Banking reform: towards the right structure - Parliamentary Commission on Banking Standards Contents


Annex: Recommendations and responses


Recommendation number SubjectOur recommendation The Government response Relevant Bill changes from draft Bill and/or relevant amendment
16 Secondary legislation The Commission strongly recommends that the Government publish the principal secondary legislation giving effect to the ring-fence at the time the Bill itself is published.[182] To assist Parliamentary scrutiny of the Bill, the Government will by the Bill's Commons Committee stage publish drafts of the principal statutory instruments, including those establishing the scope of the ring-fence, the de minimis exemption from ring-fencing, the specific prohibitions on ring-fenced banks, and the precise conditions for exemptions.[183]
17 Bill publication timetable The Commission strongly recommends [...] if the Government proceeds with publication of the Bill before the February 2013 half-term recess, there be a period of three sitting months between the second reading of the Bill in the House of Commons and the commencement of the Committee stage. The Commission would expect a pause prior to Committee stage of at least two sitting months even if the Bill is published later than mid-February.[184] The Government will not delay the Bill's passage through Parliament, as to do so could endanger the Coalition's key commitment to ensuring that all legislation necessary to implement the ICB's recommendations is in place by the end of this Parliament.[185]
18 Continuity objectives In order to anchor implementation of the ring-fence more securely to the ICB's proposals, the Commission recommends that the Bill as introduced imposes additional requirements under the new section 2BA(4) of FSMA to ensure that in advancing the continuity objective, the PRA must also seek to meet the following requirements as set out in paragraph 1.3 of the policy paper accompanying the draft Bill, namely:
  • Making banks better able to absorb losses;
  • Making it easier and less costly to sort out banks that still get into trouble; and
  • Curbing incentives for excessive risk-taking.[186]
The Government agrees with the PCBS that the objectives of ring-fencing should be fully reflected on the face of the Bill, and that the relationship between the PRA's continuity objective and the regulator's other objective should be clarified. The Government has therefore amended the Bill to make the continuity objective part of the PRA's general objective.[187]

In order to provide clarity that the original ICB objectives are captured within the PRA's general objective, the PRA will be required to protect the continuity of core services in three ways, which reflect the ICB's three objectives for ring-fencing. [...] The Government does not agree that any reference to making banks better able to absorb losses be included in the Bill; this is an important objective of the wider policy, for example with specific relevance for bail-in, but less relevant for ring-fencing.[188]

Clause 1 (amendment of section 2B of FSMA) and Clause 2 (new sections 1IA and 1EA of FSMA)

Amendments A to D

20 Regulatory judgement The new legislation must be drafted in such a way as to make clear that the regulator's decision-making should not require it to identify a specific breach of rules in order to take action to maintain the integrity of the ring-fence.[189] No distinct response identified.
21 Conditions on the exercise of certain delegated powers The Commission recommends that the Treasury's delegated powers under proposed sections 142A(2)(b) and 142D(2) be tightened. It is insufficient to require only that exemptions from the ring-fence restrictions do not have a "significant adverse effect on the continuity in the United Kingdom of the provision of core services".[190] The Government agrees with the PCBS that the tests for exempting otherwise excluded or prohibited activities must be tough. In response to the PCBS's particular concern regarding the tests for exemptions under sections 142A(2)(b) and 142D(2), the Government will consider further amendments to ensure that the tests deliver the policy intention.[191] Amendments E and F
22 Determining the height of the ring-fence The Commission recommends accordingly that proposed section 142H of FSMA be amended either to define the parameters of the rules to be set by the regulator more fully or to require that secondary legislation made by the Treasury and subject to the affirmative resolution procedure defines the parameters.[192] The Government has further amended the Bill to specify the areas in which operational and economic independence must be established [...] In addition, the Government has sought to clarify the purposes for which the regulator is required to make ring-fencing rules by clarifying the group ring-fencing purposes now set out in subsection (4) of 142H, and requiring the regulator to make any other provision it considers to be necessary or expedient to achieve those purposes [...] In addition, the Treasury will be able to give further clarity to the parameters which must be set in ring-fencing rules to ensure the independence of the ring-fenced body by imposing additional requirements on the regulator by Order.[193] Clause 4 (new section 142H of FSMA)

