Documents considered by the Committee on 9 May 2018 Contents

Meeting Summary

The Committee looks at the significance of EU proposals and decides whether to clear the document from scrutiny or withhold clearance and ask questions of the Government. The Committee also has the power to recommend documents for debate.

Brexit-related issues

The Committee is now looking at documents in the light of the UK decision to withdraw from the EU. Issues are explored in greater detail in report chapters and, where appropriate, in the summaries below. The Committee notes that in the current week the following issues and questions have arisen in documents or in correspondence with Ministers:


The European Citizens’ Initiative

The European Citizens’ Initiative (ECI) was introduced by the Lisbon Treaty and is intended to give EU citizens a direct say in shaping the laws that govern them. A 2011 Regulation sets out the procedures and conditions for implementing the ECI. The Commission considers that there is scope to clarify and simplify the existing rules to make ECIs more accessible for EU citizens and less burdensome for their organisers. Most of the changes proposed are designed to streamline the ECI process. The most eye-catching is giving 16-year olds the right to support an ECI (currently they have to be of voting age). The Government told the Committee in December that it broadly supported the changes proposed but alluded to “timing and implementation” issues connected with the UK’s exit negotiations. Since then, EU and UK negotiators have agreed a transition/implementation period which extends the application of EU law in the UK to 31 December 2020. In her latest update, the Minister for the Constitution (Chloe Smith) says that the ECI legislation will apply in the UK during a transition/implementation period but that UK nationals will not be able to take part as they will no longer be EU citizens from 30 March 2019. This is at odds with our understanding of the draft Withdrawal Agreement which provides that the ECI legislation will not apply during the transition/implementation period but makes clear that certain rights associated with EU citizenship will continue to apply until the end of 2020. The Minister is asked to explain this apparent contradiction, clarify the status of UK nationals during the transition/implementation period, and provide further information on the concept of “associated citizenship” mentioned in her letter.

Supervision of UK central counterparties after Brexit

The Committee has considered progress in the Government’s efforts to block EU proposals that would allow it to force relocation of UK-based central counterparties—a crucial part of the market infrastructure for trade in derivatives—to the EU after Brexit. The latest update from the Government shows that the UK has the support of Sweden and the US in opposing the proposals, but it appears likely the ‘location powers’ will appear in the legislation (which is due to be formally adopted in early 2019, after the Member States and the European Parliament have agreed on the definitive legal text). The Committee has drawn these developments to the attention of the Treasury Committee, and again expressed its concern over the apparent disconnect between the Government and the EU-27 over the scope and depth of any post-Brexit free trade agreement on financial services.

In June 2017, the European Commission presented proposals on EU regulatory oversight of central counterparties (CCPs) based outside the EU. CCPs are a crucial part of the market infrastructure for the trade in derivatives, which largely takes place in the UK. The proposals are driven by the perception that it would be unsafe for the EU to allow substantial volumes of CCP activity to take place outside of the EU’s legal framework (called EMIR) when the UK leaves the Single Market, In the most extreme cases, the proposed legislation could allow the EU to require a British CCP to relocate to an EU country or ban them from servicing EU-based counterparties to a derivatives transaction.

The Government has opposed these proposals, arguing that they would “risk fragmenting global derivatives markets”, which in turn would “increase the cost of trading and clearing, acting as a drag on growth and could discourage firms from hedging their risks using derivatives markets”. Instead, it has called for a new “regulatory and supervisory model” between the EU and the UK after the latter leaves the Single Market, which would preserve cross-border market access in the CCP industry on a more permanent basis without the need for the UK to continue applying EU legislation on CCPs (over which it will have no say after 29 March 2019).

The Committee has now published a Report on the latest information received from the Treasury about negotiations on the proposal, which indicates that some form of the new ‘location policy’ powers will be maintained in the final legislation despite opposition from the UK, Sweden and the US. The main unresolved issue, therefore, is the exact requirements that must be fulfilled before the location policy could be invoked against British (and other non-EU) CCPs. While the Government has welcomed some amendments to the proposals by the European Parliament’s Rapporteur, the Committee notes that those amendments are yet to receive any formal approval from the Parliament as a whole.

