Financial Services Bill

Baroness Fookes Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

I am aware that, once again, I have spoken at length, but I trust the Committee will agree that this is a crucial topic that should be considered in detail. I hope I have explained what the Treasury and the regulators are doing to tackle climate change and address green issues, and I hope it is apparent to the Committee that it is an ambitious programme of work. However, this is an area where we must continue to be ambitious, and I hope the noble Baroness, Lady Hayman, will forgive me if I do not allow myself to be drawn on the challenge that she issued at the conclusion of her remarks. I simply say that I have listened to the ideas that have been put forward, and I welcome noble Lords’ engagement on the issues that we have debated, which I am sure we will return to throughout our scrutiny of the Bill. On that basis, I ask noble Lords not to press their amendments.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received one request to speak after the Minister from the noble Baroness, Lady Bennett of Manor Castle, who I now call.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, I thank the Minister for his comprehensive answer, although I ask again, how can the Government justify having included climate change considerations in the then Pension Schemes Bill last year, but not in this far larger, more significant Bill in 2021?

I want to respond to what the Minister said: that there is no evidence that greener means prudentially safer. I hope I am quoting him accurately. I refer specifically to the fossil fuel companies that the noble Baroness, Lady Sheehan, mentioned earlier, as well as to mining companies with a substantial role in environmental destruction. As the UNEP report to which I referred earlier said, this is unlikely to continue to be tolerated on the international stage. Surely the Government are aware and are taking account of the Carbon Tracker Initiative, which is responsible for popularising the term carbon bubble, if not for inventing it. The excess of carbon beyond climate limits is termed unburnable carbon, some of which is owned by listed companies. This has the financial implication of potentially creating stranded assets and destroying significant shareholder value.

The Carbon Tracker Initiative says that valuations tend to be based on near-term cash flows, which are less likely to be affected by climate-related factors. However, exposure varies, and some companies will be in a far worse position than others, as the demand for fossil fuels and the ability to burn them reduces. Surely, this is a potential concern and a risk that the greening of companies can tackle.

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Amendments 22 and 23 not moved.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

We now come to the group beginning with Amendment 24.

Amendment 24

Moved by

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[Earl Howe (Con)]

My Lords, perhaps it will be helpful if I take as my starting point Clause 3, which enables the Treasury to revoke provisions in retained EU law to enable the PRA to implement the remaining Basel standards. As I discussed in an earlier debate, the UK Government are committed to the Basel prudential standards as a member of the G20. While a member of the EU, our adoption of the latest Basel standards was achieved through EU legislation. The capital requirements regulation implemented the previous set of Basel reforms in the EU and, therefore, in the UK. However, regulation is not static: it must continually evolve to mitigate emerging threats and respond to developments in the financial markets.

As I set out in earlier remarks, the most recent set of internationally agreed Basel standards now needs to be implemented in the UK. The capital requirements regulation, or CRR, forms part of retained EU law in the UK and therefore continues to form the basis of the UK’s prudential framework for credit institutions. In order to comply with the latest Basel standards, the CRR needs to be updated. The EU is updating its own standards through the second capital requirements regulation, CRR2. Rather than implementing the new provisions through detailed primary legislation to amend the retained CRR, Clause 3 gives the Treasury a power to revoke relevant provisions of the CRR that need to be updated in order to comply with the latest Basel standards. This then allows the PRA to make rules implementing the latest standards.

As I have already set out, the Government stand by the delegation of the responsibility for implementing those standards to the PRA but with an enhanced accountability framework. In that general context, and in response to the noble Lord, Lord Tunnicliffe, and for that matter the noble Baroness, Lady Bennett, I might usefully repeat something that I said in an earlier debate: the rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to make sure that the final rules are published ahead of the debate on the relevant statutory instruments, which have also been published in draft.

It is the PRA that has the technical expertise to implement these essential post-crisis reforms. This is a novel approach, so the Bill ensures that there are checks and balances in place. First, Clause 3 ensures that we transfer only some elements of the CRR to the PRA. The extent of the Treasury’s powers to delete will be confined to those areas of the CRR that are necessary to ensure that the UK upholds its international commitments. It is for the PRA to write the rules. The Treasury’s involvement is merely to enable the rules to be updated by deleting old rules that no longer meet international standards.

Secondly, the clause ensures that the deletions the Treasury makes take place only when it is clear that adequate provision has been made by the PRA to fill the space. Deletions will be subject to the draft affirmative procedure, providing the proper opportunity for scrutiny. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and PRA rules, which are critical to industry.

Furthermore, Clause 3 gives the Treasury power to make transitional and savings provisions to prevent firms facing cliff edges from the deletion of a provision in the UK CRR. This will allow the Treasury to save, for example, permissions to modify capital requirements that have already been granted to firms under the CRR and avoids the need for firms to reapply for those permissions under the new PRA rules.

Amendment 24 would remove the requirement on the Treasury to ensure the PRA’s rules “adequately replace” revoked parts of the CRR. It would replace this requirement with ensuring that the rules “replicate or otherwise reflect” them. I understand that the intention of this amendment is to probe the degree of flexibility allowed by the current drafting. The intention is not for the new PRA rules to completely mirror the CRR provisions that they will replace. The PRA rules will update the CRR provisions they replace to achieve compliance with the revised Basel standards, and the language of “adequately replaced by” is intended to allow for this.

The wording in the Bill— “adequately replaced”—is also phrased to ensure that the rules are written in a language appropriately tailored to the PRA’s rulebook, which is specifically for the UK sector, and that the regime remains coherent. The amendment replaces this with the word “replicated”, which suggests that the language of the EU CRR is copied over exactly into the rulebook. This may not be the most suitable language for the UK’s rulebook and may prevent the PRA making the necessary changes to ensure compliance with the latest Basel standards.

In response to the noble Baroness, Lady Bowles, the EU—as I am sure she will recognise with her immense experience—is an outlier in the extent to which it specifies these matters in the equivalent of primary legislation. The approach taken in the Bill will bring us more into line with other major financial centres. This means that the EU is used to assessing rules set in the equivalent of regulator rules.

Amendment 25 would bind the Treasury into setting out why it thinks it is appropriate for the rules not to be replaced before laying the relevant regulations before Parliament. Clause 5 already provides for the PRA to prepare a document setting out whether its rules correspond to the revoked provision and, if so, how. The Government’s view is that that should be the primary document to explain why a CRR provision is not being replaced to provide a coherent explanation. If that document does not reflect a revocation where the CRR rule is not being replaced, this can be explained by the Treasury in the Explanatory Notes accompanying the statutory instrument revoking the rules. The amendment is therefore unnecessary, and I hope noble Lords will feel able not to press it.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received no requests to speak after the Minister, so I call the noble Lord, Lord Tunnicliffe.

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[Baroness Penn (Con)]

My Lords, I suggest that this is a convenient moment to conclude our debate in Grand Committee today.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

That concludes the work of the Committee this afternoon. The Committee stands adjourned, and I remind Members to sanitise their desks and chairs before leaving the Room.

Committee adjourned at 7.13 pm.