Draft Capital Requirements Regulation (amendment) regulations 2021

Pat McFadden Excerpts

Wednesday 15th September 2021 General Committees

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Thank you for chairing the sitting, Mrs Murray.

Just before I came here, I saw media reports that there is a Government reshuffle under way. There is an old Glasgow phrase referring to job insecurity. It talks about somebody’s jacket hanging on a shoogly nail. I genuinely hope that the Minister’s jacket is not hanging on a shoogly nail, and wish him well in whatever transpires over the rest of the day.

The statutory instrument before us, as the Minister explained, is the legislative child of section 3 of the Financial Services Act, which we debated in the House last year. Under that Act, powers under certain EU directives were onshored to be allocated to UK-based regulators. Some of those powers related to the capital requirements regulation, which was the EU’s instrument for implementing the Basel standards agreed in the wake of the financial crash of 2007 and 2008.

Those Basel standards are important, because they required financial institutions to hold particular levels of capital buffer; stick to, at the very least, a minimum overall leverage requirement below which they could not fall; and have particular liquidity requirements. All that was designed to avoid a repeat of the financial crisis, when globally and systemically important banks were found to be holding too little capital, and to be overstretched when it came to leverage, and therefore to be unable to fund themselves when the crisis came.

That scenario left Governments and taxpayers—not only in this country, but in the United States, Ireland and a number of European countries—in the invidious position of having to bail out banks deemed too big to fail. The Basel rules were designed to avoid a repeat of that situation, make financial institutions more resilient and get taxpayers off the hook of bailing those institutions out, or to put it another way, and perhaps more bluntly, to deal with the problem of privatising the profits and nationalising the risks.

As the Minister and I have often discussed in such debates, there is particular onus on the UK to have resilient institutions and good regulation in this sphere, because our banking and financial services sector is so large relative to the rest of our economy. That in many ways is a great strength, but it can be a vulnerability if the UK taxpayer is the ultimate backstop for the system.

My first question to the Minister, therefore, is about whether, in giving these powers to the PRA, there is any policy intent to reduce the capital requirements on institutions. Banks will not openly lobby to put greater risk in the system. Instead, when they come knocking on the Minister’s door, they talk about competitiveness and say, “Can we just have this change? It would make us more internationally competitive. We could lend a bit more if only we didn’t have to hold all this capital against our balance sheet.”

How alive is the Treasury to that kind of lobbying and how determined is the Treasury to resist it, particularly given the number of consultations going on in the financial sector, on all sorts of subjects, asking the sector what it would like to be changed in the wake of our withdrawal from the EU? Really, my question is about whether this is a purely technical transfer of administrative responsibility, or does it open the door to lower capital requirements and greater leverage, and therefore greater risk, for UK-regulated financial institutions?

The second issue in the regulations is clearing services and the recognition of overseas central counterparties, known as CCPs, by the Bank of England. Clearing is very important; it is a firebreak in the system when large transactions take place. It is very important for the UK financial services sector and allows huge volumes of transactions to take place in this country. A temporary agreement on clearing was reached with the EU in the absence of any wider equivalence recognition on financial services last year. This instrument allows the Treasury to extend the transitional period for recognition of overseas CCPs indefinitely, but one year at a time. The reason for that is explained in paragraph 7.11 of the explanatory notes, which say that

“because there are some CCPs, who submitted applications for recognition…that will likely be unable to receive equivalence and recognition under EMIR”—

the relevant directive—

“for a prolonged period”.

In other words, “We need to have this rollover because we can’t process the paperwork.”

That is the financial equivalent of Lord Frost’s announcement yesterday of the unilateral setting aside of border controls on incoming goods. What the Government are doing through this instrument, and a number of similar ones, is empowering themselves in legislation to carry on what went before even in the absence of mutual agreements in the other direction and in recognition that their institutions do not yet have the capacity to consider the individual applications and approvals that would be necessary to do this one clearing house at a time. In the absence of that capacity, we have this catch-all rollover of the status quo, because we are openly admitting that cannot process the paperwork. Can the Minister explain why this power for endless rollover has been deemed necessary? Why, five years after the referendum, does the UK not have the necessary systems in place? How often does he expect to see this annual extension power used?

As I said, this aspect of the statutory instrument is part of a pattern. I have stood in this room and similar rooms on this Corridor debating the same thing with regard to customs procedures, and we also saw it yesterday with regard to the clearance of goods. At what point did taking back control morph into not having controls at all, and not being able to consider applications? When will we ultimately get out of this holding pattern of the rollover of the status quo and actually put in place the controls that were envisaged five years ago when the country took this decision?