Capital Requirements (Amendment) (EU Exit) Regulations 2019

Debate between Baroness Bowles of Berkhamsted and Baroness Kramer

Monday 7th October 2019 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, these capital requirements regulations and indeed the solvency II ones follow a well-trodden path in terms of allocation of powers from the EU to UK regulators, as relevant. By and large I have no problem with that, apart from the fact that it occurs to me that this might be one of the very few occasions on which there would have been a possibility—I will save noble Lords by not indulging in it—to debate in this Chamber some very important things about bank resolution and bailing. For such important things following the financial crisis not to return, shall we say, with more frequency to this place is not the way it should be with our largest industry.

I shall give an interesting bit of history about the particular requirements here. Country-by-country reporting was inserted in CRD, as is mentioned in the Explanatory Memorandum. We had been told how damaging such revelations would be to the banks, but nevertheless I found a way to get country-by-country reporting included so that if there were proof of damage, the Commission could come in and stop that provision from coming into force. And—guess what?—that provision was never exercised. So it is just a question of being persistent. Of course, I had hoped that country-by-country reporting would extend still further into other areas, but I was not the person in charge of those negotiations.

A lot of the substance of the capital requirements regulations 2019 now relates to minimum requirements and eligible liabilities—the so-called MREL—that banks must hold so that in resolution they can both recapitalise themselves and hopefully proceed as a new bank or make funds available for resolution. Under those rules, as the Minister said, there are ways in which assets and liabilities from within the EU receive preferential treatment. They receive, if you like, better valuations, but those priorities will go when we are no longer in the EU, which will mean higher provisioning. One assumes that a reciprocal thing will happen at the EU end so that it will no longer be giving favourable treatment to UK assets and liabilities.

The Bank of England is proposing to postpone those changes. I do not necessarily object to that, but some of the changes in terms of how the MREL is to be held within subsidiaries merit a little more examination. That is because I have been trying to work out in my own head, and I tried to explain this to the Minister in the Tea Room, I am afraid rather badly, what actually happens to the group when the MREL additional provision is waived. We could have a situation where, because we are giving a kind of transitional relief in the UK to a subsidiary of a UK business, but corresponding relief is not given on the other side of the Channel to a UK bank with a significant EU subsidiary, although we are not going to be asking the EU bank to find more MREL, the EU could be asking for that to happen.

What would happen to the UK group and its MREL when a greater amount of it is going to be allocated to the subsidiary that is in the EU? One thing that could happen is that it just uses up some of the spare MREL in the group. But, realistically, if there is no change happening at the UK end to increase the required MREL, that means that there is now more MREL backing what happens in the EU on resolution than what happens in the UK on resolution.

It may be that this is very minor or technical, because many of these changes are still being phased in, and I strongly suspect that the period in which we are not going to impose it will be covered, at least in part, by the fact that there is this transformation. I suppose it boils down to this bottom-line question: can we be sure that there is not an additional risk being imported to the UK end of things in resolution?

I noted that the response to the Secondary Legislation Scrutiny Committee’s second question seems to make it look as if these things are irrelevant for large groups where they base things on internal models, because they make up or compute their own risk. I would like to know whether that is the case and whether this is therefore yet another occasion when the smaller organisations will find that their costs are going up and the larger organisations will find that theirs are not.

The other point is that if we do not have equivalence provisions with existing third countries with which the EU has equivalence decisions—if we have not remade those equivalence decisions—a similar kind of change of treatment will come about. Do we have all those equivalence decisions under way or queued up, ready to happen at the relevant point?

I will switch now to risk transformation and solvency II; I have very little to say on that. It seems right that a UK special-purpose vehicle has the same rules no matter from which country it is going to receive assets. I do not think I believe in the notion that you give better treatment in any particular circumstance. Giving shoddy treatment if the assets are coming in from one country, better treatment if they are coming in from another and different treatment again if it was entirely UK-based would be a way to get a bad reputation, so that seems to be a highly sensible outcome. No doubt the other way around is also true: our insurers and reinsurers are likewise not able to transfer assets into any kind of what one might term a less rigorously regulated special-purpose vehicle.

