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

Lord Tunnicliffe Excerpts

Tuesday 30th November 2021 Grand Committee

Lastly, during the passage of the Act that lies behind this SI, my noble friend Lord Oates and I moved amendments to get the PRA to seriously consider recognising the financial risk associated with stranded fossil fuel assets and to adjust capital requirements for the banks to reflect that risk. We were dismissed very casually. Now the PRA seems to be shifting its stance in its paper Climate-Related Financial Risk Management and the Role of Capital Requirements. Will the Minister please update us, as we have no other way of getting information? As I said, the effect of the Act and the SI is to remove any direct oversight of such issues from Parliament, except through the weak consultation and committee processes. As the one last opportunity, perhaps the Minister would inform us of where the status is today.

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful, as ever, to the Minister for introducing this latest set of Treasury regulations. These are not the first changes to arise from the Financial Services Act 2021, but this SI represents the biggest amendments to and revocation of the capital requirements regulation—the CRR—since that parent legislation passed. Many of the changes are to facilitate the implementation of certain Basel III standards from 1 January 2022. As the Minister and the Explanatory Memorandum noted, the UK played an active role in negotiating this reform package.

As we discussed at length during the passage of the parent Act, the Prudential Regulation Authority—the PRA—has taken responsibility for updating parts of the CRR through its regulatory rules. That such changes are being made at arm’s length might still rankle with some—the noble Baroness, Lady Kramer, reinforced that point—but that was the Treasury’s determination and it is the framework that we must operate under.

Other changes made by the instrument are designed to facilitate the implementation of the investment firms prudential regime—the IFPR—by the Financial Conduct Authority. That new system will ensure tailored regulation of non-systemic investment firms outside the scope of the CRR. The Explanatory Memorandum notes that although the FCA has introduced most of its IFPR rules, some more are required before the regime goes live on 1 January 2022. Can the Minister confirm whether these additional rules have been finalised and published since the SI and EM were laid? If not, does the FCA have an estimate of when they will emerge?

Could the Minister also outline what parliamentary engagement has been undertaken on the CRR and the IFPR reforms? Given the highly technical nature of these regulations and the various regulatory rules that must be read alongside them, is the Minister confident that everything is present and correct? This might at first glance feel like a trivial question but, as a veteran of dozens of EU exit SIs, it is vital that we have confidence in this process.

Moving on, the Treasury has, in its Explanatory Memorandum, pointed to the existence of accountability frameworks for the PRA and the FCA. However, in doing so, it neglected to mention the unease that has been expressed about this by several colleagues across your Lordships’ House. At the time, it was suggested that concerned colleagues may find comfort in the ongoing future regulatory framework review process. Some has indeed been found in the proposals outlined in measures 6 and 7 of Command Paper 548 to introduce statutory requirements for the PRA and FCA to notify relevant parliamentary committees of their consultations and provide written responses to any representations made. If adopted, these steps would mirror several of the key asks in our previous amendments. Nevertheless, as always, the devil will be in the detail. While it may not be strictly relevant to this SI, can the Minister outline the anticipated timescale for the review? When is the Treasury likely to come forward with the resulting legislation?

Another concern around CRR and IFPR rule-making was the extent to which the regulators would have regard to the steps needed to tackle the climate crisis. The Government eventually conceded that the PRA and the FCA should have regard to the 2050 net-zero target, but this requirement takes effect only on 1 January —that is, after most of the rules have been published and at the same time as they enter into force. Can the Minister outline what steps, if any, have been taken by the regulators to ensure that green issues have been considered as part of the current exercise, in so far as it is possible within the Basel III framework? Can he also explain how he envisages the new duty operating in practice? What kinds of regulatory changes would he expect to see as a result of that concession having been made?

There is a perception—I have outlined my concerns before—that while the Chancellor likes to talk green, he is somewhat less keen on acting accordingly. Many firms in the financial sector are cognisant of the need to make their business practices more sustainable. Some have acted as outriders, setting ambitious targets and creating interesting schemes for change. However, more needs to be done. A voluntary approach to things such as investment in fossil fuels will get us only so far. Some will do the right thing but others may see opportunities to gain competitive advantage. If, by the time we get to the next financial services Bill, these kinds of issues have not been adequately addressed by the PRA and FCA, can the Minister commit the Treasury to taking action?

