DPRR/13-14/38
FINANCIAL SERVICES (BANKING REFORM) BILL
SUPPLEMENTARY MEMORANDUM FOR THE DELEGATED POWERS
AND REGULATOR REFORM COMMITTEE
Government Amendments at Lords’ Committee Stage
A. INTRODUCTION
1.
This Memorandum concerns the Financial Services (Banking Reform) Bill. It is
supplementary to the Memorandum published when the Bill was brought from the House
of Commons on 10 July 2013.
2.
It has been prepared to assist the Delegated Powers and Regulatory Reform Committee
in their consideration of the amendments to the Bill laid by the Government during the
Lords Committee Stage of the Bill. References to the numbers and pages of Government
amendments are to those amendments as they appear on the list of Government
amendments provided to the Committee on 1st October 2013.
3.
Any queries should be directed, in the first instance, to Nicola Pittam, in Treasury Legal Advisers
(nicola.pittam@hmtreasury.gsi.gov.uk or 020 7270 4422).
B. AMENDMENTS TO EXISTING DELEGATED POWERS
(1)
Government Amendment [1], new section 142H(8) (definition of “appropriate
regulator”) (page 9 of the Bill).
4.
Government Amendment [1], clause 4 amends the definition of “appropriate regulator”
in new section 142H to ensure that the term is defined not only in relation to ring-fenced
bodies, but also in relation to authorised persons who are not ring-fenced bodies. This is
a minor and technical amendment which reflects the fact that rules made by the
appropriate regulator to comply with the obligation set out in subsection (1) of that
section may apply not only to ring-fenced bodies but also to authorised persons who are
members of a ring-fenced body’s group.
(2)
Government Amendments [17 to 30] (pp 3 to 6) to new sections 142W and 142X
(pension liabilities, and interpretative provisions) (pages 17 to 19 of the Bill).
5.
The Government is laying amendments to new sections 142W and 142X. These
amendments will widen the scope of the power given to the Treasury to make regulations
requiring ring-fenced banks to make arrangements to ensure that they are not liable and
cannot become liable for the pensions liabilities of non ring-fenced bodies. The
amendments widen the scope of the power in the following ways, by enabling
regulations made under the power to—
a. extend to a wider range of pension schemes by removing the requirements that
the a relevant pension scheme must be a multi-employer scheme, and a
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scheme in relation to which a ring-fenced body is an employer (cl 4,
government amendment [17], new subsection [1A]);
b. enable trustees or managers of a relevant pension scheme to transfer certain
liabilities and associated assets to another relevant pension scheme or
segregate their pension scheme (cl 4, government amendment [17], new
subsection [1B]);
c. make provision for court applications by a ring-fenced body in any case where
the ring-fenced body has not been able to reach agreement with a third party in
relation to arrangements made for the purposes of the regulations (cl 4,
government amendment [17], [new subsections (1C),(1D)].
d. impose obligations on trustees or managers of a pension scheme or any
employer in relation to that scheme to provide information to specified
persons (cl 4, government amendment [20];
e. modify, exclude
amendment[23]);
or
apply
existing
legislation
(cl
4,
government
f. to require a ring-fenced body to do all that it can to obtain a clearance
statement from the Pensions Regulator in relation to any arrangements made
for the purpose of complying with the regulations (with with ring-fencing
obligations generally) [cl 4, government amendment [24]].
6.
The amendments also make a number of consequential changes to new sections 142W
and X (cl 4, government amendments [18],[19], [21], [22] and [25] to [30]).
Reasons for the change in the power
7.
Previously the power only extended to multi employer schemes, in respect of which a
ring-fenced body is an employer. Both limitations are being removed by the government
amendments to these sections. This is necessary to cover the possibility first, that a ringfenced body might be the single employer in relation to a scheme (before any split
required by the regulations), and secondly that a ring-fenced body may be potentially
liable for the pension liabilities of a non-ring-fenced body without being an employer in
relation to the same pension scheme as that non ring-fenced body. Such liabilities might
arise where the ring-fenced body has entered into contractual funding arrangements
(such as guarantees, security or indemnity agreements) in respect of such pension
liabilities, or if the ring-fenced body is potentially liable under the scheme rules (which
may place liability on the “scheme sponsor” or “principal employers” even though they
are not employers within the meaning of Part 1 of the Pensions Act 1995).
