Ring-fencing

1 Objectives of Prudential Regulation Authority

(1) Section 2B of FSMA 2000 (the PRA’s general objective) is amended as follows.

(2) In subsection (3)—

(a) 5at the end of paragraph (a), omit “and”, and

(b) after paragraph (b) insert “, and

(c) discharging its general functions in relation to the
matters mentioned in subsection (4A) in a way that
seeks to—

(i) 10ensure that the business of ring-fenced bodies is
carried on in a way that avoids any adverse
effect on the continuity of the provision in the
United Kingdom of core services,

(ii) ensure that the business of ring-fenced bodies is
15protected from risks (arising in the United
Kingdom or elsewhere) that could adversely
affect the continuity of the provision in the
United Kingdom of core services, and

(iii) minimise the risk that the failure of a ring-fenced
20body or of a member of a ring-fenced body’s
group could affect the continuity of the

provision in the United Kingdom of core
services.”

(3) In subsection (4) for “subsection (3)” substitute “subsection (3)(a) and (b)”.

(4) After subsection (4) insert—

“(4A) 5The matters referred to in subsection (3)(c) are—

(a) Part 9B (ring-fencing);

(b) ring-fenced bodies (see section 142A);

(c) any body corporate incorporated in the United Kingdom that
has a ring-fenced body as a member of its group;

(d) 10applications under Part 4A which, if granted, would result, or
would be capable of resulting, in a person becoming a ring-
fenced body.”

(5) In section 2J of FSMA 2000 (interpretation of Chapter 2 of Part 1)—

(a) in subsection (3) for “a PRA-authorised” substitute “an authorised”,

(b) 15after that subsection insert—

“(3A) For the purposes of this Chapter, the cases in which a person
(“P”) other than an authorised person is to be regarded as failing
include any case where P enters insolvency.”, and

(c) in subsection (4), for “subsection (3)(a)” substitute “subsections (3)(a)
20and (3A)”.

2 Modification of objectives of Financial Conduct Authority

After section 1I of FSMA 2000 insert—

“Modifications applying if core activity not regulated by PRA

1IA Modifications applying if core activity not regulated by PRA

(1) 25If and so long as any regulated activity is a core activity (see section
142B) without also being a PRA-regulated activity (see section 22A), the
provisions of this Chapter are to have effect subject to the following
modifications.

(2) Section 1B is to have effect as if—

(a) 30in subsection (3) after paragraph (c) there were inserted—

“(d) in relation to the matters mentioned in section 1EA(2),
the continuity objective (see section 1EA).”, and

(b) in subsection (4), for “or the integrity objective,” there were
substituted “, the integrity objective or (in relation to the matters
35mentioned in section 1EA(2)) the continuity objective,”.

(3) After section 1E there is to be taken to be inserted—

“1EA Continuity objective

(1) (1)    In relation to the matters mentioned in subsection (2), the
continuity objective is: protecting the continuity of the
40provision in the United Kingdom of core services (see section
142C).

(2)  Those matters are—

(a) Part 9B (ring-fencing);

(b) ring-fenced bodies (see section 142A);

(c) any body corporate incorporated in the United Kingdom that
has a ring-fenced body as a member of its group;

(d) 5applications under Part 4A which, if granted, would result, or
would be capable of resulting, in a person becoming a ring-
fenced body.

(3)  The FCA’s continuity objective is to be advanced primarily by—

(a) seeking to ensure that the business of ring-fenced bodies is
10carried on in a way that avoids any adverse effect on the
continuity of the provision in the United Kingdom of core
services,

(b) seeking to ensure that the business of ring-fenced bodies is
protected from risks (arising in the United Kingdom or
15elsewhere) that could adversely affect the continuity of the
provision in the United Kingdom of core services, and

(c) seeking to minimise the risk that the failure of a ring-fenced
body or of a member of a ring-fenced body’s group could
adversely affect the continuity of the provision in the United
20Kingdom of core services.

(4) (4) In subsection (3)(c), “failure” is to be read in accordance with
section 2J(3) to (4).”.”

3 Amendment of PRA power of direction

In section 3I of FSMA 2000 (power of PRA to require FCA to refrain from
25specified action), in subsection (4)—

(a) at the end of paragraph (a), omit “or”, and

(b) at the end of paragraph (b) insert “, or

(c) threaten the continuity of core services provided in the
United Kingdom.”

