Retained EU Law (Revocation and Reform) Bill

Evidence from TheCityUK to the House of Commons Public Bill Committee 

(REULB29).

The Retained EU Law (Revocation and Reform) Bill 2022-23

Introduction  

1. TheCityUK welcomes the opportunity to respond to the House of Commons Public Bill Committee inquiry on the Retained EU Law (Revocation and Reform) Bill.  

Executive Summary

2. The financial and related professional services industry has a number of reservations about the appropriateness of this Bill in current circumstances, in terms of the overall need for it, opportunity costs, the risk of worsening the relationship with the EU, and the potential for increased burdens on business. At a minimum, a far longer sunset period for implementation should be allowed.

· Need: From the business point of view, while all legislation should be subject to regular review, an excessively hurried process, focusing only on adapting or restating law that is of EU origin, against a deadline that is bound to require a significant diversion of effort, at a speed that will militate against consultation, and with sunsetting as a default conclusion, creates a number of avoidable risks as it will potentially result in significant misplaced effort and the unnecessary creation of legal uncertainty.

· Opportunity costs: The Bill carries clear opportunity costs. The potential diversion of effort across the government, parliament, and business risks being at the expense of prioritising the delivery of the extensive package of reforms in the Financial Services and Markets Bill, as well as other reforms.

· Relations with the EU: Business is concerned for the UK’s relationship with the EU to become normalised, and that, while some UK divergence from EU law and practice is inevitable and may be beneficial in certain areas, the international trade situation generally means that this is not the time for exercises that could create unnecessary divergence of a kind at odds with the UK’s Level Playing Field (LPF) obligations under the UK-EU TCA.

· Burdens on business: A phased approach should be taken to retained EU law, over a planned timeline that industry and regulators have capacity to implement, and which gives market participants time to understand and adapt to the changes. Because of its complex relationship with the Financial Services and Markets Bill, the implementation of the Bill could lead to added burdens on business, legal uncertainty, with consequent damage to investor confidence.

· Recommendation: At a minimum, the Bill should be amended to allow for a far longer period for implementation without diversion of scarce resources. A sunset period running over several years would be appropriate.

TheCityUK

3. TheCityUK is the industry-led body representing UK-based financial and related professional services (FRPS). We are uniquely cross-sectoral, representing accountancy firms, advisory firms, asset managers, banks, consultancies, insurers, law firms and market infrastructure firms across all regions and nations of the UK. The industry contributes 12% of the UK’s total economic output and employs over 2.2 million people, with two thirds of these jobs outside London. It is one of the UK’s largest exporters and generates a trade surplus exceeding that of all other net exporting industries combined. It is also the largest taxpayer, and has the means to make a real difference to people in their daily lives, helping them save for the future, buy a home, invest in a business, protect against hazards, and manage risk. The firms comprising the industry are probably subject to more extensive regulation, including prudential regulation, than any other UK sector. Regulatory frameworks bearing on the industry have their origins in both UK law and EU law, and would be affected to a significant degree by the Bill, measures to implement it, and the pace at which such measures are taken.

The Bill

4. The Retained EU Law (Revocation and Reform) Bill (the REUL Bill) overhauls the constitutional architecture of retained EU law (REUL), so as to make it generally easier to revoke, modify or replace through secondary legislation. If, after the Bill’s enactment, nothing were done legislatively, a mass of REUL would fall away at the end of 2023, under the Bill’s "sunset" provisions. However, the Bill provides for various powers through which the government can preserve, restate, replicate, revoke, replace or update parts of REUL. This means that, where the powers are used, REUL will survive as "assimilated law", whether or not in an adapted form, provided that this can be done in a way that does not increase the regulatory burden. Clause 22(5) of the Bill also provides that the sunset provisions in Clause 1 of the Bill will not apply to anything referred to in Schedule 1 of the Financial Services and Markets (FSM) Bill 2022. This disapplies Clause 1 to a substantial list of retained EU financial services legislation and regulation, although aspects of the interaction of the two Bills could still prove problematic: for instance, under the FSM Bill, legislation covered by its Schedule 1 would continue to be interpreted by the courts in accordance with "retained" EU and domestic case law until that legislation is revoked and replaced. Under the REUL Bill, the courts are to be given greater freedom to depart from retained EU case law when interpreting that legislation, perhaps even before end 2023.

