The House of Lords will soon debate government motions to approve the following draft statutory instruments:
- Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020
- Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020
- Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020
- Bearer Certificates (Collective Investment Schemes) Regulations 2020
All four motions are expected to be debated together in the chamber on 10 November 2020.
Each instrument is subject to the draft affirmative procedure. This means they need to be approved by both Houses of Parliament within a certain time period before they can be signed into law.
All four were laid (introduced) by the Treasury. The last instrument on the list—the Bearer Certificates (Collective Investment Schemes) Regulations 2020—was laid in both Houses on 28 September 2020. The first three were laid on 15 October 2020.
What would the regulations do?
Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020
The instrument would implement the EU’s bank recovery and resolution directive II (2019/879, known as BRRDII), adopted in 2019. This amends the first BRRD (2014/59/EU), adopted in 2014, in order to update the EU’s resolution policy and minimum requirements for own funds and eligible liabilities framework. These concern, respectively: the powers that financial authorities have to manage the failure of financial institutions; and the minimum amount of equity and debt that a firm must maintain to absorb losses and provide for recapitalisation if needed.
The instrument’s draft explanatory memorandum explains that under the terms of the withdrawal agreement, the UK has undertaken to implement any EU legislation during the transition period that requires transposition before the end of 2020. This includes the requirement to transpose BRRDII by 28 December 2020.
The Government has said the instrument’s implementing provisions will subsequently form part of retained EU law, so the instrument also makes certain changes to ensure a “fully functioning” regulatory and legal framework after the end of the transition period on 31 December 2020. It has also said the instrument does not transpose any requirements in BRRDII with a compliance deadline set after the end of the transition period.
The instrument follows a consultation, a response to which was published on 15 October 2020.
The Government considers the net impact of the directive on business to be less than £5 million a year, as set out in an impact assessment.
Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020
The instrument’s draft explanatory memorandum explains that its main purpose is to ensure a “coherent and functioning” financial services regulatory regime at the end of the transition period. The regulations form part of a programme of work led by the Treasury to ensure legislative and regulatory continuity from 31 December 2020.
In particular, the Government has said the instrument would amend and revoke aspects of retained EU law and related UK domestic law; make a number of clarifications and a minor correction to earlier financial services EU exit instruments; and provide “sufficient supervisory powers for financial services regulators to effectively supervise firms” during and after the end of the transition period.
The Government has also said the instrument follows extensive engagement with the Bank of England and the Financial Conduct Authority. It estimates the net impact of the provisions on businesses to be less than £5 million a year.
Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020
The instrument would implement the EU’s capital requirements directive V (2019/878, known as CRDV), adopted in 2019. The instrument’s draft explanatory memorandum notes that this amends the previous capital requirements directive, known as CRDIV (2013/36/EU), adopted in 2013:
[…] in order to address issues raised in relation to the provisions of CRDIV that proved not to be sufficiently clear and have therefore been subject to divergent interpretations, or that have been found to be overly burdensome for certain institutions (institutions means banks or investment firms; for the purposes of this instrument, institutions in scope are banks and systemic investment firms).
As with BRRDII, the Government has undertaken to transpose CRDV by 28 December 2020.
The Treasury has stated that the instrument “only contains provisions which are legislatively necessary to update the UK’s implementation of CRDIV (to reflect the amendments to CRDIV that have been made by CRDV)”. This includes providing the Prudential Regulation Authority (PRA) with new or updated powers to implement CRDV, and to ensure that the PRA can update its rulebook as needed. In addition, the instrument makes changes to retained EU law arising ahead of the end of the transition period to ensure continuity.
Other measures in respect of capital requirements and the applicable prudential regime are provided for in the Financial Services Bill, currently in the House of Commons.
The instrument follows a consultation, a response to which was published on 15 October 2020. The Government estimates the net cost of the provisions to businesses to be less than £5 million a year.
Bearer Certificates (Collective Investment Schemes) Regulations 2020
Abolishing bearer certificates, also known as share warrants to bearer, or otherwise implementing measures to prevent their misuse, is required under international standards on anti-money laundering and tax transparency. This instrument closes a technical loophole which still allowed certain collective investment schemes to issue bearer certificates. By prohibiting bearer certificates and making provision for the cancellation and conversion of outstanding bearer certificates, this instrument will increase transparency around who owns and controls UK investment entities and will help deter and identify those who hide their interest in UK entities to facilitate illegal activities.
The Small Business, Enterprise and Employment Act 2015 amended the Companies Act 2006 to prohibit the issuance of new bearer certificates by companies. It also provided for a transitional conversion of existing bearer certificates into ordinary registered shares within a certain time period.
However, a later review found that the 2015 act’s provisions were not comprehensive because two types of collective investment scheme registered in the UK maintain the power to issue bearer certificates: open-ended investment companies (OEICs) incorporated before 26 June 2017 and unauthorised unit trusts (UUTs). (Regulations approved in 2017 prohibited OEICs authorised on or after 26 June 2017 from issuing bearer certificates). The Government estimates that these two types of investment scheme account for 0.01% of legal entities in the UK (400 OEICs and 24 UUTs).
The instrument would prohibit all collective investment schemes from issuing bearer certificates. Transitional provisions mandate that OEIC or UUT operators must cancel any outstanding bearer certificates still held on 1 January 2022 on that day and pay the value into a bank account.
The Government has said it contacted all relevant entities and “none expressed concerns about the policy, and none admitted to making use of bearer certificates”. The impact on business is therefore thought to be “extremely limited or nil”.
The instrument does not relate to the UK’s withdrawal from the European Union.
What parliamentary scrutiny has there been to date?
The House of Lords Secondary Legislation Scrutiny Committee has not raised concerns about the four instruments. It listed the first three as instruments not drawn to the special attention of the House in its 32nd report of the current session. The last had been similarly listed in the committee’s 30th report.
The Joint Committee on Statutory Instruments did not report the Bearer Certificates (Collective Investment Schemes) Regulations 2020. It has not commented on the other three instruments.
The House of Commons has not yet considered the regulations. Motions to approve them are currently listed under the ‘remaining orders and notices’ section of the Commons order paper.