Anneliese Dodds
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Securitisation Regulations 2018
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Anneliese Dodds (Oxford East) (Lab/Co-op)
I beg to move,
That the Securitisation Regulations 2018 (S.I., 2018, No. 1288), dated 3 December 2018, a copy of which was laid before this House on 4 December 2018, be revoked.
These regulations are not labelled as no-deal preparatory regulations, but they are being pushed through via a statutory instrument in the middle of a series of about 70 Brexit-related statutory instruments relating to financial services, including one relating specifically to the operation of the securitisation regime. The matters raised by this instrument require more debate and scrutiny than they have been afforded. It is for that reason that we asked for this debate on the Floor of the House.
As the Minister will be aware, the official Opposition also requested a debate on the Floor of the House about the transposition of the markets in financial instruments directive no-deal regulations via an SI. Those regulations were so complex that they required the production of a Keeling schedule, yet they were pushed through as a negative SI without any broader debate. This SI may be less wide-ranging than the other one but, like it, it is focused on the aspects of the financial system that precipitated and amplified the 2008 financial crisis.
Securitisation refers to the pooling of different kinds of loans or debts and their repackaging into a single financial product that is sold to investors. The use of complex, opaque securitisations—particularly those linked to the US sub-prime housing market—has been viewed as a key element in transporting the negative impact of the credit crunch through the financial system into the heart of major financial institutions. It is therefore essential that any legislation proposing changes to the regulation of securities be carefully reviewed.
The regulations have three main causes of concern. First, schedule 1 amends primary legislation—the Financial Services and Markets Act 2000. Schedule 1(8) nullifies the effect of section 399 of the Financial Services and Markets Act and disapplies section 402. Delegated legislation generally should not be used to amend primary legislation. Otherwise, it would allow the exercise of what lawyers and judges have disparagingly described as Henry VIII clauses. Put simply, primary legislation that has been drafted and reviewed by Parliament as a whole should not generally be revoked through statutory instruments. It might be argued that these regulations are part of a broader package of delegated legislation bringing in a new regime, but any regime of financial regulation is best set out in primary legislation. The Opposition made that point only two days ago in the debate on the transposition of so-called in-flight EU financial services legislation.
The EU securitisation regulations are wide-ranging. For example, they impose a number of requirements on institutional investors to carry out due diligence before investing in a securitisation position. They relate not only to individual decisions about specified positions, but to the creation of new procedures for monitoring compliance and stress-testing. They also introduce numerous requirements for transparency for securitisation, requiring the originator, the sponsor and the securitisation special purpose entity to designate one of their number to provide details of the securitisation, either to a repository or on a website. Finally, they provide preferential treatment to so-called simple, transparent and standardised securitisations, enabling them to be discounted for the purpose of allocating credit margins.
A core element of STS securitisation is the retention by originators, sponsors and original lenders of a 5% stake in the securitisation, described colloquially as “skin in the game”. Those involved must also follow certain transparency and due diligence requirements. As such, although the regulation does to an extent consolidate existing legislation, it also significantly loosens the burden of capital retention for banks using STS securitisations compared with the previous situation. Some stakeholders felt that reigniting the use of securitisation through this legislation would help to promote liquidity and boost economic activity, given that it, in effect, allows higher levels of borrowing by the economic actors whose debt is repackaged in the securitisation. However, many others point to the potential dangers this poses for financial stability if unsafe, non-transparent and overly complex securitisations are allowed to fall within the STS bracket. This is especially the case given the reduced capital requirements to balance off the default risk from STS securitisations. I hardly need to remind this House of the problems caused to the sustainability of financial institutions and the subsequent calls made on the taxpayer due to insufficient margin being held by the banks against the risks they held.
Secondly, these provisions amending primary legislation affect the criminal offences that are on the statute book. The legislation permits the use of sanctions for cases of negligence and intentional infringement, for example, fraudulent reporting of STS status. In addition, however, the provisions alter existing offences. The regulations appear to say that section 399 of the Financial Services and Markets Act 2000, which establishes an offence of misleading the Competition and Markets Authority, does not apply. In addition, paragraph 8 of schedule 1 prevents the Financial Conduct Authority from instituting proceedings for money laundering and insider dealing. It is not clear why, on the basis of this statutory instrument alone, this needs to follow from the parent legislation. Why, if we are reading this complex statutory instrument right, does it abolish the offence of misleading the CMA and prevent the FCA from instituting proceedings for money laundering and insider dealing? What problem are these provisions addressing? Why are these changes being achieved through this piece of secondary legislation? We hope that we can receive some clarification on these points. If we cannot, these provisions would appear to be troubling. Because of the impact on people’s liberties and the overall balance of offences on the statute book, which surely should be as public and accessible as possible, criminal offences should not be altered by delegated legislation in this manner.
Thirdly, and finally, these regulations transfer significant powers to the FCA to supervise compliance. It might be said that the FCA is the orthodox body to develop financial regulation and to ensure compliance with it, but there is a need for full debate about the allocation of responsibility for supervision and compliance. The original EU regulation provides no obligation for the FCA to be designated as the competent authority, so this is a political choice. It is also not clear, on the basis of this statutory instrument, whether the FCA has sufficient resourcing and capacity to carry out these tasks. It is not optimal or desirable for these powers to be transferred via a statutory instrument.
