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Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022

Volume 823: debated on Tuesday 5 July 2022

Motion to Approve

Moved by

My Lords, these regulations tidy up certain aspects of the statute book following the implementation of the remaining Basel III standards and the investment firms prudential regime.

During his Mansion House speech last year, the Chancellor set out an ambitious vision for the financial services sector. The vision is one of an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across the UK. At the heart of this are the changes that the Government have proposed as part of the future regulatory framework review, which involves delegating responsibility to regulators subject to enhanced accountability.

As noble Lords may recall, the Financial Services Act 2021 introduced a similar model in the area of prudential regulation specifically, to enable the Prudential Regulation Authority to update the UK’s capital requirements regime, to implement the remaining Basel accords and to enable the Financial Conduct Authority to implement the investment firms prudential regime. Both regimes devolved the detailed firm requirements to the relevant financial services regulator.

In September and December last year, noble Lords approved two SIs made under the Financial Services Act 2021 to implement these regimes. Cumulatively, these two SIs revoked relevant sections of the capital requirements regulation and introduced consequential amendments to make the regimes function effectively. This instrument makes further consequential changes to provide a complete, functioning legal regime for firms. These can be grouped into four categories.

First, many of the measures in this instrument make changes to ensure that the statute book is coherent after the implementation of Basel III and the IFPR. For example, the instrument inserts references into legislation to PRA rules which implement the Basel standards, and FCA rules which implement the IFPR.

Secondly, as noble Lords may recall, under previous legislation already considered by this House, IFPR investment firms were removed from the scope of the UK resolution regime. This step was taken to ensure that the burden on firms is proportionate to the financial stability risks they pose. The instrument that we are considering today ensures that the statute book is coherent following this removal. For example, this instrument revokes the Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014, which has been rendered redundant, given that all IFPR investment firms have now been excluded from the resolution regime.

Thirdly, this instrument clarifies transitional arrangements for certain securitisations, following the implementation of the IFPR. Under the UK securitisation regulations, firms issuing securitisations are required to retain 5% of the risk. In some scenarios, certain firms can retain this 5% on a consolidated basis, sharing it with other entities in their group. Some IFPR firms could do this previously but, following the implementation of the regime, IFPR firms must now retain the 5% themselves. They cannot share it with other entities in their group. This reflects how the IFPR works.

A previous instrument considered by this House last year created a one-year transitional period for this change to take effect. The instrument that we are debating today clarifies the steps that firms must take before the end of the one-year transitional period. We do not expect many firms, if any, to be affected by this. However, we want to ensure that requirements are clear and workable, in case there are any firms affected.

Finally, the instrument further addresses a small number of deficiencies arising from the withdrawal of the UK from the EU which have been identified during the development of the above amendments; for example, replacing references to the EU with references to the UK.

I hope that noble Lords have found my explanation helpful. I have kept it relatively brief given that we have had similar SIs before, because the regime itself has already gone live, and the majority of this SI is simply fixing cross-references. I beg to move.

We on these Benches thank the Minister for her excellent and long explanation of this. Otherwise, we have no comment on this SI.

My Lords, I thank the Minister for introducing these regulations. They build on the Financial Services Act, which was generally not contentious legislation. Arguments took place about the transparency of rule-making by the regulators, but the introduction of the investment firms prudential regime and several other changes were seen as sensible steps forward.

One suspects that the forthcoming financial services and markets Bill will be slightly more controversial. Much media speculation about the forthcoming Bill suggests that it will simply deregulate, rather than regulate in a smarter way. Our departure from the EU undoubtedly presents opportunities for our world-leading financial services sector. However, we must not put the stability of the sector at risk in the pursuit of relatively marginal gains. Many of the protections put in place after the 2008 global crisis were sensible. Financial institutions have become accustomed to them. They provide confidence to customers. When we see the Bill, I hope that they will not have been swept away. That would expose the Government and the public to unnecessary risk.

Turning back to the regulations before us today, I am pleased to say that we are generally supportive. They contain largely technical amendments to ensure that IFPR, Basel III bail-in procedures and securitisation regulations operate more effectively in the UK context. We have played a leading role in developing many of these policy frameworks at the international level, whether as an EU member state prior to our exit or as a member of other organisations and committees.

Can the Minister comment on how the Treasury and regulators will be assessing and reporting on the impact of the various changes once they have taken full effect? What, if any, role will there be for Parliament, beyond the day-to-day work of Select Committees, for example, as these impacts become apparent? Can she also comment on the anticipated timescale for the implementation of Basel III.1? We expect consultation on the final part of the framework shortly, but can she confirm whether it is the intention to implement reforms alongside international partners? If that is the case, what would happen if another key jurisdiction, such as the European Union, were to postpone its implementation date?

I turn to other areas covered by the regulations. Can the Minister comment on what work is being undertaken to assess the impact of current bail-in procedures and thresholds on mid-tier and challenger firms? UK Finance has called for changes to the threshold for smaller banks, as well as a sliding scale depending on institutions’ total assets. Is the Treasury looking at these suggestions in partnership with the regulators? Might we see something on this topic in the forthcoming primary legislation?