5. This submission does not seek to comment on the extent to which the Bill would empower the executives, rather than the legislatures, of the UK and devolved administrations to take decisions on REUL. Instead, it seeks to focus on the magnitude of the task envisaged under the Bill – the review, at speed, of many items of REUL (amounting to some 3,800 at the most recent count) – and to set out the business views of the financial and related professional services industry, on how far, in current circumstances, such a task is necessary or desirable.

Regulatory review, and criteria for undertaking it

6. The financial and related professional services industry is probably subject to more extensive regulation, including prudential regulation, than any other UK sector. Its regulation may derive UK legislation, from standards set internationally (by, for instance, the Basel Committee on Banking Supervision (BCBS)) or from EU measures taken during the UK’s membership of the EU. Quite frequently, UK and EU legislation and international standards are all involved. In common with business as a whole, the industry fully favours periodic review of all law, to ensure that it is up-to-date, fit for purpose, and aligned to social needs. But any such review process must prioritise those areas of the law where review is most needed. The criterion for prioritisation is far more likely to be the content of the legislation or regulation in question, rather than its form or its origin. The industry is strongly of the view that substantive need, rather than the form or origin of legislation, should be the criterion to be applied.

7. Regulatory change must be designed, drafted, and implemented robustly to deliver the desired outcomes and avoid unintended consequences. There is a limit to how much capacity the industry, regulators and government have to do this, and do it well. Therefore, an holistic approach must be taken to regulatory reform, to ensure that reforms that will have the greatest net benefit are prioritised, and that sufficient time is given to ensure effective implementation.

8. This is not to say that the industry does not appreciate the desirability of ironing out anomalies arising from REUL, particularly where these concern the direct effects of EU Treaties and Directives (which were previously given effect automatically under section 2(1) of the European Communities Act 1972), decisions of the Court of Justice of the European Union (CJEU) and UK domestic courts (where these concerned the meaning and effect of EU law and EU-derived domestic laws), and core principles informing the hierarchy and interpretation of laws of EU-origin (particularly the interaction between REUL and other domestic law). However, at a time of economic difficulty, when the focus needs to be on delivering a supply-side growth agenda, the industry sees no justification for diverting government time, parliamentary time, and business time, to a hurried review of hundreds of items of law, based simply on their form and origin rather than on carefully prioritised evidence-based benefits.

Opportunity costs

9. The Bill carries clear opportunity costs. The diversion of effort across the government, parliament, and business can only be at the expense of prioritising the delivery of the extensive package of reforms in the Financial Services and Markets Bill, as well as reforms on which broad consensus has been secured in the following areas:

· Basel 3.1

· The Solvency II review

· The Wholesale Markets Review (addressing MiFID2)

· Lord Hill’s review on reform of Capital Markets

· The Kalifa review on FinTech

· The Productive Finance Working Group

· Securitisation Regulation

· Pensions charge cap reform

· The Taxation of UK Funds review

· The Prospectus Regime

· The Independent Review of Ring-Fencing.

10. These reforms must be delivered in a well-considered way, in partnership with the industry, and as swiftly and smoothly as capacity allows. These changes will improve the UK’s regulatory framework for financial services over the medium to long term, positioning the UK to compete strongly in the rapidly evolving global market.

11. The government, industry and regulators have also invested a great deal of work over recent years in a holistic and strategic review of the entire UK regulatory framework, under the heading of the ‘Future Regulatory Framework’ (FRF). The FRF project seeks to combine both existing UK and retained EU regulation into a coherent, streamlined regulatory framework that will reduce complexity and business compliance costs. It is also taking the opportunity to reform and improve some elements of UK and retained EU regulation to support this goal. A sequenced approach should be taken to FRF, to maintain market stability and the integrity of infrastructure.

The review process envisaged under the Bill, and its risks

12. The process foreseen under the Bill envisages quickly reviewing all REUL with a view to either revoking or replacing it, against a deadline. The effort involved will be demanding, in terms of both government resources (i.e. high-quality civil service time) to review REUL, and of parliamentary time (if MPs are to take responsibility for reviewing and understanding the adaptations proposed, or for weighing the default case for revocation). Even if such pressures could be fully justified, the industry foresees the following risks:

· Resources: it is not for industry to estimate the civil service resources required. But there has been commentary that, in the Department for Business alone, some hundreds of civil servants will need to be diverted from other tasks to meet the deadline. It is for government and parliament to assess the numbers involved, and the justification for deploying them. Industry can only add that an exercise of this kind will require substantial amounts of business time, both in contributing to the process and in assessing the legislative outcomes and complying with them.

