Capital Requirements (Amendment) (EU Exit) Regulations 2019 — House of Lords, 2019-10-07
Topic: Domestic Commerce
Denis Tunnicliffe (Labour, Centre-left): My Lords, I agree with the noble Baroness, Lady Bowles of Berkhamsted, that we debate the whole issue of resolution too infrequently. The tone of much of the paperwork here is concern about whether we are putting burdens on the industry that put it at a disadvantage, but one must remember that the whole issue of resolution is about catastrophe. We have had a serious resolution issue only in the 2008-09 crisis, and that was a frightful example of the taxpayer taking the losses in an area where the banks had previously taken the profits. Therefore, resolution is a very important issue, which we should perhaps bring to more democratic discussion more often. I say that with some trepidation because I am at some disadvantage compared with my Liberal Democrat colleagues, since they are professionals and tend to know what they are talking about in this area I have to glean the essence of the debate from the Explanatory Memorandum, which I therefore look to a more robust test of the quality of. The problem with British legislation is that so much of it is a statutory instrument that modifies another that amends another that amends a previous Act of Parliament which is by now a decade or so old. It is almost impossible to understand the meaning of this particular statutory instrument from looking to the instrument itself; one is entirely dependent on the Explanatory Memorandum to bring out the essence On Saturday—a lovely day to be in, reading an Explanatory Memorandum—I therefore set out and got about as far as paragraph 2.2: "The EU’s prudential policy regime for banks, building societies and investment firms consists of the CRR"— the capital requirements regulation— "and the Capital Requirements Directive IV … together with a range of Binding Technical Standards (BTS). CRR is directly applicable while CRDIV was implemented in UK legislation, predominantly through the Capital Requirements (Country-by-Country Reporting) Regulations 2013 … the Capital Requirements (Capital Buffers and Macroprudential Measures) Regulations 2014", at which point I went to the guidance for Explanatory Memoranda. The best bit of guidance comes from the Secondary Legislation Scrutiny Committee in May 2015: "The purpose of the EM is to provide members of Parliament and the public with a plain English, free-standing, explanation of the effect of the instrument and why it is necessary. It is not meant for lawyers, but to help people who may know nothing about the subject"— that is me— "quickly to gain an understanding of the SI’s intent and purpose" I have said things like this before: at its best, the Treasury produces some excellent documentation, but the real burden of these SIs is getting some feel for what they mean As has already been mentioned, we will not object to or vote against the statutory instrument. That would produce a constitutional crisis, and we have got enough people creating those at the moment without the Labour Front Bench in the Lords doing it. Accordingly, the Minister may have no fear of a Division. I am therefore going to do no more than pick out one or two issues that concern me The first is about the commencement. Regulation 1 states: "(1) These Regulations may be cited as the Capital Requirements (Amendment) (EU Exit) Regulations 2019 (2) Parts 1 and 2 come into force on the day after the day on which these Regulations are made (3) Part 3 comes into force on exit day" I have a real problem with that. My understanding is that this is a no-deal-only SI for. I do not understand what happens if we exit the European Union—as is the declared intention of the Prime Minister and many others on the Government Front Bench—with an agreement. Perhaps the Treasury has decided that it is an unreal possibility. If we leave with an agreement, we surely go into a transition period during which this SI would not apply. Can the Minister explain what happens on 31 October if we in fact leave with a deal I plodded on through the document and more or less understood what it was about until I got to paragraph 2.16: "A resolution-specific example of the removal of preferential treatment for the EU27 relates to provisions introduced by CRRII regarding MREL. CRRII imposes additional internal MREL requirements for non-EU G-SIIs"— which I understand to be global systemically important institutions "This has the effect of increasing the amount of MREL that material subsidiaries of non-EU G-SIIs should maintain from a range of 75%-90%, to 90% of the full amount of external MREL that the entity would be required to maintain if it were a resolution entity" Since it is in the EM, I assume that that is important. However, I do not have the faintest idea what it means. I would be grateful if the Minister could explain. Lest Members feel that I am being unfair to the Minister, I did alert him to this point this morning Later in paragraph 2.16, I found it slightly worryingly that it says: "The Bank of England, supported by HM Treasury, has proposed to apply its transitional powers to delay the impact of this change until 31 December 2020, giving affected firms in the UK time to adjust to changes to meet their obligations" That seems to say in plain language that the MREL reserves will be less than is required in the long term under these regulations, during a period when the world is likely to be particularly turbulent. This seems somewhat unwise. Granted, it has the effect of reducing the burden on the appropriate firms, but I would like to have seen in the document some examination as to what inquiry the Government have made to assure themselves that the increases in risk due to the reduced reserves have been thought through and are deemed to be satisfactory. While I can see that the Treasury has moved with respect to the burden on the industry, it does not seem to have considered the possible increase in risk At paragraph 3.1, we are told that this is an "urgent ‘made-affirmative’ procedure". It is obviously urgent now, but it seems to me that it did not need to become so; it was possible to see somewhat earlier that this statutory instrument was needed. Why were these problems not anticipated? Why could this instrument not come to us under the normal procedure I turn to the second statutory instrument. Paragraph 2.1 in the Explanatory Memorandum says: "This instrument also addresses deficiencies in the UK’s Risk Transformation Regulations 2017 (‘the RTR’) and related legislation. The RTR implements a competitive UK regime for Insurance Linked Securities … business" That sounds to me as though it is introducing policy, although it is too complicated for me to be sure. One of the almost sacred tenets of the withdrawal Act was that it would not introduce policy; it would essentially only use the appropriate powers where necessary. That assurance is repeated in paragraph 7.2, which says: "The financial services onshoring SIs are not intended to make policy changes, other than to reflect the UK’s new position outside of the EU, and to smooth the transition to this position". What I found even more confusing was that I could not find where this promise in paragraph 2.1 was. I wondered—as they are in quite separate places—whether it was anything to do with the various references to "special purpose vehicles". I know that the financial services industry is comfortable with special purpose vehicles—more than at the receiving end in industry—but, having come across them, I slightly shudder. I hope there is no material change to the use of special purpose vehicles brought about by this instrument.