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 essentiallythe
short version of itand 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]
Conclusions
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
|