4 30Ring-fencing of certain activities

(1) After Part 9A of FSMA 2000 insert—

“Part 9B

Ring-fencing

Introductory

142A “Ring-fenced body”

(1) In this Act “ring-fenced body” means a UK institution which carries on
35one or more core activities (see section 142B) in relation to which it has
a Part 4A permission.

(2) But “ring-fenced body” does not include—

(a) a building society within the meaning of the Building Societies
Act 1986, or

(b) a UK institution of a class exempted by order made by the
Treasury.

(3) An order under subsection (2)(b) may be made in relation to a class of
UK institution only if the Treasury are of the opinion that the
5exemption conferred by the order would not be likely to have a
significant adverse effect on the continuity of the provision in the
United Kingdom of core services.

(4) Subject to that, in deciding whether and, if so, how to exercise their
powers under subsection (2)(b), the Treasury must have regard to the
10desirability of minimising any adverse effect that the ring-fencing
provisions might be expected to have on competition in the market for
services provided in the course of carrying on core activities, including
any adverse effect on the ease with which new entrants can enter the
market.

(5) 15In subsection (4) “the ring-fencing provisions” means ring-fencing rules
and the duty imposed as a result of section 142G.

(6) An order under subsection (2)(b) may provide for the exemption to be
subject to conditions.

(7) In this section “UK institution” means a body corporate incorporated in
20the United Kingdom.

142B Core activities

(1) References in this Act to a “core activity” are to be read in accordance
with this section.

(2) The regulated activity of accepting deposits (whether carried on in the
25United Kingdom or elsewhere) is a core activity unless it is carried on
in circumstances specified by the Treasury by order.

(3) An order under subsection (2) may be made only if the Treasury are of
the opinion that it is not necessary for either of the following purposes
that the regulated activity of accepting deposits should be a core
30activity when carried on in the specified circumstances.

(4) Those purposes are—

(a) to secure an appropriate degree of protection for the depositors
concerned, or

(b) to protect the continuity of the provision in the United Kingdom
35of services provided in the course of carrying on the regulated
activity of accepting deposits.

(5) The Treasury may by order provide for a regulated activity other than
that of accepting deposits to be a core activity, either generally or when
carried on in circumstances specified in the order.

(6) 40An order under subsection (5) may be made only if the Treasury are of
the opinion—

(a) that an interruption of the provision of services provided in the
United Kingdom in the carrying on of the regulated activity
concerned could adversely affect the stability of the UK
45financial system or of a significant part of that system, and

(b) that the continuity of the provision of those services can more
effectively be protected by treating the activity as a core activity.

142C Core services

(1) References in this Act to “core services” are to be read in accordance
5with this section.

(2) The following are core services—

(a) facilities for the accepting of deposits or other payments into an
account which is provided in the course of carrying on the core
activity of accepting deposits;

(b) 10facilities for withdrawing money or making payments from
such an account;

(c) overdraft facilities in connection with such an account.

(3) The Treasury may by order provide that any other specified services
provided in the course of carrying on the core activity of accepting
15deposits are also core services.

(4) If an order under section 142B(5) provides for an activity other than that
of accepting deposits to be a core activity, the Treasury must by order
provide that specified services provided in the course of carrying on
that activity are core services.

(5) 20The services specified by order under subsection (4) must be services in
relation to which the Treasury are of the opinion mentioned in section
142B(6)(a).

142D Excluded activities

(1) References in this Act to an “excluded activity” are to be read in
25accordance with this section.

(2) The regulated activity of dealing in investments as principal (whether
carried on in the United Kingdom or elsewhere) is an excluded activity
unless it is carried on in circumstances specified by the Treasury by
order.

(3) 30An order under subsection (2) may be made only if the Treasury are of
the opinion that allowing ring-fenced bodies to deal in investments as
principal in the specified circumstances would not be likely to result in
any significant adverse effect on the continuity of the provision in the
United Kingdom of core services.

(4) 35The Treasury may by order provide for an activity other than the
regulated activity of dealing in investments as principal to be an
excluded activity, either generally or when carried on in circumstances
specified in the order.

