DRAFT BANK RECOVERY AND RESOLUTION (AMENDMENT) (EU EXIT) REGULATIONS 2020 DRAFT SECURITIES FINANCING TRANSACTIONS, SECURITISATION AND MISCELLANEOUS AMENDMENTS (EU EXIT) REGULATIONS 2020 DRAFT FINANCIAL HOLDING COMPANIES (APPROVAL ETC.) AND CAPITAL REQUIREMENTS (CAPITAL BUFFERS AND MACRO-PRUDENTIAL MEASURES) (AMENDMENT) (EU EXIT) REGULATIONS 2020 DRAFT BEARER CERTIFICATES (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 2020

John Glen Excerpts

Wednesday 18th November 2020 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020.

[The Chair]

With this it will be convenient to consider the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020, and the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020.

[John Glen]

Thank you, Sir David. It is a pleasure to serve under your chairmanship yet again. The second bank recovery and resolution directive updates the EU’s bank resolution regime, which provides financial authorities with powers to manage the failure of financial institutions in a way that protects depositors and maintains financial stability while limiting the 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, and the first statutory instrument satisfies that obligation.

In transposing the BRRD II directive, the Government have been directed 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 taken account of concerns raised by industry on elements of the directive that could pose potential risks to financial stability and consumers by tailoring the approach for the UK market.

Subsequently, we are not transposing the provisions in the directive that firms do not need to comply with until after the end of the transition period. We are also sunsetting specific provisions so that they cease to have effect in the UK after the end of the transition period, as well as inserting 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 2020. Our approach meets our legal obligations and ensures that the UK’s resolution regime remains robust and in line with international standards. We have interacted with industry and stakeholders to help explain exactly what the change means for them.

Turning to the content of the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, the SI is vital in ensuring that the UK has a fully effective legal and regulatory financial services regime at the end of the transition period. The approach taken aligns with the general approach established by the European Union (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. Specifically, this SI amends and revokes aspects of retained EU law and related UK domestic law, makes a small number of necessary clarifications and a minor correction to earlier financial services EU exit instruments, and provides sufficient supervisory powers for the financial services regulators to effectively supervise firms during and after the end of the transition period.

Moving on 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 CRD V—continues the EU’s implementation of the internationally agreed Basel standards, which further enhance international prudential standards and regulation and aim to help ensure the safety and soundness of financial institutions. This instrument will allow for the transposition of CRD V into UK law, as is legally required under the terms of the withdrawal agreement. It will also ensure that the legislation that transposes CRD V continues to operate effectively in the UK after the end of the transition period. As with previous capital requirement directives, the Government will delegate the majority of the responsibility for implementation to the independent Prudential Regulation Authority, which has the requisite technical knowledge and expertise to ensure an effective and proportionate implementation. This instrument therefore only includes provisions that are legislatively necessary to ensure that the PRA can effectively implement CRD V.

The instrument makes changes to the macroprudential toolkit to preserve 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 relevant institutions to address particular financial stability risks. In line with requirements of article 21a of CRD V, the instrument also allows holding companies in scope to apply for supervisory approval. The framework and scope of the approval regime will be administered by the PRA and the instrument will also ensure that the PRA has the appropriate tools to ensure compliance with it.

Although the capital requirement directives were created with banks in mind, they also extend to investment firms. However, the risks faced and posed by investment firms are substantially different to those of banks. The instrument therefore excludes non-systemic investment firms from the scope of CRD V. Until the Financial Conduct Authority introduces a prudential regime for investment firms, about which I have spoken to the chief executive just today, following Royal Assent to the Financial Services Bill, investment firms will remain subject to the existing prudential framework.

Finally, let me turn to the content of the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020. The UK has played a leading role in transforming tax authorities’ ability to work across borders to tackle emerging international tax risks. Maintaining the UK’s position and driving forward this agenda is a central pillar of the Government’s no safe havens strategy, which aims to improve offshore tax compliance so that everyone pays what they owe. Bearer certificates are anonymous and infinitely transferable, making them an easy means of facilitating illicit activity such as tax evasion or money laundering. It is for this reason that UK companies have been prohibited from issuing them since 2015.

A 2018 report from the OECD’s global forum noted that although the UK had mostly addressed its 2013 recommendations on 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. It 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 already prohibited from using bearer shares by the Small Business, Enterprise and Employment Act 2015. Complying with the global forum’s recommendation will help ensure that 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 and in conclusion, the Government believe that these four instruments are necessary and vital for the UK’s financial services regulatory architecture, and I sincerely hope that the Committee will join me in supporting the regulations this afternoon.

