Financial Services (Banking Reform) Bill (HL Bill 62)

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) 5In subsection (3)—

(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
10seeks to—

(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
protected from risks (arising in the United
Kingdom or elsewhere) that could adversely
affect the continuity of the provision in the
5United 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
group could affect the continuity of the
provision in the United Kingdom of core
10services.”

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

(4) After subsection (4) insert—

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

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

(b) 15ring-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) applications under Part 4A which, if granted, would result, or
would be capable of resulting, in a person becoming a ring-
20fenced 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) after that subsection insert—

“(3A) For the purposes of this Chapter, the cases in which a person
25(“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)
and (3A)”.

2 Modification of objectives of Financial Conduct Authority

30After 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) 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
35provisions of this Chapter are to have effect subject to the following
modifications.

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

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

“(d) in relation to the matters mentioned in section 1EA(2),
40the 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
mentioned 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
5provision 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) 10any body corporate incorporated in the United Kingdom that
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.

15(3)  The FCA’s continuity objective is to be advanced primarily by—

(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) 20seeking to ensure that the business of ring-fenced bodies is
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
25body or of a member of a ring-fenced body’s group could
adversely affect the continuity of the provision in the United
Kingdom of core services.

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

3 30Amendment of PRA power of direction

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) 35threaten the continuity of core services provided in the
United Kingdom.”

4 Ring-fencing of certain activities

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

“Part 9B

Ring-fencing

Introductory

142A “Ring-fenced body”

(1) 5In 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—

(a) a building society within the meaning of the Building Societies
10Act 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
15exemption 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
20desirability 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) 25In 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
30the 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
35United 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
40activity 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
5of 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) 10An 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
15financial 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
20with 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) 25facilities 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
30deposits 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) 35The 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
40accordance 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) 45An 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) The Treasury may by order provide for an activity other than the
5regulated 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) need not be a regulated activity, and

(b) 10may 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
15exposed 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
body would have an adverse effect on the continuity of the
provision in the United Kingdom of core services.

(7) 20An 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
Kingdom of core services.

142E Power of Treasury to impose prohibitions

(1) 25The 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) establishing or maintaining a branch in a specified country or
territory;

(c) 30holding 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
prohibition, the Treasury must—

(a) have regard to the risks to which a ring-fenced body would be
35exposed 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
have an adverse effect on the continuity of the provision in the
United Kingdom of core services.

(3) 40An 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
Kingdom of core services.

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

(a) 45provide for any prohibition to be subject to exemptions
specified in the order;

(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) 5authorise or require the making of rules by a regulator for the
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
10the 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) If the order confers powers on a regulator or authorises or requires the
15making 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) 20make the exercise of a power by the regulator subject to the
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) 25A ring-fenced body which—

(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.

(a)(a)30carries 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—

(a) 35make 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
40is 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
45person, the PRA;

(b) in 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) 5requiring 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
10to 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
15company, 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) 20The “group ring-fencing purposes” are—

(a) ensuring as far as reasonably practicable that the carrying on of
core 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
25business a ring-fenced body—

(i) is able to take decisions independently of other
members 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
30available to the ring-fenced body in the event of the
insolvency of the other member;

(c) ensuring 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
35group.

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

(a) provision restricting the power of a ring-fenced body to enter
into contracts with other members of its group otherwise than
40on arm’s length terms;

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

(c) provision requiring the disclosure to the appropriate regulator
45of information relating to transactions between a ring-fenced
body and other members of its group;

(d) provision 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
body’s group,

(ii) members who are treated by the rules as being
5independent of the ring-fenced body itself, and

(iii) non-executive members;

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

(f) provision requiring a ring-fenced body to act in accordance
10with 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
to meet specified requirements;

(h) such other provision as the appropriate regulator considers
15necessary 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
persons who (in each case) are of a specified description.

(7) The reference in subsection (5)(f) to a human resources policy is a
20reference to a policy about the appointment and management of
officers, employees and other persons who (in each case) are of a
specified description.

(8) In this section—

• “the appropriate regulator” means—

  (a)

  25in relation to a PRA-authorised person, the PRA,

  (b)

  in relation to any other authorised person, the FCA;

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

• “specified” means specified in the rules;

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

142I 30Powers of Treasury in relation to ring-fencing rules

(1) The Treasury may by order require the appropriate regulator, as
defined 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) 35any other specified matter.

(2) The power to make an order under this section is exercisable only if the
Treasury 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) 40otherwise for securing the independence of ring-fenced bodies
from other members of their groups.

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

142J Review of ring-fencing rules etc

(1) The PRA must carry out reviews of its ring-fencing rules and of any
45rules made by it under section 192JA (rules applying to parent
undertakings of ring-fenced bodies).