Date laid: 22 June 2017
Parliamentary procedure: negative
Date laid: 23 June 2017
Parliamentary procedure: negative
Date laid: 23 June 2017
Parliamentary procedure: negative
These three sets of Regulations serve to implement the EU Fourth Money Laundering Directive, which gives effect to updated global standards for combating money laundering, terrorist financing and other threats to the international financial system. The instruments will have a significant impact: in all, over three and a half million businesses are covered by them. No figures on the likely cost of the legislation were included in the Explanatory Memorandum laid with SI 2017/692 and HM Treasury only published the final Impact Assessment (IA) on 7 July 2017, more than two weeks after the Regulations were laid. The IA shows that implementing the Regulations will give rise to a net cost to business of £5.2 million per year. We question what assessment has been made of the effectiveness and value for money of the bureaucratic process proposed.
The Regulations were laid either on 22 or 23 June and brought into force on 26 June, in order to meet the transposition date in the Directive of 26 June. HM Treasury has provided additional information about the timetable followed. The handling of these instruments, leads us to question the seriousness with which the Government view the process of scrutiny of secondary legislation. It cannot be acceptable that, when Departments face unforeseen delays in progressing secondary legislation, their default solution is to reduce the period available for Parliamentary scrutiny. We have written to the Minister and we shall pursue this with the Cabinet Office.
We draw these Regulations to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
1.These sets of Regulations serve to implement the EU Fourth Money Laundering Directive (“the 2015 Directive”), which, as stated by HM Treasury (HMT) in the Explanatory Memorandum (EM) to SI 2017/692, seeks to give effect to updated global standards which promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. HMT says that the UK Government’s objective, through transposing the 2015 Directive, is to make the financial system a hostile environment for illicit finance while minimising the burden on legitimate businesses.
2.HMT has laid the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692), with an EM and Transposition Note. In section 7 of the EM, HMT summarises the main features of the Regulations, dealing with scope, supervision and the risk-based approach, application of customer due diligence, reliance and record-keeping, beneficial ownership, supervision and registration, information and investigation, and enforcement. HMT says that over 100,000 businesses are covered by the Regulations, which apply to financial institutions, including money service businesses, and to those sectors that are seen as “gatekeepers” to the financial system including auditors, legal advisers, insolvency practitioners, external accountants, tax advisers, estate agents, casinos, high value dealers (HVDs) and trust or company service providers (TCSPs).
3.The Department for Business, Energy and Industrial Strategy (BEIS) has laid the Information about People with Significant Control (Amendment) Regulations 2017 (SI 2017/693), and also the Scottish Partnerships (Register of People with Significant Control) Regulations 2017 (SI 2017/694). In the EM to SI 2017/693, BEIS says that the Regulations make minor changes to, and extend the scope of, Part 21A of the Companies Act 2006 (“the 2006 Act”) which requires companies to keep a register of people with significant control over the company (a “PSC register”), its application to Limited Liability Partnerships, and the Register of People with Significant Control Regulations 2016, to bring the UK’s domestic regime into compliance with the Directive’s requirements (specifically Article 30). In the EM to SI 2017/694, BEIS says that the instrument implements aspects of Article 30 in relation to Scottish partnerships, applying a modified version of the regime in Part 21A of the 2006 Act to limited partnerships governed by the law of Scotland and to qualifying general partnerships governed by the law of Scotland, collectively known as “eligible Scottish Partnerships”. On 26 June of this year, Margot James, MP, Parliamentary Under Secretary of State at BEIS, made a Written Statement about these two sets of Regulations, as well as the draft, updated statutory guidance on the meaning of “significant influence or control” over companies, in the context of the register of people with significant control.
4.We are concerned that the provisions relating to people with significant control of a partnership do not, as drafted, provide sufficient clarity to those affected. The “person with significant control” test is set as someone with the right to receive 25% of the assets on winding up. In many partnership agreements it is not clear in advance what percentage of assets will be received by an individual partner. Many partnerships provide for the priority repayment of subscribed capital, often to the original partners, with the remaining surplus distributed in different proportions, sometimes prioritising newer younger partners. The percentage of the total assets received by each partner will therefore depend not only on the individual percentages but also on the relative balance between subscribed and retained capital.
5.Both HMT and BEIS describe the consultation processes that were followed in preparing the secondary legislation. HMT says that it carried out consultation on “Transposition of the Fourth Money Laundering Directive” over eight weeks from 15 September 2016. There were 186 responses from a cross-section of stakeholders which were broadly supportive of the overall policy objectives of the Regulations. A summary of consultation responses was published by HMT in March 2017, when it carried out a four-week consultation on the technical draft Regulations.
