Capital Requirements (Amendment) (EU Exit) Regulations 2019 — House of Lords, 2019-10-07
Topic: Domestic Commerce
James Bethell (Conservative, Centre-right): I thank noble Lords for this powerful debate on a highly technical subject. I endorse the noble Baroness, Lady Bowles, in her opening comment that this Chamber does not see enough discussion of financial services and this critically important industry. By this afternoon’s account, that is a very great shame; there is a huge amount of expertise in the Chamber and it would be great if that could be put to use more often I take on board completely the comments of frustration about the Explanatory Memorandum. I too spent some of Saturday negotiating it and share that frustration; it is incredibly difficult to navigate. I reassure the noble Lord that there is no deliberate effort to obfuscate or be unclear. This is simply a very technical area where, unavoidably, one layer of legislation is on top of another in the British manner. There is no simple explanation for technical SIs such as this without running through the narrative in the way that he, frustratingly, found I start by answering the questions of the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, about the MREL, which is possibly the most delicate and central issue raised by these SIs. The noble Lord, Lord Tunnicliffe, questioned the timing, and whether that opened up some form of gap or concern, where Britain might be underregulated. I reassure him that that is not the case. The SI does not in itself delay the change until 31 December 2020. Rather, the Bank of England, like all financial regulators, has a general legal power to phase in Brexit-related changes by law. In this case, the Bank has proposed to delay the MREL requirement until 31 December 2020 The Treasury is very sympathetic to this proposal because it gives the industry the ability to make arrangements for compliance instead of facing some kind of cliff edge, which would create uncertainty and a rush to do things on 31 November 2019. The industry is also completely sympathetic to the Bank’s proposals. In other words, this SI does not introduce new risk or appreciably increase existing risk. If anything, it reduces risk by phasing the introduction of a difficult measure in a reasonable, pragmatic and sensible way The noble Baroness, Lady Bowles, raised questions about the use of subsidiaries and whether capital in one subsidiary in one country might in some way be favoured over capital in another subsidiary in another country. I reassure her that the Bank of England may waive requirements for UK subsidiaries of UK banks without reciprocity but only if, in the Bank of England’s judgment, it would be a means of preserving UK financial stability rather than importing risk from the EU. That decision lies with the Bank of England and hopefully provides some reassurance The noble Baroness, Lady Kramer, raised the question of democratic deficit. Under the new arrangements, the European Parliament will not have oversight over British arrangements. However, both the FTA and the PRA are creatures of statute. They are both accountable to Parliament through existing primary legislation. They must both act within their statutory objectives; this provides scrutiny that we believe is comparable to that exercised by the European Parliament The noble Baroness, Lady Bowles, asked about MREL equivalence. I reassure her that the Treasury has legal powers to replicate any existing EU equivalence decisions and import them into UK law vis-à-vis third countries. The Treasury is in the process of reviewing all these decisions before retaining them. The noble Baroness, Lady Kramer, asked about the impact on business. I reassure her that we are absolutely not hurting small firms; these firms do not hold capital across borders and therefore do not need to worry about the scope of these changes. More generally, this SI seeks to preserve legal stability, so any impact on commercial profits will be a function of a firm’s response to the business environment The noble Lord, Lord Tunnicliffe, asked about the affirmative procedure. I share his concern about such measures being used without need or care. I reassure him that in this instance the use of the affirmative procedure was reviewed very carefully and only because this was felt to be extremely important. The Government have laid over 600 Brexit SIs to ensure that we have a functioning statute book when we leave the EU, in all scenarios. We have been incredibly careful and very limited in our use of the "made affirmative" urgent procedure under the EU withdrawal Act, using it for a tiny percentage of the total figure. In this instance, using the "made affirmative" procedure was really the only reliable way we could make the necessary legal changes given the uncertainty around the number of sitting days. The timetable was also driven by fresh EU legislation which made it difficult for us to lay these at an earlier stage Lastly, I reassure the Chamber that these SIs are not the vehicle for new policy. They are very much about implementing existing policies. They are supported by industry after a large amount of engagement with all the major players and in no way is this an effort to try to cook up new ways of doing things. The Government believe that these instruments are essential to ensure that prudential regulation of UK credit institutions, investment firms, insurers and insurance risk transfer continues to operate safely. I hope that the House has found today’s sitting informative and that it will join me in supporting these regulations.