Banking Standards Joint Committee Contents

8  The timetable for ring-fencing

Alignment with European initiatives

108. In determining the right timetable for the implementation of ring-fencing within the UK, it is appropriate to bear in mind the possibility of an EU-wide ring-fence emerging as a result of the work of the Liikanen Group. The proposals for reform made by the Liikanen Group are under consultation and will take time to be implemented. It is impossible to be certain what form they will take. The Law Society considered that the proposals were unlikely to follow the form of the draft Bill, given the popularity of the universal banking model in EU countries.[164] Standard Chartered also told us that there was considerable uncertainty about how the Liikanen recommendations would be implemented, adding:

The scope of the ring-fence and the extra-territorial application are key issues on which there is currently a lack of clarity. Until these issues are clear it will be difficult to understand the interplay with the ICB regime, therefore, although we appreciate the need to make steady progress on the ICB legislation, the interaction with Liikanen will be key.[165]

109. Several witnesses highlighted the risk that UK banks might end up having to operate with two ring-fences in different parts of their businesses. Barclays set out the risk in some detail:

depending on how [various product, service and customer groups] are treated, the result could be the requirement for UK banks to create three tier banking groups separated by two differently constructed ring-fences. Barclays initial analysis suggests that the most important activities that sit within this indeterminate group include larger clients, interbank lending, loan syndication, wealth management and some hedging services to non-bank customers. It is vital that the treatment of these activities is defined consistently between the UK and EU.[166]

The Law Society thought that "front-running changes which may then not fit with what the UK becomes bound to do under EU law would add both to uncertainty and cost for UK regulated banks and in turn detract from their ability to support economic growth".[167] If the Government did decide to run ahead of the EU proposals, the Law Society thought that there ought to be a lengthy transition period and that the flexibility over implementation allowed for in the draft Bill should be limited by a commitment not to place UK banks at a competitive disadvantage to banks elsewhere in the EU.[168]

110. On the other hand, António Horta-Osório thought that UK legislation should not be delayed:

it is very important, especially for us in the UK and Europe, that the two proposals are compatible, but given the timeline of Liikanen, which is much delayed related to Vickers, I would think very carefully about delaying the Vickers timetable in order to accommodate Liikanen. I think it is very important to implement the proposal with a clear timeline in terms of the ring-fencing in the UK.[169]

111. Compared with other EU Member States, the banking sector represents a very large part of the UK economy. It is important that measures to strengthen the stability and resolvability of UK-based banks are put in place on a timetable that best meets the need of UK public policy. The UK cannot wait for or rely on appropriate implementation of the Liikanen proposals. It is desirable to maximise compatibility between the banking reforms to be enacted in the UK and the EU. The task of obtaining agreement across twenty-seven countries might also lead to a long delay in implementation. This could create uncertainty for public policy and for banks. The Commission has therefore concluded that the prospect of EU legislation arising from the Liikanen proposals should not be a determining factor in deciding upon the appropriate timetable for or substance of UK legislation, which should be proceeded with on a timetable that meets the needs of the UK economy.

The Government's proposed timetable

112. The Government has pledged to complete all legislation for ring-fencing before the end of this Parliament in 2015 and to implement the ring-fence before the ICB's recommended deadline of 2019.[170] The policy documents published by the Treasury in June and October 2012 shed no further light on the timetable for implementation. The Chancellor of the Exchequer confirmed the timetable and provided further information on the timing of secondary legislation in response to a request from the Commission:

The Government intends to introduce this legislation early in the New Year. [...] The Government is committed to completing all primary and secondary legislation before the end of this Parliament in May 2015. The PRA will be empowered to make relevant rules once section 142H of FSMA as amended is brought into force. It will ensure that its rules are completed (including impact assessments and consultation) within sufficient time to ensure that affected banks are able to meet the requirement to have their ring-fence in place no later than the start of 2019.