Finally, the Committee has considered the Government’s broader approach to the post-Brexit flow of financial services between the UK and the EU. This is based on mutual recognition of regulatory standards which, in the case of CCPs, would obviate the need for any forcible relocation of a clearinghouse from the UK to the EU because the two would agree their respective regulatory frameworks offered the same degree of financial stability. However, there has been no indication from the EU that it is willing to consider such an approach and as recently as 26 April Michel Barnier said that “the EU cannot accept mutual market access without the common safeguards that underpin it”, namely “EU rules [and] common EU supervision and enforcement tools”.

Not cleared from scrutiny; further information requested; drawn to the attention of the Exiting the EU and Treasury Committees

European Defence Industrial Development Programme

The Committee has considered an update from the Ministry of Defence on the new European Defence Industrial Development Programme (EDIDP), part of the new European Defence Fund. It will co-finance the development of prototypes for new military technology from the EU budget. The Government is keen to ensure the UK defence industry has the option of participating in projects financed by the Fund after Brexit, but it appears unlikely UK companies could receive any EU funding directly and the MOD would have no input into the governance of the Fund (i.e. its priorities and funding decisions). The Committee has drawn these developments to the attention of the Defence Committee.

Not cleared from scrutiny; further information requested; drawn to the attention of the Defence and Business, Energy and Industrial Strategy Committees

Energy Performance of Buildings

The Commission proposed this Directive in December 2016 with the aim of accelerating the cost-effective renovation of the existing building stock. The Committee considered the Government’s latest letter on this proposal, noting that the UK is largely content with the agreement but plans to abstain in the final vote on this proposal due to concerns about the introduction of a requirement for non-domestic buildings with large heating or air conditioning systems to have automation and control systems by 2025. Even though the requirement would apply only if it is economically and technically feasible, the Government considers that the requirement is not practical or proportionate. The Committee notes that the 20-month transposition period means that the UK will be required to transpose the legislation, but would be able—post-transition and subject to the outcome of negotiations on the future relationship—to amend the provision that the Government dislikes in advance of the 2025 deadline. As the proposal has now reached the end of the decision-making procedure and there are no outstanding issues, the Committee clears the proposal from scrutiny, while clarifying a number of matters. These include a request for the Minister to explain the decision to abstain rather than oppose.

Cleared from scrutiny; drawn to the attention of the Environment, Food and Rural Affairs Committee

Documents drawn to the attention of select committees:

(‘NC’ indicates document is ‘not cleared’ from scrutiny; ‘C’ indicates document is ‘cleared’)

Business, Energy and Industrial Strategy Committee: European Defence Industrial Development Programme (EDIDP) [Proposed Regulation (NC)]

Environment, Food and Rural Affairs Committee: Animal welfare and international competitiveness [Report (C)]

Exiting the European Union Committee: The European Citizens’ Initiative [Proposed Regulation (NC)]; Brexit: EU supervision of UK-based central counterparties [(a) Proposed Regulation (NC), (b) Recommendation (NC)]

Health and Social Care Committee: Workplace safety: amendments to the Carcinogens and Mutagens Directive (Phase II and Phase III) [(a) Proposed Directive (NC), (b) Proposed Directive (NC)]

Defence Committee: European Defence Industrial Development Programme (EDIDP) [Proposed Regulation (NC)]

Treasury Committee: The Law Applicable to Assignment of Claims in the Capital Markets [(a) Proposed Regulation (NC), (b) Communication (NC)]; Brexit: EU supervision of UK-based central counterparties [(a) Proposed Regulation (NC), (b) Recommendation (NC)]

Work and Pensions Committee: Workplace safety: amendments to the Carcinogens and Mutagens Directive (Phase II and Phase III) [(a) Proposed Directive (NC), (b) Proposed Directive (NC)]

Published: 15 May 2018