Amendments G and H

23 Procedure for scrutiny of certain secondary legislation The Commission recommends that use of each of the delegated powers under proposed new sections 142B(5), 142D(2), 142D(4) and 142E should be subject to the affirmative resolution procedure.[194] The Government agrees with the PCBS that secondary legislation made under the Bill should be subject to proper scrutiny, and has taken note of the views of the House of Lords Delegated Powers and Regulatory Reform Committee (DPRRC) and of the PCBS in relation to the level of Parliamentary scrutiny originally set for the exercise of the delegated powers provided for in the Bill. Accordingly, the Government has amended the Bill to provide for much greater use of the draft affirmative resolution procedure.[195] Clause 4 (new section 142N of FSMA)
24 Range of delegated powers The powers available to the Treasury under section 142F should be further circumscribed.[196] In response to the concerns raised by the PCBS and the DPRRC, the Government has removed the power previously created under new section 142F for an order made under sections 142A, 142B, 142D or 142E to confer powers on the Treasury, to ensure that this provision cannot be used as a way of avoiding the need for parliamentary control. New section 142F now only permits powers to make rules or other instruments to be conferred on the regulator.[197] Clause 4 (new section 142F)
25 and 26 Future scrutiny of statutory provisions Scrutiny [to] be undertaken by a small ad hoc joint committee of both Houses of Parliament, to be established on each occasion subsequent to the first use of each delegated power when the Treasury proposes to exercise one of those delegated powers. Although the membership of the joint committee would be determined by decisions of the two Houses, there should be a statutory requirement for the Chairman of the House of Commons Treasury Committee to be an ex officio member of it.[198] The Government does not consider that an additional Parliamentary scrutiny process is necessary.[199] Amendment I
29 to 31 Reserve powers for individual banking groups The Bill should include powers for the regulator to take steps that could lead to a specific banking group affected by the ring-fence being required to divest itself fully of either its ring-fenced or its non-ring-fenced bank [subject to certain conditions and steps].[200] The Government agrees with the PCBS that it is essential to preserve the robustness of the ring-fence, and that a reserve power to require an individual banking group to move to full separation of retail and wholesale activities could be a powerful additional tool for the regulator to ensure the independence of a ring-fenced bank. The Government will therefore amend the Bill to include provisions giving the regulator the power to enforce full separation between retail and wholesale banking in a specified group.[201] Amendments J and K
32 (first part) Annual report on operation of ring-fence The Commission recommends an annual report from the PRA on the operation of the ring-fence.[202] The Government will require the PRA to conduct annual reviews of the operation of the ring-fence, as the PCBS recommends.[203] Clause 6 (amendment of Schedule 1ZB to FSMA)
29, 30, 32 (second part) and 33 Reserve powers for full separation and reviews The Bill should include reserve powers to allow full separation across the sector as a result of an independent review of the effectiveness of the ring-fence, which should assess the case for a move to full separation across the sector as a whole.[204] The Government does not accept that ring-fencing will fail, but agrees with Sir John Vickers and the ICB that ring-fencing will yield benefits to financial stability while preserving the advantages that structured universal banking can bring. If in the future it became apparent that, due to developments in the nature of banking or other changes in circumstances, the ring-fence had become ineffective, then the Government would return to Parliament for a full debate on whether alternative structural changes were required. Given this, it is not necessary to legislate now for a reserve power to abandon ring-fencing at some point in the future [...] The Government will [...] monitor the ring-fence and its effectiveness in achieving its objectives on a continuous basis once it has been established.[205] Amendments L, M and N
36 to 38 DerivativesThe Commission has concluded that there is a case in principle for permitting the sale of simple derivatives within the ring-fence. However, such permission would need to be subject to conditions [...] The definition of 'simple derivatives' must appear in legislation. The Commission recommends that the proposed initial definition should be provided to the Treasury Committee before the Bill has completed its Commons stages. [...] The Commission recommends that the regulator be required to report annually to Parliament on the extent and nature of the sale of derivatives within the ring-fence, including the effects of any changes to secondary legislation proposed by a future Government.[206]

The Commission recommends [...] that the Government impose an additional cap on the gross volume of derivative sales for ring-fenced banks, and on the total value of derivatives used for hedging.[207]

