Lord Bethell
Main Page: Lord Bethell (Conservative - Excepted Hereditary)Capital Requirements (Amendment) (EU Exit) Regulations 2019
Lord Bethell Excerpts
Lord Bethell
That the Regulations laid before the House on 5 September be approved.
Relevant document: 61st Report from the Secondary Legislation Scrutiny Committee
Lord Bethell (Con)
I beg to move that the House considers the Capital Requirements (Amendment) (EU Exit) Regulations 2019 and the Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019.
Lord Tunnicliffe (Lab)
Perhaps I may help the Minister. I think he wants to move that they be approved. His speech has been prepared for a different venue.
Lord Bethell
I beg to move that they be approved.
As the House will be aware, the Government had previously made all the necessary legislation to ensure that in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the Article 50 process, new EU legislation has come into force and, under the European Union (Withdrawal) Act, it will form part of UK law at exit. Further deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit. The two instruments being considered today deal with two new pieces of EU legislation that have recently come into force.
The first instrument resolves deficiencies in the EU’s prudential regime for credit institutions and investment firms to take account of revisions the EU has recently made to the capital requirements regulation. This regime sets out how much capital institutions, such as banks and investment firms, need to hold. The CRR is a directly applicable EU regulation that has applied since 2013. An exit instrument correcting the deficiencies in retained law was laid and approved by Parliament in 2018. Earlier this year, the EU finalised a revised banking package, which included amendments to the CRR made by an amending instrument known as CRR2. This gives effect to some of the internationally agreed Basel reforms, which are the centrepiece of the post-crisis reforms aimed at making banking safer. Similar changes are expected in all G20 countries that follow the Basel guidelines.
Through the UK’s membership of the G20 and its Financial Stability Board, we have committed to the full, timely and consistent implementation of the Basel 3 reforms. Our deficiency fixes for CRR therefore need to be updated to take account of CRR2. There are three main areas where fixes are required: third country treatment, transfer of functions and updates to definitions.
Consistent with the approach taken in the 2018 exit instrument to amend the CRR, the regulations remove the preferential capital treatment given to the largest banks and investment firms in the EU 27 to reflect the fact that the EU and UK will treat each other as third countries in a no-deal scenario. In line with the approach that the Government are taking to all onshored financial services legislation, the instrument transfers a number of functions currently within the remit of EU authorities to the appropriate UK bodies. Functions such as the development of detailed technical rules on certain provisions of CRR will now be carried out by the Financial Conduct Authority, the Prudential Regulation Authority or the Bank of England. Where CRR2 confers a delegated legislation-making power on the Commission, these powers are converted into regulation-making powers conferred on the Treasury. Use of those powers by the Treasury will need the approval of Parliament. Finally, CRR2 amended some definitions used in CRR. The instrument corrects those updated definitions so that they can operate in a UK-only context.
The Treasury, financial regulators and industry agree that it is critical to have deficiency fixes in place by exit day for these new CRR provisions. Without them, there will be considerable legal uncertainty around the capital requirements that apply to banks and investment firms, particularly those that apply to global, systemically important banks. The powers of our regulators to supervise and enforce capital requirements would also be in doubt, increasing the risk of financial instability.
I now turn to the second financial services instrument we are considering today. In January this year, the Solvency 2 and Insurance (Amendment, etc) (EU Exit) Regulations were approved by Parliament. Those regulations addressed deficiencies in Solvency II as it will form part of UK law at exit. Since then, revisions by the EU to the Solvency II delegated regulation have updated aspects of the approach to setting insolvency requirements for insurance funds, including the simplification of capital calculations and greater alignment of capital requirements across insurance and banking legislation. These revisions took effect on 8 July 2019 and will form part of UK law after exit. The substance of the revisions will not result in deficiencies after exit, and the updated provisions will continue to operate in the UK as they do now.
Lord Bethell
I thank noble Lords for this powerful debate on a highly technical subject. I endorse the noble Baroness, Lady Bowles, in her opening comment that this Chamber does not see enough discussion of financial services and this critically important industry. By this afternoon’s account, that is a very great shame; there is a huge amount of expertise in the Chamber and it would be great if that could be put to use more often.
