Capital Requirements Regulation (Amendment) Regulations 2021

Lord Agnew of Oulton Excerpts

Tuesday 14th September 2021 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Capital Requirements Regulation (Amendment) Regulations 2021.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, among other things, these regulations support the implementation of the Basel III standards in the UK. I will begin by reminding the Committee of the background to this issue.

I am sure that noble Lords agree that strong prudential regulation is vital if we are to ensure that firms have enough capital and liquidity to operate effectively through periods of economic stress. However, the 2008 financial crisis highlighted major deficiencies in international financial regulation. Following the crisis, the international community came together to remedy this situation by developing updated standards known as the Basel III accords.

The UK, as a member of the G20, is committed to the implementation of the Basel III standards, given their positive benefits to financial stability. Now that the UK has left the EU, we must implement many of these standards domestically for the first time. This includes rules on subjects equivalent to those contained in the EU’s second capital requirements regulation, known as CRR2. Many of these rules do not yet apply in the UK due to the EU’s implementation date falling after the end of the transition period.

The Financial Services Act 2021 enables the Prudential Regulation Authority to make rules updating the existing provision in the UK’s capital requirements regulation for Basel III standards—the CRR—where the Treasury has or will revoke the relevant provision of the CRR. The devolution of responsibility to the PRA for updating these rules reflects its expertise in prudential matters. This is combined with a more flexible and tailored approach that comes with having these regimes set out in regulator rules rather than in statute.

On some of the detail of the instrument, to enable the PRA to update the prudential regime to account for these new Basel III standards, this instrument exercises the powers contained in Section 3 of the Financial Services Act to revoke elements of the CRR and make consequential amendments. These revocations must be within the limits imposed by Section 3(2), which limits the provision to only revoking those parts of the CRR which need to be updated to reflect the new Basel standards, and anything that is connected to, or consequential to, those standards.

When it makes CRR rules, the PRA is subject to an accountability framework, under which it must consider the impact of its rules on a number of areas; the relative standing of the UK compared to other jurisdictions; lending to the real economy; and the Basel standards themselves. For rules made after 1 January 2022, the PRA will also need to have regard to the net-zero carbon target. Additionally, the PRA must consult the Treasury on the potential impacts of any rule changes on equivalence.

This instrument contains additional EU exit-related amendments to the CRR. These are required to ensure that the prudential regime continues to function as intended now that the UK has left the EU. This instrument makes an amendment to Article 497 of the CRR. This allows for the Treasury to extend a transitional provision for certain foreign central counterparties to retain temporary qualifying status. Qualifying status allows UK firms to use these CCPs without being subject to higher capital requirements. Were these CCPs to lose this status, they would become substantially more expensive, thereby reducing the likelihood of their use by banks. This amendment will allow for the transitional period to be extended by regulation one year at a time.

--- Later in debate ---

I recognise that this is a very big question and the Minister might want to write me an essay and not answer today, but is this situation, in which future rules will have no formal parliamentary scrutiny, satisfactory? Should parliamentarians not be more involved in an issue of this importance? If they should have more involvement, how?

[Lord Agnew of Oulton (Con)]

My Lords, I thank the noble Lord again for his very thorough analysis of an immensely complicated subject. I will try to address his two substantive questions. The first was on the scrutiny of PRA rules and regulations by Parliament. I assure the noble Lord that Parliament ultimately sets the regulators’ objectives, and it is right that Parliament has the appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. The letter the noble Lord referred to was clear that we set out a reasonably long consultation period earlier this year and had substantive responses from the key players in the sector, and we have responded to those.

The regulator committed to sending these consultations and draft rules to Parliament during the passage of the Financial Services Act earlier this year. Consultation began in February so there has been a decent period to review and report on them. The PRA published its final rules in July—again, well in advance of this SI. The FSMA requires regulators to undertake these consultations and to consider and to respond to representations from Parliament as well as other stakeholders. Mechanisms for accountability, scrutiny and engagement are considered further through the further regulatory framework review. We should not rush to prejudge the outcome of the FRF review. The Government will bring forward proposals through a second consultation later this year.

On the noble Lord’s question about climate change, the Financial Services Act 2021 was amended to include a “have regard to” the net zero carbon target but its application was delayed until 1 January 2022. This means that the PRA does not need to have regard to climate change considerations in making the rules as a consequence of this specific SI. This delay will ensure that there is no unnecessary and impractical delay in implementing the Basel 3 reforms for 1 January next year, otherwise we would be in the unfortunate position where the regulators would have to reopen or restart their consultations which were first published, as I said, in February this year.

I assure the Committee that the PRA will still need to make rules to implement substantive reforms contained in Basel 3.1. I expect the regulators to use the powers again in future to update their rules: for example, to take account of new international standards or developments in the market. The PRA will need to have regard to the net carbon target in setting those rules.

I hope noble Lords will agree that these amendments strike the right balance between taking action on climate change quickly and taking swift action to reform our prudential regimes that aims to prevent a future crisis. I suggest that we write to the noble Lord to update him on the timetable for his specific concern on the net-zero targets.

[Lord Tunnicliffe (Lab)]

Before the noble Lord sits down, I recognise that what I have said is perhaps complex so I would be grateful if he would also write to me on whether he has any further reflections on how Parliament might be involved. The formal position, as I understand it, is that the PRA can now make regulations without seeking any formal authority from Parliament; indeed, that is almost the essence of it. I sense some degree of sympathy that somehow Parliament ought to be involved, so if he and the Treasury have further thoughts on that, it would be valuable if they could share them with me.

[Lord Agnew of Oulton (Con)]

Of course we will write to the noble Lord to provide a bit more clarity on that. Again, it is that difficult balancing act with incredibly complex regulations—as the noble Lord has so ably demonstrated as he has fought his way through layers of hyperlinks—and I recognise that.

The Prudential Regulation Authority has consulted on these rules. As I mentioned, in July it published the near-final version of the proposed rules, along with an accompanying policy statement. This set out how the regulator has taken into account the public policy factors in the Financial Services Act.

I hope that the noble Lord has found today’s debate informative. I will write to him on the specific items we have discussed. I hope he will join me in supporting this instrument and I beg to move.

Motion agreed.