DPRR/13-14/37
FINANCIAL SERVICES (BANKING REFORM) BILL
SUPPLEMENTARY MEMORANDUM FOR THE DELEGATED POWERS
AND REGULATOR REFORM COMMITTEE
Enhanced parliamentary scrutiny of statutory instruments to be made under the
Banking Reform Bill
A. INTRODUCTION
1.
During the passage of the Banking Reform Bill through the House of Commons
an amendment was tabled which, if accepted, would have applied a procedure
for enhanced Parliamentary Scrutiny of certain statutory instruments made
under the Bill.
2.
The Government rejected the amendment, setting out its reasoning to the House
during Committee.
3.
We understand that the Delegated Powers and Regulatory Reform Committee
(the ‘Committee’) wishes to consider again the proposals for enhanced scrutiny,
and the Government’s rational for rejecting those proposals.
4.
We have therefore provided this supplementary memorandum to assist the
Committee with its consideration. This memorandum first summarises the effect
of the amendment (Part 2), then sets out the reasons the Government believes it
is not appropriate and has rejected it (Part 3).
B. SUMMARY OF AMENDMENT ON ENHANCED SCRUTINY
5.
The full text of the amendment is provided in annex A to this memorandum
(although the Committee should be aware that the Bill has now been introduced
into the House of Lords, and consequently the line-numbering in the amendment
is no longer correct).
6.
However the main features of the procedure the amendment would introduce are
as follows.
7.
The clause applies to orders made under the Bill which:

exempt a class of UK institutions from being ring-fenced bodies (orders
under s. 142A(2)(B));

change what counts as a core activity (an activity that must be carried on
by a ring-fenced body) or the circumstances in which an activity is a core
activity (orders under section 142B(2) or 142B(5)) ;
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
change when dealing in investments as principal will count as an
excluded activity, which a ring-fenced body cannot carry on (orders
under s. 142D(2));

change what counts as an excluded activity or the circumstances in which
an activity is an excluded activity (orders under s. 142D(4));

change the scope of prohibitions applicable to ring-fenced bodies (orders
under s. 142E), or