· Complexity: the REUL in question is not necessarily simple. It may represent an accretion over time, and an intersecting of EU law with UK domestic legislation. For the financial services industry there is, for instance, the interaction between the REUL Bill and the Financial Services & Markets (FSM) Bill. For example, the powers under the REUL Bill to revoke, restate and amend retained EU law overlap with, but in some cases go beyond, the corresponding powers under the FSM Bill in relation to financial services legislation (to take just one instance, the sunset mechanism in Clause 1 of the REUL Bill does not apply to the legislation referred to in Schedule 1 FSM Bill or to the UK regulators' rules (including the generally applicable requirements and directions of the Payment Systems Regulator). This submission is not the place itemise all such complexities. But they point to the risk, indeed likelihood, that a hurried review process will fall victim to errors, whether in adapting or revoking REUL.

· Consultation: it is normal good practice, in implementing or revising legislation, to consult stakeholders (indeed this is commonly highlighted as one of the attractions of the UK legal system). It is quite usual for a draft Statutory Instrument to be subject to a consultation period of 90 days. While ending some REUL may not require consultation (for instance if the REUL in question is patently inoperable following UK withdrawal from the EU), it is difficult to see how the process envisaged under the Bill, taking into account its extent and speed, can allow for the degree of consultation that would be normal and desirable. Nor does the industry believe that a lesser degree of consultation would be acceptable because REUL already enjoys a degree of familiarity: the degree of interaction between REUL and other legislation, and the variety of options for revoking, modifying, or replacing it, in whole or in part, all demand full consultation.

· Burdens on business: the Bill is designed to relieve burdens on business. It specifies that measures taken to revoke or adapt REUL must not increase the regulatory burden. At the same time, the Bill abolishes the obligation placed on regulatory authorities by the Small Business, Enterprise and Employment Act 2015 to make and publish a Business Impact Target assessment as a means of providing a wider focus for the reduction of regulatory burdens on business, ensure greater transparency on the impact of regulation on business, and provide greater incentives for regulators to deliver policies that better meet the needs of business. No details have yet been given of the replacement provision that the government is expected to propose.

For financial services, the Bill risks placing an increased burden on business, to the extent that the changes to the status of retained EU law under the REUL Bill may affect financial services legislation. This will emerge at the end of 2023 when financial services firms will need to evaluate the impact of the change in status of legislation covered by Schedule 1 of FSM Bill that will still be in force because it will not yet have been revoked. This will place additional and ongoing burdens on firms in relation to legislation that is otherwise planned to continue in force for some time. The UK’s reputation for stability, predictability, and competence has suffered as a consequence of the events of recent months. The Bill’s unnecessary creation of legal uncertainty is unlikely to rebuild confidence or deliver the clarity, certainty, and stability that international businesses and investors seek when making investment decisions.

· Wider effects of the process: the review process cannot be seen in isolation. The resultant changes in UK law could well have effects on, for instance the extent to which UK law is regarded as diverging from EU law. The financial and related professional services industry is concerned for the UK’s relationship with the EU to become normalised as quickly as practicable. Some UK divergence from EU law and practice may be inevitable and right in certain areas. But, given the strong headwinds facing UK trade and investment and the need for the UK to maintain the strongest trading relationship that it can with the EU (which continues to take about one-third of UK exports of financial services), this is not the time for exercises that could create gratuitous divergence of a kind at odds with the UK’s Level Playing Field (LPF) obligations under the UK-EU Trade and Cooperation Agreement (TCA) 2020.

Conclusion

13. The financial and professional services industry understands the reasons why this Bill came before parliament, particularly as regards the government’s desire for formal abolition, for UK domestic law purposes, of the principle of supremacy and other general principles of EU law after 2023. This submission leaves to others any arguments that there may be on the constitutional aspects of the Bill in terms of its bearing on the relative roles, in terms of delegated powers, of the UK legislatures as against those of UK ministers and devolved authorities. For the industry, the key concern is whether there is any justification for the speed at which a very complex task will need to be carried out under the Bill, the diversion of effort involved, and the risks of undesirable outcomes for want of the necessary time and consultation.

14. The industry would recommend that, at a minimum, the Bill should be amended to allow for a far longer sunset period for implementation, without diversion of scarce resources. A period running over several years would be appropriate for a task of the magnitude foreseen in the Bill, and the consultation that will be necessary if the task is to be performed effectively.

TheCityUK

8 November 2022