[Baroness Kramer (LD)]

My Lords, I will be very brief. We on these Benches are obviously not going to oppose either of these SIs. We understand why they have been produced in such a hurry. Like my colleague, I really have no issue with the risk transformation and Solvency II SI. It genuinely seems to be simply technical and not to raise any non-technical questions.

I have two sets of questions about the capital requirements regulations, some of them picking up on my noble friend’s comments. The first is a democratic deficit comment. Reading this, it looks as though the European Banking Authority and European Securities and Markets Authority, which would have been supervisors of many of these functions within the European Union, have quite a strong accountability relationship with the European Parliament. In the process of transfer, initially to Treasury and then on to the FRA and FCA, that is lost. It looks as if we now have a series of fundamental and important decisions and issues removed from the purview of any democratic body at all. Can the Minister comment on that? Frankly, it is an underlying problem with quite a few of the SIs that we have seen and the kind of changes they make.

My second set of issues—around trying to get to the bottom of the impact—has been well described by my noble friend, so I will not go through it in detail. The problem with the impact assessments is that they do not really tell us what happens to the industry, just the admin cost of making a change. I share my noble friend’s concern that one of the costs involved would be making it more expensive to do business in financial services than it has been, and it therefore being advantageous for financial services companies to move that business out of the UK to the EU. That seems a rather awkward and pointless way to set up future arrangements.

Securitisation (Amendment) (EU Exit) Regulations 2019

Debate between Baroness Bowles of Berkhamsted and Baroness Kramer

Monday 25th February 2019 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interests, as set out in the register, as a director of London Stock Exchange plc and of Prime Collateralised Securities (PCS) Europe ASBL, which is the Belgian not-for-profit parent company of third-party verification entities. I have no comments on the usual way in which the onshoring has been done, switching to the regulators being UK rather than EU ones, or the way in which infrastructure is dealt with in that.

However, one thing on securitisation caught my eye. Sometimes what is not there, or has been crossed out, is more interesting than what remains. I noted that there was some removal of draft regulatory standard criteria in Article 6.7(a) and (b) of the EU regulation, covering,

“the modalities for retaining risk … including the fulfilment through a synthetic or contingent form of retention”,

and measurement of the level of risk retention. I can fully understand why it might not be desired to go into those, or have them dangling as an invitation for people to lobby. It may make no difference, because those were just examples; they could perhaps be brought in again. However, I was curious about why they had been specifically deleted, or has something else which I have missed taken care of it?

Article 45, regarding a feasibility report on a simple, transparent and standard synthetic securitisation and the subsequent action relating to it, is also omitted. I can see that, in the case of Article 45, the report date—2 July 2019—is close, but I would have thought that there were ways other than deletion to retain the policy that one investigates synthetic securitisation. The deletion of synthetic criteria from both the list and the article makes me question whether a policy decision has already been taken not to have synthetics within STS at all in the UK in future. I can understand that some might wish that to be the case, but this instrument is not the place to make such a policy decision. Is there some other explanation? I see no reason why the criteria for binding technical standards, in Article 6.7(a) and (b), should be removed nor why we could not have some kind of report, even at a later date.

[Baroness Kramer (LD)]

My Lords, I will focus briefly on the second of the two statutory instruments. I need help from the Minister, because I am struggling to understand the consequences of this, and I am looking specifically at STS recognition. The Minister will understand that achieving classification as an STS is advantageous because it is very likely to lead to preferential capital treatment. That is very important to banking institutions, which obviously want to keep their capital requirements as low as possible. At the moment, to qualify for STS classification, all the parties to an STS securitisation have to be located within the EU. If I understand the change that flows from this statutory instrument, if we were to leave without a deal, the regime we would move into says that in the UK an STS can be recognised provided that just one of the relevant players is located in the EU—most likely the sponsor. I raise this issue because it sounds as though securitisations in the EU and in all third countries now become available for classification as an STS.