8.
The amendments also give the Treasury power to enable the trustees or managers of a
pension scheme to transfer pension liabilities to another pension scheme, and to divide a
pension scheme into different sections by segregation. This clarifies the extent to which
the Treasury can give pension trustees or managers new powers (provision for this was
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previously limited to paragraph (e) of section 142W(3)). Further, in recognition that the
trustees or mangers of a scheme may be in a better position to provide information on
any changes to the scheme made consequent on ring-fencing obligations to members of
the scheme than the ring-fenced body, the power now permits the Treasury to impose
obligations on the trustees and managers of the scheme to give notice of specified
matters to specified persons.
9.
A ring fenced-body will only be able to ensure that it is released from contractual
funding arrangements, guarantees, security or indemnity agreements, or the scheme rules
if the third party who benefits from the arrangements in question agrees. The
Government is therefore amending new section 142W so that regulations may enable a
ring-fenced body which has been unable to make arrangements on commercial terms
with a third party to release itself from the pension liabilities described in subsection
(1A), to apply to the court. The regulations can enable the court on such an application to
order the third party to enter arrangements for these purposes, but only on such terms as
the court considers fair and reasonable, and these must be terms which the court
considers are terms on which the arrangements might be entered into for commercial
reasons by willing parties dealing at arm’s length. Non-ring-fenced bodies may therefore
be required to lose the benefit of their property rights under contractual funding
arrangements, guarantees, security or indemnity agreements; or the scheme rules.
However they will only do so on commercial terms. The additional power is necessary to
ensure that the ring-fenced body is able to resolve any disputes which might prevent it
from being able to comply with obligations imposed on it to minimise its pension
liabilities, but seeks so far as possible to achieve a fair balance between the interests of
the ring-fenced body and the interests of the other parties to the arrangements.
10. The amendments give the Treasury power to modify, exclude or apply (with or without
modification) any primary or subordinate legislation. The Treasury proposes to place
ring-fenced bodies under an obligation to ensure that their pension schemes are
segregated or to create a new pension scheme which complies with the conditions set out
in the regulations. This will in practice require modifications of the ring-fenced bodies’
existing pension schemes in most if not all cases, and further, will require those
modifications to be completed by a specified date. It may be necessary for the
regulations to modify the application of existing requirements under the Pensions Act
1995 or subordinate legislation made under that Act on the modification of pension
schemes in order to enable ring-fenced bodies to comply with their obligations under the
regulations. Pensions legislation is complex, and there may be requirements in other
primary or secondary legislation which could prevent the trustees from making the
transfers of accrued rights and associated liabilities, or segregation necessary to enable
the ring-fenced bodies to comply with their obligations under these regulations. Without
such a power, it would not be possible for the Treasury to give full effect to the policy
objective of ring-fencing, by ensuring that a ring-fenced body is required to minimise its
potential liabilities for the pension liabilities of a non-ring-fenced body.
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11. The amendments also strengthen the requirements which the regulations may impose on
ring-fenced bodies in relation to applications to the Pensions Regulator for clearance
statements under section 42 or 46 of the Pensions Act 2004 (or equivalent provisions
under Northern Ireland legislation). Rather than simply requiring an application to be
made to the Pensions Regulator, as amended, the regulations will be able to require the
ring-fenced bodies or any member of their group to do all it can to obtain a clearance
statement from the regulator under these provisions.
12. No change is made to the procedure applying to this enabling power. The Government
remains of the view that the draft affirmative resolution procedure is appropriate for the
reasons set out in the Memorandum published in July 2013. The requirement on a ringfenced body to leave a multi-employer scheme unless the required changes are made to
the scheme, and to divest itself of any non-statutory liability to the pension scheme of a
non-RFB, 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 (if the separation of the scheme, or the assignment of
certain rights to the ring-fenced section of the scheme is considered to weaken the
employer covenant provided in relation to the pension scheme). The fact that, following
the proposed amendments, the regulations will be able to modify, exclude or apply (with
or without modification) any primary or subordinate legislation provides further reason
for the use of the draft affirmative resolution procedure.