The Government agrees with the PCBS that in principle ring-fenced banks may be permitted to sell certain simple derivatives to their customers, subject to strict safeguards to ensure that derivatives do not undermine the resolvability of ring-fenced banks, and to guard against mis-selling. The conditions under which ring-fenced banks may enter into derivatives contracts will be governed by secondary legislation. The Government will ensure that the recommendations of the PCBS regarding the safeguards necessary are reflected in the secondary legislation.[208] Amendment O
39 The de minimis exemption There should be a specific requirement for a decision imposing or revising a de minimis requirement to have regard to its effect on competition in retail banking and on new entrants in the market in particular. The Commission also recommends that the regulator be required to report annually to Parliament on developments affecting the appropriateness of the level of the de minimis requirement.[209] In setting the de minimis level, the impact on competition would naturally always be an important consideration for the Government. For the sake of greater clarity, however, the Government will amend the Bill to include an additional requirement to have regard to the impact of the de minimis on competition.[210] Amendments P and Q
40 Non-core depositsThe exemption for large deposits makes sense. It is right that holders of large deposits should be required to make an informed decision to hold their deposits in a non-retail bank.[211] The Government agrees with the PCBS that high-net-worth private banking customers and larger organisations should be permitted (but not required) to deposit outside the ring-fence, subject to safeguards and provided that they make an informed choice. The conditions under which such depositors may deposit outside the ring-fence will be set out in secondary legislation, which will set monetary thresholds, and require that eligible individuals and organisations must actively seek the exemption if they wish to use it.[212]
41 Geographical restrictions under the ring-fence The Treasury should undertake a separate consultation exercise on draft secondary legislation to give effect to geographical restrictions and publish its findings two weeks prior to the House of Commons report stage. The Treasury should report to Parliament on its assessment of the trade-off between the direct intended effects of the limits and the capacity of the banks to support trade.[213] The Government will continually monitor the impact of the ring-fence on trade and investment once it has come into effect. Geographical restrictions will be established by secondary legislation: the Government will make available principal secondary legislation in time for the Bill's Commons Committee stage, and in line with the Government's better regulation practice proposes to publish all secondary legislation for consultation where possible.[214]
42 Retail and SME lending The Commission considers that it is right in the first instance not to require banking groups with a ring-fenced entity to carry out all lending for SME and retail customers within that entity. This is a provisional conclusion, which should be subject to review in the light of experience [...] The Commission has concluded that the development of retail and SME lending outside the ring-fence is a matter for the regulator to monitor as part of its work on its statement on the implementation of the ring-fence.[215] The Government agrees with the PCBS that the flexibility on the location of the ring-fence recommended by the ICB should be maintained, and that banking groups should not, therefore, be required to carry out retail and SME lending from within the ring-fence. Given the economic importance of credit provision to individuals and SMEs, however, it is clearly important for the Government to monitor closely any developments in this area. The Bank of England already collects for monetary policy purposes data on deposits with and lending from banks, building societies and some other lenders within the UK. These data collections could be adapted to provide in future data on lending inside and outside the ring-fence. In addition, the Government is currently working with the banking industry to secure a voluntary commitment to publish granular data on bank lending by postcode, giving greater transparency over the provision of credit. If, however, a satisfactory industry-led solution cannot be achieved, the Government will bring forward amendments to the Banking Reform Bill to ensure that granular lending data is published.[216]
43 Preserving the integrity of the ring-fence The Commission recommends that the Government insert within FSMA a legal duty on boards of directors to preserve the integrity of the ring-fence.[217] The Government agrees with the PCBS that independent governance is an essential part of ensuring the legal, economic and operational independence of ring-fenced banks from their wider corporate groups, and that directors of ring-fenced banks should be personally responsible for ensuring that their banks comply with ring-fencing provisions. This will be delivered through the approved persons regime, as amended by the Financial Services Act 2012. The Banking Reform Bill will further amend the Financial Services and Markets Act 2000 (FSMA) to ensure that a director of a ring-fenced body must always be an approved person.[218] Clause 5 (amendment of section 59 of FSMA)
44 Relationship between duties of directors The Commission recommends that the Government set out, in its response to this Report, a full account of how directors would be expected to manage the relationship between such a duty and their duties to the shareholders.[219] As a matter of law, directors of any company have a fiduciary duty to promote the success of the company for the benefit of the shareholders, not a separate or independent duty to shareholders. This means that bank directors must take decisions that are in the long-term interests of the bank. This duty is entirely consistent with the directors' specific duty to comply with ring-fencing rules, as envisaged by the legislation.[220]
45 Operational independence of the ring-fenced bank The initial secondary legislation made under proposed section 142H of FSMA (as envisaged in our recommendation in paragraph 139) should give the regulator a duty of ensuring operational independence for the ring-fenced bank in respect of governance, risk management, treasury management, human resourcing, capital and liquidity.[221] The Government has further amended the Bill to specify the areas in which operational and economic independence must be established. These are set out in an expanded section 142H. In addition, the Government has sought to clarify the purposes for which the regulator is required to make ring-fencing rules by clarifying the group ring-fencing purposes now set out in subsection (4) of 142H, and requiring the regulator to make any other provision it considers to be necessary or expedient to achieve those purposes. This will give the regulator an unambiguous mandate to deliver the degree of separation that the ICB envisaged.[222] Clause 4 (new section 142H of FSMA)
46 Power of the regulator with regards to the ring-fenced bank The regulator be given the power to require a sibling structure between a ring-fenced and non-ring-fenced bank, with a holding company. The Commission would expect this power to be exercised.[223] The Government agrees that the corporate structures of banking groups should not undermine the effectiveness of the ring-fence, or the resolvability of the group. The Government expects, however, that under the EU RRD regulators will be given substantial powers to require reorganisations necessary to achieve resolvability, and the reserve power to require full separation will further enhance the regulatory toolkit. Given this, the Government does not at this stage believe it necessary to provide for further powers (beyond those recommended by the ICB) to restrict groups' corporate structure.[224] Amendment R
47 LiabilitiesThe regulator be required to set rules to ensure that the creation of ring-fenced and non-ring-fenced entities is not used as an opportunity to shift liabilities or potential liabilities in an artificial way.[225] The reference to the effect of dissolution on a company's liabilities in the Treasury's evidence was made for the sake of providing a full explanation on the law in this area, and should not be seen as a suggestion that the Treasury considers that this is a likely outcome. The Government considers that this would be most unlikely. Ring-fencing is expected to result in corporate re-organisations with the transfer of existing business from one business to another, and, in some cases the creation of new companies, but not dissolutions of a company. The regulator will have a role in this area: but simply because it will be required to approve any application to the court for an order under Part VII of FSMA to sanction a scheme for a business transfer scheme made to implement ring-fencing. The Government does not consider that any further safeguard is needed in this area. [226] Amendment S
49 to 50 Bail-inThe Bank of England be subject to a statutory requirement under the new legislation to produce an annual report to Parliament on the development and subsequent operation of bail-in to assist in assessment of its feasibility.[227] The Government make provision in the forthcoming legislation for bail-in powers at national level which could come into force if the EU proposals were delayed or inadequate.[228] The Government agrees that it would be appropriate for Parliament to have assurance that the bail-in regime to be implemented in the UK and across Europe is effective and credible. The FSB are to conduct peer reviews of implementation of the Key Attributes, which have been endorsed by the G20, to assess and report on whether the full set of agreed resolution powers and tools, including bail-in, are being appropriately implemented in the UK and in other countries.[229]

