Banking StandardsWritten evidence from HM Treasury

Financial Services (Banking Reform) Bill Delegated Powers Memorandum

Introduction

1. This memorandum concerns the draft Financial Services (Banking Reform) Bill as published on 12 October 2012.

2. This memorandum has been prepared to assist the Parliamentary Commission for Banking Standards in their consideration of the draft Bill. It identifies the provisions for delegated legislation in the draft Bill. It explains the purpose of the delegated powers taken, describes why the matter is to be left to delegated legislation, and explains the procedure selected for each power and why it has been chosen.

Summary of proposals in the draft Bill

3. The draft Bill is primarily an enabling Bill. It will change the regulation of banking by:

(a)providing for additional protection to core services (which will initially be those services related to the accepting of deposits, namely facilities for making payments into an account, for withdrawing money or making payments from the account, or overdraft facilities related to that account) by giving the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) a new continuity objective, and providing for ring-fencing: that is, applying restrictions to ring-fenced bodies (which will carry on core activities), and in particular prohibiting them from carrying on excluded activities.

(b)amending the Insolvency Act 1986 and related Scottish and Northern Ireland legislation to provide that deposits which are eligible for protection under the financial services compensation scheme are to be preferential debts.

(c)giving the Treasury power to make regulations governing the way in which the PRA may use its powers under the Financial Services and Markets Act 2000 to impose debt requirements on specified classes of institutions.

4. The draft Bill will also give the Treasury power to require the PRA, the FCA and the Bank of England to impose fees on members of the financial services industry in order to cover relevant expenses incurred by the Treasury in connection with specified international organisations, such as the Financial Stability Board.

The Delegation of Powers

5. Decisions on the delegation of powers in this draft Bill is affected by two factors. First the regulation of banking, like regulation of other forms of financial services and markets is very complex, and highly technical. As noted in the delegated powers memorandum for the Financial Services Bill1, regulation operates against a background of markets for financial products which are continuously developing, sometimes very rapidly.

Clause 4 (ring-fencing of certain activities)

New section 142A (ring-fenced body)

6. Power: To exempt UK institutions of a class specified by the Treasury by order from the definition of “ring-fenced body”, and to impose conditions on any exemption provided for.

7. Body: Treasury

8. Parliamentary Scrutiny: draft affirmative resolution procedure when the power is first used; and for any subsequent occasion on which the order restricts or removes an exemption.

Reasons for the power and procedure

9. Ring-fenced bodies are defined in the draft Bill as any UK institution which has permission under Part 4A of the Financial Services and Markets Act 2000 (FSMA)2 relating to a core activity (that is, accepting deposits) (referred to in this Memorandum as “UK banks”), apart from building societies and institutions which are exempted by the Treasury using this power. The Government does not consider that it is appropriate to apply the restrictions which will be associated with ring-fenced status (such as the prohibition on undertaking excluded activities, additional capital requirements, and restrictions imposed by the regulators in ring-fencing rules) to all UK banks regardless of their size. In the case of smaller banks the imposition of ring-fencing restrictions are likely to make a comparatively small difference to the regulators’ ability to ensure that in the event that the bank fails, it is possible to resolve it so as to maintain the continuity of provision of the core services (by for example the transfer of that part of the business to another institution).

10. At the same time, the costs for smaller UK banks of implementing ring-fencing are likely to increase their costs to a greater degree than larger banks, and may affect their ability to compete effectively. The Government does not wish to set the threshold above which a bank will become a “ring-fenced body” in primary legislation. It is likely that it will need to be adjusted over time to reflect changes in banking practices, and growth in the deposit base for UK banks. It may also be necessary to modify the methodology used to determine whether a bank should be a ring-fence body. Accordingly, section 142A(2)(b) gives the Treasury power to make exemptions from the definition of “ring-fence body”. Under subsection (4), any exemptions provided for may be subject to conditions. The Treasury will not, under section 142A(3), be able to exercise the power in section 142A(2)(b) unless they consider that exempting that class of institution from the definition of “ring-fenced” activity will not have a significant adverse effect on the continuity of provision in the United Kingdom of the core services.

11. The power to exempt institutions from the definition of a ring-fenced bank will determine the scope of the ring-fencing regime. It is similar in nature to the power to provide for exemptions from the general prohibition on carrying on regulated activities without authorisation under section 38 of FSMA. Accordingly, the Treasury consider that it is appropriate for this power to be subject to the same procedure as orders made under section 38 of FSMA: that is, draft affirmative resolution procedure applying to the first occasion on which the power is used, and on any subsequent occasion when an order made under the power contains provisions restricting or removing an exemption for which provision has already been made.