113. Allen & Overy LLP expressed concern at the "lack of progress" on a range of implementation issues, and queried whether the timetable remained realistic.[171] A number of witnesses commented that there was a need for greater clarity on the timeline and process between now and 2019, given the amount of work and preparation which remained to be done.[172] HSBC said that they did "not understand the process by which [secondary legislation]will be determined and implemented",[173] while Santander noted:

as yet there is not sufficient clarity in the rules for banks to begin preparing for the proposed changes. While the purpose and principles of the Bill have been made clear, the mechanics of a separation are extremely complex and will require further detail from the Government.[174]

Bob Penn of Allen & Overy suggested that the lack of clarity over key decisions is "weighing still on banks' share prices and on their ability to raise debt within the markets", adding that

if we do not start to move from opacity to transparency pretty quickly, you will see an almighty scramble to get there and, on the way, things will be dropped. It will be disruptive. Effecting a split of a major bank takes a lot of time. It takes a lot of senior management time, and it is a distraction from running a bank.[175]

114. Other witnesses were more sanguine about the feasibility of the 2019 timetable, subject to legislative milestones being hit and there being enough clarity on requirements in good time for banks to undertake the necessary work.[176] Several witnesses highlighted the importance of thorough consultation on the detail of implementing measures.[177]

115. As chapter 4 set out, the Government is proposing a framework where the majority of the features of the ring-fence will be set out in secondary legislation and regulatory rules rather in primary legislation. To assist in understanding of the final form of the ring-fence and the challenge that will be faced by those responsible for its implementation, the Commission wrote to the Chancellor of the Exchequer requesting more detailed information on how certain of the delegated powers would be used. In his response, the Chancellor of the Exchequer committed to "produce principal draft secondary legislation before House of Commons Committee stage and publish draft secondary legislation for consultation later in the year".[178] The Treasury also provided the Commission with further written evidence on the intended use of the proposed powers.[179] When he gave oral evidence to us, the Chancellor of the Exchequer acknowledged that "the secondary legislation is incredibly important" and should be "properly scrutinised by Parliament". He felt that the Government had been sufficiently clear about its intentions for implementation:

people should be in absolutely no doubt that the secondary legislation will faithfully reflect our conclusions, our White Papers, our response to the Vickers Committee and it will faithfully implement the Vickers report, except, as I say, in those five areas at the margin where we have come to a slightly different conclusion from Vickers.[180]

On the timetable more generally, the Chancellor of the Exchequer said:

what we have tried to do is to sequence this. We are moving at quite a pace to try to get this done. Quite frankly, almost all the pressure I am under at the moment is to get on with it rather than delay it. The Second Reading debate is an opportunity to discuss the principles of the legislation, whether it is appropriate and whether it is the right answer to the right problem. Then I think you can have a very good Second Reading debate, on the basis of all this information and, indeed, on the basis of the legislation. The detail of how high the ring-fence is, how impermeable it is, and all the other issues, which will be dealt with in secondary legislation, I think are appropriately ones for the Committee. If this Commission recommends further ways of scrutinising that secondary legislation, of course I will be very willing to listen to it. I do not think you have to wait for every single piece of paper before you can have a discussion. As I say, our ambition and our intention is to implement the Vickers recommendations into law, except in the very clearly defined areas where we depart a little from them.[181]

The legislative context

116. The proposed new primary legislation, planned for introduction early in the New Year, follows hard upon the heels of other legislation in response to the banking crisis. The Banking Act 2009 established the new bank resolution regime. The Financial Services Act 2010 amended FSMA to create a new financial stability objective for the FSA and to establish requirements for bank resolution and recovery plans. The ink is not yet dry on the Financial Services Act 2012, which further amends FSMA to create two new financial regulators, the PRA and the FCA, and to give them new objectives and new powers. Like the last two Acts, the draft Financial Services (Banking Reform) Bill proceeds largely by further amending FSMA, in some cases amending provisions which are themselves to be inserted by the Financial Services Act 2012. The Treasury Committee suggested as long ago as February 2011 that a new Bill would be better than the substantial amendment of FSMA.[182] This was also the view of Sir Mervyn King when he gave evidence to the Treasury Committee in June 2011. He said that by having an amending Bill rather than a fresh replacement Bill:

We are losing the simplicity and the ability to have a cleaner debate about the new framework. Certainly the Government rejected our request to have a new Bill and the argument that they gave, understandably, was that at the cost of some complexity we could ensure that all the provisions that were appropriate could be put into an amended FSMA and it would be a faster way of doing it. I think we have seen the complexity. I am not quite sure whether we have avoided delay.[183]

Sir Mervyn was again critical of the process of making legislation in evidence to us, in the context of the objectives of the new measure:

I have never understood the drafting of legislation. This is your responsibility, you pass this stuff. Mostly it is incomprehensible, and it does not include basic statements like the objective of the legislation or in clear words what it is all about.[184]

The balance between primary and secondary legislation

117. As the Treasury pointed out when publishing the draft Bill:

It is primarily an enabling Bill. That is, it provides the Treasury with the requisite powers to implement the policy underlying the Bill through secondary legislation. With a few very important exceptions, the majority of the detail of the policy will be set out in secondary legislation and regulatory rules.[185]

As has been illustrated above, many of the policy questions about ring-fencing are therefore not addressed in the draft Bill itself. However, the Treasury does indicate its intentions on some of these issues in the accompanying policy document.

