Documents considered by the Committee on 22 February 2017 Contents

6Financial services regulatory framework: resolution and recovery and capital requirements

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested

Document details

(a) Proposed Directive concerning bank resolution and recovery; (b) Proposed Directive about the ranking of unsecured debt instruments in insolvency hierarchy; (c) Proposed Directive concerning aspects of capital requirements; (d) Proposed Regulation concerning aspects of capital requirements

Legal base

Article 114 TFEU, ordinary legislative procedure, QMV

Department

Treasury

Document Numbers

(a) (38300), 14777/16 + ADDs 1–2, COM(16) 852; (b) (38301), 14778/16 + ADDs 1–2, COM(16) 853; (c) (38303), 14776/16 + ADDs 1–2 COM(16) 854; (d) (38304), 14775/16 + ADDs 1–3, COM(16) 850

Summary and Committee’s conclusions

6.1The Commission has proposed three Directives and a Regulation with complex and technical provisions concerning bank resolution and recovery, the ranking of unsecured debt instruments in insolvency hierarchy and aspects of capital requirements. These interrelated proposals affect many important aspects of EU financial regulation.

6.2The Government is generally supportive of the Commission’s proposals. But it has told us of the need to ensure that EU legislation is entirely consistent with agreed international standards, is flexible and proportionate and has appropriate technical detail set in the primary legislation.

6.3The Government has now given us a first update on Council working group consideration of the proposals. It tells us, in the context of Brexit, of the possible timetable for adoption and implementation of the proposals. It comments about its intention that the UK will continue to be strongly supportive of international rule-setting for financial services, post Brexit.

6.4We are grateful to the Government for this account of where matters stand on negotiation of these proposals and look forward to further reports in due course. Meanwhile the documents remain under scrutiny.

6.5We note the Government’s comments in relation to these proposals and Brexit.

Full details of the documents

(a) Proposed Directive amending Directive 2014/59/EU on loss-absorbing and recapitalisation capacity of credit institutions and investment firms and amending Directive 98/26/EC, Directive 2002/47/EC, Directive 2012/30/EU, Directive 2011/35/EU, Directive 2005/56/EC, Directive 2004/25/EC and Directive 2007/36/EC: (38300), 14777/16 + ADDs 1–2, COM(16) 852; (b) Proposed Directive on amending Directive 2014/59/EU of the European Parliament and of the Council as regards the ranking of unsecured debt instruments in insolvency hierarchy: (38301), 14778/16 + ADDs 1–2, COM(16) 853; (c) Proposed Directive amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures: (38303), 14776/16 + ADDs 1–2 COM(16) 854; (d) Proposed Regulation amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012: (38304), 14775/16 + ADDs 1–3, COM(16) 850.

Background

6.6Following the very severe financial crisis some years ago the EU adopted a considerable amount of regulatory legislation aimed at restoring the stability of the financial services sector and preventing future problems. Much of the legislation was based on internationally agreed standards. Although the legislation has concerned all Member States, implementation of significant parts of it has been centralised for eurozone Member States through development of the Banking Union.

6.7Practical experience of the legislation and further development of standards in international fora have led to the need for amendment of important elements of the EU legislation. Most recently the Commission published a Communication analysing the results of a public inquiry it conducted in 2015 and 2016 into the EU regulatory framework for financial services. The Communication also set out the intentions for legislative and non-legislative proposals in response to the outcome of the inquiry. At the same time the Commission presented legislative proposals, for amendment to present legislation concerning capital requirements for credit institutions and investment firms, bank recovery and resolution, central counterparties and the Banking Union’s Single Resolution Mechanism.19

6.8Amongst the Commission’s proposals were these proposed Directives and proposed Regulation which concern bank resolution and recovery, the ranking of unsecured debt instruments in insolvency hierarchy and aspects of capital requirements. These complex and technical proposals affect many important aspects of EU financial regulation. They range from measures to ensure the regulation of non-bank entities is more appropriate and proportionate to measures to implement recent significant developments in international standards. There are significant interrelationships between them.

6.9When we considered these proposals in January 2016 we heard that the Government is generally supportive of the Commission’s proposals. But its comments to us about the very detailed provisions showed its laudable wish to ensure that EU legislation is entirely consistent with agreed international standards, is flexible and proportionate and does not give the European Securities and Markets Authority and the Commission powers to set technical detail which ought to be in the primary legislation. We said that clearly the Government would need to negotiate carefully much of the many details it had drawn to our attention to ensure everything in them when adopted meets its concerns. So we asked to be kept informed regularly about negotiating developments on each proposal. More generally we asked to be told soon about the likely implementation dates of the proposals in the context of the probable Brexit date. We wanted also to have the Government’s assessment of the consequences for the UK of these proposals—in particular would its aim post-Brexit to be closer to the relevant international standards or the EU ones, if there were any divergence between the two?

The Minister’s letter of 14 February 2017

6.10The Economic Secretary to the Treasury (Simon Kirby) tells us that the negotiations for the proposals to amend the Banking Recovery and Resolution Directive (BRRD), documents (a) and (b), the Capital Requirements Directive (CRD), document (c), and the Capital Requirements Regulation (CRR), document (d), (together known as CRD IV) are being taken forward by the Maltese Presidency as a single package and accordingly he is updating us on all of these elements. He says first that:

6.11The Minister reports that at the December 2016 ECOFIN Council, the Government outlined UK priorities for international harmonization, regulatory flexibility and proper scrutiny of the Intermediate Holding Companies (IHC) proposal for the CRD. Reporting further that Council working groups commenced in January and are ongoing, the Minister says that the main issues that have been discussed so far are:

Pillar 2 capital requirements, as proposed for the BRRD

IFRS (International Financial Reporting Standards) 9, concerning ‘expected loss’ measurements, as proposed for the CRR

Market Risk, as proposed for the CRR

Other BCBS requirements, as proposed for the CRR

IHCs, as proposed for the CRD

Remuneration, as proposed for the CRD

Total Loss Absorbing Capacity (TLAC)/minimum requirements for own funds and eligible liabilities (MREL), as proposed for the CRR and the BRRD

Large exposure requirement, as proposed for the CRR

Ranking of unsecured debt instruments in insolvency hierarchy, as proposed for the BRRD

6.12The Minister tells us that the European Parliamentary groupings have now selected their rapporteurs, on the CRD proposals, Peter Simons (DE, S&D), and on the BRRD ones, Gunnar Hökmark (SE, EPP). He undertakes to provide us with further information on parliamentary timeframes and objectives when these emerge.

6.13Turning to the relationship of these proposals to Brexit the Minister says first that:

6.14As for the consequences for the UK of these proposals, in particular whether the Government’s aim post-Brexit would be to be closer to the relevant international standards or the EU ones, if there were any divergence between the two, the Minister says that:

Previous Committee Reports

Twenty-fifth Report HC 71-xxiii (2016–17), chapter 6 (11 Jan 2017).


19 (38311) 14903/16 + ADDs 1–2: see Twenty-fifth Report HC 71-xxiii (2016–17), chapter 6 (11 Jan 2017).




24 February 2017