Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022

Lord Tunnicliffe Excerpts

Tuesday 5th July 2022 Lords Chamber

[Lord Teverson (LD)]

We on these Benches thank the Minister for her excellent and long explanation of this. Otherwise, we have no comment on this SI.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing these regulations. They build on the Financial Services Act, which was generally not contentious legislation. Arguments took place about the transparency of rule-making by the regulators, but the introduction of the investment firms prudential regime and several other changes were seen as sensible steps forward.

One suspects that the forthcoming financial services and markets Bill will be slightly more controversial. Much media speculation about the forthcoming Bill suggests that it will simply deregulate, rather than regulate in a smarter way. Our departure from the EU undoubtedly presents opportunities for our world-leading financial services sector. However, we must not put the stability of the sector at risk in the pursuit of relatively marginal gains. Many of the protections put in place after the 2008 global crisis were sensible. Financial institutions have become accustomed to them. They provide confidence to customers. When we see the Bill, I hope that they will not have been swept away. That would expose the Government and the public to unnecessary risk.

Turning back to the regulations before us today, I am pleased to say that we are generally supportive. They contain largely technical amendments to ensure that IFPR, Basel III bail-in procedures and securitisation regulations operate more effectively in the UK context. We have played a leading role in developing many of these policy frameworks at the international level, whether as an EU member state prior to our exit or as a member of other organisations and committees.

Can the Minister comment on how the Treasury and regulators will be assessing and reporting on the impact of the various changes once they have taken full effect? What, if any, role will there be for Parliament, beyond the day-to-day work of Select Committees, for example, as these impacts become apparent? Can she also comment on the anticipated timescale for the implementation of Basel III.1? We expect consultation on the final part of the framework shortly, but can she confirm whether it is the intention to implement reforms alongside international partners? If that is the case, what would happen if another key jurisdiction, such as the European Union, were to postpone its implementation date?

I turn to other areas covered by the regulations. Can the Minister comment on what work is being undertaken to assess the impact of current bail-in procedures and thresholds on mid-tier and challenger firms? UK Finance has called for changes to the threshold for smaller banks, as well as a sliding scale depending on institutions’ total assets. Is the Treasury looking at these suggestions in partnership with the regulators? Might we see something on this topic in the forthcoming primary legislation?

Finally, this statutory instrument corrects a number of deficiencies in retained EU law that were not identified during earlier tidying-up exercises. There is a consistent theme across different policy areas: departments prioritised changes to the retained law that were day-one critical, setting aside less fundamental tweaks until appropriate vehicles became available. Should we expect further corrections to retained EU law in future SIs, or is the Treasury confident that all deficiencies have now been captured? Have there been any practical issues for either the regulators or the financial institutions as a result of the failure to correct deficiencies in a more timely manner? How do these amendments fit into the Minister for Government Efficiency’s drive to repeal vast swathes of retained EU law?

In this field, many instruments contain essential technical information. They were not, as is often stated, forced upon us; rather, they came out of processes led by UK Ministers. With that in mind, can the Minister confirm whether the Treasury has been given any targets to reduce the volume of its retained EU law by the Cabinet Office? If so, what will that process look like?

[Baroness Penn (Con)]

I thank noble Lords for their contributions today and will address the points raised by the noble Lord, Lord Tunnicliffe, in his constructive speech.

The noble raised the forthcoming financial services and markets Bill. I will be absolutely clear that the Government are committed to maintaining high standards of regulation, while ensuring that rules are appropriately tailored to UK markets.

In assessing the two provisions this SI covers, the regulators have published a full cost-benefit analysis of the impact of their rules, which have applied from 1 January this year. It will be up to the PRA and FCA to consider whether any further tweaks or changes to the regimes are needed, now they are fully in force.

Parliament’s role has been to scrutinise the draft rules when they were published for consultation. Parliament is of course entitled to ask questions of the PRA and FCA in relation to the two prudential regimes.

In the future regulatory framework review consultation, the Government proposed measures setting out clearer requirements on when and how information should be provided to Parliament by regulators to support effective accountability and scrutiny. Once the reforms proposed in the FRF review are legislated for through the upcoming Bill, the measures will apply to these and future regimes. I am sure we will have much more discussion of the Government’s proposals when that Bill reaches this House.

With regards to the timescales for implementing the Basel 3.1 standards, as the noble Lord, Lord Tunnicliffe, mentioned, the PRA is expected to publish a consultation paper on its proposed implementation of the reforms in the fourth quarter of this year. That consultation will include a proposal for Basel 3.1 rules to take effect from 1 January 2025, which would align the UK’s implementation of the final set of reforms with the EU’s.

I recognise the noble Lord’s concerns around disjointed global timelines. International alignment will be critical to the effective implementation of Basel 3.1, and it is important that jurisdictions co-operate on this to ensure that disruption to firms is minimised and to maintain a level playing field. By proposing a timeline similar to the EU’s, the PRA has already signalled a willingness to align implementation with other major jurisdictions. The PRA can set its timeline only on the basis of what it knows at present. As more information becomes available, for example on the US or EU timelines, it can of course reconsider.

The noble Lord, Lord Tunnicliffe, mentioned the impact of current bail-in procedures on mid-tier and challenger banks. The Bank of England considered this as part of its review of the MREL framework last year and published its updated statement of policy in December. The Government are pleased that the Bank’s updates include a glide path that will provide more advanced certainty for firms, and a longer, more flexible transition period to meet MREL. I am also pleased to see the Bank is exploring how to improve depositors’ outcomes in insolvency and, subject to the outcomes of that work, considering whether it could significantly raise or remove the transactional accounts threshold.

As the noble Lord will be aware, the Bank has a set of statutory objectives and powers to ensure that resolution maintains critical banking services while protecting financial stability and public funds. The Treasury has worked closely with the Bank on its MREL review, and the Government are content that the Bank’s proposed changes to the framework for setting MREL ensure that the policy continues to provide appropriate protection for financial stability and public funds, while ensuring a proportionate approach to growing firms.