118. The Chancellor of the Exchequer explained that finding the "balance between primary and secondary legislation [...] is genuinely a difficult challenge for Parliament and for the Government". He explained that the motivation for leaving so much to secondary legislation was to ensure that it could respond to financial innovation over time and was not "set in stone that is then unalterable". He added that implementing the legislation would require a great deal of technical detail which was not suitable for inclusion in the Bill itself:

If we tried to put that all into a piece of primary legislation we would have hundreds and hundreds of clauses and either this Government or some future Government would be faced with a very difficult problem. As financial innovation went on and the industry adapted to the regulation, and perhaps things started to happen that we did not want to happen or had not anticipated, then some future Government would have to bring back primary legislation with all the length of time that takes and the competition for space in the parliamentary timetable. It is much better to have an enabling Bill and to be very clear about what we are seeking to achieve, and for you to test whether this enabling Bill is fit for purpose.[186]

119. RBS said "We recognise the need for the Government to retain a certain amount of flexibility".[187] A number of other witnesses agreed with this view.[188] Davis Polk & Wardell LLP argued that:

as much flexibility as possible be given to the Treasury, the Prudential Regulation Authority, and the Financial Conduct Authority […] Flexibility is an indispensable tool for dealing with the "unknown unknowns" of the ring-fence model or any other significant change in the structure of financial institutions and their regulation.[189]

120. However, several witnesses questioned whether the balance between primary and secondary legislation currently proposed was right. Andrew Bailey identified the need for clear Parliamentary authority behind the implementation of the ring-fence:

What we have to get right is the balance between giving us the job of implementing a rule book essentially—the short version of it—and Parliament having sufficient hands on in terms of the objectives so that the legitimacy and authority of Parliament is very clearly behind it. That is a balance. At the moment, this is a very short piece of legislation in a sense. It says, "We'll define some objectives and then send you off to police them." I think we have to get the balance right in terms of being a very clear statement of Parliament's intent here.[190]

Jessica Ground, Fund Manager and Analyst, Schroders, expressed a concern about "the level of secondary legislation and the level of scrutiny that goes with it," adding "These are very complicated things, with huge unintended consequences, so if you leave a lot to secondary legislation, you are not going to be able to have the type of scrutiny to make sure that we are not making a mistake".[191] Barclays suggested that more of the important policy issues should be dealt with more directly in the Bill itself:

we believe that issues such as the thresholds for customer inclusion and the structural requirements for ring-fenced banks are directional policy matters which should be dealt with by the primary legislative process and are disappointed that the draft Bill provides no certainty on these matters.[192]

The Law Society made the point that "the reliance in the draft Bill on substantial amounts of secondary legislation increases legal uncertainty",[193] and speculated that "the wide ranging use of delegated powers appears to be a function of the fact the Government is pushing this Bill through quickly, leaving little room for the detailed scrutiny that is required for such a complicated new set of laws".[194]

121. Many witnesses said that it was not possible to tell how faithfully and effectively the Government would implement the ICB recommendations relating to the ring-fence due to the lack of detail in the draft Bill. Sir John Vickers himself said "I think that it is impossible to answer whether it goes far enough without seeing the secondary legislation". He added "I see no reason to doubt that the secondary legislation will flesh out [the ICB recommendations], but I am reserving judgment on that until I have seen it".[195] RBS also drew attention to the limits of scrutiny that can be applied to an enabling Bill in the absence of secondary legislation:

Since the draft legislation is framed as an enabling Bill, it is not possible (beyond the high level of generality […]) to talk of any deviation from the Government's stated objectives. The extent to which these objectives are met will depend on how secondary legislation and regulatory rule-making is, in practice, defined and implemented.[196]

Which? went further, concluding that "the draft Bill does not sufficiently give effect to the objectives" set out in the policy document, adding that "the lack of detail [...] together with the substantial delegation of authority [...] means that the Bill alone will not ensure that the objectives will be achieved".[197]


