DPRR/13-14/36
FINANCIAL SERVICES (BANKING REFORM) BILL
DELEGATED POWERS MEMORANDUM
INTRODUCTION
1.
This memorandum concerns the Financial Services (Banking Reform) Bill as
brought from the House of Commons on 10 July 2013.
2.
This memorandum has been prepared to assist the Delegated Powers and Regulatory
Reform Committee in their consideration of the Bill. It identifies the provisions for
delegated legislation in the Bill. It explains the purpose of the delegated powers
taken, describes why the matter is to be left to delegated legislation, and explains the
procedure selected for each power and why it has been chosen.
Summary of proposals in the Bill
3. The Bill is primarily an enabling Bill. It will change the regulation of banking by:
a. providing for additional protection to core services (which will initially be
those services related to the accepting of deposits, namely facilities for
making payments into an account, for withdrawing money or making
payments from the account, or overdraft facilities related to that account)
by
(a) providing that the ways in which the Prudential Regulation
Authority (PRA)’s general objective must be advanced include
the protection of the continuity of the provision of the core
services in the United Kingdom, and giving the Financial
Conduct Authority (FCA) a new objective to protect the
continuity of the provision of core services in the United
Kingdom in the event that the FCA ever becomes responsible for
the regulation of a core activity, and
(b) providing for ring-fencing: that is, applying restrictions to ringfenced bodies (which will carry on core activities), and in
particular prohibiting them from carrying on excluded activities;
b. enabling the Treasury to make regulations requiring ring-fenced bodies to
reorganise their pension schemes to ensure that the ring-fenced body does
not become liable to make payments in relation to the pensions liabilities
arising in relation to other members of the group;
c. amending the Insolvency Act 1986 and related Scottish legislation to
provide that deposits which are eligible for protection under the financial
services compensation scheme are to be preferential debts;
d. giving the Treasury power to make regulations governing the way in
which the PRA may use its powers under the Financial Services and
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Markets Act 2000 to impose debt requirements on specified classes of
institutions.
4. The Bill will also:
a. make provision as to the way in which the scheme manager of the
Financial Services Compensation Scheme must discharge its functions,
give the Treasury a power to require the scheme manager to provide
accounting information to the Treasury, and make provision for the
appointment of a chief executive of the scheme manager, who is to be its
accounting officer;
b. give the Treasury power to require the PRA, the FCA and the Bank of
England to impose fees on members of the financial services industry in
order to cover relevant expenses incurred by the Treasury in connection
with membership of specified international organisations, such as the
Financial Stability Board, and
c. enable the Bank of England by direction to disapply the application of
requirements of the Companies Act 2006 relating to the preparation of
company accounts to certain subsidiaries of the Bank of England. This
power is only exercisable when the Bank considers it necessary to use the
power, having regard to the Bank’s financial stability objective.
The Delegation of Powers
5.
Decisions on the delegation of powers in this Bill are affected by two factors. First
the regulation of banking, like regulation of other forms of financial services and
markets is very complex, and highly technical. Secondly, as noted in the delegated
powers memorandum for the Financial Services Bill1, regulation operates against a
background of markets for financial products which are continuously developing,
sometimes very rapidly.
Clause 4 (ring-fencing of certain activities)
New section 142A (ring-fenced body)
1
6.
Power: To exempt UK institutions of a class specified by the Treasury by order from
the definition of “ring-fenced body”, and to impose conditions on any exemption
provided for.
7.
Body: Treasury;
8.
Parliamentary Scrutiny: draft affirmative resolution procedure.
Both the Memorandum prepared by the Treasury in relation to the Financial Services Bill and the Report of the
Delegated Powers and Regulatory Reform Committee in relation to that Bill can be found on the website of that
Committee - http://www.parliament.uk/business/committees/committees-a-z/lords-select/delegated-powers-andregulatory-reform-committee/bills-considered.
DPRR/13-14/36
Reasons for the power and procedure
9.
Ring-fenced bodies are defined in the Bill as any UK institution which has
permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA)2
relating to a core activity (that is, accepting deposits) (referred to in this
Memorandum as “UK banks”), apart from building societies and institutions which
are exempted by the Treasury using this power. The Government does not consider
that it is appropriate to apply the restrictions which will be associated with ringfenced status (such as the prohibition on undertaking excluded activities, additional
capital requirements, and restrictions imposed by the regulators in ring-fencing
rules) to all UK banks regardless of their size. In the case of smaller banks the
imposition of ring-fencing restrictions is likely to make a comparatively small
difference to the regulators’ ability to ensure that in the event that the bank fails, it is
possible to resolve it so as to maintain the continuity of provision of the core
services (by for example the transfer of that part of the business to another
institution).
10. At the same time, the costs for smaller UK banks of implementing ring-fencing are
likely to increase their costs to a greater degree than larger banks, and may affect
their ability to compete effectively. The Government does not wish to set the
threshold above which a bank will become a “ring-fenced body” in primary
legislation. It is likely that it will need to be adjusted over time to reflect changes in
banking practices, and growth in the deposit base for UK banks. It may also be
necessary to modify the methodology used to determine whether a bank should be a
ring-fenced body.
11. In addition, given the very wide definition of “deposit” (see Article 5(2) of the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I.
2001/544)), it may be appropriate to exclude firms who have permission to accept
“deposits”, but which would not normally be considered to be carrying on the core
activity, or providing the services associated with this activity, from the definition of
a “ring-fenced body”.
12. Accordingly, section 142A(2)(b) gives the Treasury power to make exemptions from
the definition of “ring-fenced body”. Under subsection (4), any exemptions
provided for may be subject to conditions. The Treasury will not, under section
142A(3), be able to exercise the power in section 142A(2)(b) unless they consider
that exempting that class of institution from the definition of “ring-fenced” activity
will not have a significant adverse effect on the continuity of provision in the United
Kingdom of the core services. The power is intended to be used to promote
effective competition in the market for core services. Subsection 142A(4) therefore
requires the Treasury, when deciding whether, and if so how, to use the power, to
2
The Bill proceeds on the basis that the amendments to FSMA to be made by the Financial Services Act 2012
have come into force.
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have regard to the desirability of minimising any adverse effect that ring-fencing
might be expected to have on competition in the market for core services. This
includes considering any adverse effect on the ease with which new entrants can
enter the market.
