Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026
Wednesday, 2 September 2026
Contributions
Considered in Grand Committee
Moved by
Lord Pitt-Watson
That the Grand Committee do consider the Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026.
The Parliamentary Secretary, HM Treasury (Lord Pitt-Watson) (Lab)
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 contained in that assimilated law. This instrument delivers that approach. In particular, it restates the existing UK CRR equivalence regimes within a single overseas prudential requirements regime, helping to make the prudential framework easier to navigate while maintaining continuity for firms. Existing equivalence decisions will be preserved as overseas regime decisions under the new framework, providing continuity and certainty for firms. This forms part of the Government’s wider programme under the Financial Services and Markets Act 2023 to repeal assimilated financial services law while preserving the necessary policy outcomes. This supports the implementation of the FSMA model of regulation, under which detailed firm-facing requirements are set in regulators’ rulebooks rather than in legislation. As part of this wider reform agenda, the Government are replacing the existing equivalence regimes inherited from the EU with overseas recognition regimes that are tailored to the UK’s needs and reflect the Government’s outcomes-focused approach to the unilateral regulatory recognition of overseas jurisdictions. This instrument is intended: first, to consolidate currently fragmented equivalence provisions into a single, coherent regime, while maintaining continuity for existing CRR equivalence decisions; secondly, to adjust the treatment of exposures to overseas exchanges so that capital treatment better reflects the underlying risk; thirdly, to replace the definition of “third-country investment firm” with “overseas investment firm” while maintaining the overall scope and effect of the existing treatment; and, finally, to enable the Government, subject to a further statutory instrument and parliamentary approval, to recognise eligible covered bonds from overseas jurisdictions in the future. I turn to the second instrument, which makes a targeted and important reform to the UK’s framework for regulating OTC—over-the-counter—derivatives, those traded directly between buyer and seller, by addressing intragroup transactions. It replaces the temporary intragroup exemption regime, known as TIGER, with a permanent framework. In doing so, it provides firms with long-term certainty while preserving appropriate safeguards and regulatory oversight. As I think all my audience knows, derivatives are contracts whose value is linked to an underlying asset, benchmark or index. They are widely used by businesses to manage risks. Intragroup transactions, where companies within the same corporate group are counterparties to a derivative contract, allow groups to manage their risks efficiently. The benefits of intragroup transactions are well recognised, so exemptions from certain clearing and margin requirements for certain transactions are a feature of regulatory regimes in the UK and in other jurisdictions. TIGER was introduced following EU exit to provide a temporary regime for exempting certain transactions between a UK counterparty and an entity within the same group located in a jurisdiction that has not been declared equivalent under UK legislation. It was only ever intended to be a temporary measure and, having been extended once already, it is due to expire at the end of 2026. The Government consider that a further, time-limited extension would not provide the long-term framework that firms need. This instrument therefore establishes a permanent framework for qualifying intragroup transactions with overseas group entities to benefit from a regulatory exemption. The instrument also provides continuity for firms relying on TIGER exemptions. These reforms do not remove safeguards. Firms must continue to meet the conditions for intragroup treatment, and for relevant cross-border exemptions, the Financial Conduct Authority will continue to have visibility through a notification process, while retaining oversight of the regime. In summary, these are proportionate reforms that replace EU exit arrangements with a stable UK framework, reduce unnecessary friction, support firms’ global risk management and maintain robust regulatory oversight. I beg to move.
Baroness Kramer (LD)
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.