C: NEW DELEGATED POWERS
(1) BAIL-IN STABILISATION OPTION (SEE SEPARATE DELEGATED POWERS MEMORANDUM)
(2) RULES OF CONDUCT
Government Amendment [44] (p 17) (rules of conduct), inserting new section 64A into
FSMA
(a) New Section 64A(1)
13. Power: for the FCA, if it appears to it to be necessary or expedient for the purpose of
advancing one or more of its operational objectives, to make rules applying to (1)
persons in relation to whom it has given approval to perform ‘controlled functions’, and
(2) employees of banks that are authorised persons;
14. Body: the FCA;
15. Parliamentary Scrutiny: none.
Reasons for Power and Procedure
16. The PCBS report recommended that a single set of ‘banking standards rules’ should be
introduced, and made applicable to anyone working banks (except those working in
auxiliary or purely administrative roles) (para. 633 of the PCBS report). In its response
the Government agreed to this recommendation (para. 2.18 of the Response).
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17. To implement this policy amendment number [44] inserts new section 64A into FSMA.
New section 64A(1) (read together with new section 64A(4)) confers on the FCA a
power to make rules about the conduct of persons in relation to the performance of
activities (whether or not regulated activities) by the firm on whose application they were
approved to perform a controlled function, or (if they are an employee of the firm but not
an approved person) the firm by which they are employed.
18. Insofar as this power applies to approved persons, this power is not a significant
extension of the FCA’s powers. Under the existing section 64(1) of FSMA, the FCA
may issue ‘statements of principle’ setting out the conduct expected of persons to whom
it has given its approval to perform ‘controlled functions.’ Failure by an approved
person to comply with a statement of principle amounts to misconduct, with similar
consequences to breach of a rule made by the FCA. The power given to the FCA in new
clause 64A to make rules in this area, rather than statements of principle is intended to
provide greater clarity as to the requirements on those approved to perform “controlled
functions”. It does not extend the scope of the FCA’s powers.
19. Insofar as this power applies to employees of authorised persons who are not approved
persons, the power is new. The power is necessary to ensure that the FCA is able to make
rules applying to everyone working in banks, whether or not they are “approved
persons”, to implement the PCBS recommendations, and the Government’s policy. The
Government believes it is appropriate that the policy be delivered through rule-making
by the regulators because the rules will need to cover a wide-range of roles within a
variety of financial services firms. They will range from high-level principles to more
detailed and technical provision, and may require frequent revision in order to respond to
development in different parts of the financial services industry.
20. A number of safeguards apply to the exercise of this power. When exercising the power
the FCA must comply with the procedural provisions of s. 138I FSMA, which apply to
all rules made by the FCAs: the FCA must consult the PRA about any proposed rules,
and thereafter publish draft rules for consultation accompanied by a cost benefit analysis,
an explanation of the FCA’s reasons for believing that the making of the proposed rules
is compatible with its duties and an explanation of the purpose of the rules. Final rules
may only be made after the FCA has considered any representations made during the
consultation.
(b) New Section 64A(2)
21. Power: for the PRA, if it appears to it to be necessary or expedient for the purpose of
advancing any of its objectives, to make rules applying to:
(1) persons in relation to whom it has given approval to perform ‘senior
management functions’,
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(2) persons in relation to whom the FCA has given its approval to perform ‘senior
management functions’ in relation to the carrying on by a PRA-authorised
person of a regulated activity, and
(3) employees of PRA-authorised banks.
22. Body: the PRA
23. Parliamentary Scrutiny: none
Reasons for Power and Procedure
24. These provisions are also part of the implementation of the Government’s policy to
introduce conduct rules for employees of banks. They provide a power for the PRA
equivalent to that given to the FCA (discussed above). Insofar as this power applies to
approved persons, this power is not a new one for the PRA any more than it is for the
FCA. Under the existing section 64(1A) of FSMA, the PRA may issue ‘statements of
principle’ setting out the conduct expected of persons to whom it has given its approval
to perform ‘controlled functions.’ Changing this to a power to make rules applying to
approved persons does not change the substance of the power.
25. Insofar as this power applies to employees of PRA-authorised banks who are not
approved persons, the power is new. It gives the PRA an equivalent power to the FCA to
make rules applying to employees who would not otherwise be subject to regulation, in
further implementation of the PCBS recommendation discussed above.
26. Rules made by the PRA are subject to the same safeguards as rules made by the FCA:
under section 138J, the PRA must consult the FCA about any proposed rules, and
thereafter publish draft rules for consultation 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 and an explanation of the purpose of the rules. Final rules may
only be made after the PRA has considered any representations made during the
consultation.
