Clause 24 - Collective investment schemes authorised in approved countries

Financial Services Bill – in a Public Bill Committee at 3:30 pm on 26 November 2020.

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Question proposed, That the clause stand part of the Bill.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

The clause introduces the new overseas funds regime, which delivers on the Government’s commitment to introduce a simpler way for large numbers of investment funds from other countries to be marketed to retail investors, including the general public. The OFR will promote openness to overseas markets, allowing the UK to offer broad market access to investment funds from other countries. It will also allow consumers to benefit from the widest possible choice of funds, while maintaining existing levels of investor protection.

The new regime could provide a more efficient way of allowing large numbers of investment funds from the EEA to market to retail investors on a more permanent basis. Many EEA funds are marketed into the UK through the EU’s passporting regime, which will end after the transition period. Although the Government have introduced a temporary marketing permissions regime to allow existing EEA funds to continue marketing after the transition period, these funds will need to apply for permission to market on a more permanent basis. If the OFR were not legislated for, the funds would have to apply for recognition under the existing regime; that regime allows overseas funds to be marketed to the general public, but it requires an assessment of each individual fund. Establishing the OFR could therefore provide a more permanent basis for these EEA funds to continue marketing in the UK, provided that the EEA member states are found equivalent. It will also allow for the possibility of funds in other countries gaining easier access to the UK if they meet the criteria set out in the schedule. The new regime has been welcomed by the UK’s asset management industry, and the majority of consultation respondents were highly supportive.

I will now detail how clause 24 introduces the new OFR. The clause adds to the legal definition of a recognised scheme, so that it includes funds recognised under the OFR. That will allow the funds to market to the general public in the UK. The clause also introduces schedule 9 to the Bill, which comprises the main operational elements of the OFR and any minor and consequential amendments needed to ensure the new regime is fully functional. Compared with the current assessment of individual funds, the OFR enables the Treasury to make equivalence determinations which allow specified categories of funds from other countries and territories to be marketed in the UK. Therefore, the OFR has the potential to promote the interconnectedness of financial markets and consumer choice, to provide a more appropriate basis for recognising the large number of EEA funds currently marketing through the temporary marketing permissions regime, and to support bilateral agreements with other countries.

The clause is necessary to ensure that the OFR is inserted into the relevant legislation and can fulfil its potential. I recommend that it stand part of the Bill.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

I thank the Minister for his explanation. As he said, this clause, schedule 9 and clause 25 create an overseas fund regime for establishing the recognition of collective investment schemes based outside the UK. It is estimated that there are about 9,000 such schemes, which are often known as UCITS.

Up until now, those schemes have operated under the European Union’s passporting provisions, as have UK-based schemes operating in other countries; it has been a two-way street. It was not inevitable that passporting had to end when the UK left the EU. There were models of leaving that could have preserved those rights for UK-based firms. Indeed, there were votes in Parliament that sought to guarantee the continuation of passporting rights, but the Government set their face against that, so the first thing to say about these provisions is that the need for them has arisen out of choices made by the Government.

That there would be an adverse impact on services from this decision was acknowledged. It seems the dim and distant past now, but back in the halcyon days of 2018, we had something called the Chequers plan. That document was issued in July 2018 with—I noted when I had another look at it—a foreword from the current Foreign Secretary. The Minister could usefully remind him of that the next time he bumps into him. The document said that the Government

“acknowledges that there will be more barriers to the UK’s access to the EU market than is the case today.”

It went on to note that

“these arrangements will not replicate the EU’s passporting regimes”.

Let us look at what the document’s verdict was on equivalence, which is the thing that we are trying to achieve and in part legislate for today. This is the Government’s own verdict on the kind of regime in clauses 24 and 25 and schedule 9. It said:

“The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:…institutional dialogue…a mediated solution where equivalence is threatened by a divergence of rules”— we have discussed divergence of rules quite a lot in this Committee—

“or supervisory practices…sufficient tools for reciprocal supervisory cooperation…This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or…phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.”

That is not my verdict on equivalence; it is the Government’s verdict on equivalence when they published their own plan two years ago. So there we have it in the Government’s own words. That which they have been as yet unable to secure from the EU was dismissed as inadequate for the UK’s financial services sector even if we were able to secure it, which we have not, or at least not yet. The Government were aiming for something different, because it was deemed by them to be inadequate. They were aiming for

“a bilateral framework of treaty-based commitments to…ensure transparency and stability”,

because, as the document goes on to say, equivalence

“is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities”.

The Government wanted common principles, supervisory co-operation and

“a shared intention to avoid adopting regulations that produce divergent outcomes”.

Where did all that go? What happened to all of that? That was the aim. Why is it now the summit of the Government’s ambitions to achieve an outcome for the UK’s globally significant financial services sector that they dismissed as inadequate only two years ago? Why is this not at the heart of the UK-EU negotiations, in this crucial period? We have just over a month left—less, in real terms—to strike a deal. We must think of the significance of this sector to the UK economy and look at the employment, the investment and the tax revenue.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

The shadow Minister is making a powerful case, and I suspect he is about to move on to this point. In layman’s terms, the Government are asking financial companies, which represent hundreds of thousands of jobs in our country, to deal with more paperwork, more bureaucracy, more regulation and a tougher business environment in which to operate. Does the shadow Minister think that these major financial companies are going to adhere to that because they are rather fond of London, or might they make different commercial decisions because we have not secured the kind of regulation he is talking about as yet and move themselves to other parts of the European Union?

