13 FINANCIAL SERVICES
(30802)
12093/09
+ ADDs 1-2
COM(09) 362
| Draft Directive amending Directives 2006/48/EC and 2006/49/EC as regards
capital requirements for the trading book and for re-securitisations, and the
supervisory review of remuneration policies
|
| Legal base |
Article 47(2); co-decision; QMV |
| Department | HM Treasury
|
| Basis of consideration |
Minister's letters of 6 and 17 November 2009 |
| Previous Committee Report |
HC 19-xxvi (2008-09), chapter 8 (10 September 2009) and HC 19-xxvii (2008-09), chapter 8 (14 October 2009)
|
| To be discussed in Council
| Not known |
| Committee's assessment | Politically important
|
| Committee's decision | Cleared
|
Background
13.1 In June 2006 Directives 2006/48/EC and 2006/49/EC,
known together as the Capital Requirements Directive, were adopted,
to be implemented from 1 January 2008.[36]
The Capital Requirements Directive introduced a new framework
for the prudential supervision of the capital held by banks and
other financial services firms in the Community, which reflected
new standards agreed internationally in the Basel Committee on
Banking Supervision[37]
in 2004.
13.2 In October 2008 the Commission proposed amending
the Capital Requirements Directive in several areas — large
exposures, definition of capital, supervisory arrangements and
securitisations — those amendments were agreed earlier this
year and will come into force on 31 December 2010.[38]
13.3 With this draft Directive the Commission proposed,
in July 2009, further amendments to the Capital Requirements Directive
in light of the current financial crisis. The overarching aim
of the proposal is to strengthen prudential requirements for trading
risks, align remuneration practices with effective risk management
and improve due diligence and disclosure requirements for re-securitisations.
13.4 When we considered the proposal, in September
2009, we:
- commented that the draft Directive would introduce
important changes to the Capital Requirements Directive;
- noted that the Government supported the proposed
amendments, but "where appropriate will seek adjustments
to further improve outcomes"; and
- asked to know what adjustments the Government
thought necessary and what progress was being made in securing
them.
13.5 In October 2009 we heard that the draft Directive
had three elements where the Government was seeking material adjustments:
- those amendments designed to increase the level
of capital banks hold against risks in the trading book (that
is assets consisting of positions in financial instruments or
commodities, held with the intention of trading);
- those requirements relating to re-securitisations
(that is investments for which the underlying assets are securitisations,
which are themselves packages of a group of assets, for example
a portfolio of loans, created as securities to sell to investors);
and
- those requirements relating to remuneration policies
and practices.
13.6 We learnt about adjustments the Government wished
in relation to trading book capital, particularly in relation
to the treatment of correlation trading positions, where for this
class of exposure the amended capital treatment was extremely
punitive, to the extent that it would effectively close that market,
and about the problem that in several areas, however, the proposals
had not been updated to reflect those most recently agreed by
the Basel Committee, the recognised forum for achieving international
agreement on regulatory capital requirements. We heard that:
- the Government had argued that the Basel Committee
proposals delivered a sufficient and proportionate capital treatment
for correlation trading positions and that international convergence
was of vital importance in maintaining the competitive position
of the Community;
- on this basis the Government had sought to have
the draft Directive brought into line with the Basel Committee
proposals and there had been strong support amongst Member States
for this;
- the Commission had now published a compromise
document closely aligned to the Basel Committee text and incorporating
the correlation trading exemption; and
- at that stage the Government foresaw its remaining
suggestions being limited to minor technical amendments.
13.7 On re-securitisations we were told that the
Government was particularly concerned by the introduction of the
concept of a 'highly complex'' re-securitisation (concept which
the Basel Committee did not recognise), with onerous provisions
for that form of re-securitisation and with the implications of
some of the recitals language on re-securitisations. However,
at Council Working Groups there had been almost unanimous agreement
with the Government's position on both the substantive provisions
and the recitals. But the Commission had not yet acted upon the
views expressed by the vast majority of Member States and the
Government would continue to advocate removal of these unacceptable
texts.