The Government remains confident that the UK will implement bail-in through transposition of the EU RRD.[230]


Amendments T and U
51 PLAC requirementsThe secondary legislation to be made under to section 142J of the draft Bill place the burden of proof for any exemption from PLAC requirements on the bank seeking the exemption, rather than on the regulator. This would mean that the regulator would only grant an exemption if a bank had demonstrated to the regulator's satisfaction that there was no risk to stability, rather than merely if the regulator could not show that a risk existed, providing a greater level of protection to the taxpayer.[231] The Government believes that where the overseas operations of a UK-headquartered globally systemically important bank pose no threat to UK, and European, financial stability, that bank should not be required to hold PLAC at group level against those operations. As the Chancellor argued in his evidence to the PCBS, such a requirement would risk creating an erroneous perception that the UK was responsible for the supervision of those overseas operations, or that UK public support might be extended to them in the event of failure. The Government continues to consider the details of how this principle will be implemented, and accepts there may be merit in the PCBS's proposal to place the burden of proof for any exemption on the bank, provided that the regulator exercises its judgement in a reasonable way. The Government agrees with the PCBS that it is essential that any decisions on individual firms are made within a clear framework established in legislation. The details of this framework will be set out in secondary legislation to be made under the new section 142M. A draft of this statutory instrument will be provided for the information of Parliament.[232] Clause 4 (new section 142M(4)(c) to (f) of FSMA)

Amendment V

52 and 53 Treasury powers in respect of PLAC The Treasury's powers of direction in respect of the regulator with regard to PLAC in section 142 J should be more limited and should be subject to affirmative resolution procedure.[233] On the delegated powers under section 142M [...] the Government has amended the Bill so that this power is subject to the affirmative resolution procedure, and, following the PCBS's recommendation, the broad power of direction previously in section 142J(4)(d) has been revised. Clause 4 (new section 142M of FSMA and new section 142N(1)(f) of FSMA)
54 Depositor preference The Commission recommends that the Government and Bank of England establish a joint group to prepare and publish a full report on the implications for resolution of depositor preference and of the scope and extent of depositor insurance. This report should, in particular, consider the feasibility of establishing a voluntary scheme of insurance for deposits over £85,000 with arrangements for opt-out. This report should be published at least two weeks before the House of Commons report stage of the Bill.[234] Negotiations are still ongoing in the European institutions on a revised version of the DGSD aimed at improving depositor protection across the EU. This includes proposals that would extend FSCS coverage to businesses and many other organisations regardless of size, and allow Member States to provide coverage above the harmonised coverage level of £85,000 for certain temporary high balances. Extending FSCS protection in this way should reduce pressure for any government support beyond the scope of the FSCS. The Government recognises the importance of examining the exceptional circumstances where FSCS coverage could be extended, and proposes to consider this issue further once the Directive is finalised and due to be implemented in the UK.[235]
55 and 56 Leverage RatiosThe Commission considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3 per cent minimum required under Basel III.[236]