set the framework for the regulator imposing debt requirements on
regulated persons (orders under section 142M).
8. The clause would, however, not apply to orders made under section 142D(4)
or 142E which are made in reliance on section 142Z(4) (previously section
142N(4), as referred to in the amendment); that is to say, when the Treasury
are of the opinion that it is necessary to make the order without a draft being
laid before Parliament, by reason of urgency.
9. If the enhanced procedure applies the Treasury must consult appropriate
persons before laying a draft order before Parliament. The draft order must
be accompanied by an explanatory document explaining the provisions in the
draft order, and giving details of the consultation and any changes made to
the proposed draft as a result.
10. Parliament may then call a joint committee to report on the order. The
Chairman of any such committee must be the chair of the Treasury Select
Committee. Any recommendations made by the joint committee within sixty
days following the laying of the draft order must be taken into account by the
Treasury.
11. After the sixty day period the Treasury may proceed with the order, or decide
to make a revised order. If they decide to make a revised order they must lay
the revised draft order before Parliament and explain the revisions. Any order
will still be subject to the affirmative procedure, and must be approved by a
resolution of each House of Parliament.
C. REASONS FOR GOVERNMENT RESPONSE
No Power to Amend Primary Legislation
12. The amendment draws to some extent on the super-affirmative procedure
provided for by section 18 of the Legislative and Regulatory Reform Act
2006 (the ‘2006 Act’). 1
1 The super-affirmative procedure is also applied to certain orders which can be made under s. 5 of the Localism Act 2011. However, these
are also orders of a kind which can make wide ranging amendments to primary legislation.
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13. In particular it shares with that section the provision imposing a sixty day
period within which additional Parliamentary scrutiny of the order may take
place.
14. The additional scrutiny which the ‘super-affirmative’ procedure requires is
justified by the fact that regulatory reform orders under the 2006 Act may
make extensive amendments of primary legislation, including (but not
limited to) changing the constitution of statutory bodies. This is not the case
for any of the orders which could be made under the Banking Reform Bill
and to which the enhanced scrutiny procedures contained in the amendment
would apply.
15. Further, the orders under the Banking Reform Bill to which enhanced
scrutiny would apply are all exercises of relatively tightly constrained
powers. For example, the power under new section 142A (2)(b) of the Bill
can only be used in the circumstances set out in subsection (3) of that
section.2
16. So whereas the “super affirmative” procedure under the 2006 Act governs
the exercise of delegated powers which are (1) relatively broad, and (2) can
be used to amend primary legislation, the powers the subject of the proposed
enhanced scrutiny are in each case relatively circumscribed and cannot be
used to amend primary legislation. For these reasons we do not consider that
an enhanced scrutiny procedure is necessary in this case.
Precedents in the Sphere of Financial Regulation
17. The Committee may also wish to consider the following similar powers
exercisable under the Financial Services and Markets Act 2000 (‘FSMA’) or
the Bank of England Act 1998, for which the affirmative procedure was
considered sufficient:
 Orders under s. 1J FSMA, which amend the scope of the Financial
Conduct Authority’s competition objective;
 Orders under s. 55C, by which the Treasury can alter the ‘threshold
conditions’. Before granting permission for a firm to carry out
regulated activities, the appropriate regulator (that is, the PRA or the
FCA) must be satisfied that they satisfy, and will continue to satisfy,
the threshold conditions. The thresholds conditions therefore
constitute the minimum standards for performing regulated activities
in the United Kingdom;
2
We are aware that even a power which can be used to amend primary legislation may not, if it is relatively
tightly circumscribed, be subject to a form of super-affirmative procedure. For example [ ].
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 Orders under s. 192B FSMA, which enable the Treasury to vary the
classes of parent undertaking which the PRA or the FCA, in respect
of which the PRA or the FCA can make binding rules. This is in
effect a power to determine the scope of regulatory control over
parent undertaking of authorised persons (where those parent
undertakings are not themselves authorised persons); and
 Orders under 9L of the Bank of England Act 1998, which specify the
‘macro-prudential’ measures which the Bank of England’s Financial
Policy Committee can direct the regulators (the FCA or the PRA) to
implement. Such orders specify the central toolkit of measures which
the Financial Policy committee, acting through the financial services
regulators, can take to support the Bank of England’s objective of
protecting and maintaining the stability of the UK Financial System.
18. In relation to the last example in particular, we are conscious the Joint
Committee on the Draft Bill and the House of Commons Treasury Select
Committee both recommended an enhanced affirmative procedure for the
non-urgent orders, based on that in the Public Bodies Act 2011. However, in
its fourth report of session 2012-13 the Committee concluded that ‘the
affirmative procedure provided for in the Bill should be a sufficient
safeguard against inappropriate use of these powers’.3
19. These examples demonstrate that orders which affect the competition
objective of the FCA, which alter the scope of the regulatory regime and
which determine the tools available to the Bank of England’s financial policy
committee, can all be made under the ordinary affirmative procedure.
20. The orders to which the amendment would apply can be made to determine
the scope of the ring-fencing regime, and the requirements that will apply to
ring-fenced bodies. They are not of a different magnitude of importance to
the orders cited in paragraph 17 above. Indeed, they will apply only to a