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

We will come on to their reaction. It is extraordinary that a sector this important has been relegated so far in the Government’s priorities. It is absolutely extraordinary that in these final days of renegotiation this is not front and centre. We just need to look at the employment, the investment and the tax revenues, and the role that the sector can play in global standards. Yet it has been relegated by the Government to an outcome that they admit is inferior and which, right now, they have not even been able to achieve.

All we can legislate for here is what we do. The fact that it is not front and centre of the negotiations right now speaks volumes about how far we have drifted from talk of achieving all the same benefits and securing a free trade zone from Iceland to the Urals—do hon. Members remember that? All of that has gone.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

Is my right hon. Friend therefore surprised or unsurprised that the Office for Budget Responsibility documents yesterday said that the cost of the end of the transition period will be an economy that is permanently 2% smaller?

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

That is the OBR’s estimate of the additional cost of a no-deal scenario, on top of the already long-term hit in the deal scenario. My hon. Friend is absolutely right to set that out.

The fact that this has happened slowly over the past couple of years, and maybe the fact that the industry has become weary of arguing about it—as, perhaps, have all of us—should not disguise the importance of what has happened. It is important to set that out and to put these clauses in perspective. The Government chose to relegate the importance of UK financial services industries in the Brexit negotiations. Having made that decision, they then relegated financial services even further by aiming for an outcome that they openly admitted was inadequate, and they have not even been able to achieve that outcome. That is the context of these clauses.

I have a few questions on the details of the regime being established by the clauses. First, how does this relate to the Chancellor’s statement on financial services on 9 November? The clause and schedule 9 set out a country-by-country approval system for equivalence decisions, but in his statement on 9 November the Chancellor said that he was publishing a set of equivalence decisions for the UK and the EEA member states—those member states who still have access to these passporting rights, even though they are not EU members. Clause 24, as I said, implies a country-by-country process. Does the Chancellor’s statement mean that in policy terms, the equivalent recognition has already been given to all EU and EEA member states? Is that for all the financial products that are produced to which such equivalence might apply—that is, those traded on a cross-border basis?

Secondly, the regime being established here still requires company and product registration with the FCA, as I understand it. Is this process of registration necessary for the 9,000 collective investment products from EU member states that already exist, or is it only for new products for firms based in those states? I know that the intention is to make this a fairly light administrative burden for the firms and the regulators. Can the Minister tell us a bit more about how that firm-by-firm registration process would work?

Thirdly, can the Minister confirm what the scope of these provisions is geographically? I appreciate that this regime is being established with EU countries in mind, but is it applicable to countries outside the EU, which may wish to sell investment products here, for example from the United States or elsewhere?

Fourthly, could the Minister say something about the permanence or otherwise of the equivalence status being granted? In what circumstances could the Treasury and the regulators withdraw that equivalence recognition? Given that this is a country-by-country system, would withdrawal operate at the level of a country or the individual firm, or could it operate on the basis of both the country and the individual firm?

My fifth question relates to the products themselves. Given that as things stand we are granting equivalence recognition to firms from EU countries, but we have not secured equivalent recognition for companies from this country, does this mean that there will be two types of uses marketed in the UK—one EU type and one British type—and will there be differences between those two products, given that one has Europe-wide recognition and the other does not?

Finally, could the Minister give us an update on when he expects to hear about reciprocal decisions in response to the Chancellor’s announcement of 9 November? I know the Minister is hoping for a positive response, and I am too. It is very much in the interest of the financial services sector to get this recognition, even though it is much less than we were aiming for at the beginning of the process. What is the relationship between the desire for equivalence and all the powers of divergence that we put into the Bill? Is it not the case that there is a risk that the EU will watch to see how we use all these divergence powers on one directive after another before deciding about granting equivalence to UK firms?

In conclusion, I can understand why the Government are legislating for this regime. They want to minimise market disruption here in the UK. I can understand how doing it in this way makes things more manageable for our regulators, but no one should be in any doubt that this does not come anywhere near what it was claimed would be achieved for financial services at the start of this process. The fact that all of us are hoping for a positive response from the EU does not illustrate us taking back control; it is a graphic and, potentially, economically significant example of control being lost.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 3:45, 26 November 2020

I have one or two further questions about people who are invested in things for which equivalence is withdrawn. The Association of British Insurers said in its written evidence:

“While the regime states that investors can stay invested in funds if equivalence has been withdrawn, they do not to spell out the practicalities of the situation an existing investor may face if a fund they are invested in has been suspended, for example if additional money is invested after a fund suspension. For the regime to fully work for consumers, situations such as this need to be clarified.”