(c) Power to make further consequential amendments (government amendment 76) (p
41) (New Clause following clause 18)
27. Power: to make consequential amendments to primary and secondary legislation
28. Body: The Treasury;
29. Parliamentary scrutiny: draft affirmative if the order amends or repeals primary
legislation, otherwise negative (see clause 17, as amended by government amendment
75).
30. This clause enables the Treasury to make an order amending any enactment passed or
made before the passing of the Bill, and any enactment passed or made on or before the
last day of the Session in which the Bill is passed.
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31. The power is needed to enable amendments to both primary and secondary legislation
consequential to the provisions made in or under the Bill, and in particular the extensive
amendments to the approved persons regime in the Financial Services and Markets Act
2000 which are proposed in government amendments [36] to [48], and the introduction
of a bail-in stabilisation option proposed in government amendments [35] and [78].
Amendments to primary legislation may be needed in consequence of provisions made
under the Bill and to give effect to implementation of the Bill. Secondary legislation can
be amended under the powers under which it was originally made; however, the power in
this clause will ensure that consequential amendments can be made where the powers
under which the secondary legislation to be amended would not otherwise extend to the
making of the amendment.
32. The Treasury consider it appropriate that an order under this clause should be subject to
the draft affirmative procedure where it amends or repeals primary legislation, and that
the negative procedure is appropriate in other cases.
(3) PAYMENT SYSTEMS SPECIAL ADMINISTRATION REGIME
(a) Government amendment [53] (page 26) new Clause (interpretation: infrastructure
companies)
33. Power: to designate companies that provide services to operators of recognised inter–
bank payment systems and securities settlement systems as “infrastructure companies”.
34. Body: Treasury
35. Parliamentary scrutiny: Negative resolution
Reason for power and procedure
36. The purpose of Amendments [52] to [69] is to establish a special administration regime
for operators of recognised inter–bank payment systems and securities settlement
systems. These operators often rely on services provided by other companies in order to
operate the relevant systems. If any such service provider were to become insolvent,
there is a danger that the continuity of the operation of the relevant system would be
jeopardised. With that in mind, subsection (4) of the new clause in amendment [53]
provides the Treasury with a power, by order, to designate companies that provide
services to inter-bank payment systems or to securities settlement systems the relevant
operators as “infrastructure companies”, where the Treasury is of the view that an
interruption of those services “would have a serious adverse effect” on the operation of
the system. The effect of such a designation would be that if any such company were to
become insolvent, a financial market infrastructure (FMI) administration order could be
made in respect of the company in the interests of ensuring that the relevant system
continued to operate effectively.
37. The decision has been taken that the negative resolution procedure provides the
appropriate level of scrutiny for orders designating this third category of company as
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“infrastructure companies”. The making of a designation order will not affect the subject
of the order in any way unless it becomes insolvent, or is likely to become insolvent.
Subsection (6) provides for a consultation process that must be followed before a
company is designated. This includes a requirement to consult the company itself, so the
company will have the opportunity to make representations if it does not agree that
designation is appropriate. It is also the case that in the event a FMI administration order
is made in respect of a designated company, the company’s members will be in no worse
a position than would be the case if a “normal” administration order had been made in
respect of it. Accordingly, the government is of the view that the negative resolution
procedure is appropriate in this case.
(b) Government Amendment [62] (page 32). new Clause (conduct of administration, transfer
schemes etc)
38. Power: Allows for the rule making power provided for in section 411(1B) of the
Insolvency Act 1986 to be exercised for the purposes of giving effect to FMI
administration.
39. Body: In relation to England and Wales: the Lord Chancellor with the concurrence of
the Treasury and, in the case of rules that affect court procedure, the Lord Chief Justice.
In relation to Scotland: the Treasury.
40. Parliamentary scrutiny: Negative resolution (see section 411(5) of the Insolvency Act
1986).
41. This amendment allows for rules to be made pursuant to section 411(1B) of the
Insolvency Act 1986 for the purposes of giving effect to the special administration
regime that is established by government amendments [52] to [69] of the Bill and which
is known as “FMI administration” (see government amendment [52] inserting new clause
(financial market structure administration)).