These powers are, of course, complicated by the interaction of this SI with the no-deal SI related to securitisation, which transfers the responsibility of the European Systemic Risk Board, for assessing and mitigating systemic risk, to the “competent authorities”. The latter are, as I understand it, here designated as the Prudential Regulation Authority, the FCA and the Bank, with systemic risk here identified as
“a material risk to the financial stability of a financial institution or to the financial system as a whole”.
Under this approach, the FCA would also be able to permit re-securitisation for specified legitimate purposes, an important exception to the general ban imposed from this legislation on re-securitisation. The general ban prevents the underlying assets of a securitisation from being themselves already securitised assets—this is one of many activities that produced the highly complex and opaque securitisations linked to contagion during the financial crisis. As part of these regulations, the FCA would be responsible for ensuring that those engaged in a securitisation complied with the relevant transparency requirements. It is especially important that these kinds of regulatory developments receive scrutiny, given the contention around elements of the securitisation package and, in particular, whether it is sufficiently stringent. What became known as “skin in the game” was set in the regulation at 5% of risk to be retained across each mode of risk retention, despite calls for a higher level from many quarters. Indeed, many actors within the EU questioned whether securitisation should be encouraged in the first place through the creation of the STS designation. Given that the resultant regulations were a balance between very polarised positions on this subject, it is essential that we properly scrutinise the transposition of these measures into UK law. For that reason, we have prayed against these measures being transferred purely through an SI process.
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.
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.
Madam Deputy Speaker (Dame Eleanor Laing)
Order. A short while ago, this was a very well behaved debate on very specific issues, but since the speech of the hon. Member for Enfield, Southgate (Bambos Charalambous), it seems to have become a very general and exciting debate. I know that Members are anticipating a Division, and they will be trying very hard to make up their minds on which side of the House they are going to vote, but they must listen to the hon. Lady.
Anneliese Dodds
I will not strain the House’s patience, but I fear that the Minister, who is normally very clear in his remarks, is mixing apples and pears. He mentioned credit rating in relation to sub-prime mortgage-related securities in the United States. There was a relationship with the US state in that case, because of Fannie Mae and Freddie Mac, but there was not a connection between that process and the British state. I fear that there was a little bit of confusion there.
Mr Jim Cunningham (Coventry South) (Lab)
Perhaps we can clear up the mystery of whose fault it was, because the previous Chancellor said that it was not the fault of the Labour Government at all.
Anneliese Dodds
As ever, my hon. Friend makes an important, pertinent and brief point.
Mr Jayawardena
I wonder whether, on reflection, the hon. Lady thinks that the former regulatory structure under the Financial Services Authority was not fulfilling its duties, that it was right to break it up between the PRA and the FCA, and that that resulted in an improvement in regulation.
Anneliese Dodds
The overall regulatory structure for the financial services industry is surely not what we are talking about in this debate. We are talking specifically about the regulation of securitisation. [Interruption.] The hon. Gentleman appears to be suggesting that he was trying to make a point about the lack of stringent regulation at the time of the financial crisis. I remind all Members that it was, of course, the Conservatives who urged the then Government to deregulate further and to remove regulation.
My hon. Friend the Member for Enfield, Southgate (Bambos Charalambous) set out the involvement of securitisation in the financial crisis very clearly. To respond briefly to the hon. Member for North East Hampshire (Mr Jayawardena), building on what my hon. Friend said, there has been a wide-ranging debate about whether it is appropriate to encourage additional securitisation, of which he may be aware. Of course, securitisation facilitates additional leverage, beyond what would already be there, because it makes liquid assets that are not already liquid. That may be appropriate in some contexts, but it can lead to inappropriate leveraging, particularly when it is conducted in a complex and opaque way, as arguably was the case during the financial crisis. It is surely appropriate, therefore, that we question any new regulations that apply to securitisation in this House, as we have done in this debate.
I am grateful to the Minister for his opening remarks. However, I regret that he failed to respond to my detailed comments about the manner in which the EU regulation has been transposed. Our complaint is not necessarily with the overall framework, which, as he rightly intimated, came from the Basel framework through IOSCO and, latterly, the EU. The point is that the process has not been entirely without controversy. As a result, the decisions that the Government make about how to implement the framework are potentially delicate, as was underlined rightly by the hon. Member for Aberdeen North (Kirsty Blackman).
The Minister said that the statutory instrument is a simple empowerment of the FCA. However, I referred in my remarks to how the regulations disapply elements of existing legislation, including those relating to offences under the purview of the Competition and Markets Authority and to insider dealing. He did not make it clear why that was necessary. He said that the measures would make our statute book consistent with offences in other countries in respect of complex securitisation and so on. He did not indicate whether they were consistent with existing offences on the UK statute book. That, surely, is what is at issue.
For all those reasons, we will press the motion of revocation to a vote.
Question put.