I take on board completely the comments of frustration about the Explanatory Memorandum. I too spent some of Saturday negotiating it and share that frustration; it is incredibly difficult to navigate. I reassure the noble Lord that there is no deliberate effort to obfuscate or be unclear. This is simply a very technical area where, unavoidably, one layer of legislation is on top of another in the British manner. There is no simple explanation for technical SIs such as this without running through the narrative in the way that he, frustratingly, found.
I start by answering the questions of the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, about the MREL, which is possibly the most delicate and central issue raised by these SIs. The noble Lord, Lord Tunnicliffe, questioned the timing, and whether that opened up some form of gap or concern, where Britain might be underregulated. I reassure him that that is not the case. The SI does not in itself delay the change until 31 December 2020. Rather, the Bank of England, like all financial regulators, has a general legal power to phase in Brexit-related changes by law. In this case, the Bank has proposed to delay the MREL requirement until 31 December 2020.
The Treasury is very sympathetic to this proposal because it gives the industry the ability to make arrangements for compliance instead of facing some kind of cliff edge, which would create uncertainty and a rush to do things on 31 November 2019. The industry is also completely sympathetic to the Bank’s proposals. In other words, this SI does not introduce new risk or appreciably increase existing risk. If anything, it reduces risk by phasing the introduction of a difficult measure in a reasonable, pragmatic and sensible way.
The noble Baroness, Lady Bowles, raised questions about the use of subsidiaries and whether capital in one subsidiary in one country might in some way be favoured over capital in another subsidiary in another country. I reassure her that the Bank of England may waive requirements for UK subsidiaries of UK banks without reciprocity but only if, in the Bank of England’s judgment, it would be a means of preserving UK financial stability rather than importing risk from the EU. That decision lies with the Bank of England and hopefully provides some reassurance.
The noble Baroness, Lady Kramer, raised the question of democratic deficit. Under the new arrangements, the European Parliament will not have oversight over British arrangements. However, both the FTA and the PRA are creatures of statute. They are both accountable to Parliament through existing primary legislation. They must both act within their statutory objectives; this provides scrutiny that we believe is comparable to that exercised by the European Parliament.
The noble Baroness, Lady Bowles, asked about MREL equivalence. I reassure her that the Treasury has legal powers to replicate any existing EU equivalence decisions and import them into UK law vis-à-vis third countries. The Treasury is in the process of reviewing all these decisions before retaining them.
The noble Baroness, Lady Kramer, asked about the impact on business. I reassure her that we are absolutely not hurting small firms; these firms do not hold capital across borders and therefore do not need to worry about the scope of these changes. More generally, this SI seeks to preserve legal stability, so any impact on commercial profits will be a function of a firm’s response to the business environment.
The noble Lord, Lord Tunnicliffe, asked about the affirmative procedure. I share his concern about such measures being used without need or care. I reassure him that in this instance the use of the affirmative procedure was reviewed very carefully and only because this was felt to be extremely important. The Government have laid over 600 Brexit SIs to ensure that we have a functioning statute book when we leave the EU, in all scenarios. We have been incredibly careful and very limited in our use of the “made affirmative” urgent procedure under the EU withdrawal Act, using it for a tiny percentage of the total figure. In this instance, using the “made affirmative” procedure was really the only reliable way we could make the necessary legal changes given the uncertainty around the number of sitting days. The timetable was also driven by fresh EU legislation which made it difficult for us to lay these at an earlier stage.
Lastly, I reassure the Chamber that these SIs are not the vehicle for new policy. They are very much about implementing existing policies. They are supported by industry after a large amount of engagement with all the major players and in no way is this an effort to try to cook up new ways of doing things. The Government believe that these instruments are essential to ensure that prudential regulation of UK credit institutions, investment firms, insurers and insurance risk transfer continues to operate safely. I hope that the House has found today’s sitting informative and that it will join me in supporting these regulations.