Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020

Baroness Penn Excerpts

Tuesday 10th November 2020 Lords Chamber

Moved by

[Baroness Penn]

That the draft Regulations laid before the House on 15 October be approved.

[Baroness Penn (Con)]

My Lords, the second bank recovery and resolution directive updates the EU’s bank resolution regime, which provides financial authorities with the powers to manage the failure of financial institutions in an orderly way. This protects depositors and maintains financial stability while limiting risks to public funds. Under the terms of the withdrawal agreement, the UK has a legal obligation to transpose the directive by 28 December 2020. This instrument fulfils that obligation.

In transposing the directive, the Government have been guided by the commitment to maintain prudential soundness, alongside other important regulatory outcomes such as consumer protection and proportionality, when leaving the EU. We have also considered concerns raised by industry on elements of the directive that could pose risks to financial stability and to consumers, to tailor the approach for the UK market. As a result, we are not transposing the provisions in the directive that do not need to be complied with by firms until after the end of the transition period—in particular, an article that revises the framework for a minimum requirement for own funds and eligible liabilities, referred to hereafter as MREL, across the EU. The UK already has in place an MREL framework in line with international standards.

We are also sunsetting certain provisions so that they cease to have effect in the UK after the end of the transition period, as well as including provisions to ensure that the elements that remain in effect after the end of the transition period continue to operate effectively. The sunsetted provisions will cease to have effect in the UK from 11 pm on 31 December. In doing so, we have taken an approach that meets our legal obligations but also ensures that the UK’s resolution regime remains robust and is in line with international standards. We have engaged with industry and stakeholders to help explain exactly what this means for them.

I turn to the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020. This instrument, along with the approximately 60 other financial services instruments that the Treasury has introduced under the European Union (Withdrawal) Act 2018, is vital in ensuring that the UK has a fully effective legal and regulatory financial services regime at the end of the transition period. It achieves this by amending and revoking aspects of retained EU law and related UK domestic law, making a small number of necessary clarifications and a minor correction to earlier financial services EU exit instruments, and providing sufficient supervisory powers for the financial services regulators to effectively supervise firms during and after the end of the transition period.

I turn to the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020. The fifth capital requirements directive, known as CRD5, continues the EU’s implementation of the internationally agreed Basel standards. These standards strengthen and develop international prudential regulation, which helps ensure the safety and soundness of financial institutions. This SI will transpose that directive into UK law, as required under the terms of the withdrawal agreement. It will also ensure that the legislation transposing it continues to operate effectively in the UK after the end of the transition period.

As with previous capital requirements directives, the Government will delegate most of the responsibility for implementation to the independent Prudential Regulation Authority—the PRA—which has the requisite technical knowledge and skills to ensure effective and proportionate implementation. This instrument includes only provisions legislatively necessary to ensure that the PRA can implement CRD5. This instrument is in line with requirements of article 21a of CRD5 for holding companies in scope to apply for supervisory approval. The framework and scope of the approvals regime will be administered by the PRA, and the instrument gives the regulator appropriate tools to ensure compliance with it.

The instrument also makes changes to the macro- prudential toolkit, preserving the current level of macroprudential flexibility. The most important of these is enabling the PRA to apply an other systemically important institutions buffer and a systemic risk buffer to certain institutions to address particular financial stability risks. 

 Although the capital requirements directives were created with banks in mind, they also apply to investment firms. However, the risks faced by investment firms are different from those faced by banks. Therefore, this instrument excludes non-systemic investment firms from the scope of CRD5. Investment firms will remain subject to the existing prudential framework until the Financial Conduct Authority introduces the prudential regime for investment firms, following Royal Assent of the Financial Services Bill.

Finally, I turn to the Bearer Certificates (Collective Investment Schemes) Regulations 2020. The UK has been at the forefront of international changes that are transforming tax authorities’ ability to work across borders to tackle emergency international tax risks. Bearer shares or certificates are anonymous, infinitely transferable and an easy means of facilitating illicit activity such as tax evasion or money laundering. This is why UK companies have been prohibited from issuing them since 2015. The OECD’s global forum noted in its 2018 peer review report that, although the UK had “mostly addressed” its 2013 recommendations concerning the prohibition of bearer shares,

“a small cohort of entities and arrangements … are still able to issue bearer shares or equivalent instruments.”

The report went on to recommend that the UK abolish bearer shares. This instrument implements that recommendation and prohibits the remaining entities capable of issuing bearer shares or certificates—which include certain types of collective investment schemes—from doing so. It also makes arrangements for the conversion or cancellation of any existing bearer shares. This brings those remaining collective investment schemes, including open-ended investment companies formed before 26 June 2017 and all unit trusts not authorised by the Financial Conduct Authority, in line with companies formed under the Companies Act 2006, which are prohibited from issuing bearer shares by the Small Business, Enterprise and Employment Act 2015. Complying with the global forum’s recommendation will help make sure the UK maintains its position at the forefront of the international community, continuing to set standards that help improve offshore tax compliance and fund our vital public services.

In summary, the Government believe that these instruments are necessary and vital for the UK’s financial services regulatory architecture, and I hope noble Lords will join me in supporting the regulations. I beg to move.

[The Deputy Speaker (Lord Haskel) (Lab)]

My Lords, the noble Baroness, Lady Bowles, has withdrawn, so I call the noble Lord, Lord Mann.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank noble Lords for their thoughtful contributions to this debate, including the words of welcome from the noble Lord, Lord Tunnicliffe, for what may be many debates on such issues. I shall take the points raised in turn.