New section 142B(2) Core activities (exceptions)

12. Power: to specify the circumstances in which accepting deposits is not to be a core activity;

13. Body: Treasury;

14. Parliamentary scrutiny: negative resolution procedure.

Reasons for the power and procedure

15. The Government is taking the power to provide for exceptions where accepting deposits is not a core activity in secondary legislation, because the class of deposit it is considered necessary to protect, and the way in which that class is defined is likely to change over time. Following the recommendations of the Independent Commission on Banking (“ICB”), the Government proposed in its White Paper to provide in secondary legislation that accepting deposits should only be a core activity where the deposits concerned are those of individuals who are not high-net worth individuals, and of small and medium-sized enterprises. Providing for this in secondary legislation will make it easier to adjust the conditions which have to be satisfied before someone can be considered to be a high-net worth individual, or before a company or other association may qualify as a small and medium sized enterprise. And it is possible that it may in future be thought necessary to add to the class of core deposits (for example to protect deposits of larger companies as well as small and medium-sized entities), if it becomes clear that customers in the class in question are not able to arrange alternative banking facilities in the event that their bank fails.

16. In addition, given the very wide definition of “deposit” (see Article 5(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544)), it may be appropriate to exclude some forms of deposit-taking such as the premiums taken by insurers from the core activity of accepting deposits.

17. Under subsections (3) and (4), the Treasury will only be able to exercise the power to provide that accepting deposits is not a core activities in the specified circumstances where the Treasury are satisfied that protection is not necessary in order either to secure that the depositors concerned receive appropriate protection, or to protect the continuity of the provision in the UK of services provided in the course of accepting deposits. The Treasury will therefore have to consider the position of the depositors who will be affected by the proposed order, and the potential impact of providing for such an exception to the core activity on the continuity of the provision of the services associated with the activity in the United Kingdom.

18. The power will be subject to the negative resolution procedure. Given the restrictions on the Treasury’s use of the power, and the fact that the effect of the power will be to narrow the range of cases where a person who accepts deposits must be a ring-fenced bank or an exempt bank, the Treasury consider that the negative resolution procedure is appropriate.

Clause 142B(5) new core activities.

19. Power: to create new core activities;

20. Body: The Treasury

21. Parliamentary scrutiny: negative resolution procedure.

Reasons for the power and procedure

22. The Government currently consider that only accepting deposits should be a core activity. However, it may in future become apparent that there is another regulated activity other than accepting deposits where an interruption in the provision of the services associated with that activity is likely to harm the stability of a significant part of the financial system in the United Kingdom, and that making alternative provision for the services in question is difficult to do in the short term. It is not possible to tell in advance what activities may need to be protected in this way—making it necessary to take a power to do this in secondary legislation rather than identifying all core activities on the face of the draft Bill.

23. The Treasury will only be able to exercise the power to create new core activities in relation to activities which are regulated activities under FSMA. In addition, under new section 142B(6), they must be satisfied first that an interruption of the provision of the services associated with the regulated activity in question could have an adverse effect on the stability of the UK financial system or any part of that system, and secondly that the continuity of the provision of those services can be more effectively protected if the activity concerned becomes a core activity.

24. Given the conditions attaching to the Treasury’s exercise of the power to create additional activities, and that it is possible that it might in some cases be desirable to take urgent action to protect the activity in question, the Treasury consider that it is appropriate for this power to be subject to the negative resolution procedure.

New section 142C (Core services)

25. Power:

(a)to provide that specified services other than those listed in section 142C(2) are core services in relation to the core activity of accepting deposits (section 142C(3));

(b)to specify those services to be considered to be core services in relation to any new core activity created under section 142B(5) (section 142C(4))

26. Body: the Treasury;

27. Parliamentary scrutiny: negative resolution procedure.

Reasons for the power and procedure

28. “Core services” are those services which are provided in the course of carrying on a “core activity”. To provide greater certainty as to what services should be treated as “core services” in relation to the core activity of accepting deposits, section 142C(2) lists those categories of services which the Government considers to be associated with the activity of “accepting deposits”. The Treasury are also taking a power to provide that other specified services provided in the course of carrying on a core activity should be considered to be core services. The Treasury have no current proposals to define new core services in relation to the core activity of accepting deposits under new section 142C(3). The power is being taken as a form of “future proofing”. The way in which banking services are provided to customers has changed very significantly in recent decades (as exemplified in the development of internet banking), and it continues to change. It is possible that, as banking develops, there may be other categories of service which become to be considered to be an essential part of the services provided with a bank account, to the extent that it becomes desirable to make them “core services”. It is not possible to tell in advance whether this will be necessary, and therefore not possible to make the necessary provision in primary legislation.

29. In the event that any new core activities are created by the Treasury using the power taken in new section 142B(5), the Treasury will be required to specify the services which they consider are provided in the course of carrying on the proposed core activity and that an interruption in their provision could harm the stability of the UK financial system or a significant part of that system, so that they are also treated as core services.

