Securitisation Regulations 2018

Ranil Jayawardena Excerpts

Wednesday 13th February 2019 Commons Chamber

[Bambos Charalambous (Enfield, Southgate) (Lab)]

It is a pleasure to follow the hon. Member for Aberdeen North (Kirsty Blackman).

Not everyone appreciates the role that securitisation of loans and debts played in the financial crash of 2008, but it was a substantial role, with devastating consequences. To give some context, in the years prior to 2008, a calamitous decision was taken by executives in large US-based international banks to securitise sub-prime mortgages, which were mortgages given to people who had virtually no way of paying them back. Because of predatory lending, the number of these sub-prime mortgages continued to rise. They were then pooled together with other loans and debts and packaged as a financial product in the form of mortgage-backed securities that received triple A ratings from the credit rating companies.

[Mr Ranil Jayawardena (North East Hampshire) (Con)]

The hon. Gentleman is surely arguing that sub-prime lending was mismanaged rather than securitisation itself. Do I understand him correctly, or is he suggesting that securitisation was the problem?

[Bambos Charalambous]

It was both. It was the sub-prime lending and it was also the packaging of these products into securitisation with other, better products that were then triple A rated.

[Mr Jayawardena]

But is it not true that securitisation is really helpful in recycling capital, thereby providing investors with a stream of income that is useful to them and allowing responsible financial institutions to direct their capital at new people who want, for example, to borrow money to buy a home?

[Bambos Charalambous]

If done properly, there is benefit in securitisation, but it was not done properly in the United States, and therefore we need to take extra precautions now to ensure that it is done properly.

[Mr Jayawardena]

The hon. Gentleman is very kind to give way again. I want to unpick that a little further, because it is helpful. Can he confirm that securitisation is a good way of managing risk across a portfolio of loans, so that those with worse credit ratings can be properly and openly matched up with those with better credit ratings, to ensure that investors have a blend that they can draw an income on in the long run and allow institutions to use the capital they have secured from investors to offer new products to new people?

[Bambos Charalambous]

But if credit rating companies do not give the correct ratings, as happened in the United States, it all falls apart. I am happy to carry on the conversation with the hon. Gentleman in Strangers’ afterwards.

There was a big investment in mortgage-backed securities, with many financial institutions choosing to invest in them because of their promised high rate of return. When people started defaulting on sub-prime mortgages, the mortgage-backed securities lost their value, and the financial institutions that had invested heavily in them became exposed and suffered catastrophic losses. Since that time, steps have been taken to ensure that we never again experience the shockwaves of those failing giant financial institutions and the aftermath. We need a robust system of dealing with the risk of any such exposure due to securitisation, and that requires primary legislation.

As the hon. Member for Aberdeen North said, what we have before us are ill-conceived regulations that do not address the whole picture, and these changes are being made without the House having a chance to properly scrutinise them. Let us be clear: these regulations are not required due to the fear of a no-deal Brexit. They have conveniently been slipped in by the Government, under not the European Union (Withdrawal) Act 2018 but other legislation.

The regulations give responsibility to the Financial Conduct Authority to supervise the compliance of people involved in securitisation practices and allow it to impose certain penalties and take other steps to monitor securitisation. Such changes should not be made via secondary legislation. The complexity of these measures needs proper scrutiny. The very fact that the regulations change provisions in criminal law by preventing the FCA from instituting criminal proceedings for money laundering and insider dealing is a serious matter that is worthy of proper debate and scrutiny, which cannot be done via this debate. The regulations are wrong-headed, as schedule 1 amends primary legislation and transfers significant powers to the Treasury, the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England.

[Mr Jayawardena]

I am enjoying the hon. Gentleman’s contribution, even if we come from different starting points. Does he support the FCA having such a role but object to the principle of how this is being arrived at, or does he object to the FCA having this role? If not the FCA, who should it be?

[Bambos Charalambous]

Those are exactly the sort of points that should be made via a debate on primary, not secondary, legislation.

[Mr Jayawardena]

Will the hon. Gentleman give way?

[Bambos Charalambous]

I will not give way again, as I am almost at the end of my contribution.

These are important changes that Parliament needs to get right, due to the dire consequences of what went wrong in the past. These measures are opaque, unconstitutional and lacking in proper scrutiny. I invite the Government to withdraw the regulations and introduce primary legislation, to allow thorough and proper scrutiny to take place. Without such assurances, I will vote for the motion in the name of my right hon. Friend the Member for Islington North (Jeremy Corbyn) and against the Government.

--- Later in debate ---

[Anneliese Dodds]

As ever, my hon. Friend makes an important, pertinent and brief point.

[Mr Jayawardena]

I wonder whether, on reflection, the hon. Lady thinks that the former regulatory structure under the Financial Services Authority was not fulfilling its duties, that it was right to break it up between the PRA and the FCA, and that that resulted in an improvement in regulation.

[Anneliese Dodds]

The overall regulatory structure for the financial services industry is surely not what we are talking about in this debate. We are talking specifically about the regulation of securitisation. [Interruption.] The hon. Gentleman appears to be suggesting that he was trying to make a point about the lack of stringent regulation at the time of the financial crisis. I remind all Members that it was, of course, the Conservatives who urged the then Government to deregulate further and to remove regulation.

My hon. Friend the Member for Enfield, Southgate (Bambos Charalambous) set out the involvement of securitisation in the financial crisis very clearly. To respond briefly to the hon. Member for North East Hampshire (Mr Jayawardena), building on what my hon. Friend said, there has been a wide-ranging debate about whether it is appropriate to encourage additional securitisation, of which he may be aware. Of course, securitisation facilitates additional leverage, beyond what would already be there, because it makes liquid assets that are not already liquid. That may be appropriate in some contexts, but it can lead to inappropriate leveraging, particularly when it is conducted in a complex and opaque way, as arguably was the case during the financial crisis. It is surely appropriate, therefore, that we question any new regulations that apply to securitisation in this House, as we have done in this debate.

I am grateful to the Minister for his opening remarks. However, I regret that he failed to respond to my detailed comments about the manner in which the EU regulation has been transposed. Our complaint is not necessarily with the overall framework, which, as he rightly intimated, came from the Basel framework through IOSCO and, latterly, the EU. The point is that the process has not been entirely without controversy. As a result, the decisions that the Government make about how to implement the framework are potentially delicate, as was underlined rightly by the hon. Member for Aberdeen North (Kirsty Blackman).

The Minister said that the statutory instrument is a simple empowerment of the FCA. However, I referred in my remarks to how the regulations disapply elements of existing legislation, including those relating to offences under the purview of the Competition and Markets Authority and to insider dealing. He did not make it clear why that was necessary. He said that the measures would make our statute book consistent with offences in other countries in respect of complex securitisation and so on. He did not indicate whether they were consistent with existing offences on the UK statute book. That, surely, is what is at issue.

For all those reasons, we will press the motion of revocation to a vote.

Question put.