The noble Lord, Lord Mann, is right about the importance of a smooth transition for our financial services sector. He is also right to pay tribute to the excellent work done by officials and regulators to ensure this. He asked about derivatives. These SIs do not address that issue directly, but I reassure him that the UK has already put measures in place to avoid disruption to cleared derivatives markets. The Chancellor announced yesterday that we will be granting CCP equivalence to the EU and EEA/EFTA states. This, together with our temporary recognition regime, means that UK firms will be able to continue using EEA CCPs after the end of the transition period. The EU has also granted the UK temporary CCP equivalence for a period of 18 months after the end of the transition period and has recognised all three UK CCPs. This allows UK CCPs to continue to provide services into the EU.

My noble friend Lady Altmann asked who is in charge of assessing the buffers and what analysis is undertaken to do so. In the case of the other systemically important institution buffer, the Financial Policy Committee is responsible for setting a framework for the buffer, while the Prudential Regulatory Authority applies that buffer to individual institutions. The FPC is required to review the buffer framework every two years and will benefit from PRA and Bank of England analysis of whether the buffers are still achieving their objectives. The PRA will be responsible for setting the CRDV systemic risk buffer, which again includes a requirement to review any buffer rate set periodically. The Bank of England’s Financial Policy Committee is tasked with considering systemic financial stability risks, including those that might flow from higher levels of debt or changes in capital markets. The latest remit for the Financial Policy Committee asks that the FPC and the Monetary Policy Committee should continue to have regard to each other’s actions to enhance co-ordination between monetary and macroprudential policy. This co-ordination has enhanced the strength and resilience of the UK’s macroeconomic framework.

These buffers are an important means of maintaining financial stability. For instance, the other systemically important institutions buffer will help ensure that ring-fenced banks are resilient against potential risks. This instrument seeks to preserve the current level of macroprudential policy flexibility. The actual setting of buffers is largely left to the independent regulators, subject to certain provisions in the regulation. My noble friend also asked about nationalisation. Temporary public ownership is one of the resolution tools available, but it would be used only as a last resort. Progress on gender equality in the financial services sector is essential, and the Government too welcome the provisions in CRDV, which are in line with existing requirements on gender equality in the UK.

The noble Baroness, Lady Kramer, is right to note that the Bank of England is committed to reviewing its framework on the MREL framework—I am sorry to use the acronym—by the end of 2020, but the outcome of that review cannot be prejudged. The Government take a proportionate approach. Indeed, in not implementing the EU’s new MREL requirements as part of these SIs, one of the considerations was that we think the new requirements could impose a disproportionate impact on some medium-sized building societies. That is a reflection of the fact that the Government wish to take a proportionate approach.

The noble Lord, Lord Tunnicliffe, asked about the power to remove board members. This stems directly from the EU directive. I reassure him that the regulator will exercise a power of removal only where a person is no longer of sufficiently good repute to perform their duties, no longer possesses sufficient knowledge, skills, experience, honesty, integrity or independence of mind to perform their duties, or is no longer able to commit sufficient time to perform their duties. The individual in question will have the right to refer their case to the Upper Tribunal if they are aggrieved with the actions of the regulator in this respect.

I also confirm to the noble Lord that he is absolutely correct that this SI forms part of the programme of statutory instruments made under the EU withdrawal Act 2018. The purpose of most of these SIs, apart from the final one, is to ensure there is a fully functioning financial services, legal and regulatory regime at the end of the transition period. The approach taken in this instrument aligns with the general approach established by the EU withdrawal Act 2018, providing continuity by retaining existing legislation at the end of the transition period but amending, where necessary, to ensure effectiveness in a UK-only context.

The noble Lord asked specifically whether the approach to sunsetting certain provisions within the first SI is consistent with that approach. The UK has considered very carefully which provisions would not be suitable for the UK resolution regime after leaving the EU, while still maintaining prudential soundness and other regulatory outcomes, such as consumer protection and proportionality. He mentioned consultation—we have consulted the UK financial regulators and taken into account concerns raised in consultation responses on the potential risks to financial stability and consumers. It is with those in mind that we have taken the approach that we have on sunsetting.

To give him a couple of examples, one of the provisions we have sunsetted is the introduction of a pre-resolution moratoria power and the extension of a moratoria power to eligible deposits. We were concerned that that could create potential risks to financial stability, as it could both increase the risk of runs on the particular banks affected and further trigger runs on unaffected banks, and therefore we have sunsetted that provision.

Another example is the changes to priority of debts and insolvency. These are sunsetted due to concerns around the potential impact that this could have on investor expectations and the market, including pricing. Given the difficulties in predicting where and to what degree the impacts on firms and investors will be felt, it was thought that it was in the interests of prudential regulation to sunset that provision.

The sunsetting of these provisions does not remove obligations, given that the existing UK resolution regime already provides powers for the resolution authority to exercise moratoria powers as part of the resolution. The Prudential Regulation Authority can also impose restrictions on distributions if firms are in breach of their buffer requirements, and it requires firms to include contractual recognition clauses in contracts governed by third-country law and provides for non-inclusion on the basis of impracticability. In many of the areas where we have sunsetted the provisions, there is already existing regulatory provision to take action where needed.

I also acknowledge the noble Lord’s comments on the Explanatory Memorandum; I too find some of these issues complex to get my head around. They are technical SIs, and every effort is made to ensure that the Explanatory Memorandums are as understandable as possible. We will bear in mind the noble Lord’s points in future.

With that, I hope noble Lords have found the debate informative and will join me in supporting these regulations.

Motion agreed.