Clause 26 is a core element of the overseas funds regime, the equivalence regime for money market funds. As I am sure a number of colleagues know, money market funds are a type of investment fund that invests in liquid assets such as cash, Government bonds and corporate debt. They are considered to be a low-risk, short-term and high-liquidity investment. Many organisations in the UK, such as local authorities, use money market funds to invest their cash in the short term as an alternative to bank deposits, and the vast majority of money market funds currently available to UK investors are domiciled overseas. UK investors need continued access to those overseas money market funds to use for cash management purposes. Money market funds are subject to separate regulations for other types of funds, and the Government therefore believe it is necessary to have a separate equivalence regime for money market funds that allows the Government to consider the additional factors and regulations.
Clause 26, and the new article 4A equivalence regime that it creates, will ensure that overseas money market funds that wish to become recognised in the UK must be from a country or territory where the relevant regulations have equivalent effect to the MMF regulation in the UK. I therefore recommend that the clause stand part of the Bill.
We have met the capital requirements regulation, we have met undertakings for collective investment in transferable securities, and now we meet the money market funds regulation. I have a couple of questions for the Minister on this issue. First, new article 4A(2) of the money market funds regulation says that the Treasury must be satisfied that the requirements on money market funds
“have equivalent effect to the requirements imposed by this Regulation.”
The key phrase here is “have equivalent effect”. That is the yardstick by which judgments will be made. How will this be assessed? What exactly will the Treasury be looking for when it makes such an assessment? How are we judging equivalent effect?
Secondly, article 4A(4) says that when considering the revocation of equivalence,
“the Treasury may ask the FCA to prepare a report on the law and practice of the country” that is involved. That harks back to what I said a moment ago. Will preparing reports on the law and practice involved be a new task for the FCA? The Bill states only that the Government “may” ask the FCA, but I would have thought that if the Treasury were to consider the revocation of one of the equivalence recognitions, it would be pretty essential that the FCA be involved in that.
Thirdly, there is nothing in new article 4A that requires the UK to continuously monitor the law and practice of other countries once equivalence has been granted. That is important, because we grant the equivalence recognition on the basis of a view at the time that a country’s regulations have equivalent effect. However, how can we guarantee that there might not then be a process of regulatory or deregulatory change in the country that had been deemed equivalent, with consequential risks for UK consumers if—to put it in lay terms—the rules become a lot more lax in that country? Really, I am asking how this will all be monitored again in the future, and I would be grateful if the Minister has some comments on that.
I thank the right hon. Gentleman for those questions. Essentially, there are two parts. The first is about how the assessment will be made. The UK is committed to what we describe—I have said it before—as an outcome-based approach to equivalence. That is based on the principles of FSMA, which means acknowledging how different regulatory practices can combine to achieve the same outcomes, as opposed to the prescriptive rule-by-rule-based approach that our friends in the EU have often preferred. We would not expect to see identical line-by-line regulations.
The OFR does not require countries to have those exact rules and regulations, but they must have laws and practices that have an equivalent effect in terms of the outcomes achieved. Obviously, there is considerable expertise involved in evaluating that and a particular group of people who are capable of doing that within the FCA. We believe that that outcomes-based equivalence can provide a high level of consumer protection while also allowing the UK to maintain a competitive market for overseas funds.
The second part of the right hon. Gentleman’s question addressed the issue of future evolution and divergence in standards, and how that would be monitored. The monitoring would be conducted in line with the equivalence guidance document that the Government published on