42. Whilst the provision made in the New Schedule (Conduct of FMI Administration) to the
Bill (see government amendment no [80]) applies (with various modifications) certain
provisions in relation to administration made in the Insolvency Act 1986 to the case of
FMI administration, there is a requirement for rules to be made prescribing detail as to
the making of applications for FMI administration orders, the conduct of FMI
administration and court procedure and practice in relation to FMI administration. It is
envisaged that such rules will in part apply certain provisions made in the Insolvency
Rules 1986 (SI 1986/1925) with a number of general and specific modifications for this
purpose. It is not considered appropriate for such procedural matters to be prescribed in
primary legislation. Instead the government consider that the model of leaving such
detail to rules should be adopted, to provide more flexibility to deal with the changes
necessary to update procedural requirements from time to time.
43. There is precedent for this approach: For example, when a new administration regime for
banks was established by Part 3 of the Banking Act 2009, section 160 of the Banking Act
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2009 amended section 411 of the Insolvency Act 1986 in order to allow company
insolvency rules to be made pursuant to section 411 for the purpose of giving effect to
Part of the Banking Act 2009 (bank administration).
44. The negative resolution procedure is applied to rules made pursuant to section 411 of the
Insolvency Act 1986 (see section 411(5)), and it is considered appropriate to follow that
precedent in the case of rules made for the purposes of giving effect to FMI
administration. These are technical and procedural rules and we consider that it would
not be an appropriate use of Parliamentary time to debate them.
45. It should also be noted that the consultation requirements provided for by section 413 of
the Insolvency Act 1986 will apply in the case of rules applicable in England and Wales
made for this purpose. That is the Lord Chancellor will be required to consult with the
Insolvency Rules Committee before making any rules under section 411 for the purposes
of FMI administration.
(c) Government amendment no 80 (page 79): new Schedule (Conduct of FMI
Administration); paragraph (6) (power to make further modifications).
46. Power: Allows for amendments to be made to this Schedule for the purposes of making
further modifications to the provision in the Insolvency Act 1986 and any other
insolvency enactment extant at the time that this Schedule comes into force to give effect
to FMI administration.
47. Body: The Treasury.
48. Parliamentary scrutiny: Affirmative resolution.
49. This provision allows the Treasury to amend this Schedule by affirmative order should it
be considered necessary to do so. The reason for the conferral of this power is to allow
the Treasury to make changes to primary legislation in the future for the purposes of
ensuring that the FMI administration regime operates effectively.
50. The amendments to the Insolvency Act 1986 that feature in the Schedule have been
prepared on the basis that they apply certain provisions in the Insolvency Act 1986 with
appropriate modifications so as to enable FMI administrations to be conducted
effectively. It is possible, however, that experience will in the future suggest further
modifications will be appropriate, and this provision will allow for such modifications to
be made without recourse to primary legislation.
51. This approach has precedent: this clause is modelled on similar provision made in
paragraph 46 of Schedule 10 to the Postal Services Act 2011 and, like that provision,
prescribes the affirmative resolution procedure. The affirmative procedure is considered
appropriate given that this is a Henry VIII power.
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(4) POWERS OF FCA AND PRA TO MAKE RULES APPLYING TO PARENT UNDERTAKINGS
(a) Government amendment [72] (page 38), new clause (power of FCA and PRA to make
rules applying to parent undertakings), inserting new section 192JA into FSMA (rules
applying to parent undertakings of ring-fenced bodies)
52. Power: to make rules in relation to bodies corporate which are parent undertakings of a
ring-fenced body as appear to the regulator to be necessary or expedient for ring-fencing
purposes.
53. Body: the Prudential Regulation Authority, for parent undertakings of ring-fenced bodies
which are PRA-authorised persons, and in other cases, the PRA. Initially, all ringfenced bodies are expected to be PRA-authorised persons.
54. Parliamentary Procedure: None.
Reason for power and procedure.
55. Under new section 142H, the regulators are required to make rules making provision for
the group ring-fencing purposes set out in section 142H(4). These purposes require rules
to ensure that the carrying on of core activities (i.e. the provision of core services in
relation to accepting retail deposits) is not adversely affected by the acts or omissions of
other members of the ring-fenced body’s group; that the ring-fenced body is able to take
decisions independently of other members of its group and does not depend on resources
from them; and that as far as possible the ring-fenced body would be able to continue to
carry on core activities in the event of the insolvency of one or more other members of
its group.
