Date laid: 5 September 2018
Parliamentary procedure: affirmative
It is clearly important to ensure that, in a “no-deal scenario” for the UK’s exit from the EU, there is minimal disruption to the UK’s financial services sector when firms lose their authorisation based on the EEA passport and seek instead to be authorised by the UK’s regulatory bodies, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). By providing for a “temporary permissions regime”, these draft Regulations seek to achieve that objective.
Information provided by HM Treasury (HMT) indicates the scale of the task that the PRA and FCA may face in dealing with applications for authorisation during that regime. The draft Regulations allow for the possibility that the period of the regime could be extended in the light of an assessment of progress by the regulatory bodies. We consider it sensible that the Government should be able to introduce such an extension: a decision to do so would be a matter of great interest to the House. Given the significance of any regulations to extend the temporary permissions regime, however, it may seem surprising that HMT has proposed that the negative, rather than the affirmative, procedure should apply. We wrote to the Economic Secretary to the Treasury on this point, and we are publishing his reply. The House may wish to press for a fuller justification of the choice of negative procedure than has so far been given.
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.The EEA financial services “passporting” system enables financial services firms authorised by the regulatory authorities in their home EEA member state to provide their services to customers in any other EEA member state without having to obtain authorisation from the other member states’ regulatory authorities. In the Explanatory Memorandum (EM) to these draft Regulations, HM Treasury (HMT) says that, after the UK leaves the EU on 29 March 2019, the use of the EEA financial services passport would not operate effectively without a negotiated agreement with the EU; and that, as a result, the thousands of EEA firms undertaking business in the UK via an EEA financial services passport would suddenly lose their authorisation to carry out regulated activities in the UK, with disruptive consequences.
2.The draft Regulations are intended to ensure that, in a “no-deal scenario”, there would be an orderly transition from the use of the EEA financial services passport to the requirement that EEA financial services firms that carry on regulated activities in the UK must be authorised by the UK’s competent authorities, namely, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The Regulations propose the creation of a “temporary permissions regime” whereby EEA firms currently operating in the UK via an EEA financial services passport are granted UK authorisation for a limited time until the PRA and the FCA determine their applications for UK authorisation. (The instrument also removes references in UK law to the provisions that implement the EEA financial services passport.)
3.To enter the regime, prior to exit day eligible firms will need to submit either an application for UK authorisation or a notification of their intent to enter the regime. Once in the regime, firms will be required to make an application within two years from exit day if they have not already done so. Firms in the regime will be treated as though they have UK authorisation. This will enable the PRA and the FCA to have the same supervisory powers over the firms as they would with any other UK-authorised firm. The scope of the activity a firm will be permitted to undertake will be limited to the scope of regulated activities they were permitted to carry on immediately before exit day under their passport.
4.In the EM, HMT says that, in line with the duration of the regime, the Regulations extend the deadlines by which the PRA and the FCA have to make a determination on an application for authorisation from EEA firms operating in the UK via a passport, to up to three years after exit day. In addition, the instrument provides HMT with the power to extend both the length of the regime and these deadlines, by no more than 12 months at a time, in certain circumstances. There is reference to this power in the Statement at Part 2 of the Annex to the EM (at paragraph 5.2): “The power is exercisable by statutory instrument subject to annulment in pursuance of a resolution of either House of Parliament. This is considered appropriate should it transpire that, given the number and complexity of applications, they cannot all be dealt with in time, and that this would result in detrimental effects on UK consumers, firms and financial markets.” The Regulations provide that HMT could use this power only after receiving an assessment of the need for an extension from the FCA and PRA at least six months before the end of the existing period.
5.We wrote to the Economic Secretary to the Treasury seeking further clarification of why the negative, rather than the affirmative, resolution procedure was being proposed for a statutory instrument that would extend the length of the regime. In his reply of 15 October (which we are publishing at Appendix 1), Mr Glen has said that the choice of procedure is appropriate since “the overall powers and purpose” will be scrutinised through these draft Regulations, and the negative procedure would be used only for an extension.
6.We obtained additional information from HMT about the level of applications anticipated, and the ability of the PRA and FCA to handle these; we are publishing the information at Appendix 2.
7.HMT has said that the PRA estimates it will receive approximately 160 applications for authorisation from EEA firms, many of them substantial and complex; and that this would be a significant increase by comparison with the PRA’s current experience of dealing with around a dozen applications for authorisation per year, normally from start-ups or relatively small firms. As regards the FCA, HMT has told us that, in the year to 31 March 2018, the FCA processed approximately 1,200 applications for authorisation from firms (excluding consumer credit); that applications from a proportion of the firms that passport into the UK would represent a significant increase; and that, for business planning purposes, the FCA is using an assumption of just under 1000 firms that may use the regime (in addition to the business as usual figure). HMT has said that it is content that the PRA and FCA are making adequate preparations to deal with these applications.
8.In writing to the Economic Secretary to the Treasury, we also asked about the reliability of these estimates. In his reply of 15 October, Mr Glen acknowledges that there is an unavoidable degree of uncertainty about them, but describes them as sensible working assumptions that will be kept under review.
9.We also asked Mr Glen about the position of UK firms operating elsewhere in the EEA after the UK has left the EU (albeit that this falls outside the scope of these Regulations). In his reply, the Minister refers to the implementation period which, if taken forward, would allow firms to continue to trade on the same terms as now until 31 December 2020, and also to the proposal that the UK Government have made for a new economic arrangement with the EU to manage regulatory change in the future. He acknowledges, however, that if there is no deal with the EU, unilateral action by the UK Government would not be able to influence the status of UK firms operating in the EEA.
10.It is clearly important to ensure that, in a “no-deal scenario”, there is minimal disruption to the UK’s financial services sector when firms lose their authorisation based on the EEA passport and seek instead to be authorised by the UK’s regulatory bodies, the PRA and FCA. By providing for a “temporary permissions regime”, these draft Regulations seek to achieve that objective. Information provided by HMT indicates the scale of the task that the PRA and FCA may face in dealing with applications for authorisation during that regime.
11.The draft Regulations allow for the possibility that the period of the regime could be extended in the light of an assessment of progress by the regulatory bodies. We consider it sensible that the Government should be able to introduce such an extension, and we think that a decision to do so would be a matter of great interest to the House. Given the significance of any regulations to extend the temporary permissions regime, however, we do not see it as self-evident that such an instrument should be subject to the negative, rather than the affirmative, procedure, as HMT has proposed. The Economic Secretary to the Treasury has stressed that HMT would be able to modify the time limits only if it considered it necessary to do so. While accepting that this would be the case, we take the view that the House might well wish to debate such a necessity, and that it may also wish to press for a fuller justification of the choice of negative procedure than has so far been given.