the first instance after the consultation. Given the importance of scheme funders to the financial sustainability of master trusts, and the potential impact on scheme funders of the requirements in clause 11, we recognise that the regulations first exercising the power to set out exceptions to the requirement should be subject to parliamentary scrutiny and debate.
I am delighted to serve under your chairmanship, Ms Buck, albeit with a frog in my throat. Our concern with this clause regards the strict nature of requiring a master trust to be a separate legal entity, which could have numerous consequences across the board. Since the contents of the Bill have become known, I have tried to meet as many parties and groups as possible that have an interest in the Bill, to hear their perspectives, thoughts and concerns. This clause came up often. I note that the Minister has tabled amendments to it, which I welcome as a first step towards recognising that the original clause was not fit for purpose.
Amendment 3 widens the definition of the two legal characteristics that a scheme funder must meet in order for a master trust to be authorised by the Pensions Regulator. It gives the Secretary of State greater discretion in exempting a scheme from the second requirement. However, the amendment does not make clear what policy considerations will apply to how that discretion is applied. Will the Minister confirm that insurance companies regulated by the Financial Conduct Authority with master trusts will be exempt from the second requirement, giving members access to the full resources of the insurance company, which will carry full liability for costs in the event of a master trust scheme failure? Our amendment 26 seeks to clarify just that—namely, that if an organisation is already regulated by the Financial Conduct Authority, which is incredibly thorough with its regulation, it does not need to register as a separate legal entity as well.
As the Minister said, my colleagues in the Lords raised concerns about the clause, proposing instead that the scheme funder be approved by the Pensions Regulator, but that was rejected with the argument that it would be more difficult for the regulator to obtain transparency on the financial position of the funder and its financial arrangements with the master trust. Instead, colleagues tabled a motion requiring the scheme funder to be constituted and to carry out its activities in a manner that enables its financial position, and the financial arrangements between it and the master trust, to be transparent to the regulator. However, that was withdrawn on the assurance that the Government would be considering that later in the legislative stages.
So here we are, with an amendment from both the Opposition and the Government on how to ensure that we are not unnecessarily enforcing regulation on companies that are already bound by strict regulation elsewhere. The difference here is that the Government’s amendment is on the vague side. The second requirement for the scheme funder that the Government have proposed is that it carries out only activities that relate directly to master trust schemes of which it is a scheme funder or prospective scheme funder. The line in amendment 3 following on from the second requirement gives the Secretary of State the power to
“make regulations providing for exceptions from the second requirement.”
That needs more detail and clarity. What possible exceptions do the Government have in mind? Has the Minister yet considered what these exceptions may be?
We need stability, and to provide stability for the numerous businesses and companies that rely on us to provide effective laws governing their livelihoods and, particularly in relation to master trusts, the livelihoods of millions of people in this country. This is not largely a matter that we disagree on—I think we share the same aims—but I want to be able to provide more assurance to the companies watching today that we will not seek to bear down on them with extra costs and paperwork when they are already abiding by regulation from the Financial Conduct Authority.
Although the Government’s amendment does not give me enough specifics about the type of exceptions that they would give the Secretary of State the power to decide, I welcome their approach, and their acknowledgement that it is counterproductive to place extra requirements on companies that already follow the rules diligently. We had a particular concern that forcing a restructuring on master trust schemes could weaken the position of the funder, which is especially important when one considers the debate on the issue of the funder of last resort. We need larger companies to be in a position to pick up failing master trusts, and should ensure that they are well equipped to do that.
I welcome the amendment from the Scottish National party Members, which would also allow exceptions to the requirement that a scheme funder carries out only activities directly relating to the scheme for which it is a funder. I am optimistic that we will leave here today having made positive progress on this matter, as we largely seem to agree on the principle of exceptions.
Amendment 26 would except insurers that operate under stringent Financial Conduct Authority regulation. Where insurers with master trusts operate under both sets of regulation, it must be ensured that unnecessary duplication or overlapping of the requirements is avoided. In particular, insurers should not have to reserve even more additional funds to meet the requirements set out for master trusts, as they already hold the resources needed for this purpose under other regulatory regimes. Members of master trust schemes used for automatic enrolment should meet high solvency and reporting standards, but these organisations have already met standards set under other frameworks, such as that of the FCA. We believe that it is not necessary to expect large companies with significant capital to be required to hold additional capital on top of that in order to meet the new obligations in the Bill.
