Capital Requirements (Amendment) (EU Exit) Regulations 2019

Baroness Kramer Excerpts

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.