56. Rules made for these purposes will affect the extent to which the ring-fenced body may
enter into transactions with other members of its group, or continue to be party to
arrangements with other members of its group. For example, the regulator may find it
advisable to restrict the exposures which a ring-fenced body may have in relation to other
members of its group. So far as possible, requirements considered to be necessary for
the enforcement of the ring-fence should be enforceable not only in relation to the ringfenced body, but also to its parent undertakings (that is its holding companies) which will
have a significant influence on the ring-fenced body’s ability to comply with the
requirements, and, through the group holding company, the extent to which requirements
imposed in relation to ring-fencing are observed in the rest of the group. The regulators
currently only have power under the Financial Services and Markets Act 2000 to make
general rules applying to authorised persons. While many members of the same group
are likely to be authorised persons, the parent undertakings of ring-fenced bodies may
well not be. Accordingly, new clause 192JA give the regulators power to make such
rules applying to parent undertakings of ring-fenced bodies as they think necessary or
expedient for the group ring-fencing purposes. There is a precedent for giving the
regulators rule-making powers in relation to unauthorised parent undertakings. Under
section 192J of the Financial Services and Markets Act 2000 parent undertakings have
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power to make rules requiring the provision of information by certain parent
undertakings.
57. Rules made by the PRA under the power given by this new section will be subject to the
same safeguards applying to all rules made by the regulator 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 for consultation 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. Final
rules may only be made after the PRA has considered any representations made during
the consultation. Rules made by the regulators under FSMA are not subject to any
Parliamentary procedure, and the Government considers that it is appropriate for rules
made by the regulators under the new powers to be subject to the safeguards described
above.
(b) Government amendment [72] (page 39), new clause (power of FCA and PRA to
make rules applying to parent undertakings), inserting new section 192JB into FSMA
(Power for the PRA and the FCA to make rules applying to qualifying parent
undertakings to facilitate resolution)
58. Power: to make rules requiring qualifying parent undertakings to make arrangements to
facilitate the exercise of resolution powers in relation to a qualifying authorised person
in the event that that authorised person gets into financial difficulties.
59. Body: the PRA or the FCA, in the case of parent undertakings of a qualifying authorised
person who is a PRA-authorised person, and in all other cases, the FCA.
60. Parliamentary procedure: none.
61. The new power conferred by new section 192JB will enable the appropriate regulator
(the PRA or the FCA as the case may be) to impose rules for the purposes of requiring
arrangements to be made that would, in the opinion of the regulator, allow or facilitate
the exercise of resolution powers in relation to the qualifying parent undertaking or any
subsidiary undertakings.
62. Rules made in exercise of this power are intended, among other things, to ensure that
banks (and other relevant regulated entities) can be resolved in an orderly manner, for
example, by securing that qualifying parent undertakings ensure that regulated
subsidiaries may be separated from the rest of the group, if part of the business fails. It
may be necessary for a subsidiary which has been transferred to another person through
the use of powers under the Banking Act 2009 to continue to receive operational service
from another company in the failed group. These powers are necessary as the regulated
subsidiaries may not be in a position of control in relation to, for example, group
companies who provide services to the regulated entity concerned (for example, where
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the service company is wholly owned by the parent undertaking and not the regulated
entity).
63. Rules may also be necessary to require that qualifying parent undertakings have
sufficient loss absorbency capacity issued to the market and internally down-streamed in
an appropriate form to the bank (and other relevant subsidiaries), for the purposes of
ensuring that the bank (and other relevant subsidiaries) can be resolved together in an
orderly manner. This is necessary as the regulated subsidiaries may wish to meet their
debt requirement through internally issued debt to the qualifying parent undertaking, and
as such the qualifying parent undertaking will itself need to issue a sufficient amount of
debt to the market to cover this.
64. Although the power of direction currently available to the appropriate regulators (see
sections 192C to 192E of the FSMA) may be exercised on a case-by-case basis to
achieve similar effects, a rule-making power is necessary as the appropriate regulators
will need to impose uniform arrangements in a transparent and consistent manner across
a certain class of qualifying parent undertaking.
65. In terms of the procedural arrangements, the same arrangements will apply as for the
power to make rules for ring-fencing purposes (see paragraph 56 above).