Implementing Basel III and IFPR is one thing, and we do not oppose these regulations’ small part in delivering those reforms. However, meeting the challenges of the future is another matter and it is not yet clear that we are on the right course.

[Lord Agnew of Oulton (Con)]

I thank noble Lords for their contributions today. Some important points have been raised during the debate. I will attempt to answer them but there may be one or two where I will have to write.

To start, my noble friend Lord Naseby asked about impact assessments. A de minimis impact assessment has been published alongside the instrument. As the equivalent annual net direct cost is less than £5 million, the only direct costs to businesses in scope of the instrument will be approximately £900,000. This is for provisions relating to the securitisation regulation.

Regarding the amendment to Article 2(12)(g) of the securitisation regulation, including all the FCA investment firms in scope of due diligence requirements, the net impact to firms is expected to be £900,000 per annum, based on the relevant firms investing in 20 securitisation positions per year. This figure represents the aggregate compliant costs for firms that are being brought within the scope of the due diligence requirements. This figure has been calculated from information provided by the FCA and industry; the calculation is based on the type of investment firms on which the amendment has an impact, the estimated number of such firms and the estimated cost of complying with the due diligence requirements.

The noble Baroness, Lady Kramer, asked about future regulatory reform and parliamentary oversight. The Government and the regulators are committed to ensuring that Parliament has the opportunities it needs to scrutinise the PRA’s rules and respond to anything raised. The Government consider that Parliament has a wide range of powers to request information and conduct effective scrutiny of the regulators, including through the Select Committee system. To support this work, the Government have proposed formalising through statute the mechanisms through which the regulators provide information to Parliament to ensure that it has the information it needs to undertake this scrutiny.

The noble Lord, Lord Tunnicliffe, asked me to outline what parliamentary engagement has been undertaken on both the CRR and IFPR reforms. Ultimately, it is Parliament that sets the regulators’ objectives. It is of course right that Parliament has an appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. The regulators committed to sending their consultations and draft rules on Basel and the IFPR to Parliament during the passage of the Financial Services Act earlier this year.

Consultation on these changes started in December 2020, so there has been plenty of time for Parliament to review and report on it, including through the Select Committee process. The PRA and the FCA also published their near-final rules over the summer to provide ample time for familiarisation well in advance of this debate. As part of the ongoing future regulatory reform, as I have mentioned, we have proposed formalising through statute the mechanism through which regulators provide information.

The noble Lord, Lord Tunnicliffe, and my noble friend Lord Naseby asked whether the detail of this instrument and the accompanying rules set by the regulators are present and correct. The answer is yes. Treasury officials have worked extensively with their counterparts at the regulators to ensure that the changes mesh and make a cohesive whole. Where appropriate, both the Treasury and the regulators have consulted on the measures implemented through this statutory instrument. The noble Lord and my noble friend also asked whether the IFPR rules have been finalised and published since the SI and EM were laid. I can confirm that the FCA has now published all the IFPR rules, including the final outstanding set of rules, which were published on 26 November.

I thank the noble Lord, Lord Tunnicliffe, for his assertion that two of the measures in the recent financial future regulatory framework review consultation provided him with some comfort on the question of the regulators’ accountability to Parliament. He also asked about the timescales of the review. The Government published their consultation on 9 November, with a closing date for responses of 9 February next year. We will bring forward further detail on our approach to implementing the proposals in the review in due course.

The noble Lord asked me to outline what steps, if any, have been taken by regulators to ensure that green issues have been considered as part of their rule-making processes. He is of course correct to say that the Financial Services Bill 2021—now an Act—was amended to include

“have regard to the net-zero carbon target”,

which will apply after 1 January next year. This means that the PRA does not need to have regard to climate change considerations in making the Basel III rules, nor the FCA in making the IFPR rules, for 1 January. This was done to ensure that there is no delay in implementing the Basel III and IFPR reforms. It will be for regulators to determine how the new duty will operate in practice. The Government anticipate that it will function in much the same way as other similar obligations did during the PRA’s implementation of the Basel III standards, such as the need to have regard to the ability of firms

“to continue to provide finance to businesses and consumers in the UK”.

The PRA and the FCA are aware of the need to respond to the potential risks posed by climate change. For example, on 28 October, the PRA published its second climate change adaptation report, finding that under the existing regulatory capital framework there is scope to use capital requirements to address certain aspects of climate-related financial risks. This and future work will no doubt feed into how the PRA sets its rule from 1 January 2022.