I raise that concern because we are all very aware that the United States has gone back to its old tricks in mortgage lending, and asset-backed paper, backed by US mortgages, is once more beginning to raise some fairly significant issues of concern. We have been protected from that to some degree by the STS regime, which requires that all relevant players are within the EU. If I understand this correctly, that protection is now removed, and since third countries can now get STS classification and therefore preferential capital treatment, we increase the risk or the attraction quite possibly—or rather, quite likely—to UK institutions to once again start playing in that environment of US mortgage-backed securities, where we already know there is incipient trouble; I hope it is genuinely incipient, but some people are using much stronger language than that. I would therefore like the Minister to explain that.

The other issue on which I had a question was under exposures to national promotional banks. At the moment, national promotional banks located in the EU, again, are eligible to be provided with preferential treatment. It would therefore encourage a financial institution to invest in those national promotional institutions because if it lends to them, it faces a lower capital requirement. What is the situation that will fall out of the picture, according to the Explanatory Memorandum? It seems to be KfW, which is the German state-owned development bank. A UK investor who is lending money to KfW would no longer get that preference as it calculated its required capital ratios.

To me, this is the equivalent of “have gun, shoot foot”. KfW is a major player in funding small businesses in the UK. It has sat alongside the European Investment Fund and the European Investment Bank in putting significant blocs of long-term patient capital into large-scale infrastructure in the UK. I know that we have the British Investment Bank, but it is minuscule compared to the EIB, the EIF and KfW, and nothing I have heard from government suggests a scale-up to anywhere like the same dimensions. Why, then, would we, in a situation like this, try to discourage KfW from looking at opportunities to put its money into projects in the UK, and especially into that much-needed arena of small business? I find it slightly perverse but that is one of the things that this SI apparently intends to achieve. As I said, I am very fond of the British Investment Bank but, boy, does it have a long way to go before it can possibly replace those other institutions. Surely we should be encouraging KFW—we cannot do anything about the EIF or the EIB because of European rules—to keep it as a player.

Uncertificated Securities (Amendment and EU Exit) Regulations 2019

Debate between Baroness Bowles of Berkhamsted and Baroness Kramer

Monday 25th February 2019 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interest, as in the register, as a director of London Stock Exchange plc. I am glad that we are debating these two instruments together, because they seem to go together and to form a continuum. Indeed, in some ways it is rather strange. The first says that it would not be appropriate to give the Bank of England powers pre Brexit, but then in the second the powers are being given to the Bank of England. That arises largely because the uncertified securities regulations are largely about transposing EU legislation under the European Communities Act.

I too was interested in the consultation done in 2015 and noted that there seemed to be variably one, two or three comments on various sections. That certainly determined me to step up my rate of response to consultations. The report says that changes have been made, but it leaves you having to compare the before and after. All that was getting a bit too much on a sunny Sunday, as the noble Lord, Lord Tunnicliffe, said. What struck me particularly was the explanation on page 6 of the Explanatory Memorandum to the uncertified securities regulations, which said that,

“the Treasury is taking a proportionate approach to implementing Article 49(1)”.

Given that they are regulations, and you cannot change what is in the regulation done by the EU, I am curious as to what this more proportionate approach entails. Does it imply that the first draft had been gold-plated in some way? What was in and has been taken out? I did not find a great deal of guidance in the documents.

My next comment is a very general one. In both of these statutory instruments, and in particular in the second one dealing with exchanges and so forth, there is a large number of changes to the Financial Services and Markets Act. As we have discussed at some length before, that is not up to date on legislation.gov.uk— although, of course, it does give you a list of the things you might want to go and explore, to see if you can work out what an up-to-date version might be, or you may be thrust into the hands of one of the commercial organisations that will do that for you. However, by the time we have ploughed through all 60 statutory instruments that we are told we have to deal with, and then whatever other number we may get regarding corrections and re-workings—some of which are coming along now—FSMA will be even more incomprehensible on the legislation website, and so too will be any sensible comparison of how EU legislation has been retained with regard to the EU originals.