Can the Minister provide assurance right now that insurance companies that are already under strict regulation by the Financial Conduct Authority will be exempt from the separate legal entity clause, and will he provide clarity on when we can expect to see the Secretary of State’s regulations? The scheme funder requirements in the Bill will bring no additional benefit to the many people in master trust schemes operated by insurers, which are already well protected. Additional requirements on FCA-regulated insurance companies will lead to significant additional costs. I hope that the Government can address my concerns, and that they will outline exactly what regulations the Secretary of State will look to implement.
The Minister’s amendment of
Will the Government confirm whether they plan to consult with the insurance industry before defining “information” and “additional requirements”? Zurich has said that the approach taken by the shadow Pensions Minister in amendment 26 and the SNP’s amendment give greater certainty, which would be preferable. As far as Labour’s amendment 26 is concerned, we share the concerns about the unnecessary duplication of requirements for insurers who already operate under stringent regulatory standards. Our amendments 34 and 35 would have a similar effect to amendment 26, as they state that the requirement need not apply to firms whose activities are already restricted by virtue of existing regulation.
The Prudential Regulation Authority’s rules mean that insurers’ activities are restricted. This will mean that the activities of the scheme funder not directly related to the master trust are transparent and do not threaten the solvency and sustainability of the master trust. Amendment 35 makes provision for the Secretary of State to define “restricted activities” in regulations, including through a list of specific activities restricted in order to minimise risk of loss by master trust scheme funders.
This is a very good and laudable example of Government and Opposition Members trying to achieve the same objective. I have already heard many of the arguments used today by the Opposition; the Association of British Insurers and others have made similar arguments. As I have often said before, this is not black and white. It is not as though one argument makes absolute sense and the other is absolutely stupid; that is not the case at all. The argument is legitimate. We have had to think about this following representations, and following the Lords debate. However, I do not think that the amendments would achieve the level of transparency needed for the regulator’s financial assessment of the scheme.
Amendment 26 would disapply the requirement on an FCA-regulated insurance company that is also a scheme funder of the trust to set up a legal entity. The amendment would hamper the regulator’s assessment of the final sustainability of the scheme. The matters overseen by the FCA in relation to the prudential and financial conduct of the insurance provider are not the only aim behind the clause; they are aims, but not the only aims, and are not the only aspect that the regulator needs to take into account in the assessment.
The hon. Member for Stockton North asked me to clarify quite a few points. He asked whether the FCA-regulated companies will be exempt. They will be exempt if they meet the prescribed requirements in the regulations. He asked how we will get to the regulations. We will consult on them; we are not simply going to make them up. They are not something that the Secretary of State will dream up in his office. I promise that they will be comprehensive. The intent is to ensure that there is no duplication of regulation; that is why we have created the extra flexibility of the Secretary of State’s discretion.
The hon. Gentleman asked what factors will be considered when we consult on the regulations. They are solvency of the entity, what regimes it falls under, transparency of arrangements and what connections there are between the funder and provider of the schemes. On when the draft regulations will be published, we have stated clearly that we expect consultation on policy in the autumn and the draft regulations in 2018, so that is not a long way away.
Amendments 34 and 35 would expand the range of activities a scheme funder of a master trust can undertake by allowing the funder to carry out any activities apart from those that have been prescribed in regulations as restricted activities. The intention seems to be to introduce more flexible funding requirements, but specifying the activities in which the scheme funder cannot engage is cumbersome. There would be a risk of certain activities being missed out, and specifying restricted activities could have unintended consequence, despite perfectly good intentions.
We have tried in the Government amendments to create flexibility in what we believe is a better way, but to achieve broadly the same outcomes as amendments 26, 34 and 35. I therefore urge hon. Members not to press the amendments.
It is amazing the amount of consensus that we are managing to achieve today, but I still return to duplication. The Minister is saying that measures will be in place through regulation to ensure that we do not have the duplication I am concerned about. It all boils down to these invisible regulations.
I am grateful to the Minister for providing clarity on the areas that will be covered by the consultation on the future regulations. The industry is concerned that they are a considerable time off. He said it is not long until 2018, but the cliché is that a week is a long time in politics. It is important to send clear signals to the industry, particularly to those who are likely to be or could have been compelled to have the additional administrative burden on them, to make it clear to them that this will not be required because they should be able to read much of that in the document that goes out for consultation.
Amendment made: 4, in clause 11, page 7, line 20, leave out subsection (6) and insert—
‘( ) The first regulations that are made under subsection (3A) are subject to affirmative resolution procedure.
( ) Any subsequent regulations under subsection (3A), and regulations under subsection (4), are subject to negative resolution procedure.”.—
This amendment makes provision about the Parliamentary procedure for the new regulation-making power provided for in amendment 3. The power will be subject to the affirmative procedure when first exercised, and to the negative procedure on any subsequent exercise.