16:14 - The House divided: - Ayes: 263 / Noes: 306 - Question accordingly negatived.
The Economic Secretary to the Treasury (John Glen)
As part of our obligations while the UK remains a member of the EU, it is our responsibility to ensure that domestic law is compatible with EU legislation. That includes this statutory instrument, which will, as the hon. Member for Oxford East (Anneliese Dodds) said, ensure that the EU securitisation regulation is effective and enforceable in the UK. It is not an EU-exit statutory instrument through which functions are transferred from an EU authority to domestic authorities. The instrument that does that—the Securitisation (Amendment) (EU Exit) Regulations 2019—was laid on 23 January and will be debated in due course.
It might be helpful if I gave the House some background information. The securitisation market’s slow recovery after the financial crisis reflects concerns among investors and prudential supervisors about risks associated with the securitisation process itself. The EU responded by proposing in 2015 legislative measures to promote a transparent and liquid market for securitisation. There were 120 responses to the 2015 consultation that gave rise to the regulations, which evolved over two years of EU discussions. They were then scrutinised in Parliament and were approved by the House of Lords scrutiny Committees in July 2017 and by the House of Commons European Scrutiny Committee in February 2017.
Kirsty Blackman (Aberdeen North) (SNP)
The Minister mentioned the number of consultation responses; were they from throughout the EU or just from companies and organisations in the UK?
John Glen
I am not certain, but I would imagine they were from the UK. It was an extensive consultation that led to the evolution of the regulations, which were then scrutinised at different intervals by the Lords and Commons Committees before their final approval in 2017.
The UK voted in favour of the package of reforms in 2017 because it ensures high standards of process, legal certainty and comparability through a greater degree of standardisation of products. The new rules bear no relation to the securitisation of sub-prime mortgages created in the US that contributed so significantly to the financial crisis. Along with other legislation, including on the overhaul of the credit ratings agencies and more stringent rules for mortgage and credit granting, the proposals build on the lessons learned from the financial crisis by improving regulation and oversight, and they implement standards introduced by the international supervisory community.
The EU regulation, which the instrument we are debating implements, is derived from the new international standards set by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. These two bodies worked to create a new framework of high-quality securitisations to introduce the degree of assurance around the information on securitisation that was necessary in the markets. Their work seeks to restore an important funding channel for the EU economy while making the market less risky and supporting financial stability.
At a time when bank lending is constrained, securitisation can boost credit and growth. It can help to free up banks’ balance sheets so that they can lend to households and businesses. The good functioning of and access to securitisation as a funding tool allows investors to diversify their investments and supports the real economy. It is for that purpose that effectively supervised securitisation is actively supported by the prudential authorities, including the Bank of England, which supported the EU initiative as playing
“an essential role in de-stigmatising European securitisation, helping the market to develop on a sustainable track”.
Let me turn now to the securitisation regulations. Although the EU rules themselves were agreed in 2017, the statutory instrument under consideration concerns empowering the regulators to effectively supervise the new securitisation rules that came into force at the start of the year. As the industry has prepared itself for the new regime, the Government are obliged to ensure that the new framework is operable. In essence, this SI simply gives effect to the directly applicable EU securitisation regulation and ensures that it is effective and enforceable in the UK.
The supervisory, investigative and sanctioning powers that this instrument delegates to the relevant competent authorities give effect to the EU framework. The hon. Lady mentioned the resourcing of the Financial Conduct Authority and the Bank of England. Both have been instrumental in the development of these regulations and are primed and ready to take on responsibility for them. The instrument fulfils the necessary obligations of the EU regulation in designating roles to the domestic regulators and provides them with the powers that they require to effectively supervise the market.
To summarise, the Government believe that this instrument is needed to ensure that the new securitisation regulatory regime works effectively. This will support a sound and transparent securitisation market in the UK, bringing real benefits to investment, jobs and growth while enhancing long-term financial stability. The whole purpose of the EU regulation is to address the challenges of the past and to ensure that mistakes prior to the financial crisis in respect of securitisation are not repeated by keeping the measures simple in form and more transparent. The proposal to revoke the instrument would only endanger that and disrupt the market as supervisors would not be able to enforce infringements to the rules that seek to better regulate the market.