13. The power to exempt institutions from the definition of a ring-fenced bank will
determine the scope of the ring-fencing regime. It is similar in nature to the power
to provide for exemptions from the general prohibition on carrying on regulated
activities without authorisation under section 38 of FSMA, which is subject to the
draft affirmative resolution procedure when it is first used, and on any subsequent
occasion when an order made under the power contains provisions restricting or
removing an exemption for which provision has already been made, and the
Treasury originally proposed the same procedure should apply in this case.
However, the Delegated Powers and Regulatory Reform Committee (DPRRC) noted
in its written evidence to the Parliamentary Commission on Banking Standards
(PCBS), that important issues of public policy may be as much at stake where an
additional exemption is granted, or an existing exemption is extended. The Treasury
has accordingly amended the Bill to provide for use of the draft affirmative
resolution power in all cases.
New section 142B(2) Core activities (exceptions)
14. Power: to specify the circumstances in which accepting deposits is not to be a core
activity;
15. Body: Treasury;
16. Parliamentary scrutiny: draft affirmative resolution procedure.
Reasons for the power and procedure
17. The Government is taking the power to provide for exceptions where accepting
deposits is not a core activity in secondary legislation, because the class of deposit it
is considered necessary to protect, and the way in which that class is defined, is
likely to change over time. Following the recommendations of the Independent
Commission on Banking (“ICB”), the Government proposed in its White Paper to
provide in secondary legislation that accepting deposits should only be a core
activity where the deposits concerned are those of individuals who are not high-net
worth individuals, and of small and medium-sized enterprises. Providing for this in
secondary legislation will make it easier to adjust the conditions which have to be
satisfied before someone can be considered to be a high-net worth individual, or
before a company or other association qualifies as a small and medium sized
enterprise for this purpose. And it is possible that it may in future be thought
necessary to add to the class of core deposits (for example to protect deposits of
larger companies as well as small and medium-sized entities), if it becomes clear
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that such customers are not able to arrange alternative banking facilities in the event
that their bank fails.
18. Under subsections (3) and (4), the Treasury will only be able to exercise the power
to provide that accepting deposits is not a core activity in circumstances where the
Treasury are satisfied that protection is not necessary in order either to secure that
the depositors concerned receive appropriate protection, or to protect the continuity
of the provision in the UK of services provided in the course of accepting deposits.
The Treasury will therefore have to consider the position of the depositors who will
be affected by the proposed order, and the potential impact of providing for such an
exception to the core activity on the continuity of the provision of the services
associated with the activity in the United Kingdom.
19. Following the evidence given by the DPRRC to the PCBS, the Treasury has
reconsidered the parliamentary procedure applying to this power. In recognition of
the extent to which this power will interact with the power conferred under new
section 142A(2)(b) to determine the scope of the ring-fencing regime, it is now to be
subject to draft affirmative resolution procedure.
Clause 142B(5) new core activities.
20. Power: to create new core activities;
21. Body: Treasury;
22. Parliamentary scrutiny: draft affirmative resolution procedure.
Reasons for the power and procedure
23. The Government currently consider that only accepting deposits should be a core
activity. However, it may in future become apparent that there is a regulated activity
other than accepting deposits where an interruption in the provision of the services
associated with that activity is likely to harm the stability of a significant part of the
financial system in the United Kingdom, and that making alternative provision for
the services in question is difficult to do in the short term. It is not possible to tell in
advance what activities may need to be protected in this way, making it necessary to
take a power to do this in secondary legislation rather than identifying all core
activities on the face of the Bill.
24. The Treasury will only be able to exercise the power to create new core activities in
relation to activities which are regulated activities under FSMA. In addition, under
new section 142B(6), they must be satisfied first that an interruption of the provision
of the services associated with the regulated activity in question could have an
adverse effect on the stability of the UK financial system or a significant part of that
system, and secondly that the continuity of the provision of those services can be
more effectively protected if the activity concerned becomes a core activity.
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25. The Treasury has reconsidered the appropriate parliamentary procedure for this
power in the light of the evidence given by the DPRRC to the PCBS. Given the
potential consequences for those carrying on an activity which is made a “core
activity”, and the public policy issues involved, the power will be subject to draft
affirmative procedure.
New section 142C (Core services)
26. Power:
a. to provide that specified services other than those listed in section 142C(2)
are core services in relation to the core activity of accepting deposits
(section 142C(3));
b. to specify those services to be considered to be core services in relation to
any new core activity created under section 142B(5) (section 142C(4))
27. Body: Treasury;
28. Parliamentary scrutiny: draft affirmative procedure (section 142N(1)(c)).
Reasons for the power and procedure
29. “Core services” are those services which are provided in the course of carrying on a
“core activity”. To provide greater certainty as to what services should be treated as
“core services” in relation to the core activity of accepting deposits, section 142C(2)
lists those categories of services which the Government considers to be associated
with the activity of “accepting deposits”. The Treasury are also taking a power to
provide that other specified services provided in the course of carrying on a core
activity should be considered to be core services. The Treasury have no current
proposals to provide for new core services in relation to the core activity of
accepting deposits under new section 142C(3). The power is being taken as a form
of “future proofing”. The way in which banking services are provided to customers
has changed very significantly in recent decades (as exemplified in the development
of internet banking), and it continues to change. It is possible that, as banking
develops, there may be other categories of service which come to be considered to
be an essential part of the services provided with a bank account, to the extent that it
becomes desirable to make them “core services”. It is not possible to tell in advance
whether this will be necessary, and therefore not possible to make the necessary
provision in primary legislation.
30. In the event that any new core activities are created by the Treasury using the power
taken in new section 142B(5), the Treasury will be required to specify the services
which they consider are provided in the course of carrying on the proposed core
activity and that an interruption in their provision could harm the stability of the UK
financial system or a significant part of that system, so that they are also treated as
core services.
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31. The effect of the definition of new core services is that the services in question are
the services to which the continuity provision in the PRA’s general objective (as
well as the FCA’s continuity objective where applicable) applies, and the services
which must be taken account of when—
a. the Treasury considers whether creating an exception to the excluded
activity of dealing in investments as principal would result in any
significant adverse effect on the continuity of provision in the UK of core
services (new section 142D(3));
b. the Treasury considers whether the creation of new excluded activities
under section 142D(4) or the imposition of prohibitions under section
142E(1) is necessary or expedient to protect the continuity of provision in
the UK of core services (sections 142D(7); 142E(3)).
