Capital Requirements (Amendment) (EU Exit) Regulations 2019
Debate between Lord Bethell and Lord Tunnicliffe
Lord Bethell (Con)
I beg to move that the House considers the Capital Requirements (Amendment) (EU Exit) Regulations 2019 and the Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019.
Lord Tunnicliffe (Lab)
Perhaps I may help the Minister. I think he wants to move that they be approved. His speech has been prepared for a different venue.
Lord Bethell
I beg to move that they be approved.
As the House will be aware, the Government had previously made all the necessary legislation to ensure that in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the Article 50 process, new EU legislation has come into force and, under the European Union (Withdrawal) Act, it will form part of UK law at exit. Further deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit. The two instruments being considered today deal with two new pieces of EU legislation that have recently come into force.
The first instrument resolves deficiencies in the EU’s prudential regime for credit institutions and investment firms to take account of revisions the EU has recently made to the capital requirements regulation. This regime sets out how much capital institutions, such as banks and investment firms, need to hold. The CRR is a directly applicable EU regulation that has applied since 2013. An exit instrument correcting the deficiencies in retained law was laid and approved by Parliament in 2018. Earlier this year, the EU finalised a revised banking package, which included amendments to the CRR made by an amending instrument known as CRR2. This gives effect to some of the internationally agreed Basel reforms, which are the centrepiece of the post-crisis reforms aimed at making banking safer. Similar changes are expected in all G20 countries that follow the Basel guidelines.
Through the UK’s membership of the G20 and its Financial Stability Board, we have committed to the full, timely and consistent implementation of the Basel 3 reforms. Our deficiency fixes for CRR therefore need to be updated to take account of CRR2. There are three main areas where fixes are required: third country treatment, transfer of functions and updates to definitions.
Consistent with the approach taken in the 2018 exit instrument to amend the CRR, the regulations remove the preferential capital treatment given to the largest banks and investment firms in the EU 27 to reflect the fact that the EU and UK will treat each other as third countries in a no-deal scenario. In line with the approach that the Government are taking to all onshored financial services legislation, the instrument transfers a number of functions currently within the remit of EU authorities to the appropriate UK bodies. Functions such as the development of detailed technical rules on certain provisions of CRR will now be carried out by the Financial Conduct Authority, the Prudential Regulation Authority or the Bank of England. Where CRR2 confers a delegated legislation-making power on the Commission, these powers are converted into regulation-making powers conferred on the Treasury. Use of those powers by the Treasury will need the approval of Parliament. Finally, CRR2 amended some definitions used in CRR. The instrument corrects those updated definitions so that they can operate in a UK-only context.
The Treasury, financial regulators and industry agree that it is critical to have deficiency fixes in place by exit day for these new CRR provisions. Without them, there will be considerable legal uncertainty around the capital requirements that apply to banks and investment firms, particularly those that apply to global, systemically important banks. The powers of our regulators to supervise and enforce capital requirements would also be in doubt, increasing the risk of financial instability.
I now turn to the second financial services instrument we are considering today. In January this year, the Solvency 2 and Insurance (Amendment, etc) (EU Exit) Regulations were approved by Parliament. Those regulations addressed deficiencies in Solvency II as it will form part of UK law at exit. Since then, revisions by the EU to the Solvency II delegated regulation have updated aspects of the approach to setting insolvency requirements for insurance funds, including the simplification of capital calculations and greater alignment of capital requirements across insurance and banking legislation. These revisions took effect on 8 July 2019 and will form part of UK law after exit. The substance of the revisions will not result in deficiencies after exit, and the updated provisions will continue to operate in the UK as they do now.
Customs Safety and Security Procedures (EU Exit) (No. 2) Regulations 2019
Debate between Lord Bethell and Lord Tunnicliffe
Lord Bethell
The noble Lord makes a very fair point, but I reassure him that this impact assessment is not solely on this SI and is not an effort to try to mislead the Chamber. It is the overall HMRC impact assessment that covers, I believe, duties and the impact of all these measures. Its publication today is an effort to get it out as quickly as possible, and it is coincidental to the fact that we are discussing this specific SI. It is the updating of a previous impact assessment which is, I believe, more than six months old and has been available on the website for some time. If I can provide some clarification on where it can be found, I would be happy to share it. It refers to all the measures contained in this SI.
Lastly, the noble Lord, Lord Purvis, asked why we are using the urgent procedure under the EU withdrawal Act after giving assurances that we would not do so. The truth is that the number of times we have used the urgent procedure is very low indeed—minimal, even. I pay tribute to officials at HMRC and the Treasury for getting through a huge amount of work to get the legislative frameworks in place to prepare for a potential no-deal Brexit. On the eve of prorogation, when certain clocks on SIs that were laid before the House are ticking down, it made sense to use the urgent procedure to make sure that the request of industry and HMRC could be reassuringly executed so in this instance we decided to do that. This has been a really valuable debate—
Lord Tunnicliffe
I hate to be picky, but I asked only one substantive question, which is whether the French have to agree to any of this.
Lord Bethell
The noble Lord asked a very good question. I apologise for not putting it at the top of the list because it is absolutely right. No. This is a matter for the UK. France and other EU member states will have their own requirements for safety and security which UK businesses will have to comply with if entering or leaving those countries. No waiver from them is necessary as this is purely domestic law. I hope that that answers the question clearly.
Lord Bethell
The noble Lord puts it very well. The truth is that, in order to execute the SI before us, we do not require EU permission, which I think was the substance of the noble Lord’s initial question.
Lord Tunnicliffe
My question is on very much the same point. We are creating this SI, and I entirely accept that it is within domestic law to create a frictionless border, but if at the other side of the border there is a piece of EU bureaucracy—I must call it that rather than French bureaucracy—then the exercise becomes a bit pointless.
Lord Bethell
My Lords, in this Chamber we can execute only what is within the realms of our legislative ability. These are the measures that the industry and HMRC have sought from us. Negotiations with the EU to create the right kind of border will take place in the future. What we are trying to do here is to put in place whatever we can do as a country to have the best possible framework for our importers and exporters.
Lord Tunnicliffe
Perhaps the Minister might like to reflect on this conversation and see whether any of his colleagues could add some colour to that answer. There are quite a lot of deals relating to no-deal situations—I believe the EU calls them bonus deals—and I would be grateful, if there is further information, if he could write to us both.