Date laid: 13 December 2018
Parliamentary procedure: affirmative
In anticipation of the UK’s exit from the EU, these draft Regulations amend an EU Regulation on credit rating agencies to establish a UK regime for regulation and supervision of credit rating agencies (CRAs). In particular, they propose to transfer functions and powers from the European Securities and Markets Authority to the Financial Conduct Authority (FCA), so that the FCA will gain full powers of regulatory oversight over CRAs on the first day the UK leaves the EU: the powers will include complete authorisation and supervision responsibilities over such agencies.
The Impact Assessment (IA) accompanying the Regulations relates not only to this instrument but also to nine other instruments that address deficiencies in UK law and retained EU law relating to financial services regulation that arise from the UK leaving the EU. Although nine of the SIs have now been laid before Parliament, this is the first time that this IA has been laid in support of an SI. HM Treasury (HMT) estimates that the total cost to financial services businesses of implementing these instruments will be some £140 million. Commentary in the IA itself suggests that it may not be appropriate to rely too heavily on this estimate. HMT says that no IA was prepared for consultation with those affected, and that the time available made it impossible to engage with the financial services industry in sufficient detail to monetise the costs associated with the SIs.
We draw these Regulations to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.
2.In the Explanatory Memorandum to these draft Regulations, HM Treasury (HMT) states that credit ratings are used for regulatory purposes, which involve assessing the creditworthiness of an entity or financial instrument, and that they are used widely by financial market participants. In 2009, the EU introduced a Regulation on credit rating agencies (“CRAR”)2 with the aim of regulating credit rating agencies (CRAs) established in the EU for the first time, to address failings in the run-up to the financial crisis. The CRAR provides that only credit ratings issued under the CRAR can be used for regulatory purposes.
3.HMT says that, after the UK’s exit from the EU, CRAs established in the UK would not be covered by the EU regulatory regime under CRAR. These draft Regulations therefore amend CRAR to establish a UK regime for regulation and supervision of CRAs. In particular, they transfer functions and powers from the European Securities and Markets Authority (ESMA) to the Financial Conduct Authority (FCA), so that the FCA will gain full regulatory oversight powers from ESMA on the first day the UK leaves the EU: the powers will include complete authorisation and supervision responsibilities over CRAs.
4.HMT acknowledges that there will be an impact on the credit rating industry, because the Regulations will require a CRA to establish a legal entity in the UK and register with the FCA if its credit ratings are to be used for regulatory purposes in the UK after exit; and because IT processes will have to be changed, for example, where firms will be required to report to the FCA rather than ESMA. HMT adds, however, that other aspects of CRAR will not create significant strains for businesses as the Regulations largely replicate the current regulatory framework. Detailed cost figures are provided in the Impact Assessment (IA) accompanying the Regulations which gives a total of £290,000 as the one-off non-familiarisation costs (relating to changes to IT systems, business processes, and reporting requirements) and £640,000 as the recurring cost of duplicating compliance and control functions.
5.The accompanying IA is of particular interest. It relates not only to the draft Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019, but also to nine other statutory instruments (SIs) that address deficiencies in UK law and retained EU law relating to financial services regulation that arise from the UK leaving the EU. Although nine of the SIs have now been laid before Parliament, this is the first time that this IA has been laid in support of an SI. The instruments covered, all subject to the affirmative resolution procedure, are as follows:
6.The IA gives detailed information about the impact of the individual SIs (at page 23 onwards). The summary sheet (at page 3) gives a figure of £141.1 million as the best estimate of the total cost which may be incurred by the main affected groups as a result of these SIs. HMT comments that, while most direct costs to businesses relate to the need for familiarisation with new requirements, there will be a limited set of other business costs which may include transition costs, such as changes to business processes and reporting requirements. HMT adds that it intends to legislate to provide the financial services regulators with powers to introduce transitional measures that they could use to phase in any changes resulting from the UK leaving the EU, and that this could reduce the costs of adjusting to the new regulatory regime. Commentary in the IA itself suggests that it may not be appropriate to rely too heavily on the estimate of £141.1 million. HMT says that no IA was prepared for consultation with those affected, and that the time available made it impossible to engage with the financial services industry in sufficient detail to monetise the costs associated with the SIs.
7.The House will be interested to see that, through these Regulations, HMT proposes to give the FCA full regulatory oversight over credit rating agencies once the UK leaves the EU. It may also take an interest in the accompanying IA which relates not only to these Regulations but also to nine other SIs, all but one of which have been laid before Parliament in the last three months without an IA. HMT estimates that the total cost to financial services businesses of implementing these instruments will be some £140 million. It states that, without these SIs, financial services firms would face much greater costs, and far greater uncertainty.
2 Regulation (EC) No 1060/2009 on credit rating agencies.
3 Laid on 9 October 2018, made on 6 December 2018 as SI 2018/1321.
4 Laid on 9 October 2018, made on 19 November 2018 as SI 2018/1201.
5 Laid on 9 October 2018, made on 19 November 2018 as SI 2018/1199.
6 Laid on 17 October 2018, made on 19 December 2018 as SI 2018/1403. Sub-Committee B of the SLSC drew the draft Regulations to the attention of the House in its 3rd Report of the current Session (HL Paper 213).
7 Laid on 23 October 2018, made on 20 December 2018 as SI 2018/1394.
8 Laid on 31 October 2018, made on 6 December 2018 as SI 2018/1320.
9 Laid on 6 November 2018, made on 6 December 2018 as SI 2018/1318.
10 Laid on 15 November 2018, made on 19 December 2018 as SI 2018/1401.
11 Laid on 13 December 2018.
12 Laid on 8 January 2019.