Finally, this statutory instrument corrects a number of deficiencies in retained EU law that were not identified during earlier tidying-up exercises. There is a consistent theme across different policy areas: departments prioritised changes to the retained law that were day-one critical, setting aside less fundamental tweaks until appropriate vehicles became available. Should we expect further corrections to retained EU law in future SIs, or is the Treasury confident that all deficiencies have now been captured? Have there been any practical issues for either the regulators or the financial institutions as a result of the failure to correct deficiencies in a more timely manner? How do these amendments fit into the Minister for Government Efficiency’s drive to repeal vast swathes of retained EU law?

In this field, many instruments contain essential technical information. They were not, as is often stated, forced upon us; rather, they came out of processes led by UK Ministers. With that in mind, can the Minister confirm whether the Treasury has been given any targets to reduce the volume of its retained EU law by the Cabinet Office? If so, what will that process look like?

I thank noble Lords for their contributions today and will address the points raised by the noble Lord, Lord Tunnicliffe, in his constructive speech.

The noble raised the forthcoming financial services and markets Bill. I will be absolutely clear that the Government are committed to maintaining high standards of regulation, while ensuring that rules are appropriately tailored to UK markets.

In assessing the two provisions this SI covers, the regulators have published a full cost-benefit analysis of the impact of their rules, which have applied from 1 January this year. It will be up to the PRA and FCA to consider whether any further tweaks or changes to the regimes are needed, now they are fully in force.

Parliament’s role has been to scrutinise the draft rules when they were published for consultation. Parliament is of course entitled to ask questions of the PRA and FCA in relation to the two prudential regimes.

In the future regulatory framework review consultation, the Government proposed measures setting out clearer requirements on when and how information should be provided to Parliament by regulators to support effective accountability and scrutiny. Once the reforms proposed in the FRF review are legislated for through the upcoming Bill, the measures will apply to these and future regimes. I am sure we will have much more discussion of the Government’s proposals when that Bill reaches this House.

With regards to the timescales for implementing the Basel 3.1 standards, as the noble Lord, Lord Tunnicliffe, mentioned, the PRA is expected to publish a consultation paper on its proposed implementation of the reforms in the fourth quarter of this year. That consultation will include a proposal for Basel 3.1 rules to take effect from 1 January 2025, which would align the UK’s implementation of the final set of reforms with the EU’s.

I recognise the noble Lord’s concerns around disjointed global timelines. International alignment will be critical to the effective implementation of Basel 3.1, and it is important that jurisdictions co-operate on this to ensure that disruption to firms is minimised and to maintain a level playing field. By proposing a timeline similar to the EU’s, the PRA has already signalled a willingness to align implementation with other major jurisdictions. The PRA can set its timeline only on the basis of what it knows at present. As more information becomes available, for example on the US or EU timelines, it can of course reconsider.

The noble Lord, Lord Tunnicliffe, mentioned the impact of current bail-in procedures on mid-tier and challenger banks. The Bank of England considered this as part of its review of the MREL framework last year and published its updated statement of policy in December. The Government are pleased that the Bank’s updates include a glide path that will provide more advanced certainty for firms, and a longer, more flexible transition period to meet MREL. I am also pleased to see the Bank is exploring how to improve depositors’ outcomes in insolvency and, subject to the outcomes of that work, considering whether it could significantly raise or remove the transactional accounts threshold.

As the noble Lord will be aware, the Bank has a set of statutory objectives and powers to ensure that resolution maintains critical banking services while protecting financial stability and public funds. The Treasury has worked closely with the Bank on its MREL review, and the Government are content that the Bank’s proposed changes to the framework for setting MREL ensure that the policy continues to provide appropriate protection for financial stability and public funds, while ensuring a proportionate approach to growing firms.

The noble Lord also raised the issue of future corrections of deficiencies in retained EU law. Beyond this instrument, the Treasury has identified a small number of specific areas where further corrections are required and will use future statutory instruments to correct those deficiencies. However, I am not aware of any significant practical issues that have resulted from not correcting the deficiencies at an earlier stage. As the noble Lord pointed out, the most fundamental changes were prioritised at the earliest stage.

On the noble Lord’s broader question on retained EU law, for the financial services sector this was dealt with in the FRF review, which will be implemented in the upcoming financial services and markets Bill. I very much agree with the noble Lord that there are important provisions in retained EU law but, as the Government set out in their consultation on the FRF review, many of the detailed and technical elements of retained EU law should be in the rulebooks of the regulators. The upcoming Bill will repeal retained EU law in financial services and enable it to be replaced with a regulatory regime that is properly tailored for UK markets and can be updated in an agile manner.

This will be a carefully managed process, with the repeal of retained EU law gradually taking effect over a period of time, as the Treasury and regulators put in place the appropriate legislation and rules to replace it. This approach is aligned with the broader approach taken to retained EU law across the Government. As set out in the Queen’s Speech, the Brexit freedoms Bill will enable law inherited from the EU to be amended, repealed or replaced with legislation that better suits the UK. I hope I have addressed the noble Lord’s detailed and useful questions on the Government’s approach.

Motion agreed.

My Lords, in the absence of the Minister for the next debate, I suggest we adjourn during pleasure for 10 minutes.

Sitting suspended.