13.8 On remuneration policies the Government commented
that:
- the Commission proposals on remuneration set
out high-level principles, based on both its Recommendation on
Remuneration Policies in the Financial Services Sector[39]
and the principles set out by the Financial Stability Board;[40]
- as had been noted in the initial Impact Assessment
sent us with the Government's Explanatory Memorandum of 24 July
2009, these principles were broadly aligned with those due to
be implemented by the Financial Services Authority at the start
of 2010, with the exception that the FSA principles went further
in some regards;
- the topic of remuneration was high on the political
agenda, with the Government pursuing its goals domestically and,
at the international level, both within the Community and the
G20;
- the Prime Minister had set out the overriding
principles that, in the Government's view, should guide the work
on remuneration up to the G20 Pittsburgh summit in a letter of
3 September 2009 to the Swedish Prime Minister (as President of
the European Council), co-signed by the French President and the
German Chancellor;[41]
and
- the Government expected to pursue these principles
in the negotiations on this draft Directive.
13.9 We noted that there was now a satisfactory text
on trading book capital, that the Commission had yet to respond
properly to the near unanimous views of Member States on re-securitisation
and that the Government intended to pursue the remuneration policies
it had agreed with the French and German Governments in the continuing
negotiations on the proposed amendments to the Capital Requirements
Directive. We said that before considering the document further
we wanted to hear of further developments in these negotiations
in relation to re-securitisation and remuneration. Meanwhile the
document remained under scrutiny.[42]
The Minister's letters
13.10 The Financial Services Secretary to the Treasury
(Lord Myners) writes in his first letter in response to our wish
for information on further developments in relation to re-securitisation
and remuneration. On re-securitisations the Minister reminds us
that:
- the original Commission proposal included new
provisions which did not result in a treatment that was any more
robust than the present one, yet was significantly more onerous
for firms and supervisors and potentially introduced uncertainty
and ambiguity for firms; and
- the Government position was to seek the removal
of any reference to "highly complex" re-securitisations.
He then tells us that:
- in Working Group discussions there was almost
unanimous agreement with the Government's position on re-securitisations;
- as a result, the Commission has now removed all
provisions relating to "highly complex" re-securitisations,
such that the text is now closely aligned to the Basel Committee
text on re-securitisations; and
- the Government is satisfied that the text on
re-securitisations is now appropriate for delivering a satisfactory
regulatory outcome.
13.11 On remuneration policies the Minister says
that:
- the original Commission proposals on remuneration
set out high-level principles, based on both the its Recommendation
on Remuneration Policies in the Financial Services Sector and
the Financial Stability Board Principles for Sound Compensation
Practices Implementation Standards[43]
— but at that point it was difficult to progress negotiations
as Member States were awaiting the outcome of the G20 meeting
in September 2009 in Pittsburgh;
- at that meeting the G20 agreed to adopt the Financial
Stability Board principles on compensation;[44]
- the Government position was to achieve text in
the draft amending Directive that implemented, but did not go
further than, these standards;
- the proposed Capital Requirements Directive remuneration
text is now very much along the lines of the Financial Stability
Board principles;
- overall, the Government is content with the outcome
of the negotiations;
- there are some differences between the Capital
Requirements Directive and the Financial Stability Board texts,
the only substantive one being of scope — an annex (which
we reproduce) describes the remaining differences;
- the scope of the Capital Requirements Directive
covers credit institutions and investments firms, whereas the
Financial Stability Board principles were drafted and endorsed
in respect of large banks;
- as a result the Capital Requirements Directive
amending text contains proportionality wording that "credit
institutions shall comply with the following principles in a way
and to the extent that is appropriate to their size, internal
organisation and the nature, the scope and the complexity of their
activities";
- this therefore gives a degree of flexibility
as to how far firms, in particular smaller firms, comply with
the principles; and
- however, the disclosure (of compensation policies)
requirements do not contain a reference to proportionality in
terms of their application — therefore, read literally,
all credit institutions and investment firms covered by the Capital
Requirements Directive would be required to comply with the disclosure
rules.
