Forty Second Report Contents

Financial Services (Implementation of Legislation) Bill [HL]

1.This Bill, which had its Second Reading on 4 December, will provide the Treasury with power to implement and make changes to “in flight” files of EU financial services legislation. “In flight” files are pieces of European legislation that either have been adopted and do not yet apply or are currently in negotiation. In each case the date of application of this legislation is expected to be after 29 March 2019, the day on which the UK is expected to withdraw from the European Union, and therefore none of the pieces of legislation would constitute retained EU law by virtue of the European Union (Withdrawal) Act 2018 (“EUWA”).

2.The Treasury have provided a Delegated Powers Memorandum.1

The ‘no deal’ premise

3.The Bill is presented both in the Explanatory Notes and in the Delegated Powers Memorandum as if the powers it is conferring will only apply in a ‘no deal’ scenario. However, there is nothing on the face of the Bill to limit the powers so that they can only be exercised where no deal is reached in relation to the UK’s withdrawal from the EU. While it may well be that in practice the powers would not be capable of being exercised in a situation where agreement has been reached, because doing so would be incompatible with the terms of the agreement, this cannot be known for certain until the withdrawal agreement has been entered into.

4.The Committee is mindful of the recent report of the Lords Economic Affairs Select Committee (the EAC) entitled The Powers of HMRC: Treating Taxpayers Fairly.2 We acknowledge that that report concerns a subject quite different to that of the Bill. It raises, however, a point of general application about the breadth of powers conferred and their subsequent use. Referring to witnesses who included Malcolm Gammie QC and the Institute for Fiscal Studies Tax Law Reform Committee, the EAC commented that “broad, badly targeted legislation” was “unsatisfactory” because, amongst other things, it left “too much to HMRC discretion or to guidance”.3 This reaffirms a point to which the DPRRC attaches great significant and one made by the DPRRC in its report on the European Union (Withdrawal) Bill, namely that: “We judge powers not on how the Government say that they will use them but on how any Government might use them”.4

5.Furthermore, the assumption that the Bill will only apply in a ‘no deal’ scenario has led in our view to inconsistencies in the drafting of the Bill.

6.An important aspect of the Bill is that the powers it confers are time limited and will only be capable of being exercised until the end of a period of two years beginning with exit day. Coupled with this are the requirements on the Treasury to report on the exercise of the powers. Under clause 1(8) and (9) the Treasury must publish a first report before the end of April 2020 and a second report before the end of April 2021.

7.It is clear that the reporting periods are intended to reflect the two-year period after exit day. However, for this to work exit day would necessarily have to fall on 29 March 2019. While section 20(1) of the EUWA defines exit day as 29 March 2019 at 11pm, section 20(4) allows the time of exit day to be changed if the EU Treaties continue to apply to the UK after 29 March 2019 because a withdrawal agreement has been concluded.

8.In our view, the provisions fixing the period when the powers under clause 1 may be exercised, and the provisions governing reporting, should be consistent. We recommend, therefore, that if specific dates are to be used in the provisions on reporting, then the period fixing when the powers may be exercised should also be based on a specified date.

Clause 1—Power to implement EU financial services legislation

9.Clause 1(1) confers a power on the Treasury to make provision by regulations which corresponds or is similar to the EU financial services legislation referred to in clause 1(2), or which corresponds or is similar to any provision which might be made by a member State for the purposes of implementing that legislation.

10.The relevant legislation falls into the following categories:

11.The powers conferred by clause 1(1) are not limited to making provision which corresponds or is similar to the relevant EU financial services legislation. Clause 1(1)(b) also allows the Treasury to make any adjustments it considers appropriate to the relevant legislation, including (but not limited to) adjustments in connection with the withdrawal of the United Kingdom from the EU. This is therefore a broader power than that conferred by section 8 of the EUWA where the power to make modifications is limited to remedying deficiencies resulting from the UK’s withdrawal from the EU.

12.Regulations under clause 1(1) are subject to the affirmative resolution procedure in respect of all exercises of the power.

13.The Treasury explain that, as a member of the EU, the UK has primarily derived its financial services legislation from the EU. Although the EUWA has the effect of bringing into domestic law EU legislation which applies immediately before exit day, it does not have that effect for EU legislation which does not apply by that date. The purpose of the Bill is to address this gap in the legislative framework and to allow the Treasury to implement through regulations the specific pieces of EU financial services legislation identified in clause 1. It is stated that the list of EU financial services legislation in the Bill comprises “the key pieces of legislation without which there would be a risk to the reputation, global competitiveness and efficiency of the UK’s financial markets”.

14.The Treasury also explain why the powers are not limited to making provision which corresponds or is similar to that contained in the relevant EU legislation; but includes a broad power to make adjustments which is not limited to making adjustments in connection with the UK’s withdrawal from the EU. The Memorandum states:

“There will also be uncertainty as to how the negotiations around each in-flight file listed in the Schedule will conclude once the UK has exited the EU, and it is possible that the legislation might not accommodate for the specificities or interests of the UK market. A power is therefore needed to make adjustments to the legislation to fix any deficiencies and to ensure that it applies appropriately to UK markets.”5

15.We note that these reasons do not explain why the power is required in respect of all the EU legislation to which the powers relate. Instead, they are only relevant to those cases where the EU legislation is still in negotiation and therefore it is not possible to know what the final form of that legislation will be. The Memorandum does not explain why the power to make adjustments conferred by clause 1(1)(b) is required for the EU legislation referred to in clause 1(2) which has already been adopted and is already in its final form.

16.The power to make adjustments is a very broad one with no restrictions on what the modifications may relate to or the circumstances in which they may be made. In the absence of any explanation, we consider the power to be inappropriate in so far as it relates to EU legislation that has already been adopted. We recommend that the power should in that case be limited (by analogy with section 8 of the EUWA) to a power to remedy deficiencies arising from the UK’s withdrawal from the EU.

17.Clause 1(1) does not require the Treasury to implement the EU financial services legislation identified in clause 1(2) and the Schedule to the Bill. Instead, it confers on the Treasury a power to make provision corresponding or similar to the provisions or “any of the provisions” of the relevant EU financial services legislation. It is therefore a matter for the discretion of the Treasury as to whether a particular EU instrument is implemented. Even where the Treasury decides to implement a particular EU instrument, the Treasury has a choice as to which provisions of that legislation it implements. It is not under an obligation to implement all of its provisions. This aspect of the power is significant because the overall effect of the legislation might vary quite substantially depending on which provisions are implemented and which provisions are not.

18.The Treasury explain in the Delegated Powers Memorandum why they have adopted this approach.6 Again, that explanation is based on the fact that in many cases the legislation is still under negotiation and therefore it is critical that the UK has the power to choose only to implement those provisions that are necessary and beneficial for the UK.

19.We accept that there needs to be a discretion to determine whether to implement specific provisions of legislation, where that legislation is still under negotiation and not yet in its final form. However, we consider the position to be different where the legislation has already been adopted and is in its final form. In that case, it seems to us that the Treasury should have no such discretion since it should be possible for the Treasury to know now whether it is in the UK’s interests for particular provisions of that legislation to be implemented. We recommend, therefore, that specific provisions should only be identified in clause 1(2) if those provisions are necessarily going to be implemented in UK law.

2 Economic Affairs Committee, The Powers of HMRC: Treating Taxpayers Fairly (4th Report, Session 2017–19, HL Paper 242)

3 Ibid., para 127

4 Delegated Powers and Regulatory Reform Committee, European Union (Withdrawal) Bill (12th Report, Session 2017–19, HL Paper 73), para 23

6 Ibid.

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