small set of institutions, where as the orders cited above (para 17) can affect
the whole landscape of financial services regulation.
21. In our view, it is therefore perfectly appropriate that the orders to which the
amendment applies can be made by way of the ordinary affirmative
resolution procedure. In reaching this view we are also mindful that no order
that can be made under FSMA is subject to any more intensive procedure
that ordinary affirmative resolution.
3
Paragraph 11 of the report.
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A new precedent? Basing choice of procedure on subject matter of powers
22. We are also mindful of the precedent such a procedure would set. It would
create a new category of enhanced Parliamentary procedure for the scrutiny
of statutory instruments, with some of the elements of the ‘super-affirmative’
procedure provided for by the 2006 Act.
23. However, none of the powers to which the amendment would apply can be
used to amend primary legislation; nor are the powers in question especially
wide or loosely articulated. Accordingly, it seems the rationale for applying
an enhanced scrutiny procedure is because the substance of the instruments
is considered to be sufficiently important.
24. This sets a novel, and very uncertain, precedent. There is no clarity at all
about what topics might be considered sufficiently important to merit future
application of such an enhanced scrutiny procedure. It is not even possible to
say with any certainty whether other areas within the general field of
financial services law are properly considered of similar importance or not.
Considering the matter outside the field of financial services law is even
more uncertain.
Parliamentary Privilege and Legislating for Parliamentary Procedure
25. Further, amendment 19 goes further than even the 2006 Act in legislating for
the procedure which Parliament must adopt in relation to any of these orders.
While Parliament is, of course, free to determine that particular statutory
instruments must be considered by a specially constituted committee, it is not
appropriate for the government to seek to ensure that Parliament convenes a
joint committee to undertake this task, or to seek to dictate to Parliament in
primary legislation, whom the chairman of that committee has to be. The
nature of any committee charged with considering any draft SI under these
provisions, and the identity of the chair of that committee are questions for
Parliament to decide, and we doubt whether it is appropriate for the
Government to specify in primary legislation what procedure Parliament
must adopt.
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Annex A: Full text of amendment tabled during Common Committee
Clause 4, page
13, line
7,
at end insert—
‘142NA Enhanced scrutiny procedure for certain affirmative procedure orders
(1)
This section applies if—
(a)
an order under section 142A(2)(b) exempts a class of UK institutions from being
ring-fenced bodies,
(b)
an order under sections 142B(2) or 142B(5) makes provision for a regulated
activity to be or cease to be a core activity or varies the circumstances in which a
regulated activity is a core activity,
(c)
an order under section 142D(2) varies the circumstances in which the regulated
activity of dealing in investments as principal is an excluded activity,
(d)
an order under section 142D(4) provides for an activity to be or cease to be an
excluded activity or varies the circumstances in which an activity is an excluded
activity, or
(e)
an order under section 142E varies the scope of what ring-fenced bodies are
prohibited from doing by virtue of that section (including by varying exemptions
or conditions),
(f)
an order is made under section 142M,
and the order is not made in reliance on section 142N(4).
(2)
The Treasury must, before laying a draft of the order before either House of Parliament for
approval, consult such persons as the Treasury considers appropriate in relation to the
proposed draft.
(3)
If, after the consultation required by subsection (2), the Treasury considers that it is
appropriate to proceed with the making of an order, the Treasury must lay before each House
of Parliament a draft of the order together with an explanatory document—
(a)
explaining the provisions in the draft order, and
(b)
giving details of the consultation under subsection (2), any representations received
as a result of the consultation and any changes made to the proposed draft as a result
of the representations.
(4)
If a joint committee of both Houses of Parliament is charged with reporting on the draft
order—
(a)
the chairman of the Treasury Committee of the House of Commons is to be the
chairman of the joint committee, and
(b)
the Treasury must have regard to any recommendations of the joint committee made
during the 60-day period.
(5)
If, after the expiry of the 60-day period, the Treasury wish to make an order including
material changes from the draft order, they must lay before Parliament—
(a)
a revised draft order, and
(b)
a statement giving details of the revisions
(6)
After the expiry of the 60-day period (and, if subsection (5) applies, after complying with that
subsection) the Treasury may make the order in the terms of the draft, or revised draft, if it is
approved by a resolution of each House of Parliament (as required by section 142N(2)(a)).
(7)
In this section “the 60-day period” means the period of 60 days beginning with the day on
which the draft order is laid before Parliament under subsection (3).
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(8)
(9)
In calculating the 60-day period no account is to be taken of any time during which
Parliament is dissolved or prorogued or during which either House is adjourned for more than
4 days.
The references in this section to the Treasury Committee of the House of Commons—
(a)
if the name of that Committee is changed, is to be treated as a reference to that
Committee by its new name, and
(b)
if the functions of that Committee (or substantially corresponding functions)
become functions of a different Committee of the House of Commons, is to be
treated as a reference to the Committee by which the functions are exercisable;
and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the
House of Commons.”.’.
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