The hon. Lady raised a number of points. I have clarified that this measure is not related to a no-deal situation. A point was made about the amendment to primary legislation and the fact that criminal offences already on the statute book will be affected. Although the EU regulation is directly applicable, the Securitisation Regulations 2018 make changes to UK law to ensure that EU regulations are fully effective and enforceable in the UK. The power under section 2(2) of the European Communities Act 1972 makes it possible to give effect in national law to measures in EU law by secondary or delegated legislation such as statutory instruments. Importantly, such secondary legislation can amend an Act of Parliament—section 2(4)—as the delegated legislative power includes the power to make such provisions as might be made by an Act of Parliament. So the instrument applies and modifies certain provisions of the Financial Services and Markets Act 2000 and other UK legislation both to create the new supervisory, investigative and sanctioning powers required by the EU regulation and to ensure that UK legislation is compatible with EU regulation, including applying and/or modifying necessary offences pursuant to sections 398 and 177 of the 2000 Act. This instrument allows an approach consistent with existing enforcement regimes elsewhere in the sector and with other financial services implementing SIs.
The hon. Lady referred to preferential treatment of capital for banks and risk retention and needing to have skin in the game. These rules are derived directly from international standards, which are set by the Basel Committee on Banking Supervision and by the International Organisation of Securities Commissions. There is no attempt to develop some bespoke UK regime. These measures are completely consistent, which has been acknowledged during the significant scrutiny process to which they have already been subject. The hon. Lady also mentioned the CMA. The CMA was not designated as it does not have a role to play under the EU regulation.
I think that I have dealt with the points that have been raised. These are straightforward regulations that give effect to the directly applicable EU securitisation regulation. When Sub-Committee A of the Secondary Legislation Scrutiny Committee looked at these regulations on 17 December, it cleared them without comment. This is an attempt to update the regulations appropriately to give more confidence in the markets. I hope that the House will join together in support of the continued application of this instrument, and to oppose the motion to revoke it.
Madam Deputy Speaker
I beg your pardon. If the Minister would like to respond, and it is the wish of the House that he should do so, he may.
John Glen
Thank you, Madam Deputy Speaker. I feel it is appropriate for me to respond to the remarks of the hon. Members for Enfield, Southgate (Bambos Charalambous) and for Aberdeen North (Kirsty Blackman).
The Treasury has not undertaken a formal consultation on this SI, as the changes to domestic legislation required are minor, and the enforcement approach taken is in line with existing enforcement regimes in the financial services sector. We have worked closely with the FCA and the PRA throughout.
The hon. Member for Aberdeen North made some remarks about the resourcing of the FCA. It has additional resources through the onshoring programme, but this SI has nothing to do with that. This is a business-as-usual SI that would have happened anyway. There was certainly no attempt to slip it in amidst all the others that were taken through Committee. It was a consequence of these regulations being taken through the scrutiny process. I can confirm that there were 120 responses from across the EU as a whole in 2015 to the Commission’s proposals, which were then iterated over the two years before they were approved.
I agree with much of what the hon. Member for Enfield, Southgate said about the aspirations of the regulations underlying this SI. This will bring in more stringent underwriting criteria for mortgage and credit granting. It will overhaul the supervision of credit rating agencies. We have updated international standards on the amount of capital that banks need to hold against securitisations. It responds directly to the work of the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. The process of consultation that led to the regulations being agreed in this House and through the Commission has lasted two years, from 2015 to 2017, and this SI is simply implementing them.
In conclusion, I believe that the securitisation regulations will enable the FCA and the PRA to supervise the new framework for securitisations agreed in the EU, which introduces stricter standards and makes securitisations simpler and more transparent.
Kirsty Blackman
On the point about the powers of the FCA and the changes that are being made to it—I am not suggesting that he is trying to slip out this particular one, but there do seem to have been various changes along the way—is it likely that the Government will come forward with something explaining how they expect the FCA to look in future and how we will get to that point?
John Glen
There are two or three things going on. There are 53 financial services SIs going through Committee in connection with no-deal preparations, which is certainly an additional burden on the FCA, and it has had the resources for that. The hon Lady asked about the Government’s holistic view of the role of the FCA. It is subject to a periodic review, having been formed under the legislation of five or six years ago, and that will happen in due course. We hope there will be more financial services legislation in future Sessions.
This instrument is necessary to enable the regulations to take effect. I hope that the House has found this afternoon’s debate on this matter informative and will be able to join me in opposing the motion.
Anneliese Dodds
If I may, I will start my remarks with a brief observation. Far too often in this House, I have heard hon. Members suggest that the financial crisis was somehow the result of the then Government’s policies. I am very pleased to have heard the opposite from the Minister today. In fact, it was the correct interpretation of what precipitated the global financial crisis, which did indeed, as he intimated, begin with the sub-prime mortgage collapses in the United States and then spread through the financial system, particularly through the use of complex financial instruments.
Anneliese Dodds
I am very happy for the Minister to agree with what I am saying.
John Glen
I am very happy to draw the hon. Lady’s attention to the fact that the default rate for triple A rated bonds in the EU was 0.6%, while in the US it was 16%. The key point that the Conservatives have always wished to stress is that the spending profile from 2002 and 2007 massively compounded the difficulties we found ourselves in.