The FPC should be given the duty of setting the leverage ratio from Spring 2013.[237]

The Government does not [...] see the case for permanently raising the leverage ratio beyond the Basel III standard.[238]

The Government continues to support the inclusion of a backstop leverage ratio in the EU prudential toolkit and has committed to provide the Bank of England Financial Policy Committee (FPC) with a time-varying leverage ratio direction-making tool, but no earlier than 2018 and subject to a review in 2017 to assess progress on international standards.[239]

57 Risk-weighting assessments The Commission recommends that the new Bill require the Bank of England to provide an annual assessment to be laid before Parliament of progress of risk-weighting and that the assessment should examine in particular the possible operation of floors for risk-weights, and steps taken with regard to simplification of risk-weights and trading exposures.[240] The Government [...] notes ongoing work by bodies such as the Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) to review risk-weights internationally. With these reviews under way, the Government believes an additional UK specific assessment of risk-weights to be unnecessary.[241] Amendments W and X
58 Fees to meet Treasury expenses If provisions based on Clause 9 are included in the Bill, the Commission considers it essential that the Clause be amended to limit the levy to recovery of subscriptions rather than unspecified expenses, so that the provision cannot be used by a future Government to recover part of the Treasury's running costs, such as the salaries of civil servants involved in this work.[242] The Government agrees with the PCBS that provisions in clause 13 (previously clause 9) should be limited to the recovery of subscriptions and membership fees related to Treasury's participation in international organisations. The Government has therefore amended the Bill to limit the power to require the payment of fees so that fees may only be charged in respect of those expenses that represent a contribution to the resources of the international organisation. This will ensure that the scope of the power cannot be used to recover administrative costs of the Treasury.[243] Clause 13 (section 410A(2) of FSMA)



182   First Report, para 124 Back

183   Banking reform, para 2.10 Back

184   First Report, para 125 Back

185   Banking reform, para 2.10 Back

186   First Report, para 130 Back

187   Banking reform, para 2.14 Back

188   Ibid., para 2.15 Back

189   First Report, para 133 Back

190   Ibid., para 135 Back

191   Banking reform, para 2.16 Back

192   First Report, para 139 Back

193   Banking reform, para 2.17 Back

194   First Report, para 146 Back

195   Banking reform, para 2.18 Back

196   First Report, para 149 Back

197   Banking reform, para 2.20 Back

198   First Report, paras 151-152 Back

199   Banking reform, para 2.20 Back

200   First Report, para 165 Back

201   Banking reform, para 2.22 Back

202   First Report, para 171 Back

203   Banking reform, para 2.24 Back

204   First Report, paras 164, 165, 171 - 172 Back

205   Banking reform, paras 2.23-2.24 Back

206   First Report, paras 193 - 194 Back

207   Ibid., para 195 Back

208   Banking reform, para 2.30 Back

209   First Report, para 200 Back

210   Banking reform, para 2.34 Back

211   First Report, para 203 Back

212   Banking reform, para 2.33 Back

213   First Report, para 209 Back

214   Banking reform, para 2.32 Back

215   First Report, para 215 Back

216   Banking reform, para 2.31 Back

217   First Report, para 222 Back

218   Banking reform, para 2.27 Back

219   First Report, para 223 Back

220   Banking reform, para 2.28 Back

221   First Report, para 224 Back

222   Banking reform, para 2.17 Back

223   First Report, para 228 Back

224   Banking reform, para 2.25 Back

225   First Report, para 230 Back

226   Banking reform, para 2.50 Back

227   First Report, para 242 Back

228   Ibid., para 245 Back

229   Banking reform, para 2.42 Back

230   Ibid., para 2.41 Back

231   First Report, para 258 Back

232   Banking reform, para 2.44 Back

233   First Report, paras 262 - 263 Back

234   Ibid., para 279 Back

235   Banking reform, para 2.48 Back

236   First Report, para 294 Back

237   Ibid., para 295 Back

238   Banking reform, para 2.37 Back

239   Ibid., para 2.38 Back

240   First Report, para 296 Back

241   Banking reform, para 2.39 Back

242   First Report, para 300 Back

243   Banking reform, 2.51 Back


 
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Prepared 11 March 2013