32. The power in section 142C(3) is provided for clarificatory purposes, so that it is
possible to make it clear, if the nature of the services provided in the context of
accepting deposits changes, what services are considered to be provided in the
course of carrying on a core activity, and therefore to what, among other things, the
regulators’ objectives apply. Given the limited, technical, nature of these powers,
the Treasury originally considered that the negative resolution procedure would be
appropriate. However, in the light of concerns expressed during the Committee
stage of the Bill, the procedure has been amended to the draft affirmative procedure.
33. The power in section 142C(4) is provided for the same purposes, but in contrast to
the position for the core activity of deposit taking (where the core services are
defined in the Bill), the core services for any new core activity will be defined
wholly in secondary legislation. The necessary provision must be made when an
order is made under section 142B(5) creating the new core activity. The power
under section 142C(4) may also be exercised subsequently, to make amendments
solely to core services other than those associated with the acceptance of deposits.
This power will also be subject to the draft affirmative procedure, in the same way
as the power in section 142C(3).
New section 142D(2) (Excluded activities: exceptions)
34. Power: to specify circumstances in which dealing in investments as principal is not
to be an excluded activity;
35. Body: Treasury;
36. Parliamentary scrutiny: draft affirmative resolution procedure.
Reasons for the power and procedure
37. The Bill provides in new section 142D(2) that the regulated activity of dealing in
investments as principal is to be an excluded activity: that is ring-fenced bodies will
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not be able to carry on this activity. However, there will be circumstances in which
UK banks need to undertake this activity in order to raise wholesale funding, to
manage liquidity or to manage the risks arising from their core activities of lending
and providing payment services. The Treasury is taking this power so that it is
possible to permit such dealing in these circumstances while at the same time
providing for safeguards to ensure that ring-fenced banks do not expose themselves
to unacceptable levels of risk. This is likely to require a level of technical provision
which is most easily made in secondary legislation. For example, an exemption
might be made conditional on a bank’s residual market exposure being capped at a
certain level, and a specified level of collateral being provided for its counterparty
credit risk. It is also likely that the circumstances in which such dealing is
permitted, or the safeguards applied to it will need to change over time to match
developments in financial markets.
38. The Treasury will not be able to make an order providing for exceptions to the
excluded activity of dealing in investments as principal unless it is satisfied that
permitting dealing in the specified circumstances would not be likely to cause
significant harm to the continuity of the provision in the United Kingdom of core
services.
39. The Treasury has reconsidered the appropriate parliamentary procedure in the light
of the DPRRC’s evidence to the PCBS. Given the importance of the use of the
power in determining what ring-fenced banks are permitted to do, and the related
public policy issues, the power will be subjected to the draft affirmative resolution
procedure.
New Section 142D(4) (new excluded activities)
40. Power: to provide for activities other than dealing in investments as principal to be
treated as excluded activities and to create exceptions to any new excluded activity
created;
41. Body: Treasury;
42. Parliamentary scrutiny: draft affirmative resolution procedure in general; “made
affirmative” procedure where the Treasury are of the opinion that, by reason of
urgency, it is necessary to make the order without a draft being laid and approved.
Reasons for the power and procedure
43. The only excluded activity provided for on the face of the Bill is the regulated
activity of dealing in investments as principal. The Government considers that it
will be necessary to create additional excluded activities. The ICB recommended
that ring-fenced banks should be prohibited from providing services which, for
example, expose UK banks to risks that are not integral to the provision of payment
services to customers or the direct intermediation of funds between savers and
borrowers outside the financial sector, or that directly increase the exposure of ring-
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fenced banks to global financial markets.3 Not all services in this category will be
caught by the proposed excluded activity of dealing in investments as principal. For
example, structuring, arranging or executing derivative transactions will not always
come within the excluded activity, even though such transactions may significantly
increase the exposure of the banks which undertake them to global financial
markets, as not all derivatives fall within the definition of “investment” under the
Financial Services and Markets Act 2000 (Regulated Activities) Order 20014.
44. Providing for the appropriate additional excluded activities to catch such activity
will require a level of technical provision which may best be provided for in
secondary legislation. The precise terms of any particular chosen activity may also
need to be changed, and new excluded activities added in response to the rapid
evolution of the financial services market, as new financial services and products are
developed. This also requires a power for the Treasury to make secondary
legislation.
45. Before the Treasury is able to exercise the power in new section 142D(4) to create a
new excluded activity, it must, under subsection (6) consider the risks which a ringfenced body would be subject to if it carried on the activity concerned, and whether
permitting a ring-fenced bank to carry on the proposed excluded activity would
make it more likely that a subsequent failure of the ring-fenced bank would harm the
continuity of provision in the UK of the core services (because, for example it would
make it more difficult to wind down the ring-fenced bank in an orderly fashion).
The Treasury must also be satisfied that it is necessary or expedient to make the
order in order to protect the continuous provision within the UK of the core services.
46. In recognition of the recommendation made by the DPRRC in its evidence to the
PCBS, the power will in general be subject to a draft affirmative procedure.
However, there may be circumstances where it is necessary to stop ring-fenced
banks from carrying out a particular activity as a matter of urgency. Where this
applies, the Treasury will be able to make an order under the “made affirmative”
procedure, coming into force immediately, but ceasing to have effect unless it is
approved by each House of Parliament within 28 days (the same procedure is
adopted in FSMA in paragraph 26 of Schedule 2 to that Act for orders made under
section 22 of that Act which regulate new activities) (see new section 142Z(3) to
(5)). The Government consider that this strikes a sensible balance between the
possible need to bring new provisions into force urgently, and the desirability of
appropriate Parliamentary control.
3
Paragraph 3.39 of the Final Report of the Independent Commission on Banking.
4
SI 2001/544.
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New section 142E (power of Treasury to impose prohibitions)
47. Power: to prohibit ring-fenced banks from entering into specified transactions;
establishing branches in specified countries or territories, or from investing in
specified companies;
48. Body: Treasury;
49. Parliamentary scrutiny: draft affirmative resolution procedure in general; “made
affirmative” procedure where the Treasury are of the opinion that, by reason of
urgency, it is necessary to make the order without a draft being laid and approved.