That might be relevant. If we are ever trying to argue for equivalence, the first thing we will be asked to do is to show it. Page 3 of the Explanatory Memorandum for the investment exchanges SI names six other SIs involved in the onshoring of the Securities Financing Transactions Regulation—so one regulation goes to seven SIs, each of which further redistributes powers and requirements over a range of other instruments. As I have said, we are also getting into second-order corrections and additions, with further SIs winging their way through the system.

It is not my idea of a lawful democracy for laws to be so obscure and inaccessible. It is actually quite a mockery to make a fuss about the accessibility and clarity of wording in individual documents while it remains impossible to find out their cumulative effect. I have long been shocked at this unwholesome situation, but Brexit is making it far worse. What is the Treasury going to do about it? Clearly, check tables have to be used in the Treasury. I am coming to the view that we are reaching a stage at which Parliament should refuse to amend law that is not available in an up-to-date format. At the very least, could the Treasury share the various schedules that point out what has been put where, so that those of us who are expected to scrutinise this do not have to spend an awful lot of time getting frustrated as we try to work out the true current state of the law? If we cannot do it, and we are responsible for it, how is the ordinary citizen supposed to know what is the law, when ignorance is no defence?

[Baroness Kramer (LD)]

My Lords, I concur with all the comments made by my colleagues on these Benches. I want to raise again the issue that I picked up in relation to the earlier statutory instrument: namely, the responsibility or duty to exchange information between the UK regulators and the EU regulators. As far as I am concerned, this gets even worse in these two statutory instruments. I will not comment much on the first statutory instrument because, to me, it is a combination of in-flight and onshoring, and I can see why it is essential. Obviously, I am also not going to object to the second statutory instrument.

However, I want to draw the House’s attention to the significance of regulating CCPs. Following the crash of 2008, the G20—quite appropriately, most of us think—realised that to underpin financial stability in the future it would be necessary to require that derivatives be cleared through central counterparties rather than just exchanged between institutions, because in the financial crash it was impossible to work out who owed money to whom, and that caused much of the system to freeze up and undermined liquidity. But everyone has also recognised that, by running all derivative contracts through a limited number of central counterparties, we are cumulating risk in one location. A mistake by a CCP in understanding a risk, in requiring margins and in recognising the creditworthiness of various players has potentially huge consequences because so much is now gathered in the one location—it has become absolutely critical.

Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019

Debate between Baroness Bowles of Berkhamsted and Baroness Kramer

Monday 11th February 2019 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I thank the noble Lord, Lord Bates, for his introduction. Just in case, I will declare my interest as a director of the London Stock Exchange Group plc; obviously, this would not affect the exchange, but I guess that it could be relevant to some of our competitors. Perhaps it would have been useful if we could have had one of those flow diagrams like the ones you make when you are trying to create your algorithm, to see the way through this. I will try to do that in my own little way, but it will have to be with words.

It seems that any passporting firm that provides services at the moment can continue by going into the temporary permissions regime, and then it can either become authorised or can bounce out of that regime because it will not go for a permanent authorisation; that has been contained mainly in things that we have dealt with previously. When we come to this provision, which is quite useful, those that are not intended to continue to be authorised indefinitely can either go into the supervised run-off, which does what it says on the tin in that they continue to be supervised here, or they can go into the contractual run-off, which relies on their home member state because they do not have an entity here. So you go into the supervised one when there is a branch here and you go into the contractual one if you do not have a branch here. That is clear.

However, I wonder what is going on when you might start to yo-yo between one and the other. It says that you can go from the SRO into the CRO; I suppose I could understand that if the branch closed down, so that it was going to be doing it remotely—is that how it is envisaged? What would cause the regulator to move it from the SRO into the CRO? Obviously, if there is a branch and you are in a run-off, there may come a point at which you say, “Hey, I want to close this branch and disappear”—so that seems to be one reason why you might need it. I was not quite clear why you might want to go the other way, from the CRO into the SRO, if there is no entity here to regulate—I cannot see that a branch would be invented. I could not quite understand why one would go in that direction.

