CAPITAL REQUIREMENTS (AMENDMENT) (EU EXIT) REGULATIONS 2019

Jonathan Reynolds Excerpts

Monday 7th October 2019 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

May I, too, say what a pleasure it is to see you in the Chair, Mr Bailey?

The statutory instrument returns the Minister and I to our preparations for the country’s potential exit from the European Union without a deal. For the avoidance of any doubt, let me state that the Opposition believe that a no-deal Brexit would be extremely damaging and grossly irresponsible, and would return the Brexit process to square one rather than be the clean break that some would, erroneously, have us believe. However, we acknowledge, as we always have, the need for a functional regulatory regime in the eventuality that we have to fall back on it.

The issue relating to the capital requirements regulation was first addressed by the Minister and me in Committee on 12 December 2018. The Opposition retain our concerns about one of the central tenets of the instrument, which is the removal of the preferential treatment for EU sovereign debt. That raises the risk of a potentially costly, disruptive and unnecessary sale and repurchase of assets immediately upon a no-deal Brexit. The trade publication GlobalCapital expressed it succinctly last year as proposing

“a hit to UK bank capital ratios at the worst time imaginable.”

However, I am mindful that we have had that substantive debate before, and the Government and Opposition do not agree. Hopefully we will never have to find out who is correct on that point.

The explanatory memorandum highlights that the reason we are going round this matter again today is to account for changes that have occurred between the original proposed EU exit date of 29 March and the revised exit date of 31 October. However, that seems to be a convenient means of avoiding the resurrection of the Financial Services (Implementation of Legislation) Bill on in-flight files. To remind colleagues, the Opposition were put under significant time pressure on the in-flight Bill in March. We were given very short notice to scrutinise and table amendments to that piece of primary legislation. When it became apparent that the Bill would not be passed by Parliament unless it was amended to strengthen money laundering and anti-corruption provisions, the Government withdrew it.

Today’s instrument will seemingly implement some of those in-flight changes. The capital requirements regulation was named as one of the relevant files in scope of that original Bill. I ask the Minister whether he can clarify that point and, if so, how it can be that those changes have been demoted in importance from primary to secondary legislation. Is it the intention that the entire in-flight Bill will be broken up across several statutory instruments to conceal the fact that it cannot be passed on the Floor of the House of Commons?

The changes contained in the statutory instrument again give new responsibilities to UK regulators. The capital requirements regulation is an important part of the post-financial crisis regulatory regime, and I am sure that we all wish never to find ourselves in a repeat of the circumstances of 2008. Yet new requirements are being loaded on to UK regulators regarding macro-supervisory obligations that have previously been conducted at an EU level. Will the Minister assure the Committee that that is the right supervisory model?

Furthermore, in almost all the substantive changes to the capital requirements regulation—for example on internal modelling, reporting requirements and reporting on prudential requirements—there has been an important change of language. Where the original EU legislation states that the European Banking Authority “shall” make standards, that has become,

“The FCA and PRA may…make”,

on pages 11, 13, 15, 17 and so on.

I read that as a shift from mandatory action to optional action by the regulator. Why has that new distinction been made? The argument has always been that this process simply transfers responsibilities, with no policy decisions being taken, but surely this decision could lead to a change of regulation. Will the Minister elaborate on why that change of language was made, and on the Treasury’s intentions behind it?