Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021

Lord Naseby Excerpts

Tuesday 30th November 2021 Grand Committee

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

My Lords, the Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2021 among other things support the implementation of the remaining Basel III standards and the investment firms prudential regime, the IFPR.

As I am sure noble Lords will recall, the Government legislated, through the Financial Services Act 2021, to enable the Prudential Regulation Authority to update the UK’s capital requirements regime to implement the remaining Basel accords. These standards were developed following the 2008 financial crisis, which highlighted major deficiencies in international financial regulation.

Now that the UK has left the EU, we must implement many of these standards domestically for the first time. Parliament has approved the implementation of these standards by expert independent regulators, alongside an overarching accountability framework. In September, this House approved the Capital Requirements Regulation (Amendment) Regulations 2021, made under the Financial Services Act, which revoked the provisions in the UK capital requirements regulation, or UK CRR, necessary for the PRA to make these updates. The Financial Services Act 2021 also enabled the Financial Conduct Authority to introduce the investment firms prudential regime, or IFPR, which is the UK’s new tailored prudential regime for FCA investment firms. This regime carves FCA investment firms out of the UK CRR. The combination of these two prudential packages requires consequential changes to the statute book. This instrument ensures that these changes mesh appropriately and provide a complete, functioning legal regime for firms.

I now turn to the instrument in detail, first in respect to changes that implement the Basel standards. Many of the measures contained in this instrument update references in existing legislation to the UK CRR, so that they now relate to the new rules made by the PRA, known as the CRR rules. In addition, this instrument revokes the reporting and disclosure requirements for the leverage ratio. I remind noble Lords that the leverage ratio is a capital backstop that prevents banks from becoming excessively leveraged. I reassure noble Lords that the PRA was already able to set leverage-based capital requirements through PRA rules. The UK leverage ratio framework has been, and continues to be, set by the Financial Policy Committee, which has indeed reviewed it in its entirety recently.

This instrument also removes a legacy equivalence determination on Article 132 that was tied to an equivalence regime that was revoked as part of the Capital Requirements Regulation (Amendment) Regulations 2021 earlier this year. This is therefore a tidying up. This instrument ensures that firms do not have to reapply for permissions where the relevant article of the UK CRR is revoked and replaced with PRA rules.

I turn to the changes in relation to the implementation of IFPR. Some of these changes are straightforward—for example, removing now defunct terminology due to changes stemming from IFPR. Two others are more substantive. First, this instrument extends the Securitisation Regulation’s due diligence requirements to all FCA investment firms. This ensures that all FCA investment firms buying securitisations must conduct due diligence, thereby helping to safeguard the integrity of the UK securitisation market. The second removes FCA investment firms from the UK resolution regime. This reflects the Government’s view that the FCA’s existing toolkit, along with the measures the FCA will implement in future through IFPR and the investment bank special administration regime, are more appropriate ways of managing such firms’ failure. FCA investment firms currently use existing rules and go into insolvency proceedings anyway, rather than going into resolution. Therefore, keeping them within the resolution regime only serves to create administrative cost for these firms for no benefit.

This instrument contains a savings provision and a transitional provision for the IFPR. It enables the FCA to continue to modify, revoke or amend IFPR-relevant technical standards. It provides for transitional provisions that support the functioning of the UK securitisation market by extending the existing risk retention requirements for one year to allow time for firms to transition their approach. The risk retention requirement ensures that firms retain an economic interest in a portion of the risk that is being sold on to investors.

Finally, this instrument addresses a small number of deficiencies arising from the withdrawal of the UK from the EU which have been identified during the process of making these Basel and IFPR amendments.

In conclusion, the Treasury has worked closely with the Bank of England, the PRA, FCA, industry and, in relation to the resolution change, the Banking Liaison Panel in the drafting of this instrument.

I hope that noble Lords have found my explanation helpful. In short, this instrument plays an important functional part in preparing UK legislation for the important Basel III implementation and IFPR packages. I would like to inform noble Lords that a correction slip has been issued in relation to a typographical error in this draft instrument. There is an incorrect cross-reference in the title of Regulation 38. The operative provisions in that regulation are correct. As a result, the error has no legal effect, and noble Lords can be assured that this change is minor. I beg to move.

