Schedule 10 - Amendments of the Markets in Financial Instruments Regulation

Financial Services Bill – in a Public Bill Committee at 9:45 am on 1 December 2020.

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Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 9:45, 1 December 2020

I beg to move amendment 18, in schedule 10, page 164, line 7, leave out “services” and insert “investment services, or performing investment activities,”.

This amendment provides that the Treasury’s regulation-making power under new Article 48A of the Markets in Financial Instruments Regulation applies to third-country firms performing investment activities, as well as to third-country firms providing investment services.

The intention of this amendment is to make a correction to article 48A for the markets in financial instruments regulation by replacing the word “services” in line 7 of page 164 with

“investment services, or performing investment activities,”.

This will mean that the Treasury may impose requirements on overseas firms performing investment activities in the UK in addition to overseas firms providing investment services in the UK.

Amendment 18 agreed to.

Question proposed, That the schedule, as amended, be the Tenth schedule to the Bill.

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

Schedule 10 amends the retained Markets in Financial Instruments Regulation. This regulation will continue to have effect in the UK after the end of the transition period. In part, it regulates overseas firms that provide investment services and activities in the UK, following an equivalence determination, as I described in relation to clause 27.

Under MiFIR, investment firms in a jurisdiction the regime of which has been found to be equivalent can provide a specified range of services in the UK under a recognition regime. The amendments the Bill makes to MiFIR broadly reflect the changes that the EU introduced to its own overseas regime for investment firms where those changes make sense for the UK. These changes will ensure that we can assess the EU and treat EU firms seeking to operate in the UK in the way the EU will assess the UK and treat UK firms in the future.

Schedule 10 provides the FCA with a power to specify reporting requirements for overseas firms that register under the regime. As the expert regulator, the FCA is best placed to specify that level of detail. Schedule 10 also updates the assessment criteria for equivalence to reflect the latest changes in the UK’s prudential regimes, as updated by this Bill. Countries will be required to have provisions in place that are equivalent in effect in areas such as prudential rules, business conduct, market transparency and other areas. That means that overseas firms accessing UK markets will be subject to the same level of investor protection and prudential regulatory standards as that which we place on UK firms.

The process of equivalence is a dynamic one. Indeed, we need to ensure that equivalence can be monitored, not only now but in the future—that speaks to the point made earlier by the right hon. Member for Wolverhampton South East. That is why the FCA will be required to monitor the regulatory and supervisory developments and enforcement practices of an overseas country that has received an equivalence determination and report its findings to the Treasury. By doing that, we will be able to ensure that we can continue to protect UK consumers as much now as in the future.

Schedule 10 also enables the FCA to temporarily restrict or prohibit an overseas firm from accessing UK markets if the firm does not co-operate with the FCA. In some cases, the FCA may withdraw an overseas firm’s registration. These important tools need to be exercised carefully and, as such, schedule 10 also specifies the procedures that the FCA must follow when using them.

Finally, schedule 10 will enable the Treasury, where appropriate, to impose specific requirements on overseas firms that register under the MiFIR regime as part of the equivalence decision. That will allow the FCA to account for the specific nature of overseas firms providing services across borders to UK markets. The schedule therefore provides the Treasury and the FCA with the appropriate powers to ensure that the UK remains open to global investment, while upholding the highest standards of investor protection and ensuring the effective functioning of UK markets.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury) 10:00, 1 December 2020

I asked some questions about this matter in relation to clause 27, so I do not intend to speak again.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

The powers are necessary to prevent not only exploitation that might pose some systemic risks to the financial system, but catastrophic loss to UK investors due to rogue investors or investments. Regulators are reluctant to use the more draconian end of their powers, and there is little evidence that they actually go there.

Is the Minister satisfied that the practical effect of the changes will be that the FCA is determined to use those powers, if need be? It seems to be reluctant to go to the stage of closing firms down. That would be a huge decision that may involve considerable disruption. Is he convinced that the FCA has the resources, the aptitude and the determination to do that if necessary?

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

The hon. Lady makes a good point. This goes to the heart of the evolution in the FCA’s responsibilities in an environment where it is being asked to do things differently and to account to Parliament for its actions. The future regulatory framework discussions through the next six months will allow us to solidify what those responsibilities will be.

The hon. Lady is right to say that the FCA will be required to make significant judgments on regulatory and supervisory developments, enforcement practices and other relevant market developments in third countries. The Treasury will request reports from the FCA with regards to overseas jurisdictions. We will consider those reports and other sources of information and take appropriate action, which would involve reviewing and equivalence determination or withdrawing equivalence.

Resourcing is a matter for the FCA itself, which it reflects on and establishes a levy for. I have conversations every six weeks with the FCA’s chief executive and chairman, and such matters are under ongoing review. Clearly, in the light of these changes, the FCA will need to update its provision. The FCA has a new chief executive officer who is undertaking a significant transformation project. I welcome his appointment and his plans, but reviews will be ongoing, and I am confident that he and his organisation will rise to the occasion.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

I am sorry to press the Minister again, but this area is crucial to ensuring that our financial services industry is properly and appropriately regulated. We will be discussing crime, money laundering, and market abuse later today, I think, but the powers arranged against a regulator wanting to take drastic action, particularly in the form of disruption, trouble, lawyers, threats and all that, can mitigate decisive action. With Action Fraud and the failures in some of these areas, we have seen that even when criminal liability and offences are in the mix, rather than just regulatory offences, we do not seem to have developed a system that is as effective as it needs to be.

To what extent does the Economic Secretary think that the FCA’s use of levies to finance that activity is good enough given their volume and the drastic effects of some decisions, especially considering the funding of other regulators? Across the pond—we will increasingly have to look across the Atlantic—regulators are much better resourced than our own. Is he convinced that he has got the balance right for capacity and resources?

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

The hon. Lady is taking me further and further away from the Bill. Her core point is about the suitability and sufficiency of the FCA’s capability. The FCA has provision to take account of consumer and market conditions and intervene, and I am clear that it has the capacity and the experience to do that work. The broader economic crime challenges that she mentions are why the March Budget contained an additional £100 million economic crime levy to support existing public investment and levies.

These are an ongoing, challenging, evolving and changing set of risks across that market, with the application of new technology—I have mentioned cryptocurrencies—and new ways of doing business that mean that the nature of crime is also evolving. I would never be complacent about the capacity of the FCA, and I recognise that it needs constant review and refresh to ensure that it is aligned with the other agencies involved in monitoring and dealing with threats to market integrity.

Question put and agreed to.

Schedule 10, as amended, accordingly agreed to.