Then there seemed to be a carve-out of some of the more important organisations, such as fund managers, trustees and depositories, and I can understand that they have to go into the temporary permissions regime—I agree with that. We are then probably dealing here on the markets side with smaller organisations. However, I was not quite sure how long they could be hanging around for. It says that it could be five years after entry into the regime; then it says that that is whether they enter on exit day or enter after having been in the TPR. So if they have been in the TPR, which is a year but which can keep on being extended, is there an end stop? Could some of these be hanging around for about 10 years, if the TPR was extended a few times and then they went into the SRO and the CRO for another five years? That seems a long time; I would have thought that five years for the combination might have been enough.

I was thinking that when of course I got to the parts such as those on the trade repositories and CCPs, where the PRA is in charge. There it is a much stricter regime, and quite rightly so, because you are looking here at market infrastructure and potentially bigger effects. However, there it will be a non-extendable period of one year or, in the second scenario, if they have been in the temporary permissions previously, the recognition may be adjusted—but, again, it will be no longer than one year. So it looks like they have been thinking around the problem I have related with regard to the market side of things. So that was in sharp contrast. My only concern was for how long as a maximum an organisation could be in the TPR and then in one of the run-off situations, because it does not make that clear.

Apart from that, I have no particular comment, and obviously it seems to be a very sensible provision to have made for the benefit of the stability of business that is going on in the UK. It would be very welcome if we knew that there was reciprocity in the rest of the EU for this, and it would be even better if we did not have to do it at all—but I suppose it is making the best of things in the circumstances.

[Baroness Kramer (LD)]

My Lords, I have just one quick question to follow on from the comments of my colleague, who is so much better versed in this than me. It struck me that we seem to have one timetable proposed by the FCA and a different one proposed by the PRA, without an awful lot of logic as to why one takes one approach and the other takes another. Are these two regulators working completely independently and sending over their various paragraphs that then get incorporated into the statutory instrument, or is there some coherent framework? If the regulators are not working together, what can we do to make sure that they will? It will be complicated enough for business without trying to work out which regulator is thinking which way. I would assume—I do not know—that some entities find that they face both regulators. Why the difference under the new rules that each regulator is bringing forward?

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Baroness Bowles of Berkhamsted and Baroness Kramer

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Baroness Kramer]

I thought that the noble Lord described naked short selling, which I thought I just defined. Anyway, I am nervous about the idea of policies such as this. There will be enormous pressure to use this opportunity, where the Treasury alone is the decision-maker, basically to loosen the regulatory structure that we have in the UK. That issue is a fundamental one for Parliament.

I would say to the noble Lord, Lord Hodgson, who talked about the need to find the appropriate place and that it is good that we can have those discussions with the Treasury, to have them with Parliament because there is another side to the argument. One reason why the UK been spectacularly successful as a financial centre is because the regulatory environment in which it functions is considered by many to be a global gold standard. If the noble Lord goes to countries such as China, India or other places, the level of trust and respect in financial institutions that are framed within those EU parameters—he could say it is foolish or sensible—is very high. It annoys the United States to heaven and beyond because so often it has loosened its regulatory standards but has not seen the business shift out of the EU into the US.

If you talk to companies, part of that reason is the reputational issue. For many companies, to be able to turn to clients and say, “I operate in the gold standard regulatory environment which means that you can trust me and what I do”, is so key to the future of their business that clients will reply, “If there is a significant loosening of standards, it might in the short term increase my profits but in the long term it will damage my regular relationship with my client base and I will need to move to the place that carries that gold standard kitemark”. Losing the kitemark is significant. That is something that this House and the other House should consider and should not be simply left to a conversation between the industry and the Treasury. It backs up our whole argument that this Bill, by transferring all those decisions simply to statutory instruments, is running into very dangerous territory.

