---

Capital Requirements (Amendment) (EU Exit) Regulations 2019

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.

5.15 pm

However, routine deficiency fixes, including removing references to the EU and EU institutions, will be needed to ensure the Solvency II regulation continues to operate effectively in the UK after exit. Nevertheless, the fixes are essential to ensure clarity and legal certainty around the procedures that insurers must follow to set their solvency requirements and certainty around the Prudential Regulation Authority’s ability to supervise and enforce the requirements. This comes at a critical time in the Solvency II calendar. Firms are currently preparing their annual supervisory reports, which must be submitted to the PRA by 31 December. Without clarity around the basis on which these important reports should be prepared, the effectiveness of the prudential regime for insurance in the UK would be undermined.

I will now cover the fixes to the UK’s Risk Transformation Regulations 2017 which were introduced to set up a new regime for insurance-linked securities or ILS. ILS are an innovative form of risk transfer that allows insurers and reinsurers to transfer risk to a

special purpose vehicle. The new regime for ILS was introduced as part of our efforts to ensure that the UK remains a leading global centre for specialist reinsurance business. As the Risk Transformation Regulations were designed to follow Solvency II requirements for insurance special purpose vehicles, they include references to and definitions in EU law. This instrument fixes them by using references to relevant UK legislation and importing certain definitions from Solvency II, as it will form part of UK law at exit, with those definitions adapted to work in a UK stand-alone regime.

In addition, the Risk Transformation Regulations established two regulatory regimes: one for the transfer of risk by EEA insurers or reinsurers, and one for the transfer of risk by non-EEA insurers or reinsurers. This reflects the Solvency II directive, which applies only to EEA insurers and reinsurers that transfer risk to EEA special purpose vehicles. The provisions of this instrument remove this distinction, which will no longer be necessary once the UK leaves the EU, but the Solvency II-derived requirements will still apply to all transfers of risk to a UK special purpose vehicle after exit. In the drafting of these instruments, the Treasury has been working closely with the financial services regulators, and we have engaged extensively with the financial services industry, taking account of feedback from industry players that would be significantly affected.

Before I conclude, it is important that I address the procedure under which these instruments have been made. This and two other financial services exit instruments were made and laid before Parliament on 5 September, under the made affirmative procedure provided for in the European Union (Withdrawal) Act. This is an exceptional, urgent procedure that brings an affirmative instrument into law immediately before Parliament has considered the legislation, but the procedure also requires that Parliament must consider and approve a made affirmative instrument, if it is to remain in law. The Government have not used this procedure lightly and it must be remembered that, across departments, we have already laid more than 600 exit instruments under the usual secondary legislation procedures. However, as we draw near to exit day, it is vital to have all critical exit legislation in place, including legislation necessary to ensure that our financial services regulatory regime continues to function effectively. It would have been reckless to leave this until the last minute. Industry and our financial regulators need legal certainty on the regime that will apply from exit. Both the instruments before the House today are also being considered in another place this afternoon, consistent with the Government’s objective to ensure all critical legislation is in place before exit.

In summary, these two instruments are essential to ensure that the prudential regimes applying to UK credit institutions, investment firms, insurance firms and insurance risk transfer work effectively if the UK leaves the EU without a deal on 31 October. I hope that colleagues will join me in supporting the regulations.