Reasons for the power and procedure
50. This power is being taken to supplement the power set out in new section 142D for
the Treasury to create new excluded activities. It permits the Treasury to impose the
prohibitions listed in subsection (1). In each case, it is envisaged that action by the
ring-fenced body of the type described in paragraphs (a) to (c) of subsection (1) may
increase the exposure of the body concerned to global financial markets, and make it
more difficult for that body to be wound down in an orderly fashion without
disrupting the continuous provision of any core services it may provide. However,
such action is arguably not an “activity” carried on by the ring-fenced body, so that
the Treasury could not impose such prohibitions by using its powers under new
section 142D. Any prohibition imposed under these powers is also likely to be
accompanied by a number of exemptions setting out the circumstances in which the
ring-fenced body is to be permitted to act in a way otherwise prohibited, and the
safeguards which it must observe to do so. For example, the ICB recommended that
ring-fenced banks should be prohibited from providing services to other financial
institutions (apart from payment services where the regulator considers this to be
appropriate), to reduce their exposure to failure elsewhere in the financial system. A
prohibition on all transactions with other financial institutions would achieve this,
but may be disproportionate, restricting the business of ring-fenced banks more than
is necessary to achieve the objective.
51. The Government therefore proposes to permit transactions with other financial
institutions where such transactions are undertaken for particular purposes (such as
the management of a ring-fenced bank’s liquidity, or for risk-management
purposes), subject to specified safeguards. As with excluded activities, both the
extent of the permitted exceptions to a prohibition, and the safeguards required, are
likely to need to be adjusted over time. It is also likely to be necessary to impose
additional prohibitions on ring-fenced banks as financial markets develop further,
and new forms of exposure become possible. It is therefore necessary to have
powers to make the necessary provisions in secondary legislation, so that
amendments can be made over time without the need to bring forward new primary
legislation.
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52. The conditions which must be satisfied before the Treasury are able to exercise the
power are the same as the conditions applying to the power in new section 142D(4)
for the Treasury to provide for a new excluded activity. The Treasury must have
regard to the risks to which a ring-fenced bank would be exposed if it was permitted
to act in the way the Treasury propose to prohibit, and whether permitting a ringfenced bank to act in such a way would make it more likely that a subsequent failure
of the ring-fenced bank would harm the continuity of provision in the UK of the core
services. The Treasury must also be satisfied that making the order prohibiting the
specified action is necessary or expedient to protect the continued provision of the
core services in the United Kingdom. The same parliamentary procedure will apply
to orders made under section 142E as applies under section 142D(4), because of the
similarity of the two powers. In general (following the recommendation made by the
DPRRC in its evidence to the PCBS), the power will be subject to a draft affirmative
procedure. However, where it is necessary to impose a prohibition on a ring-fenced
body as a matter of urgency, the “made affirmative” procedure will apply, so that the
prohibition can be brought into force immediately (see new section 142Z(3) to (5)).
New section 142F
53. Power: supplementary powers to authorise or require the regulator to make rules
for the purposes of any provision in an order made under new sections 142A, 142B,
142D or 142E; or to authorise other instruments to be made for such purposes.
54. Body: Treasury;
55. Parliamentary scrutiny: determined by principal instrument.
Reason for power and procedure
56. These powers are supplementary to the powers contained in new sections 142A,
142B, 142D and 142E, and may only be used in combination with those powers. It
is envisaged that it may be appropriate to give the regulator power to make technical
provision related to the core activities and excluded activities, in areas which are
generally treated as the preserve of the regulator. For example, provision for new
excluded activities will also provide for the circumstances in which ring-fenced
bodies are to be permitted to undertake such activities. It will be necessary to
provide for safeguards, and it may be more appropriate for detailed provision about
the safeguards which must be observed to be made in rules by the regulator, or in
instruments setting out guidance in a particular area. Accordingly, it would be
necessary for the Treasury to be able to confer powers on the regulator to make rules
to do this (the Treasury would also have power, if necessary, to require the regulator
to make any rules needed). The power to impose conditions on the exercise of any
such power, consultation requirements and, where appropriate to require the consent
of the Treasury to the regulator’s exercise of such a power, will enable the Treasury
to provide the framework for the way in which the power is exercised, to assist the
regulator, and provide for greater certainty to the market.
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57. The power conferred by this section has been amended since the publication of the
draft Bill by the removal of the power “to confer powers on the Treasury or on a
regulator”, in response to concerns expressed by the DPRRC in its evidence to the
PCBS. Instead there is a more limited power to authorise or require the regulator to
make rules or other instruments in connection with any provision of an order made
under the powers in these sections. In addition, a power has been added to refer to
publications by regulators, UK and international bodies, as those publications have
effect from time-to-time. Guidelines, frameworks and other instruments developed
at an international level are becoming increasingly important in financial regulation,
and it can also be helpful and provide greater certainty for Orders made under these
powers to refer directly to terms as defined in rules made by the regulators. This
power will enable the Treasury to refer to such publications as they are currently in
force, without the need to amend the Order every time the publication referred to is
amended.
58. As these powers are supplementary to the powers in the sections listed, they will be
exercised in the same instrument, and will be subject to the parliamentary procedure
applicable to the primary powers.
New section 142G(3).
59. Power: To specify those cases where a person who has suffered loss as a result of a
contravention may bring an action for breach of statutory duty in relation to that
contravention;
60. Body: Treasury;
61. Parliamentary scrutiny: negative resolution procedure
Reason for power and procedure
62. The power is essentially the same as that is sections 20(3) and 202(2) of the
Financial Services and Markets Act 2000 (FSMA), which provide that
contraventions related to breaches of the general prohibition on carrying on
regulated activities without being authorised or exempt from authorisation, or
breaches of requirements imposed by the Financial Services Authority under the Act
are actionable by those who suffer loss “in prescribed cases” (that is, cases
prescribed by the Treasury in regulations). A ring-fenced body which carried on an
excluded activity, or acts in a way which has been prohibited by an order under
section 142E, will be treated as having contravened a requirement under FSMA, and
it is important that remedies should be available to those who have suffered loss in
consequence of the contravention in the same circumstances as provided for in the
equivalent cases under FSMA in the Financial Services and Markets 2000 (Rights of
Action) Regulations 2001 (S.I. 2001/2256).
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63. Orders made under this power will be subject to the negative resolution procedure,
which is the procedure applicable to regulations made under sections 20(2) and
202(2) of FSMA.