[Lord Naseby (Con)]

My Lords, I declare a possible interest as a trustee of the Parliamentary Contributory Pension Fund. I want to put this on the record, as we are getting wide briefings at the moment. I also have some experience of the friendly society movement as a former chairman of the Tunbridge Wells Equitable Friendly Society and two Invesco investment trusts.

I particularly draw attention to paragraph 7.8 of the Explanatory Memorandum, which is key. It says that

“the framework in its current form does not appropriately cater for the differences between credit institutions and investment firms and can be disproportionate”

and “burdensome”, et cetera. That seems crucial. It then goes on to mention the consultation that has been carried out. When my noble friend winds up, could he make it clear whether all parts of Part 9C rules have been produced and circulated to the interested parties, or not? Certainly, implementation on 1 January 2022 does not fill me with enthusiasm. It is after Christmas and less than a month away, so I hope he will say that they have been produced, and when.

I am sure that my noble friend and all noble Lords would feel that there are some deficiencies in UK-retained law. I seek reassurance that we are confident that those deficiencies have been removed.

The other dimension I raise relates to paragraph 12.3. It will not surprise my noble friends that, once again, I feel very strongly about impact assessments and statements from Her Majesty’s Treasury that it considers that the net impact will be less than £5 million and very limited. Paragraph 14.1 says that

“the number of small businesses in scope is low.”

They may be small businesses, but they are important businesses to whoever is running them—and we are talking about financial firms.

It is always helpful to have a review of any legislation, particularly legislation relating to our coming out of the EU. That may not be proportionate in the judgment of the Treasury, but I do not know how many firms we are talking about. If my noble friend has that information, that will be helpful. I suppose that if we are talking of only three or four, that may be right, but I do not believe that that is the number—from my experience in the City, from some of the presentations we have recently had and, indeed, from some of the publicity about what is happening in the financial sector at the moment.

Is my noble friend absolutely confident that those firms do not want the SI reviewed after a period? If they all say no—that they do not want a review and are comfortable—fine, but my judgment is that, in life, it is helpful to have a review at some point.

[Baroness Kramer (LD)]

My Lords, obviously I will not oppose this statutory instrument, but it raises a number of issues which need to be explored, and I shall look forward to the Minister’s response to our concerns. We raised these concerns during the passage of the Financial Services Act 2021, but they have not been alleviated.

The Act and this SI transfer significant power to set the UK rules on Basel III standards to the financial regulators accompanied by minimal parliamentary oversight. It is a crucial process and has a fundamental impact on financial stability, as it sets the capital and risk management requirements for banks and other financial institutions. The PRA and the FCA are expected to consult on their decisions, and parliamentarians can contribute to those consultations, but as no more than ordinary consultees, despite their responsibilities to the public, and can at best hope for a few comments on their points as part of the general response.

Committees of Parliament can question the PRA and FCA and undertake reports but, in practice, on only a handful of issues each year, so they are likely to be visited exceedingly rarely and probably only at a time of crisis, which is rather too late. Even the SIs offer no meaningful accountability, because they cannot be amended. This SI, with the powers it gives the regulators, will mean that the issues of Basel III, so crucial to our financial structure, will probably never again come before either this House or the other place, except through that committee arrangement, which is, as I said, pretty minimal. Perhaps the Minister will confirm that.

When we were members of the EU—I know mentioning that is not popular with the Government—basic Basel standards were implemented through EU law, where the process was open and accountable and as different as day from night from our current circumstance. Before the EU Commission proposed draft legislation, it held many conferences and public meetings involving parliamentarians; parliamentarians were engaged in briefings, expert evidence sessions and discussions with a wide range of relevant regulators and supervisory authorities; and the Economic and Monetary Affairs Committee would be involved in scrutinising the main directive and regulations by way of co-decision. With Brexit, the power has transferred from the EU, but the Government have chosen to do it in a way that essentially removes any meaningful democratic accountability. I should like to hear for the record why the Minister has chosen such a route.