[Baroness Bowles of Berkhamsted]

My Lords, a couple of interesting points have been made in the context of this amendment. As it reads, it looks reasonably acceptable as we do not want gold-plating, which could potentially happen. I echo that the Commission has been particularly good at dealing with smaller companies and businesses. My experience is that that has not always been reflected in the UK when the dispensations have been a matter for the member state. On more than one occasion, I have written to regulators and others about that.

One of the points was about asymmetric effects and the fact that when we are no longer a member state the law will bear down on us when we replicate it, or nearly replicate it, in a different way from when we were a member state. It is not only in financial services legislation that this could potentially happen. It happens with contractual obligations. When we replicate Rome I and Rome II, if the other party is in, say, New York, the penalty for breach of contract will be different in the UK from what it would be in France because we no longer tick the member state box. It essentially means that the higher New York penalty will apply rather than it being limited.

I sit on one of the secondary legislation scrutiny committees, and there have been various occasions when asymmetries have come up. There have sometimes been attempts to balance them, but sometimes not. It depends. These judgments about asymmetries already appear to be going on under the withdrawal Act. From the ones that I have seen, by and large it has not looked as though we could have dealt with them differently, but the issue is worth investigating. To say that the Treasury should do what it can for small businesses is a good thing, whether or not we say that we should not be put in a worse competitive position. Our markets are bigger and, because we have bigger global markets, we may have to regulate in a way that looks stronger rather than weaker. There may be other ways that it does not suit the specificities. I would be a little worried about “no worse competitive position” taken to its extreme, but in the general sense it is possibly more acceptable.

Sanctions and Anti-Money Laundering Bill [HL]

Debate between Baroness Bowles of Berkhamsted and Baroness Kramer

Committee: 4th sitting (Hansard): House of Lords
Tuesday 12th December 2017 Lords Chamber

[Baroness Bowles of Berkhamsted]

My Lords, Amendment 77, which is in my name and that of my noble friend Lady Kramer, takes your Lordships again to the issues of the Ahmed case. The amendment would delete the first three subsections of Clause 47, which repeal the Terrorist Asset-Freezing etc Act 2010, so would stop that Act being revoked. We do not agree with the repeal of that Act and its replacement by a general power to do anything, which is what the Bill does.

There have already been significant contributions from noble Lords, and especially noble and learned Lords, in respect of powers in Clauses 10, 11, 16 and 32 which reach into the same issues. If anything, the amendments proposed already have not gone far enough. The rights of appeal as well as review that are contained in the Terrorist Asset-Freezing etc Act 2010 should not be dispensed with.

The Supreme Court struck down the Treasury’s previous regime as an oppressive one that had devastating effects on families, which led to the 2010 Act. It looks like the Government are giving themselves power to do that again. We come back to worthy intentions, but the safeguards must be there. Under the current law, the court hears appeals against designation decisions, not just reviews. That should be maintained.

This amendment revisits issues debated at the time of the 2010 Act, such as who decides questions of fact and the scope of error allowed to the administrative decision-maker. There will be noble and learned Lords who have a better grasp of the issues than me, and as I mentioned, we have already been around that loop in previous debates on other clauses. However, to me, it is a question of principle: to seek to increase power and simultaneously reduce defences is not acceptable, all the more so when there is no relevant change in circumstances or threats brought about by Brexit. It is no excuse to ravage what have previously been just defences. I beg to move.

[Baroness Kramer]

My Lords, I will speak briefly. I am no expert on the relevant legislation that is being repealed under this clause, but I have spoken to those who are, and the response I have had is one of shock. Legislation that went through both Houses of Parliament, with great care, debate, consideration and amendment, is now being swept away, to be replaced by a regulatory power, which, again, is not bounded in any way. It could be identical or it could be completely different, but it is not discussed or laid out anywhere in this legislation.

In the past we have talked primarily of powers that have come through a democratic process in Brussels: through the European Parliament’s scrutiny, consultation and voting processes, and through votes of the Council. In this case, we are talking about sweeping away, to be replaced by regulation, significant legislation that came through this Parliament in a democratic process. I do not understand, nor have I heard any explanation, why the Government are choosing to take this route.