--- Later in debate ---

[John Glen]

I listened carefully to what the right hon. Gentleman had to say, and he is, as always, the model of courtesy and constructive opposition. The substantive challenge that he offered was about the value, legitimacy and appropriateness of a four-in-one SI debate. It is vital that we deliver each of these financial instruments before the end of the transition period both to ensure continuity and a fully functioning and effective legal and regulatory regime from 1 January 2021 and, in the case of the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020, to ensure that the UK meets its international obligations.

Given the links across each of the financial services instruments and the importance of them coming into force before the end of the year, it is appropriate for the Committee to consider them together, and it is the most effective use of parliamentary time. It is also the case that the SIs could not have been brought forward sooner. Several of the provisions in the instruments fix deficiencies in changes to EU regulations that have only recently become applicable during the transition period.

The right hon. Gentleman asked three specific questions about the SIs and then one about the process. He first asked about the extent of the changes from the BRDD II resolution regime. Under the terms of the withdrawal agreement, the Government will implement EU legislation, such as this regime, that evolved during the transition period. In our transposition of BRDD II, we have considered which provisions would not be suitable for the UK resolution regime after leaving the EU, while still maintaining that prudential soundness and the other important regulatory outcomes, such as consumer protection and proportionality. We have also taken into account concerns raised in consultation responses about the potential risk to financial stability and consumers. Given the complexity of those considerations, I am happy to write to the right hon. Gentleman to set things out more clearly.

The right hon. Gentleman asked about the extent to which CRD V changes the capital requirements regime. The capital buffers instrument is being introduced partly to ensure that the current macroprudential flexibility is maintained. The purpose of the buffers is to allow the regulators to continue to be able to address financial stability risks, including those posed by large institutions.

The right hon. Gentleman asked about hidden charges in remittances and referenced an answer I gave on 3 July about their cost. I am sorry, but I will have to write to him on that matter as well. I am sorry that I cannot offer him a clear answer now. I do not want to busk it.

[Mr McFadden]

Will the Minister give way?

[John Glen]

I am happy to give way. Perhaps the right hon. Gentleman will say that that makes the point that he made earlier.

[Mr McFadden]

No, I am grateful to the Minister for giving way. I would be grateful if he clarified the point. Let me be clear why. A clarification from him that the intention is to make transparent the full cost of fees and charges will help the regulators to police the charging of the instruments. If the Minister clarifies the matter in that way, that might help stop some of the practices that we have seen in the past whereby charges are hidden, to consumers’ cost. Clarification would therefore be helpful.

[John Glen]

I respect that point and I am happy to give that clarification at the earliest opportunity.

The final process point that the right hon. Gentleman set out is the relationship between the onshoring programme and the Financial Services Bill that is now in Committee. The EU exit legislative programme, known as the onshoring programme—I seem to have been engaged with it all my life—is about ensuring a fully functioning legal and regulatory financial services framework at the end of the transition period.

The Financial Services Bill is an important step in taking responsibility for our financial services regulation, ensuring that we maintain the highest regulatory standard and remain an open and dynamic global and financial centre now that we have left the EU. It will deliver several existing Government commitments and ensure that the UK maintains that world-leading standard. It goes beyond the simple process of onshoring what we have had to date and what has gone live this year. It looks forward and sets out, with a new accountability framework, how the regulators will act. It also enacts a number of other smaller measures. However, I concede that it is a complex process—I do not mean that to sound patronising—whereby we have been trying to onshore and then look forward. The Bill, which we will hopefully take through Parliament, is the first in a series of steps that will involve legislation in subsequent Sessions.

I hope that I have substantively, if not exhaustively, addressed the points that have been made. As ever, I thank the right hon. Gentleman for the constructive way that he has brought his points to the Committee. I hope that the Committee is sufficiently satisfied to support the regulations.

Question put and agreed to.

DRAFT SECURITIES FINANCING TRANSACTIONS, SECURITISATION AND MISCELLANEOUS AMENDMENTS (EU EXIT) REGULATIONS 2020

Resolved, 

That the Cttee has considered the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020.—(John Glen.) 

DRAFT FINANCIAL HOLDING COMPANIES (APPROVAL ETC.) AND CAPITAL REQUIREMENTS (CAPITAL BUFFERS AND MARCRO-PRUDENTIAL MEASURES) (AMENDMENT) (EU EXIT) REGULATIONS 2020

Resolved, 

That the Committee has considered the draft Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020.—(John Glen.) 

DRAFT BEARER CERTIFICATES (COLLECTIVE INVESTMENT SCHEMES) REGULATIONS 2020

Resolved, 

That the Cttee has considered the draft Bearer Certificates (Collective Investment Schemes) Regulations 2020.—(John Glen.)