Baroness Neville-Rolfe (Con)
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 particular institutions or exposures and may attach conditions. The detailed prudential treatment will continue to depend on the PRA rulebook and the characteristics of the exposure concerned. This, of course, places considerable responsibility on the Treasury when deciding which jurisdictions should be recognised and for what purpose. What evidence and methodology will the Treasury use when assessing an overseas regime? What formal role will the regulators play in this determination, and will the Treasury publish its assessment when making a new designation, so that Parliament and the market can understand the basis for the decision? There is also the question of what happens after a designation has been made. Prudential standards, supervisory capacity and political circumstances can change. How will the Treasury monitor designated jurisdictions on an ongoing basis, and how frequently will their status be reviewed? If standards deteriorate, can a designation be suspended or withdrawn urgently during a period of financial stress, and how quickly could that decision take effect? Future designation decisions will ordinarily be made under the negative procedure. Given that those decisions can affect the capital treatment of significant overseas exposures, will the Minister explain why that level of parliamentary scrutiny is considered sufficient? Will the Government at least commit to placing a clear assessment of the prudential case and the expected effect of each designation before Parliament? Finally, on this instrument, Regulation 5 establishes a mechanism for recognising overseas eligible covered bonds, but the initial Schedule does not appear to designate any jurisdiction for that purpose. Can the Minister explain when the Treasury expects the power to be used? I turn to the Over the Counter Derivatives (Intragroup Transactions) Regulations. These provide a permanent replacement for temporary post-Brexit arrangements, governing exemptions from the clearing and margin requirements in UK EMIR. This is targeted deregulation rather than the dismantling of the wider derivatives regime. It does not exempt ordinary transactions with unrelated third parties, and the FCA retains an important supervisory role. The hope is that the reforms will reduce duplication, release collateral and make it easier for international groups to manage risk centrally. In considering this instrument, it would be helpful to know how things stand on derivative policy more generally. In particular, are the French still seeking to transfer valuable trade through protective EU regulation or have they seen sense, given the interests of their own companies and banks? The Treasury says that no significant impact is expected. That is rather disappointing for a deregulatory measure, and it has consequently not produced a full impact assessment. What estimate has it made of the clearing, collateral and administrative costs that firms will avoid and the scale of any hidden costs? How, in practical terms, will the new notification system reduce the time and compliance work involved, compared with the present arrangements? Has Dr Felix Martin of the Cost Benefit Analysis Panel been given a chance to take a view? These are both serious measures, which is why they are subject to affirmative resolution, and I would like some reassurance on the deregulatory impact. The Government present these reforms as supporting the competitiveness of the UK financial services sector, which is obviously an objective that we support. How does our new framework compare with the treatment of intragroup derivatives in the European Union, the United States or other major financial centres? Will the United Kingdom become a more attractive location for the treasury and risk management operations of international groups? If so, what indicators will the Treasury use to assess whether that benefit is realised? The FCA’s role will be central. Is the Minister satisfied that it will have the information, expertise and capacity needed to assess potentially complex international group structures within the 30-day period? Where an exemption concerns two overseas entities, how will supervisory responsibility be co-ordinated with the relevant overseas authorities? Conditions can also change, as the noble Baroness, Lady Kramer, explained. A jurisdiction may introduce capital controls, a local regulator may impose ring-fencing requirements or funds that once moved freely may become trapped during a crisis. What continuing obligation will firms have to notify the FCA of such changes? What power will the FCA have to suspend or withdraw an exemption? The central task in both cases is to ensure that greater flexibility and competitiveness are accompanied by robust supervision, continuing vigilance and appropriate parliamentary transparency. However, I am clear that these are important instruments and, subject to some sensible answers on these questions, we support them.
Lord Pitt-Watson (Lab)
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 by other jurisdictions and whether they could receive preferential treatment without further parliamentary scrutiny. The answer to that is no. A specific designation of an overseas jurisdiction in relation to covered bonds would require a subsequent statutory instrument and parliamentary approval. This instrument does not designate any jurisdiction or confer preferential treatment on any particular covered bond markets. There are no current plans to use the power, but it is important that we have it available. I should write to her on the question on the bets. That is well beyond my pay grade. How does the UK approach compare with that of the EU? The EU removed the previous dependent on third-country equivalence decisions for intergroup treatment through EMIR 3. The EU now uses restrictions linked to specified high-risk or non-co-operative jurisdictions with scope for additional jurisdictions to be identified. The UK instrument likewise delinks intragroup eligibility from Article 13 equivalence but has detailed safeguards and processes designed for the UK framework. Finally, on why a full impact assessment has not been made, the instrument is not expected to impose significant ongoing direct costs. It largely preserves existing treatment and does not include new designations. A de minimis impact assessment has been prepared. It identifies negligible familiarisation costs and no expected annual direct costs to business. Any material future costs or benefits associated with detailed prudential treatment would arise principally from PRA rules and be assessed by the PRA through cost-benefit analysis. Today, the Committee has considered two statutory instruments. Although covering different aspects of financial regulation, both support the Government’s objective of maintaining a regulatory framework that is proportionate, effective and supportive of growth, while safeguarding financial stability. The overseas prudential requirements regime supports the Government’s wider programme of reforming assimilated EU financial services law. It brings together currently fragmented provisions within a clearer and more coherent statutory framework, while supporting the transition of assimilated law to the FSMA model of regulation. The second instrument, the Over the Counter Derivatives (Intragroup Transactions) Regulations, replaces a temporary regime that expires at the end of this year with a permanent framework for qualifying intragroup transactions. It gives firms certainty, supports efficient risk management across international groups and avoids unnecessary disruption when TIGER expires. At the same time, it does not remove the underlying condition that firms must meet to benefit from these exemptions. The Financial Conduct Authority will retain oversight across border exemptions and the ability to object when those conditions are not met. The Government therefore believe that the reforms strike the right balance between reducing unnecessary burdens and maintaining appropriate safeguards. Taken together, these instruments provide certainty, support the competitiveness of the UK’s financial services sector and ensure that our regulatory framework continues to operate effectively.
Baroness Neville-Rolfe (Con)
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.
Lord Pitt-Watson (Lab)
It would come to Parliament for approval, with an assessment.
Motion agreed.
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Source: UK Parliament Hansard API. Debate ID: 5396538.