What happens to investors in those funds if equivalence is withdrawn? What information will they receive from the Government, from regulators or from anybody else if that happens, so that they know what they have to do in that scenario, if anything? That could affect many people and would be very complicated to unravel, so it would be useful to set out people’s obligations in those circumstances.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

We were treated to more of a Second Reading response there from the shadow Minister, with all that he said about the frustrations of the last three years. Having been Minister for three years under three Chancellors and seen the evolution in the nature of that negotiation, I have a lot of empathy with his analysis about the evolving nature of a negotiation, which is of course what happens.

I can tell the right hon. Gentleman that the whole issue of the importance of financial services has gripped me since 9 January 2018, when I came into the role, and he is absolutely right to say that it is a very important industry and that we must do all that we can to maximise opportunities for it. I very much regret where we are on what we thought would be a technical process of equivalence granting. We filled in 2,500 pages of forms over about 40 questionnaires by June last year and, self-evidently, we have been leaders in the regulation of financial services within the EU. We have not heard anything from the EU on the equivalence determinations, which is strange. We regard the EU as some of our most important trading partners, and we look forward to continuing a constructive dialogue.

The right hon. Gentleman raised a number of questions about the Chancellor’s statement, the registration process and the situation for jurisdictions beyond the EU, and I will address those. On the equivalence for UK firms, although the EU does not currently have an equivalence regime for the marketing of investment funds—we cannot speak for any future changes to the EU’s equivalence framework—the Government are introducing the new equivalence regime for overseas investment funds to market to UK retail investors, to allow our consumers to benefit from the widest possible choice of funds. We are doing that to support and preserve consumer choice for UK investors. Currently, about 9,000 EEA-domiciled funds use passporting to market to retail investors in the UK. That makes up a substantial proportion of the overseas funds that are on offer to UK investors. In comparison, about 2,600 UK-domiciled funds are available to UK investors, and UK funds do not commonly sell into the EU.

The geographic scope of the OFR could be used to find any jurisdiction equivalent, but a fund from another jurisdiction could be permissible even if the jurisdiction is not equivalent. That would use a different process—the existing process, which I think is provided for in section 272 of the Financial Services and Markets Act 2000. We hope and expect to refine that to align it with this process to remove any uncertainty.

The Chancellor’s announcement of 9 November, when we made 17 equivalence decisions, is separate to the OFR, which is a new equivalence regime that the UK is introducing for EEA funds. The withdrawal of equivalence can happen at the country level, but the FCA has powers to suspend or revoke the marketing permissions of individual funds. If funds from a country are found equivalent under the OFR, they will not need to go through the section 272 provision, so this will be a faster route.

The hon. Member for Glasgow Central asked what happens to investors if equivalence is withdrawn or a fund is suspended. Obviously equivalence is necessary to ensure that UK investors can assume at least equivalent investor protection to that of the UK. If the Government believe that that is no longer the case, it would be appropriate for the Treasury to act and to make that clear to potential existing investors by withdrawing equivalence.

We recognise the importance of clarity and stability regarding the potential withdrawal of equivalence, so withdrawing an equivalence determination will be undertaken in an orderly and controlled manner to ensure that investors are protected and businesses have time to adjust. In the event of equivalence being withdrawn, funds from the country or territory in question will no longer have recognised status and can no longer be marketed to the general public in the UK.

The Treasury does not envisage that investors will be forced to divest their investments in the fund, and the funds should continue to service them; however, the loss of recognition could make it more difficult for investors to continue investing in the fund.

For example, the loss of recognition might result in investment platforms no longer offering the fund on their platforms. The Bill also includes a power so that the Treasury can take steps to smooth the transition for funds to the existing regime if equivalence has been withdrawn.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I thank the Minister for that clarification. I am just trying to get my head around the practicality or how this would work. If equivalence is withdrawn, how do people who have money in the funds find out about it? Is there an obligation on the funds to tell them, or on the Government to ask the funds to tell them? Do the Government somehow contact these people, and what is the timeline of those things, should that occur?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

That procedure would depend on the particular breakdown of the fund and the scale of the problem. It would be for the regulator to work with the individual fund to demonstrate that, and to give clarity to consumers. It is difficult without a specific example to set that out, but the provision is there and the provisions are comprehensive in terms of being able to do that.

The right hon. Member for Wolverhampton South East asked about the relationship between equivalence and the divergence allowed for by the Bill. The Bill makes no assumptions about what the relationship between the UK and the EU will be in the area of financial services. That negotiation is ongoing. That is entirely consistent with the mutual findings of equivalence. It ensures that the right framework is in place for making equivalence decisions and for ensuring that any likely impact on existing equivalence decisions is taken into account when making rules in an area covered by the Bill.

I have tried to cover everything that has been raised. I am sure that I have not covered everything, but if I find anything substantive when I reflect on today’s proceedings, I will write to the right hon. Gentleman and make the letter available to the Committee.

Photo of Rupa Huq Rupa Huq Labour, Ealing Central and Acton

These letters are coming back quite quickly. The one from the other day is already here, so we look forward to any future ones.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.