(5) An activity to which an order under subsection (4) relates—

(a) 40need not be a regulated activity, and

(b) may be an activity carried on in the United Kingdom or
elsewhere.

(6) In deciding whether to make an order under subsection (4) in relation
to any activity, the Treasury must—

(a) have regard to the risks to which a ring-fenced body would be
exposed if it carried on the activity concerned, and

(b) consider whether the carrying on of that activity by a ring-
fenced body would make it more likely that the failure of the
5body would have an adverse effect on the continuity of the
provision in the United Kingdom of core services.

(7) An order under subsection (4) may be made only if the Treasury are of
the opinion that the making of the order is necessary or expedient for
the purpose of protecting the continuity of the provision in the United
10Kingdom of core services.

142E Power of Treasury to impose prohibitions

(1) The Treasury may by order prohibit ring-fenced bodies from—

(a) entering into transactions of a specified kind or with persons
falling within a specified class;

(b) 15establishing or maintaining a branch in a specified country or
territory;

(c) holding in specified circumstances shares or voting power in
companies of a specified description.

(2) In deciding whether to make an order under this section imposing a
20prohibition, the Treasury must—

(a) have regard to the risks to which a ring-fenced body would be
exposed if it did the thing to which the prohibition relates, and

(b) consider whether the doing of that thing by a ring-fenced body
would make it more likely that the failure of the body would
25have an adverse effect on the continuity of the provision in the
United Kingdom of core services.

(3) An order under this section may be made only if the Treasury are of the
opinion that the making of the order is necessary or expedient for the
purpose of protecting the continuity of the provision in the United
30Kingdom of core services.

(4) An order under this section may in particular—

(a) provide for any prohibition to be subject to exemptions
specified in the order;

(b) provide for any exemption to be subject to conditions specified
35in the order.

142F Orders under sections 142A, 142B, 142D or 142E

(1) An order made under section 142A, 142B, 142D or 142E may—

(a) authorise or require the making of rules by a regulator for the
purposes of, or connected with, any provision of the order;

(b) 40authorise the making of other instruments by a regulator for the
purposes of, or connected with, any provision of the order;

(c) refer to a publication issued by a regulator, another body in the
United Kingdom or an international organisation, as the
publication has effect from time to time.

(2) 45If the order confers powers on a regulator or authorises or requires the
making of rules or other instruments by a regulator, the order may
also—

(a) impose conditions on the exercise of any power conferred on
the regulator;

(b) impose consultation requirements on the regulator;

(c) make the exercise of a power by the regulator subject to the
5consent of the Treasury.

Ring-fenced bodies not to carry on excluded activities or contravene prohibitions

142G Ring-fenced bodies not to carry on excluded activities or contravene
prohibitions

(1) A ring-fenced body which—

(a) 10carries on an excluded activity or purports to do so, or

(b) contravenes any provision of an order under section 142E,

is to be taken to have contravened a requirement imposed on the body
by the appropriate regulator under this Act.

(a)(a)carries on an excluded activity or purports to do so, or

(b) 15contravenes any provision of an order under section 142E,

is to be taken to have contravened a requirement imposed on the body
by the appropriate regulator under this Act.

(2) The contravention does not—

(a) make a person guilty of an offence;

(b) 20make a transaction void or unenforceable;

(c) (subject to subsection (3)) give rise to any right of action for
breach of statutory duty.

(3) In such cases as the Treasury may specify by order, the contravention
is actionable at the suit of a person who suffers loss as a result of the
25contravention, subject to the defences and other incidents applying to
actions for breach of statutory duty.

(4) In this section “the appropriate regulator” means—

(a) in relation to a ring-fenced body which is a PRA-authorised
person, the PRA;

(b) 30in relation to any other ring-fenced body, the FCA.

Ring-fencing rules

142H Ring-fencing rules

(1) In the exercise of its power to make general rules, the appropriate
regulator must in particular make rules—

(a) 35requiring a ring-fenced body to make arrangements to ensure
the effective provision to the ring-fenced body of services and
facilities that it requires in relation to the carrying on of a core
activity, and

(b) making provision for the group ring-fencing purposes applying
40to ring-fenced bodies and to authorised persons who are
members of a ring-fenced body’s group.

