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

Lord Haskel Excerpts

Tuesday 10th November 2020 Lords Chamber

[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.