New section 142H
64. Power: a requirement for the regulators to make rules governing specified aspects
of the relationship between the ring-fenced body and other companies within the
same group;
65. Body: the Prudential Regulation Authority (for those ring-fenced bodies which are
not regulated by the PRA, the appropriate regulator is the Financial Conduct
Authority, but initially, all ring-fenced bodies are expected to be PRA-authorised
persons);
66. Parliamentary scrutiny: none (see paragraph 69 for the procedure applicable to
rules made by the regulator).
Reasons for power and procedure
67. New section 142H makes provision as to the way in which the appropriate regulator
(which, as noted above, is expected to be the PRA) is to exercise its power to make
general rules in relation to ring-fenced bodies. The powers to make these rules are
set in section 137A (for the FCA), and section 137G (for the PRA). The powers are
expressed as being with respect to the carrying on of activities (both regulated and
un-regulated). Subsection (5) lists the areas in which the regulator is to be required
to make rules. In that sense, it is not a new power.
68. The primary purpose of new section 142H is to ensure that the regulator makes rules
for ring-fenced bodies in relation to each of the areas which are identified in
subsection (5), which cover different aspects of the relationship between a ringfenced bank and other members of the same corporate group as the ring-fenced bank
(such as the terms on which a ring-fenced bank may transfer funds to other members
of the group). The Government considers that rules in these areas are necessary to
ensure that ring-fenced banks which are members of groups are able to operate their
businesses independently of the other entities of the group. This should help to
ensure that a failure of another member of the group does not pose a significant
threat to the continued existence of the ring-fenced bank.
69. Rules made by the PRA to comply with the requirements of this section will be
subject to the safeguards applying to all PRA general rules under section 138J of
FSMA (unless the exemption in section 138L(2) applies): the PRA must consult the
FCA about any proposed rules, and thereafter publish draft rules accompanied by a
cost benefit analysis, an explanation of the PRA’s reasons for believing that the
making of the proposed rules is compatible with its duties in relation to its objectives
(as amended by clause 1 of the Bill) and an explanation of the purpose of the rules
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for consultation. Final rules may only be made after the PRA has considered any
representations made.
70. The rules will cover matters of operational detail and the Treasury considers that it is
appropriate for such rules to be made by the regulators subject to the safeguards
described above.
New Section 142I
71. Power: to require the regulator to include (or not to include) specified provision in
ring-fencing rules in any of the matters listed in section 142H(5), or about other
specified matters;
72. Body: Treasury;
73. Parliamentary scrutiny: draft affirmative resolution procedure.
Reasons for Power and Procedure
74. The PCBS recommended that the key issues determining the height of the ring-fence
should not be left wholly to the regulators to determine. In addition to amending
section 142H(5) to specify further areas where the regulator is to be required to
make ring-fencing rules to satisfy the purposes, the Treasury has provided for a new
power in answer to this concern, which will enable the Treasury, where appropriate,
both to set out in greater detail the provision which must be made by the regulator in
relation to one or more of the areas listed, and to specify further areas where rules
are required. It will also be possible to provide for rules to be made in new areas
where it becomes apparent that because of developments in the banking industry this
is necessary to ensure the independence of the ring-fenced bank.
75. As the use of this power will affect the way in which the regulator is required to
exercise its general rule-making function, and following the recommendation of the
PCBS, this power will be subject to the draft affirmative resolution procedure.
New section 142K (pension liabilities)
76. Power: To require a ring-fenced body which is an employer in relation to a multi-
employer occupational pension scheme to ensure that it is not and cannot become
liable to meet or contribute to liabilities in respect of pensions or other benefits by
other employers in respect of the scheme;
77. Body: Treasury;
78. Parliamentary Scrutiny: draft affirmative resolution procedure.
Reasons for the power and procedure
79. If a ring-fenced body and a bank which is not a ring-fenced body (“non-RFB”) were
both employers in a non-segregated multi-employer scheme and the non-RFB
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became insolvent, the ring-fenced body would become liable to pay its share of the
extent to which the scheme’s liabilities exceed the scheme’s assets: s. 75 Pensions
Act 1995 and the Occupational Pensions Schemes (Employer Debt) Regulations
2005, SI 2005/678. Because of the size of the deficits, this would potentially threaten
the retail banking sector in the UK, the protection of consumers and the protection of
financial stability, thereby undermining the policy objective of ring-fencing. New
section 142K therefore enables the Treasury to make regulations requiring a ringfenced body which is an employer in relation to a multi-employer occupational
pension scheme (where one or more of the employers is a ring-fenced body, and one
or more of the employers is not a ring-fenced body) to make arrangements to ensure
that the ring-fenced body is not, and cannot become, liable to meet or contribute to
the meeting of liabilities in respect of pensions or other benefits payable to or in
respect of employment by other members of the group. In order to achieve this
effect, the regulations may in particular require a ring-fenced body to cease to
participate in a multi-employer scheme unless the scheme is divided in accordance
with specified conditions.
80. However ring-fenced bodies will be given a significantly longer period to comply
with any requirements imposed by the Treasury under its power in relation to
pensions than under the rest of the ring fenced regime. Regulations under this power
may require ring fenced bodies to achieve these results no earlier than 1 January
2026, and may require them to be achieved at a later time. This is to cater for the
possibility that ring fenced banks may not be able to achieve these results earlier due
to the size of the deficits in the relevant pension schemes. Due to the technical nature
of pensions legislation, and the fact that pensions law and practice may change,
requiring amendments to the provision made in the regulations from time to time
(particularly given the period envisaged before the requirements are to take effect),
the Treasury considers that it is more appropriate for provision to be made in
secondary legislation than in the Bill. The policy is that ring fenced bodies will need
to take the requisite steps in accordance with existing employer debt legislation
(which includes primary legislation but also the complex and detailed provisions
contained in the Employer Debt Regulations just mentioned). The requirements
imposed by the Treasury will need to dovetail with the employer debt legislation,
which may change before 2026 as a result of changes made to secondary legislation.
The requirements will apply not only to those bodies which are ring fenced upon
commencement of the Bill but also to new entrants to the market after
commencement and to bodies which become ring fenced as a result of any exercise
of the Treasury’s powers to narrow the class of UK institution exempted from being
a ring fenced body under new section 142A or to provide that a regulated activity
other than that of accepting deposits is to become a core activity under new section
142B. The Treasury need to retain flexibility to ensure that the requirements
imposed on ring-fenced bodies in respect of pension liabilities are appropriate to
bodies which become ring fenced as a result of the exercise of these powers.
