Capital Requirements (Amendment) (EU Exit) Regulations 2019 — House of Lords, 2019-10-07
Topic: Domestic Commerce
James Bethell (Conservative, Centre-right): I beg to move that they be approved As the House will be aware, the Government had previously made all the necessary legislation to ensure that in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. Following the extension to the Article 50 process, new EU legislation has come into force and, under the European Union (Withdrawal) Act, it will form part of UK law at exit. Further deficiency fixes are therefore necessary to ensure that the UK’s regulatory regime remains prepared for exit. The two instruments being considered today deal with two new pieces of EU legislation that have recently come into force The first instrument resolves deficiencies in the EU’s prudential regime for credit institutions and investment firms to take account of revisions the EU has recently made to the capital requirements regulation. This regime sets out how much capital institutions, such as banks and investment firms, need to hold. The CRR is a directly applicable EU regulation that has applied since 2013. An exit instrument correcting the deficiencies in retained law was laid and approved by Parliament in 2018. Earlier this year, the EU finalised a revised banking package, which included amendments to the CRR made by an amending instrument known as CRR2. This gives effect to some of the internationally agreed Basel reforms, which are the centrepiece of the post-crisis reforms aimed at making banking safer. Similar changes are expected in all G20 countries that follow the Basel guidelines Through the UK’s membership of the G20 and its Financial Stability Board, we have committed to the full, timely and consistent implementation of the Basel 3 reforms. Our deficiency fixes for CRR therefore need to be updated to take account of CRR2. There are three main areas where fixes are required: third country treatment, transfer of functions and updates to definitions Consistent with the approach taken in the 2018 exit instrument to amend the CRR, the regulations remove the preferential capital treatment given to the largest banks and investment firms in the EU 27 to reflect the fact that the EU and UK will treat each other as third countries in a no-deal scenario. In line with the approach that the Government are taking to all onshored financial services legislation, the instrument transfers a number of functions currently within the remit of EU authorities to the appropriate UK bodies. Functions such as the development of detailed technical rules on certain provisions of CRR will now be carried out by the Financial Conduct Authority, the Prudential Regulation Authority or the Bank of England. Where CRR2 confers a delegated legislation-making power on the Commission, these powers are converted into regulation-making powers conferred on the Treasury. Use of those powers by the Treasury will need the approval of Parliament. Finally, CRR2 amended some definitions used in CRR. The instrument corrects those updated definitions so that they can operate in a UK-only context The Treasury, financial regulators and industry agree that it is critical to have deficiency fixes in place by exit day for these new CRR provisions. Without them, there will be considerable legal uncertainty around the capital requirements that apply to banks and investment firms, particularly those that apply to global, systemically important banks. The powers of our regulators to supervise and enforce capital requirements would also be in doubt, increasing the risk of financial instability I now turn to the second financial services instrument we are considering today. In January this year, the Solvency 2 and Insurance (Amendment, etc) (EU Exit) Regulations were approved by Parliament. Those regulations addressed deficiencies in Solvency II as it will form part of UK law at exit. Since then, revisions by the EU to the Solvency II delegated regulation have updated aspects of the approach to setting insolvency requirements for insurance funds, including the simplification of capital calculations and greater alignment of capital requirements across insurance and banking legislation. These revisions took effect on 8 July 2019 and will form part of UK law after exit. The substance of the revisions will not result in deficiencies after exit, and the updated provisions will continue to operate in the UK as they do now.