(5) DELEGATED POWERS UNDER FCA CONCURRENT COMPETITION CLAUSES
Government amendment [82] (page 85) New Schedule (Functions of FCA under Competition
Legislation), paragraph 3, inserting new section 234I(2) into FSMA: power to amend the
definition of “financial sector activities”
66. Power: to amend new section 234I, defining “financial sector activities”
67. Body: the Treasury
68. Parliamentary procedure: Affirmative resolution
69. New section 234I(1) provides a definition of “financial sector activities” for the purposes
of new sections 234J and 234K (inserted into FSMA by the Fifth New Schedule). New
sections 234J and 234K make provision for the FCA to have functions, exercisable
concurrently with the Competition and Markets Authority (“CMA”), under Part 4 of the
Enterprise Act 2002 and Part 1 of the Competition Act 1998 (“CA98”). Under Part 4 of
the Enterprise Act 2002, the FCA will have the power to carry out market studies and
make references to the CMA to conduct market investigations. Under Part 1 of the
CA98, the FCA will have the power to address restrictive practices engaged in by
companies operating in the UK that distort, restrict or prevent competition. One of the
powers is to impose a fine of up to 10% of a company’s UK annual turnover for every
year a violation has taken place, for a maximum of three years. The definition in new
section 234I(1) establishes the matters in relation to which the FCA can discharge its
concurrent competition functions.
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70. New section 234I(2) provides that the Treasury may by order amend section 234I. This
gives the Treasury the flexibility to change the scope of matters in respect of which the
FCA can discharge its concurrent competition functions. This power is necessary to deal
with the possibility of matters arising in the future in respect of which the use by the
FCA of competition powers is warranted but where those matters do not fall within the
definition of “financial sector activities”.
71. This is a Henry VIII power which could be used to change significantly the range of
those matters in respect of which the FCA would be permitted to exercise its competition
powers under new sections 234J and 234K. It is appropriate that Parliament be afforded
the opportunity to scrutinise and debate any order which seeks to change the definition of
“financial sector activities” and so the affirmative procedure has been specified. There is
a precedent for this power in section 369 of the Communications Act 2003.
(6) BUILDING SOCIETIES ACT 1986 AMENDMENTS
Government Amendment [83], page 90 (New Schedule (Societies), paragraph 2(5), inserting
new subsections (12) and (13) into section 7 of the Building Societies Act 1986)
72. Power – to amend the amount of annual turnover which determines whether or not a
person is a small business for the purposes of calculating the funding limit in section 7 of
the Building Societies Act 1986;
73. Body: Treasury;
74. Parliamentary Scrutiny: negative resolution procedure.
Reason for power and procedure
75. Paragraph 2 of the new schedule will amend section 7 of the Building Societies Act 1986
which contains the funding limit for building societies. New subsections (12) and (13)
will give the Treasury power, by order made by statutory instrument, to amend the
amount of £1 million annual turnover in new subsections (10) and (11)(c) which
determines whether or not a person is a small business for the purposes of calculating the
funding limit.
76. The funding limit requires a building society to ensure that the value of shares in the
society held by individuals’ accounts for at least 50% of the value of funds of the
society’s group. The amendments to section 7 made by the new schedule will mean that a
limited amount of deposits from small businesses (up to 10% of group funds) will be
disregarded when calculating the funding limit (new paragraph (aa) of subsection (3) and
new subsection (3A)).
77. It may be appropriate in future to amend the £1 million amount of annual turnover used
to determine which is a small business. The definition of small business in new
subsection (10) is based on the definition used in the Financial Services Compensation
Scheme (FSCS) which is expected to be amended within the next few years (in line with
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EU requirements) and there may be other reasons to change the figure, for example, to
reflect inflation. This power will enable the Treasury to amend the figure as appropriate.
78. Section 7 of the Building Societies Act 1986 is one of a number of restrictions on the
activities of building societies in that Act (e.g. sections 6, 8, 9A and 9B). Certain of
these sections also include power to amend through secondary legislation: for example at
section 9A(12), the Government may by statutory instrument (subject to negative
resolution) substitute amounts specified in subsections (2) and (3) of that section.
79. The Government considers that it is appropriate that a statutory instrument made under
new section 7(12) should be subject to the negative procedure. This is because the power
is limited to substituting for the amount of £1 million a new amount.
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