Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026
House of Lords · Grand Committee · 2 Sep 2026 · 14 speeches · Official Report
Considered in Grand Committee
Moved by
That the Grand Committee do consider the Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026.
My Lords, the Committee will consider together two statutory instruments made under the Financial Services and Markets Act 2023, known as FSMA 2023. Although these instruments address different areas of financial regulation, they share a common purpose, which is to ensure that the UK’s regulatory framework remains stable, proportionate and internationally competitive. Together, they provide greater certainty for firms, preserve appropriate regulatory safeguards and support the continued effective functioning of UK financial markets. The first instrument supports the Government’s wider programme of replacing retained EU legislation by creating a new overseas prudential requirements regime. The second concerns over-the-counter, or OTC, derivatives and establishes a permanent regulatory framework for certain intragroup transactions. I will address each instrument in turn, beginning with the overseas prudential requirements regulation. The first instrument is the Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026. Following EU exit, the UK retained a body of EU-derived financial services legislation, known as assimilated law. This includes the capital requirement regulation, or UK CRR, which sets detailed prudential requirements for credit institutions, such as banks and building societies, and for larger investment firms. In 2025, the Government consulted on their approach to repealing a number of equivalence provisions currently...
My Lords, I will address each of these instruments separately. First, on the overseas prudential requirements regime, in the Government’s perspective, this statutory instrument is simply the application of the FSMA model to decisions on equivalence. The Government know that I am quite concerned that the FSMA model removes from parliamentary oversight decisions that were once considered to require democratic engagement and puts them into a model that is notably weak on accountability to Parliament. This is obviously a much bigger issue than this SI. Initially, existing equivalence decisions will remain in place. Can the Minister explain whether future changes and additions will come before Parliament in any way? Will it be a deciding situation or will it be merely reported? I stress that, to me, transparency and accountability are two different things, yet sometimes, in conversations with the regulators, you would think that they were the same.
Equivalence decisions are not just technical; they have political consequences. For example, the EU has extended its equivalence for UK central counterparties to 30 June 2028, but there are serious concerns that it may then begin to restrict that equivalence because the EU has built its own capacity in this sector and is in a position both to onshore major financial business and to strengthen the oversight of its own regulators. Can the Minister comment on the political aspects of equivalence? To me, this is one of the issues that raises the question of whether the regulator alone should be making equivalence decisions.
In a sense, that leads on to the next SI, which is to some degree about central counterparties: the OTC derivatives regulations. In the 2007-08 crash, liquidity seized up in the global banking system because nobody knew who was at risk from whom since the majority of derivatives trades had been negotiated directly, bank to bank, rather than passed through a central counterparty. The Basel rules were put in place to incentivise banks to clear trade through a regulated CCP rather than dealing directly with each other. That system has been very successful, although many of us quake at the thought of the risk that is accumulated in the CCPs, which they manage through margin calls.
This SI deals with intergroup transactions, which enable firms, in a sense, to shift the geographic location of risk. The SI gives regulators powers to provide permanent exemptions from clearing obligations and margin requirements. Again, this has a political aspect to it. I am always very concerned about BEPS-base erosion and profit shifting-which is where a company reduces its corporate tax bill by finding mechanisms where it needs to make payouts to overseas locations of low tax jurisdiction. These kinds of internal transaction, using the flow of derivatives, are an ideal instrument to use if you want to shift profit from one area to another. You simply do an unbalanced transaction: money flows in one clear direction, where it becomes profit, but in a country where corporate taxes are either zero or very low.
I am concerned that applying the FSMA model will take away accountability around these kinds of decision. I am not going to oppose this SI, since opposing SIs is fairly useless anyway and the issue is much bigger than a single SI. However, I believe that there is a BEPS element in this that I do not think was addressed by the Minister and it is one which the Treasury and the Government need to be cognisant of.
My Lords, I am grateful to the Minister for setting out the purpose and effect of these two instruments. Although both are technically dense, they share a common and quite straightforward purpose: they replace parts of the inherited or temporary post-EU framework with permanent UK arrangements. It gives us an opportunity to make the regime more proportionate and better suited to the UK market while preserving the prudential safeguards on which financial stability depends. We support both instruments in principle, but I have a few important, mainly technical, questions. I hope that the Minister will be able to answer them today; if not, perhaps he could write to the Committee by way of follow-up. I turn first to the overseas prudential requirements regime regulations. The instrument carries across a substantial number of existing recognitions from the outset, for countries with sophisticated regulatory regimes, such as the US and Singapore, to some with newer and riskier ones. That is welcome because it should prevent a cliff edge for firms when the EU-derived framework is revoked. The separate treatment afforded to Gibraltar also reflects the particularly close relationship between our two financial systems. It is important to be clear that designation does not make an exposure risk free, automatically give it a zero-risk weight or amount to a blanket finding that every aspect of an overseas regime is equivalent to our own. The Treasury can designate a jurisdiction for...
My Lords, I thank the noble Baronesses for their comments, some of which go a little beyond what we are trying to address here with these statutory instruments. I understand the concern of the noble Baroness, Lady Kramer, about the FSMA regime, how it works, parliamentary oversight and the rest of it, but not relitigating it when we are talking about statutory instruments would be a better use of everybody’s time. On concerns about decisions passed by regulators, no new responsibility is being passed to Parliament. These will stay decisions for Ministers and Parliament, not regulators. I specifically mentioned that the recognition of covered bonds would need to be approved by Parliament. Essentially, we are moving from one regulatory regime to a UK regulatory regime. I understand the questions about whether the UK regulatory regime is right, but we should probably not relitigate that now. The noble Baroness, Lady Neville-Rolfe, asked what criteria would apply to future designations. The Treasury will assess whether recognition of an overseas jurisdiction is compatible with the relevant policy outcomes, which includes protecting the stability of the UK financial system, protecting the safety and soundness of UK banks and investment firms, promoting effective competition in financial services and markets and/or supporting the international competitiveness and medium to long-term growth of the UK economy. The noble Baroness, Lady Neville-Rolfe, asked about covered bonds issued...
I have just one question. The Minister gave a very helpful reply. He seems to be saying that the second instrument is essentially carrying things over-that both instruments are carrying over from previous EU law, rushed through after Brexit-and putting them on a permanent basis. My questions were about assessment and the FCA, which he answered well. What happens when we have a new designation? Will there be a process of assessment and an impact assessment for that? I can understand where we are just moving things across, but it would be helpful to know what the Treasury’s plan is.
It would come to Parliament for approval, with an assessment.
Motion agreed.