Draft Capital Requirements Regulation (amendment) regulations 2021

(Limited Text - Ministerial Extracts only)

Wednesday 15th September 2021 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Capital Requirements Regulation (Amendment) Regulations 2021.

It is a pleasure to serve under your chairmanship, Mrs Murray. The regulations, among other things, support the implementation of the Basel III standards in the United Kingdom. This is yet another statutory instrument that I bring to the Committee, and I am delighted to do so.

I want to begin by reminding the Committee of the background to this issue. After the financial crisis, the international community came together to rectify major deficiencies in financial regulation and created new banking standards, known as the Basel III accords. As a member of the G20 the UK is committed to implementing these standards, but now we have left the EU, we have the opportunity to do so in our own way, enabling our expert regulators to apply international standards in a way that is most fitting to the UK’s individual circumstances. The instrument therefore exercises the powers contained in section 3 of the Financial Services Act 2021, to revoke elements of the UK’s capital requirements—the CRR, or capital requirements regulation—so the Prudential Regulation Authority can update the current regime to account for the Basel III standards.

Let me turn to some of the detail. The Financial Services Act restricts the ability of Ministers to only revoking those parts of the CRR that need to be updated to reflect the new Basel standards, and anything that is connected to, or consequential to, those standards. When it makes CRR rules under the new regime, the PRA is subject to an accountability framework under which it must consider the impact of its rules on a number of areas. These are: the relative standing of the UK compared to other jurisdictions, lending to the real economy and the Basel standards themselves. In addition, the PRA must consult the Treasury on the potential impacts of any rule changes on equivalence.

The instrument also contains additional EU exit-related amendments to the CRR. It makes an amendment to article 497 of the CRR, allowing for the Treasury to extend a transitional provision that allows for certain foreign central counterparties, or CCPs, to retain temporary qualifying status. Qualifying status allows UK firms to have exposures to these CCPs without being subject to higher capital requirements. This amendment will allow for the transitional period to be extended by regulations one year at a time. These extensions are required as there may be non-UK CCPs that will be unable to receive qualifying status through recognition for a prolonged period. However, the Treasury still considers it beneficial that they retain qualifying status. The Treasury will keep these arrangements under review to ensure they are fit for purpose.

Additionally, under article 391 of the CRR, the Treasury may determine that an overseas jurisdiction applies prudential requirements to the same standard as those applied in the UK and grant it equivalence. Smaller UK banks in particular benefit from that article as it allows them to lend more as a single loan to overseas firms. However, the UK’s only equivalence decision in this area is with respect to EEA member states. That is because, at the end of the transition period, the EU had not made any equivalence decisions under the article and the European Banking Authority had issued guidance allowing EU firms, including those in the UK, to use equivalence decisions under a different article—107—as a proxy for article 391 equivalence. However, this is, in effect, regulatory guidance overruling legislation.

The Government and the UK’s regulators consider that guidance inappropriate and therefore do not intend to replicate it in the UK. It is also impractical to undertake the equivalence assessments in such short timescales. The Treasury is therefore, through this statutory instrument, using section 8 powers under the European Union (Withdrawal) Act 2018 to put in place transitional arrangements. In parallel, the Treasury will seek a legislative opportunity to streamline the system by linking the equivalence regime in article 391 to that in article 107, providing certainty to firms.

The Treasury has worked closely with the PRA in drafting the instrument. We also engaged with industry throughout the process, including through a public consultation. The Government have updated their approach in line with the points raised in the consultation.

I hope I have given Members a comprehensive overview of the measure, and I urge colleagues to join me in supporting the regulations. In short, the measure will enable the implementation of Basel III—regulation that is key to the UK’s international standing. In addition, it will iron out some of the wrinkles in existing EU regulation. Together, the proposals will give UK firms certainty, and therefore help them to flourish. I commend the regulations to the Committee.

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[John Glen]

I am grateful to the right hon. Gentleman, as ever, for his constructive scrutiny of the statutory instrument. He always provides succinct summaries of complex matters. They are often full of wisdom, and always courteous, and I am very happy to try to address the points that he made.

The right hon. Gentleman referred to the anxiety that exists in his mind concerning the Government’s intentions with respect to standards, competitiveness, what the PRA will be subject to and what we may wish to do to encourage it to succumb to such covert lobbying. As I have always tried to stress in our encounters, this Government wish to retain the highest possible standards. Of course, having regard to our situation in the global financial services industry will always be important, but we are united, in terms of the Treasury, the PRA and the FCA, on the need to hold to the highest international standards, which give us a baseline of resilience. As the right hon. Gentleman will know, the UK was extremely influential in both shaping the Basel accords and pushing for their implementation. We remain committed to their effective implementation.

As the right hon. Gentleman will know, as part of the Financial Services Act, the PRA is required to have regard to the effect of its rules on international standards, including Basel. As was demonstrated in the publicly available analysis, which I think was published in July, the PRA considers all its rules as achieving the same outcomes: a safe and sound prudential regime to the Basel standards and EU equivalent legislation.

The second issue that the right hon. Gentleman raised was around the CCPs and the transitional rollover concept. He asked about that provision. I would want to say to him that while a foreign firm or jurisdiction can express an interest in receiving equivalence or recognition, it will be for the Treasury to decide whether to initiate consideration of an EU equivalence decision for a foreign jurisdiction and the appropriate timescales. As with all equivalence decisions, the UK authorities will need to ensure that granting equivalence is compatible with the UK’s policy priorities, including those relating to the rule of law, international standards, human rights and efforts to combat money laundering.

Let me turn to the retention of that transitional status without, I think the right hon. Gentleman said, all the forms being processed. Letting that transition fall away might create disruption for the UK firms with exposures to the relevant CCPs. That is not something we would wish to have. The market access provided by qualifying central counterparty status is more limited than that provided by full recognition status, with QCCP firms unable to provide clearing services directly to UK clients. Therefore, it is appropriate that firms may continue to benefit from QCCP status while awaiting the result of their application for recognition.

On any Government intention to extend the transition indefinitely, that is not the case. The Treasury will keep those arrangements under review to ensure they are fit for purpose while a permanent solution is considered. Obviously, I am engaged in discussions with colleagues about legislation in the next Session.

May I conclude by reminding members of the Committee of the key purposes of the statutory instrument? The legislation revokes a number of provisions in the UK’s capital requirements regulations. By doing so, it will enable regulators to make rules in these areas reflecting Basel III international standards. The PRA has consulted on those rules, and in July it published a near-final version of the rules alongside an accompanying policy statement. That set out how the regulator had taken into account public policy factors set out in legislation.

I hope that the Committee has found today’s sitting informative, and that its members will join me in supporting the regulations, which I commend to the Committee.

Question put and agreed to.