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81. The requirement on a ring-fenced body to depart from a multi-employer scheme
unless the required changes are made to the scheme, will not alter the terms or the
extent of any members’ benefits that have been earned or accrued. However the
interests of members could be adversely affected by changes to their security of
benefit and terms of future accrual. The Treasury therefore consider that the draft
affirmative resolution procedure is appropriate.
New section 142Y (Power in relation to loss absorbency requirements)
82. Power: to regulate the way in which the regulator imposes debt requirements on
relevant bodies (banks, including ring-fenced banks and building societies, and
members of the same group as a bank), by requiring the regulator to require a
relevant body to issue debt – or to hold debt of a particular class; or by limiting the
requirements the regulator may impose;
83. Body: Treasury;
84. Parliamentary scrutiny: draft affirmative resolution procedure.
Reason for power and procedure
85. The Government believes that UK banks should have sufficient capacity to absorb
losses to ensure that they are both resilient to shocks and that they can be resolved
without recourse to taxpayers’ funds. Such loss absorbing capacity may be made up
of capital or debt issued by the bank (debt becomes capable of absorbing loss when
it may be written down or converted into equity). The rules determining what
capital a bank must hold are set out in EU legislation.5 This power is intended to
permit the Treasury to provide a framework determining how the regulators may use
their powers to require a relevant body to have in issue sufficient debt, and debt of
an appropriate class, to ensure that it has sufficient loss absorbing capacity. It will
be necessary to strike a balance between ensuring that those UK banks which are
considered to be of systemic importance (in that their failure may have implications
for the stability of the UK or, in some cases, the global financial system) are
required to have sufficient loss absorbing capacity but that they are not subjected to
disproportionate requirements which may harm their capacity to contribute to
economic growth in the UK. It will also be necessary for the provisions made in
relation to loss absorbing capacity to change over time in response to conditions in
the global markets. They are therefore more suited to secondary legislation rather
than primary legislation.
86. The power originally included in the draft Bill published for pre-legislative scrutiny
has been amended. In the light of the concerns expressed by DPRRC in paragraph
13 of their evidence to the PCBS, the Treasury removed the power to confer power
5
The Capital Requirements Regulation and Capital Requirements Directive IV, which will replace EU
directives 2006/28/EC and 2006/49/EC (the banking consolidation directive) are currently under negotiation.
DPRR/13-14/36
on the Treasury to issue directions to the regulator. Subsection (4) has been extended
to provide greater detail about what the Treasury can do in the exercise of the power
(which includes imposing consultation requirements on the regulator in specified
cases, or requiring the regulator to seek the Treasury’s consent before exercising a
specified function in relation to debt requirements). Power has been taken for the
Treasury to refer to publications of the regulators, UK or international bodies as
those publications are in force from time-to-time (so that it is possible to refer where
necessary to rules made by the regulator in technical areas, or international
publications identifying those banks considered to be global systemically important
institutions).
87. Following the recommendation of the PCBS, the parliamentary procedure applying
to orders made under this power has been changed to draft affirmative resolution
procedure.
Clause 8 – Building Societies (power to make provision about ring-fencing)
88. Power – to make provision for ring-fencing legislation to apply to building societies and to
apply the relevant continuity provision to the exercise of any powers by the FCA or the PRA
in relation to functions conferred on it through applying ring-fencing legislation to building
societies;
89. Body: Treasury;
90. Parliamentary Scrutiny: draft affirmative resolution procedure.
Reason for power and procedure
91. Under clause 8 the Treasury may, by statutory instrument, apply any provision of
Part 9B (except ss142W to 142Y) and any provision made under this part to building
societies. In applying these provisions, the Treasury may amend the Building
Societies Act 1986, authorise the making of rules or other instruments by the FCA
and the PRA as appropriate, confer functions on the FCA and the PRA and make
any other consequential amendment, including amendments of other primary
legislation as required.
92. Building societies are already subject to restrictions on the activities which they may
undertake under the Building Societies Act 1986, though those restrictions differ in a
number of ways to what is proposed in relation to ring-fencing. It may be
appropriate to amend the legislation applying to building societies to reflect the
restrictions which will apply to ring-fenced bodies. This power will enable the
Treasury to do this. It is intended to supplement existing provisions and powers in
the Building Societies Act 1986 to circumscribe the activities of building societies.
The Building Societies Act 1986 contains a number of restrictions on the activities
of building societies, in particular in sections 6 through 9B of that Act. A number of
these sections also include power to amend the section through secondary
legislation.
DPRR/13-14/36
93. It is anticipated by the Treasury that many of the existing restrictions in the Building
Societies Act 1986 will mirror restrictions that are imposed through the ring fence or
will be capable of being amended through the existing powers in that Act to mirror
the ring fence. To include building societies within clauses 1-4 of this Bill would
therefore risk double legislation of building societies and the upsetting of an
established and familiar legislative structure.
94. As set out above, the exact scope of the ring fence will be determined in secondary
legislation. It is consequently not yet clear that all matters to be covered in the ring
fence will be within the scope of the existing powers in the Building Societies Act
1986. Clause 8 of the Bill therefore provides a general power to amend the Building
Societies Act 1986 to enable the Treasury to apply the ring fence where the Building
Societies Act 1986 would not permit it to do so.
95. The power includes a power both to apply the continuity function to the building
societies ring fence and to confer the ability to make rules on the FCA or PRA. The
FCA or PRA will be responsible for the supervision of the ring fence as applicable
to building societies and thus will need to be able to make rules and issue guidance
to fulfil this function. This accords with the power in new section 142F, as inserted
into FSMA by clause 4. A separate power is required for building societies for these
matters because as outlined above, it is anticipated that a number of the changes
required to apply the ring fence to building societies will be carried out through
existing legislation and thus different rules and guidance will be required for
building societies as opposed to other ring-fenced entities.
96. Clause 8 also includes power to make consequential amendments to other legislation
where necessary. If the ring fence is applied to building societies, the Treasury
anticipates that there may be conflicting provisions in other pieces of primary
legislation applicable to building societies which will require amendment to ensure
compatibility with the ring fence. This power will enable the Treasury to make
these amendments.