6.BEIS says that, in parallel, it published a separate public discussion paper in November 2016 on the approach to transposition of Article 30 for comment. In response to our queries, however, BEIS has said that, since the discussion paper focussed on the detailed implementation of the Directive, it took the view that a separate response document was unnecessary; and that the Written Statement, the two sets of Regulations and the guidance together set out the outcome to the feedback received to the discussion paper. We pointed out that in early July the relevant web-page for the discussion paper stated that BEIS was analysing feedback, and that it would “soon” be possible to download the outcome; BEIS has said that it will amend the web-page to point to the Statement, instruments and guidance.
7.There is no doubt that these instruments will have a significant impact. As noted above, HMT has said of SI 2017/692 that over 100,000 businesses are covered by the Regulations. In the EM to SI 2017/693, BEIS says that the new measures introduced by the instrument will affect some 3.6 million companies that are already within the scope of the PSC Register, and will bring a further 840 companies into scope; in the EM to SI 2017/694, BEIS says that the Regulations will affect 74,000 Scottish partnerships.
8.No figures on the likely cost of the legislation were included in the EM laid with SI 2017/692 as the Impact Assessment (IA) was awaiting an opinion from the Regulatory Policy Committee (a government-imposed clearance process). HMT only published the final IA on 7 July 2017, more than two weeks after the Regulations were laid. The IA shows that implementing the Regulations will give rise to a net cost to business of £5.2 million per year. We question what assessment has been made of the effectiveness and value for money of the bureaucratic process proposed, particularly as compliance costs are inevitably passed on to the customer.
9.The Government say that regulation 35 of SI 2017/692 will help to address concern about the behaviour of firms toward politically exposed persons (PEPs) and those close to them. Some financial institutions have taken a one-size-fits-all approach to PEPs, treating low-risk customers as though they posed high risks and asking them intrusive and disproportionate questions. To address this, Regulation 35(3) requires firms to assess the risk posed by each relevant customer on a case-by-case basis and tailor the enhanced measures they apply accordingly.
10.On 6 July, the Financial Conduct Authority (FCA) published detailed guidance to help firms differentiate between low- and high-risk PEPs and apply the right level of enhanced measures in each case. The FCA’s guidance states that UK PEPs should be treated as low risk, unless the firm has identified indicators of high risk that are not linked to that person’s status as a PEP.
11.The three sets of Regulations were laid either on 22 or 23 June and brought into force on 26 June. In the EM to SI 2017/692, HMT states that “the Regulations come into force in national law on 26 June as this is the transposition and implementation date in the Directive and FTR (Funds Transfer Regulation)”. Acknowledging that it is breaching the convention that 21 days are normally allowed between the laying of an instrument and its coming into force, HMT goes on to say that “due to the dissolution of Parliament for the General Election which was held on 8 June, and the need for new ministers to approve the Regulations it has not been possible to lay these Regulations any earlier”. BEIS refers to the need to meet the transposition deadline to explain its handling of the laying and bringing into force of SIs 2017/693 and 694.
12.We understand that the calling of the General Election in June of this year cannot have been foreseen when Departments started to plan implementation of the 2015 Directive. However, given that HMT closed its main consultation exercise in November 2016, the question arises of whether it could have moved sooner to finalise the Regulations than in April 2017 (after its technical consultation), which was in any case only two months before the transposition deadline.
13.We question the seriousness with which the Government view the process of scrutiny of secondary legislation. Presenting so significant an instrument as SI 2017/692 to Parliament without simultaneously providing a final IA suggests that the Government are rushing the preparation of such legislation. Leaving less than a week between laying Regulations and bringing them into force greatly inhibits the scope for effective Parliamentary scrutiny. It cannot be acceptable that, when Departments face unforeseen delays in progressing secondary legislation, the default solution to their timing difficulties is to reduce the period available for Parliamentary scrutiny. We have written to the Minister and we shall pursue this with the Cabinet Office.
1 2015/849/EU, and also the Funds Transfer Regulation (FTR): 2015/847/EU.
2 Developed by the Financial Action Task Force (FATF), an inter-governmental body whose objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. See:
3 SI 2016/339.
4 HCWS7: see
6 In the case of SI 2017/694, all but two of the regulations were brought into force on 26 June; regulations 4 and 81 are to come into force on 24 July.