13.12 The Minister also tells us, in response to
a question asked by the Lords European Union Committee as to whether
this draft Directive makes any progress towards establishing a
counter-cyclical capital regime, that this is not an issue directly
addressed by the proposal. However, he continues that:
- on 7 September 2009 the Group of Central Bank
Governors and Heads of Supervision, the oversight body of the
Basel Committee, agreed to introduce a framework for counter-cyclical
capital buffers and to promote more forward-looking provisions
based on expected losses;
- the Basel Committee will issue proposals on these
measures by the end of 2009; and
- the Commission is expected to propose a further
package of amendments to the Capital Requirements Directive in
July 2010, including proposals on dynamic provisioning and counter-cyclical
capital buffers, that take account of these international developments.
13.13 In his first letter, dated 6 November 2009,
the Minister purports to foreshadow that it was the Presidency
intention, on the basis that Working Group discussion of the draft
Directive was concluded, to have its compromise text taken as
an "I" item (information, no discussion) at a COREPER
meeting of 4 November 2009. He says in connection with this timetable
that:
- the Government's parliamentary scrutiny reserve
would remain in place;
- the Government had raised its objection to the
point on disclosure and remuneration policies with the Presidency
and this was to be appended to the document that intended for
COREPER; and
- with the exception of pursuing this point with
the European Parliament, the Government did not expect at this
stage to negotiate any further substantive changes to this draft
Directive to amend the Capital Requirements Directive as regards
capital requirements for the trading book and for re-securitisations
and the supervisory review of remuneration policies.
13.14 In his second letter the Minister reports that:
- the Swedish Presidency decided to seek agreement
on a general approach as an "A" Item at the ECOFIN Council
on 10 November 2009;
- a note accompanying the "A" Item recorded
that "The UK delegation maintains a parliamentary scrutiny
reservation";
- the Presidency noted outstanding scrutiny reservations
but indicated that it could assume agreement through QMV; and
- the Presidency would now pursue negotiations
with the European Parliament with a view to a first reading agreement.
Conclusion
13.15 We note the Minister's information on further
developments in relation to re-securitisation and remuneration
and the Government's intention to pursue the disclosure
point during European Parliament consideration of the draft Directive.
We have no further questions to ask and clear the document.
13.16 However, we wish to draw the House's attention
to aspects of the scrutiny process for this proposal which have
disappointed us. We recognise that the Government could have done
little to prevent the Council's adoption of this proposal whilst
it was still under our scrutiny and that the Government did, nevertheless,
maintain its scrutiny reservation. But the Minister's first letter
purported to foreshadow a COREPER meeting which had already taken
place and did not, therefore, fully explain timetable developments.
And the Minister's second letter did not address this confusion
of dates, despite the matter being drawn to the attention of his
officials. Moreover, that second letter took a full week to come
to us, as an email enclosure, after the Minister had signed it.
We should be grateful to the Minister for an explanation of these
lapses.
13.17 As for the information that the Commission
will be proposing a further package of amendments to the Capital
Requirements Directive in 2010, including proposals on dynamic
provisioning and counter-cyclical capital buffers, we shall of
course be scrutinising any such proposals in due course.
36 (25852) 11545/04 + ADDs 1-3: see HC 42-xxxiii (2003-04),
chapter 2 (20 October 2004) and Stg Co Deb, European Standing
Committee B, 8 November 2004, cols 3-18. Back
37
The Basel Committee is composed of representatives of the supervisory
authorities (and central banks where these are not the same institution)
of Belgium, Canada, France, Germany, Italy, Japan, Luxembourg,
the Netherlands, Spain, Sweden, Switzerland, the United Kingdom
and the United States. The Financial Services Authority and the
Bank of England represent the UK at the Basel Committee. See http://www.bis.org/bcbs/. Back
38
(30003) 13713/08 + ADDs 1-3: see HC 16-xxxiv (2007-08), chapter
8 (5 November 2008), HC 16-xxxv (2007-08), chapter 1 (12 November
2008) and Gen Co Debs, European Committee, 25 November 2008, cols.
3-24. Back
39
(30641) 9589/09 + ADDs 1-2: see HC 19-xviii (2008-09), chapter
27 (3 June 2009). Back
40
See http://www.financialstabilityboard.org/publications/r_0904b.pdf. Back
41
See http://www.number10.gov.uk/Page20496.
Back
42
See headnote. Back
43
See http://www.financialstabilityboard.org/publications/r_0904b.pdf.
Back
44
See http://www.pittsburghsummit.gov/mediacenter/129639.htm.
Back
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