97. The Treasury consider that it is appropriate that a statutory instrument made under
clause 8 should be subject to the draft affirmative procedure. This is appropriate
given that the statutory instrument is likely to be amending primary legislation.
Clause 13, New section 410A (fees to meet certain expenses of the Treasury)
98. Power:
a. to make regulations giving the Treasury power to require the FCA, the
PRA or the Bank of England to require certain persons to pay fees to meet
relevant expenses incurred by the Treasury which represent a contribution
to the resources of the organisation and which relate to the organisation’s
work on financial stability or financial services;
b. to list the international organisations concerned.
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99. Body: Treasury;
100. Parliamentary scrutiny:
a. for regulations which only prescribe the international organisations which
are relevant for this purpose, the negative resolution procedure;
b. for all other regulations, draft affirmative resolution procedure.
Reasons for procedure and power
101. This power is being taken to enable the Treasury to recover from the financial services
industry the costs the Treasury incur which represent a contribution to the resources of
international organisations in connection with financial stability or financial services. The
power would, for example, enable the Treasury to recover the costs associated with
membership of international organisations like the Financial Stability Board (the FSB).
International organisations are growing in importance as a means of setting international
standards which affect the operation of the UK financial services industry. It is also
becoming increasingly clear that in many cases action to address risks to financial stability
can only be taken effectively at the international level.
102. The Treasury consider that it is appropriate that the financial services industry (in particular,
authorised persons, recognised clearing houses and recognised investment exchanges)
should bear these costs. Such firms benefit significantly from these activities by the
Treasury. Participation by the regulator (the PRA, the FCA or the Bank of England) in such
forums can be recovered from the financial services industry under existing legislation6.
103. The scheme created by this clause is as follows. The Bill sets a framework for charging
relevant expenses and enables the Treasury to make secondary legislation giving itself a
power to direct the regulator to recover certain expenses. The Treasury may make such
secondary legislation, which may confer the direction-issuing power and make provision
about, amongst other things, what international organisations are relevant and what types of
expense may be recovered. To recover particular expenses, the Treasury must then issue a
direction to the relevant regulator (the PRA, FCA or the Bank of England) specifying the
expenses to be recovered. The regulator, in turn, must make rules providing for the recovery
of the specified expenses from the relevant parts of the industry.
104. The Treasury consider it appropriate that both the regulators and the financial services
industry have clarity as to what expenses are to be recovered in this way, what international
organisations are at issue and the considerations the Treasury will take into account when
recovering their costs in this way. The Treasury therefore consider that legislation should
set out these matters. However, as these matters may change over time, it is not possible to
set them out in primary legislation.
105. For example, the nature of the expenses that the Treasury incur in connection with UK
membership of such international organisations or in representing the UK in such forums
6
See paragraph 23 of Schedule 1ZA to FSMA for the FCA; paragraph 31 of Schedule 1ZB to FSMA for the
PRA; and paragraph 36 of Schedule 17A to FSMA for the Bank of England.
DPRR/13-14/36
have generally included the obligation to pay membership fees. However other forms of
contribution to the resources of such international organisations, such as the provision of
non-financial resources (e.g. staff), have also been envisaged. Consideration has also been
given to funding the Financial Stability Board via an endowment rather than a membership
fee for example. Depending on the nature of the expense, the Treasury may not consider
that it is appropriate to be able to recover it from the industry. It is therefore not possible to
set out comprehensively what expenses are to be recoverable from the financial services
industry.
106. The Treasury also consider that it is not possible to set out a comprehensive list of the
international organisations at issue in the Bill itself. New institutions may be established at
any time. The names of existing organisations may also change over time. For example, the
Financial Stability Board itself has only existed since 2009 as the successor organisation to
the Financial Stability Forum. Thus the Treasury consider it appropriate to take a power to
set out the international organisations which are relevant for this purpose in secondary
legislation.
107. The Government have considered carefully the comments on this power of the DPRRC in
their evidence to the PCBS. The Government has in particular considered whether it would
be appropriate to adopt the suggestion made by the DPPRC that the content of the proposed
regulations under section 410A(1) conferring the power of direction on the Treasury be set
out on the face of the Bill.
108. The Government has concluded that this would not be appropriate. The Government notes
that the key details of the Treasury power to direct the regulators to impose a fee are to be
set out in secondary legislation. So for example the list of international organisations which
is relevant for this purpose will be in secondary legislation. Further provision as to what is
regarded as an “expense” and the requirements (for example as to consultation or
consideration of relevant factors) that the Treasury must comply with before giving a
direction are to be set out in secondary legislation. In light of this, the Government has
concluded that it is more appropriate for the power to give a direction also to be created in
secondary legislation. This will mean that the legislation regarding the power of direction is
set out comprehensively in a single instrument rather than split between the Bill and
secondary legislation made under it. The Government consider that it will be more
accessible and user-friendly for those likely to be affected by the direction making power
(the regulators and the financial services industry) for the power to give a direction and the
considerations and conditions which are relevant to that power to be set out in one place.
This would ensure that the imposition of additional fees on the industry by virtue of this
power is governed by three tiers (order, direction and rules) rather than the four tier structure
outlined by the DPRRC (Act, order, directions and rules). In reaching this conclusion, the
Treasury have taken into account the fact that the exercise of the power to create the
direction will be subject to the draft affirmative procedure in all cases.
109. Any directions given under regulations made under section 410A must comply with the
procedural safeguards set out in section 410B including the obligation on the Treasury to lay
a copy of any direction before Parliament.
110. As section 410A confers a power to direct the regulators to impose a fee and so is of the
nature of a power to impose a tax, the draft affirmative procedure is considered appropriate
DPRR/13-14/36
to the power to require the payment of fees. However, changes to the list of international
organisations in relation to which expenses may be claimed are more technical in nature,
and may (as in the case of the Financial Stability Board) be required simply to reflect a
change in an organisation’s name. Accordingly, the Treasury consider that where
regulations made under section 410A only prescribe the international organisations which
are relevant for this purpose, the regulations should be subject to negative resolution
procedure.
Clause 15 (Accounts of Bank of England and its wholly-owned subsidiaries)
111. Power: to direct a qualifying company to exclude the application to that company of
relevant Companies Act requirements;
112. Body: Bank of England;
113. Parliamentary scrutiny: none.
Reasons for power and procedure
114. Section 7 of the Bank of England Act 1998 provides that the Bank of England (which was
established by Royal Charter and so is not subject to the Companies Act 2006) is to prepare
its accounts subject to provisions corresponding to the requirements of the Companies Act
2006 to which directors of a banking company are subject to in relation to the preparation of
accounts (“relevant Companies Act requirements”). Section 7(4) provides that the Bank may
disregard such a requirement to the extent it considers it appropriate having regard to its
functions.