122. There is a good case for placing technical detail in secondary rather than primary legislation, in particular because of the importance of "future proofing" to allow a flexible response to developments in the banking sector. However, given the evidence we received about past regulation being too much of a negotiation between banks and regulators, we do not believe that too much of the burden of defining the ring-fence should be left to regulators. It is important that legislation properly equips the regulator with the clarity and authority necessary to maintain the ring-fence. The Commission is concerned that the heavy reliance on secondary legislation leaves open too many questions of significant policy importance. It would be unacceptable if the Commission's work in considering the framework were not matched by adequate scrutiny of the policy detail which follows in secondary legislation. This is not simply a parliamentary issue; it matters most because it creates uncertainty for the regulators who will be charged with making the new framework operational and for the banks required to operate within it. The Commission considers steps that could be taken to address these concerns through changes to the primary legislation in the next chapter. In the meantime, the Commission welcomes the firm commitment of the Chancellor of the Exchequer given in evidence to the Commission to "faithfully implement" the relevant measures of the ICB Report, subject only to previously identified exceptions. However, Parliament should not be expected to rely on his assurances alone. It is for this reason that the Commission makes specific recommendations about the timetable for parliamentary consideration and scrutiny of the forthcoming primary legislation and the accompanying draft secondary legislation.

123. The absence of secondary legislation has seriously impeded the Commission in discharging the task which we have been set by the two Houses of Parliament. In view of the fact that the Treasury has been committed to publishing the primary legislation to enable effect to be given to the ring-fence since at least May 2012, the Commission finds it regrettable that further thought was not given at an earlier stage to the effects of the timing of draft secondary legislation on the process of pre-legislative scrutiny and the wider process of preparing for implementation. Without further information about the secondary legislation, it is not possible for this Commission to assess with any certainty how faithfully the Bill will give effect to the ICB recommendations. The jury is still out on the question of whether the Bill will implement those recommendations in letter and spirit.

124. The Commission notes the commitment to publish the principal secondary legislation in draft in time for the Commons Committee stage, but considers it inadequate. 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. This is essential to provide a reasonable opportunity for its consideration by regulators and by others directly affected, as well as Parliament. In the absence of their views, parliamentary consideration by relevant Committees and in the two Chambers will inevitably be of very limited value. This would be unacceptable in the case of legislation of such importance.

125. The Commission has not received evidence to call into question the appropriateness of a 2019 deadline for full implementation of the ring-fence. The extended timetable for implementation creates a risk of erosion even before the ring-fence is first put in place. This reinforces the need for a high level of transparency during the implementation phase. In addition, the primary concern of Government, Parliament, regulators and the affected institutions should be on getting the new legislation right. The Commission is not persuaded that immediate introduction of the primary legislation and its passage through the two Houses on a normal timetable would best serve this greater interest, given that much of the substance will reside in secondary legislation which should be available in draft. The Commission strongly recommends accordingly that, 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.

164   Q 688 Back

165   Ev w149 Back

166   Ev w27 Back

167   Ev w75 Back

168   Ev w74 Back

169   Q 895 Back

170   "Government publishes draft Banking Reform Bill", HM Treasury press notice, 12 October 2012 Back

171   Ev w10 Back

172   Ev w36 [British Bankers Association]; Ev w85 [Lloyds Banking Group]; Ev w11[Allen & Overy LLP]; Ev w145 [Legal and General]; Ev w162, [Which?]. Back

173   Ev w134 Back

174   Ev w123 Back

175   Q 679 Back

176   Ev w26 [Barclays Bank]; Ev w85 [Lloyds Banking Group]; Ev w100 [RBS] Back

177   Ev w128 [HSBC Holdings]; Ev w75 [Law Society of England and Wales] Back

178   Ev w194 Back

179   Ev w194 Back

180   Q 1031 Back

181   Q 1037 Back

182   Treasury Committee, Seventh Report of Session 2010-12, Financial Regulation: a preliminary consideration of the Government's proposals, HC 430-I, para 25 Back

183   Oral evidence taken before Treasury Committee on 28 June 2011, HC 874-v, Qq 372-3 Back

184   Q 1184 Back

185   HM Treasury, Sound banking: delivering reform, Cm 8453, October 2012, p 6 Back

186   Q 1031 Back

187   Ev w13 Back

188   Ev w77 para 55 [Law Society of England and Wales]; Ev w123, para 5.2 [Santander UK]; Ev w152, para 35 [Virgin Money]. Back

189   Ev w50 Back

190   Q 977 Back

191   Q 719 Back

192   Ev w27 Back

193   Ev w71 Back

194   Ev w77 Back

195   Q 782 Back

196   Ev w101 Back

197   Ev w163 Back

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© Parliamentary copyright 2012
Prepared 21 December 2012