Financial Services (Banking Reform) Bill

House of Lords

Session 2013 - 14
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Other Bills before Parliament

Financial Services (Banking Reform) Bill

Financial Services (Banking Reform) Bill
Part 1 — Ring-fencing
1

A
Bill
[AS AMENDED IN COMMITTEE]
To
Make further provision about banking and other financial services, including
provision about the Financial Services Compensation Scheme; to make
provision for the amounts owed in respect of certain deposits to be treated as a
preferential debt on insolvency; to make further provision about payment
systems and securities settlement systems; to make provision about the
accounts of the Bank of England and its wholly owned subsidiaries; and for
connected purposes.
Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and
consent of the Lords Spiritual and Temporal, and Commons, in this present
Parliament assembled, and by the authority of the same, as follows:—
Part 1
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)—
5
(a)
at 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—
10
(i)
ensure 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
15
protected from risks (arising in the United

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Financial Services (Banking Reform) Bill
Part 1 — Ring-fencing
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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
body or of a member of a ring-fenced body’s
5
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—
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“(4A)
The 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;
15
(d)
applications 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”,
20
(b)
after 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)
25
and (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
30
(1)
If 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—
35
(a)
in 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
40
mentioned in section 1EA(2)) the continuity objective,”.

Financial Services (Banking Reform) Bill
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(3)
After section 1E there is to be taken to be inserted—
“1EA
Continuity objective
(1)   In relation to the matters mentioned in subsection (2), the
continuity objective is: protecting the continuity of the
provision in the United Kingdom of core services (see section
5
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
10
has a ring-fenced body as a member of its group;
(d)
applications 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—
15
(a)
seeking to ensure 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,
(b)
seeking to ensure that the business of ring-fenced bodies is
20
protected 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
(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
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adversely affect the continuity of the provision in the United
Kingdom of core services.
(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
30
In section 3I of FSMA 2000 (power of PRA to require FCA to refrain from
specified 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
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United Kingdom.”

Financial Services (Banking Reform) Bill
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4
Ring-fencing of certain activities
(1)
After Part 9A of FSMA 2000 insert—
“Part 9B
Ring-fencing
Introductory
5
142A
“Ring-fenced body”
(1)
In this Act “ring-fenced body” means a UK institution which carries on
one 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—
10
(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
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UK institution only if the Treasury are of the opinion that the
exemption 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
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powers under subsection (2)(b), the Treasury must have regard to the
desirability 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
25
market.
(5)
In 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.
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(7)
In this section “UK institution” means a body corporate incorporated in
the United Kingdom.
142B
Core activities
(1)
References in this Act to a “core activity” are to be read in accordance
with this section.
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(2)
The regulated activity of accepting deposits (whether carried on in the
United 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
40
that the regulated activity of accepting deposits should be a core
activity when carried on in the specified circumstances.

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(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
of services provided in the course of carrying on the regulated
5
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)
An order under subsection (5) may be made only if the Treasury are of
10
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
financial system or of a significant part of that system, and
15
(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
with this section.
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(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)
facilities for withdrawing money or making payments from
25
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
deposits are also core services.
30
(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)
The services specified by order under subsection (4) must be services in
35
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
accordance with this section.
40
(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)
An order under subsection (2) may be made only if the Treasury are of
45
the opinion that allowing ring-fenced bodies to deal in investments as

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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)
The Treasury may by order provide for an activity other than the
regulated activity of dealing in investments as principal to be an
5
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)
need not be a regulated activity, and
(b)
may be an activity carried on in the United Kingdom or
10
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
15
(b)
consider whether the carrying on of that activity by a ring-
fenced body would make it more likely that the failure of the
body 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
20
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
Kingdom of core services.
142E
Power of Treasury to impose prohibitions
(1)
The Treasury may by order prohibit ring-fenced bodies from—
25
(a)
entering into transactions of a specified kind or with persons
falling within a specified class;
(b)
establishing or maintaining a branch in a specified country or
territory;
(c)
holding in specified circumstances shares or voting power in
30
companies of a specified description.
(2)
In deciding whether to make an order under this section imposing a
prohibition, 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
35
(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
have 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
40
opinion that the making of the order is necessary or expedient for the
purpose of protecting the continuity of the provision in the United
Kingdom of core services.
(4)
An order under this section may in particular—
(a)
provide for any prohibition to be subject to exemptions
45
specified in the order;

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(b)
provide for any exemption to be subject to conditions specified
in 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
5
purposes of, or for purposes connected with, any provision of
the order;
(b)
authorise the making of other instruments by a regulator for the
purposes of, or for purposes connected with, any provision of
the order;
10
(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)
If the order confers powers on a regulator or authorises or requires the
making of rules or other instruments by a regulator, the order may
15
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
20
consent 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—
25
(a)
carries 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.
(2)
The contravention does not—
30
(a)
make a person guilty of an offence;
(b)
make 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
35
is actionable at the suit of a person who suffers loss as a result of the
contravention, 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
40
person, the PRA;
(b)
in relation to any other ring-fenced body, the FCA.