115. Clause 15 amends the test to be applied by the Bank when disregarding requirements of the
Companies Act 2006 (so that the Bank may only do so where it considers it necessary to do
so having regard to the Bank’s financial stability objective under section 2A of the Bank of
England Act 1998). Clause 15 also enables the Bank to direct a “qualifying company” to
exclude the application to that company of any of the relevant Companies Act requirements
to such a company. Such a direction may only be given where the Bank considers it
necessary to do so, having regard to the Bank’s financial stability objective. “Qualifying
companies” are companies which are wholly-owned by the Bank, other than the Prudential
Regulation Authority or a company which is a bridge bank for the purposes of section 12(3)
of the Banking Act 2009. Qualifying companies will, unlike the Bank itself, be subject to
the requirements of the Companies Act 2006. The effect of a direction will therefore be to
disapply the effect of the Companies Act 2006.
116. The rationale for the power in section 7 of the Bank of England Act 1998 and in new section
7A of that Act as inserted by clause 15 is that application of the relevant Companies Act
requirements to the Bank or to a qualifying company may pose a threat to financial stability.
One example of where this could occur is the effect of section 395 of the Companies Act
2006 which requires individual company accounts to be prepared in accordance with
international accounting standards. Current international accounting standards require the
company to disclose certain transactions, including funding transactions, with a related party
(such as a parent or subsidiary undertaking). Where the Bank of England is providing
confidential financial assistance to a financial institution or a range of financial institutions
DPRR/13-14/36
via a qualifying company7, this requirement would require the Bank and the qualifying
company to disclose publicly the funding arrangements between the Bank and the qualifying
company. The effect of this (in light of the likely sums involved) would be to disclose the
existence of the financial assistance operation. This could have a serious adverse effect on
financial stability.
117. The power in new section 7A of the Bank of England Act 1998 is exercisable by the Bank
by way of direction and is not subject to Parliamentary scrutiny. This reflects the fact that
the power is not legislative in nature (it is exercisable only in relation to a specific
company); is exercisable by the Bank, having regard to the Bank’s financial stability
objective (rather than a Minister of the Crown); and that any procedure which involved
disclosing publicly the fact of the direction would undermine the purpose of the direction.
There are significant safeguards and limits on the power including the high test for its
exercise; the very limited range of companies to which it applies; the duty on the Bank to
consult the Treasury before exercising the power; and the Treasury’s power (regardless of
the effect of a direction given by the Bank) to require the Bank to publish information
relating to the accounts of a qualifying company (see section 7A(5)). The Treasury
therefore consider that this power, and the procedure applicable to it, are appropriate.
Clause 17 - (transitional provisions and savings)
118. Power: to make transitional, transitory or saving provision by order
119. Body: Treasury;
120. Parliamentary scrutiny:
a. for orders contained in a statutory instrument subject to draft affirmative
resolution procedure, draft affirmative resolution procedure;
b. for all other orders, negative resolution procedure.
Reasons for power and procedure
121. This clause enables the Treasury by order to make such provision as they consider necessary
or expedient for transitory, transitional or saving purposes in connection with the
commencement of any provision made by or under the Bill. The power is needed to
facilitate the transition between the current arrangements and the new regulatory regime
introduced by the Bill. Any modifications or exclusions made in relation to any enactment
will be of a temporary nature.
122. When making orders under the Bill which are subject to the draft affirmative resolution
procedure (for example under clause 142A), the Treasury may also need to make transitory,
transitional or saving orders under this Clause. Clause 17(3) therefore ensures that where
any provision made under this power is included in a statutory instrument containing
provision made under a power subject to the draft affirmative procedure, it is also subject to
7
It will often be convenient for the Bank to provide financial assistance via a specially created wholly-owned
subsidiary. This is especially likely to be the case where the Bank is providing financial assistance by virtue of
a direction given to the Bank by the Treasury under section 61 of the Financial Services Act 2012.
DPRR/13-14/36
draft affirmative procedure. This will make it possible for the power in clause 19 to be
exercised in the same statutory instrument as powers subject to draft affirmative procedure.
In general, however, the Treasury does not consider it necessary that transitional and savings
provision should require the approval of each House in draft. Therefore, in all other cases it
is appropriate that orders under this provision should be subject to the negative procedure.
Schedule 2 - (minor amendments)
123. Power: to provide, by order, for functions of the FCA, the PRA and the Bank to be “relevant
functions” for the purposes of the complaints scheme established under Part 6 of the
Financial Services Act 2012;
124. Body: Treasury;
125. Parliamentary scrutiny: negative resolution procedure.
Reasons for power and procedure
126. Paragraph 8 of Schedule 2 to the Bill amends the provisions in section 85 of the Financial
Services Act 2012 which specify the functions of the FCA, the PRA and the Bank that are
“relevant functions” for the purposes of the complaints scheme. The complaints scheme
under section 85 currently includes all of the FCA’s and the PRA’s functions as “relevant
functions”; this would include its non-regulatory functions as well as its regulatory ones,
potentially requiring the independent complaints commissioner (“the investigator”) to
investigate complaints in respect of data protection, freedom of information and other
legislation, irrespective of whether there are other procedures for resolving such complaints.
Paragraph 8 therefore amends section 85 to limit the scope of the complaints scheme, as
regards the FCA and the PRA, to their functions under FSMA (in line with the scope of the
complaints scheme in relation to the Financial Services Authority, the predecessor to the
FCA and the PRA). However, a power is conferred on HM Treasury to provide, by order
that other functions – of the FCA, the PRA or the Bank – are to be covered by the
complaints scheme, for example, functions of the FCA under the Payment Services
Regulations or, potentially, functions conferred on the FCA or the PRA in the future by
directly applicable European legislation.
127. The extension of the complaints scheme would result in benefit to authorised persons and
the public, with no direct financial or other burdens on them. The power can only be used to
add to the functions specified in the Financial Services Act 2012, and not to take away from
them. It is therefore considered that the appropriate procedure for this power is the negative
resolution procedure is appropriate.