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

I turn to the changes in relation to the implementation of IFPR. Some of these changes are straightforward—for example, removing now defunct terminology due to changes stemming from IFPR. Two others are more substantive. First, this instrument extends the Securitisation Regulation’s due diligence requirements to all FCA investment firms. This ensures that all FCA investment firms buying securitisations must conduct due diligence, thereby helping to safeguard the integrity of the UK securitisation market. The second removes FCA investment firms from the UK resolution regime. This reflects the Government’s view that the FCA’s existing toolkit, along with the measures the FCA will implement in future through IFPR and the investment bank special administration regime, are more appropriate ways of managing such firms’ failure. FCA investment firms currently use existing rules and go into insolvency proceedings anyway, rather than going into resolution. Therefore, keeping them within the resolution regime only serves to create administrative cost for these firms for no benefit.

This instrument contains a savings provision and a transitional provision for the IFPR. It enables the FCA to continue to modify, revoke or amend IFPR-relevant technical standards. It provides for transitional provisions that support the functioning of the UK securitisation market by extending the existing risk retention requirements for one year to allow time for firms to transition their approach. The risk retention requirement ensures that firms retain an economic interest in a portion of the risk that is being sold on to investors.

Finally, this instrument addresses a small number of deficiencies arising from the withdrawal of the UK from the EU which have been identified during the process of making these Basel and IFPR amendments.

In conclusion, the Treasury has worked closely with the Bank of England, the PRA, FCA, industry and, in relation to the resolution change, the Banking Liaison Panel in the drafting of this instrument.

I hope that noble Lords have found my explanation helpful. In short, this instrument plays an important functional part in preparing UK legislation for the important Basel III implementation and IFPR packages. I would like to inform noble Lords that a correction slip has been issued in relation to a typographical error in this draft instrument. There is an incorrect cross-reference in the title of Regulation 38. The operative provisions in that regulation are correct. As a result, the error has no legal effect, and noble Lords can be assured that this change is minor. I beg to move.

Is my noble friend absolutely confident that those firms do not want the SI reviewed after a period? If they all say no—that they do not want a review and are comfortable—fine, but my judgment is that, in life, it is helpful to have a review at some point.

Moving on, the Treasury has, in its Explanatory Memorandum, pointed to the existence of accountability frameworks for the PRA and the FCA. However, in doing so, it neglected to mention the unease that has been expressed about this by several colleagues across your Lordships’ House. At the time, it was suggested that concerned colleagues may find comfort in the ongoing future regulatory framework review process. Some has indeed been found in the proposals outlined in measures 6 and 7 of Command Paper 548 to introduce statutory requirements for the PRA and FCA to notify relevant parliamentary committees of their consultations and provide written responses to any representations made. If adopted, these steps would mirror several of the key asks in our previous amendments. Nevertheless, as always, the devil will be in the detail. While it may not be strictly relevant to this SI, can the Minister outline the anticipated timescale for the review? When is the Treasury likely to come forward with the resulting legislation?

Another concern around CRR and IFPR rule-making was the extent to which the regulators would have regard to the steps needed to tackle the climate crisis. The Government eventually conceded that the PRA and the FCA should have regard to the 2050 net-zero target, but this requirement takes effect only on 1 January —that is, after most of the rules have been published and at the same time as they enter into force. Can the Minister outline what steps, if any, have been taken by the regulators to ensure that green issues have been considered as part of the current exercise, in so far as it is possible within the Basel III framework? Can he also explain how he envisages the new duty operating in practice? What kinds of regulatory changes would he expect to see as a result of that concession having been made?

There is a perception—I have outlined my concerns before—that while the Chancellor likes to talk green, he is somewhat less keen on acting accordingly. Many firms in the financial sector are cognisant of the need to make their business practices more sustainable. Some have acted as outriders, setting ambitious targets and creating interesting schemes for change. However, more needs to be done. A voluntary approach to things such as investment in fossil fuels will get us only so far. Some will do the right thing but others may see opportunities to gain competitive advantage. If, by the time we get to the next financial services Bill, these kinds of issues have not been adequately addressed by the PRA and FCA, can the Minister commit the Treasury to taking action?

Implementing Basel III and IFPR is one thing, and we do not oppose these regulations’ small part in delivering those reforms. However, meeting the challenges of the future is another matter and it is not yet clear that we are on the right course.

The noble Lord, Lord Tunnicliffe, asked me to outline what parliamentary engagement has been undertaken on both the CRR and IFPR reforms. Ultimately, it is Parliament that sets the regulators’ objectives. It is of course right that Parliament has an appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. The regulators committed to sending their consultations and draft rules on Basel and the IFPR to Parliament during the passage of the Financial Services Act earlier this year.

Consultation on these changes started in December 2020, so there has been plenty of time for Parliament to review and report on it, including through the Select Committee process. The PRA and the FCA also published their near-final rules over the summer to provide ample time for familiarisation well in advance of this debate. As part of the ongoing future regulatory reform, as I have mentioned, we have proposed formalising through statute the mechanism through which regulators provide information.

The noble Lord, Lord Tunnicliffe, and my noble friend Lord Naseby asked whether the detail of this instrument and the accompanying rules set by the regulators are present and correct. The answer is yes. Treasury officials have worked extensively with their counterparts at the regulators to ensure that the changes mesh and make a cohesive whole. Where appropriate, both the Treasury and the regulators have consulted on the measures implemented through this statutory instrument. The noble Lord and my noble friend also asked whether the IFPR rules have been finalised and published since the SI and EM were laid. I can confirm that the FCA has now published all the IFPR rules, including the final outstanding set of rules, which were published on 26 November.

I thank the noble Lord, Lord Tunnicliffe, for his assertion that two of the measures in the recent financial future regulatory framework review consultation provided him with some comfort on the question of the regulators’ accountability to Parliament. He also asked about the timescales of the review. The Government published their consultation on 9 November, with a closing date for responses of 9 February next year. We will bring forward further detail on our approach to implementing the proposals in the review in due course.

The noble Lord asked me to outline what steps, if any, have been taken by regulators to ensure that green issues have been considered as part of their rule-making processes. He is of course correct to say that the Financial Services Bill 2021—now an Act—was amended to include

“have regard to the net-zero carbon target”,

which will apply after 1 January next year. This means that the PRA does not need to have regard to climate change considerations in making the Basel III rules, nor the FCA in making the IFPR rules, for 1 January. This was done to ensure that there is no delay in implementing the Basel III and IFPR reforms. It will be for regulators to determine how the new duty will operate in practice. The Government anticipate that it will function in much the same way as other similar obligations did during the PRA’s implementation of the Basel III standards, such as the need to have regard to the ability of firms

“to continue to provide finance to businesses and consumers in the UK”.

The PRA and the FCA are aware of the need to respond to the potential risks posed by climate change. For example, on 28 October, the PRA published its second climate change adaptation report, finding that under the existing regulatory capital framework there is scope to use capital requirements to address certain aspects of climate-related financial risks. This and future work will no doubt feed into how the PRA sets its rule from 1 January 2022.