(2) Section 142E(1)(c) does not affect the power of the appropriate
regulator to make general rules imposing restrictions on the extent of
the shares or voting power that a ring-fenced body may hold in another
45company, except where a restriction on the extent of the shares or
voting power that the ring-fenced body may hold in the company is
imposed by order under section 142E(1)(c).

(3) General rules that are required by this section or make provision falling
within subsection (2) are in this Act referred to as “ring-fencing rules”.

(4) The “group ring-fencing purposes” are—

(a) ensuring as far as reasonably practicable that the carrying on of
5core activities by a ring-fenced body is not adversely affected by
the acts or omissions of other members of its group;

(b) ensuring as far as reasonably practicable that in carrying on its
business a ring-fenced body—

(i) is able to take decisions independently of other
10members of its group, and

(ii) does not depend on resources which are provided by a
member of its group and which would cease to be
available to the ring-fenced body in the event of the
insolvency of the other member;

(c) 15ensuring as far as reasonably practicable that 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.

(5) Ring-fencing rules made for the group ring-fencing purposes must
20include—

(a) provision restricting the power of a ring-fenced body to enter
into contracts with other members of its group otherwise than
on arm’s length terms;

(b) provision restricting the payments that a ring-fenced body may
25make (by way of dividend or otherwise) to other members of its
group;

(c) provision requiring the disclosure to the appropriate regulator
of information relating to transactions between a ring-fenced
body and other members of its group;

(d) 30provision requiring a ring-fenced body to ensure that its board
of directors (or if there is no such board, the equivalent
management body) includes to a specified extent—

(i) members who are treated by the rules as being
independent of other members of the ring-fenced
35body’s group,

(ii) members who are treated by the rules as being
independent of the ring-fenced body itself, and

(iii) non-executive members;

(e) provision requiring a ring-fenced body to act in accordance
40with a remuneration policy meeting specified requirements;

(f) provision requiring a ring-fenced body to act in accordance
with a human resources policy meeting specified requirements;

(g) provision requiring arrangements made by the ring-fenced
body for the identification, monitoring and management of risk
45to meet specified requirements;

(h) such other provision as the appropriate regulator considers
necessary or expedient for any of the purposes in subsection (4).

(6) The reference in subsection (5)(e) to a remuneration policy is a reference
to a policy about the remuneration of officers, employees and other
50persons who (in each case) are of a specified description.

(7) The reference in subsection (5)(f) to a human resources policy is a
reference to a policy about the appointment and management of
officers, employees and other persons who (in each case) are of a
specified description.

(8) 5In this section—

• “the appropriate regulator” means—

  (a)

  in relation to a ring-fenced body which is a PRA-
  authorised person, the PRA;

  (b)

  in relation to any other ring-fenced body, the FCA;

• 10 “shares” has the meaning given in section 422;

• “specified” means specified in the rules;

• “voting power” has the meaning given in section 422.

142I Powers of Treasury in relation to ring-fencing rules

(1) The Treasury may by order require the appropriate regulator, as
15defined in section 142H(8), to include (or not to include) in ring-fencing
rules specified provision relating to—

(a) any of the matters mentioned in section 142H(5)(a) to (g), or

(b) any other specified matter.

(2) The power to make an order under this section is exercisable only if the
20Treasury consider it necessary or expedient to do so—

(a) for any of the group ring-fencing purposes as defined in section
142H(4), or

(b) otherwise for securing the independence of ring-fenced bodies
from other members of their groups.

(3) 25“Specified” means specified in the order.

142J Review of ring-fencing rules

(1) The PRA must carry out reviews of its ring-fencing rules.

(2) The first review must be completed before the end of the period of 5
years beginning with the day on which the first ring-fencing rules come
30into force.

(3) Subsequent reviews must be completed before the end of the period of
5 years beginning with the day on which the previous review was
completed.

(4) The PRA must give the Treasury a report of each review.

(5) 35The Treasury must lay a copy of the report before Parliament.

(6) The PRA must publish the report in such manner as it thinks fit.

(7) If (because any ring-fenced body is not a PRA-authorised person)
section 142H has the effect of requiring the FCA to make ring-fencing
rules, subsections (1) to (6) apply to the FCA as they apply to the PRA.