30. The effect of the definition of new core services is that the services in question are the services to which the regulators’ continuity objective applies, and the services which must be taken account of when—

(a)the Treasury considers whether creating an exception to the excluded activity of dealing in investments as principal would result in any significant adverse effect on the continuity of provision in the UK of core services (new section 142D(3));

(b)the Treasury considers whether the creation of new excluded activities under section 142D(4) or the imposition of prohibitions under section 142E(1) is necessary or expedient to protect the continuity of provision in the UK of core services (sections 142D(7); 142E(3)).

31. Both the powers are provided for clarificatory purposes, so that it is clear in all cases what services are considered to be provided in the course of carrying on a core activity, and therefore what, among other things, the regulators’ continuity objective applies to. Given the limited, technical, nature of these powers, the Treasury consider that the negative resolution procedure is appropriate in each case.

New section 142D(2) (Excluded activities: exceptions)

32. Power: to specify circumstances in which dealing in investments as principal is not to be an excluded activity;

33. Body: The Treasury;

34. Parliamentary Scrutiny: Negative resolution procedure.

Reasons for the power and procedure

35. The Bill provides in new section 142D(2) that the regulated activity of dealing in investments as principal (or dealing on own account) is to be an excluded activity: that is ring-fenced bodies will not be able to carry on this activity. However, there will be circumstances in which UK banks need to undertake this activity in order to raise wholesale funding, to manage liquidity or to manage the risks arising from their core activities of lending and providing payment services. The Treasury is taking this power so that it is possible to permit such dealing in these circumstances while at the same time providing for safeguards to ensure that ring-fenced banks do not expose themselves to unacceptable levels of risk. This is likely to require a level of technical provision which is most easily made in secondary legislation. For example, an exemption might be made conditional on a bank’s residual market exposure being capped at a certain level, and a specified level of collateral being provided for its counterparty credit risk. It is also likely that the circumstances in which such dealing is permitted, or the safeguards applied to it will need to change over time to match developments in financial markets.

36. The Treasury will not be able make an order providing for exceptions to the excluded activity of dealing in investments as principal unless it is satisfied that permitting dealing in the specified circumstances would not be likely to cause significant harm to the continuity of the provision in the United Kingdom of core services.

37. Given the technical nature of the provision to be made in orders made under this power and the limits on the Treasury’s power, the Treasury consider that the negative resolution procedure is appropriate.

Clause 142D(4) (new excluded activities)

38. Power: to provide for activities other than dealing in investments as principal to be treated as excluded activities and to create exceptions to any new excluded activity created.

39. Body: the Treasury;

40. Parliamentary scrutiny: negative resolution procedure.

Reasons for the power and procedure

41. The only excluded activity provided for on the face of the draft Bill is the regulated activity of dealing in investments as principal. The Government considers that it will be necessary to create additional excluded activities. The ICB recommended that ring-fenced banks should be prohibited from providing services which, for example, expose UK banks to risks that are not integral to the provision of payment services to customers or the direct intermediation of funds between savers and borrowers outside the financial sector, or that directly increase the exposure of ring-fenced banks to global financial markets.3 Not all services in this category will be caught by the proposed excluded activity of dealing in investments as principal. For example, structuring, arranging or executing derivative transactions will not always come within the excluded activity, even though such transactions may significantly increase the exposure of the banks which undertake them to global financial markets, as not all derivatives fall within the definition of “investment” under the Financial Services and Markets Act 2000 (Regulated Activities) Order 20014.

42. Providing for the appropriate additional excluded activities to catch such activity will require a level of technical provision which may best be provided for in secondary legislation. The precise terms of any particular chosen activity may also need to be changed, and new excluded activities added in response to the rapid evolution of the financial services market, as new financial services and products are developed. This also requires a power for the Treasury to make secondary legislation.

43. Before the Treasury is able to exercise the power in new section 142D(4) to create a new excluded activity, it must, under subsection (6) consider the risks which a ring-fenced body would be subject to if it carried on the activity concerned, and whether permitting a ring-fenced bank to carry on the proposed excluded activity would make it more likely that a subsequent failure of the ring-fenced bank would harm the continuity of provision in the UK of the core services (because, for example it would make it more difficult to wind down the ring-fenced bank in an orderly fashion). The Treasury must also be satisfied that it is necessary or expedient to make the order in order to protect the continuous provision within the UK of the core services.

44. Given the technical nature of the provision to be made here, and the limits on the Treasury’s power, the Treasury consider that the negative resolution procedure is appropriate.

New section 142E (power of Treasury to impose prohibitions)

45. Power: to prohibit ring-fenced banks from entering into specified transactions; establishing branches in specified countries or territories, or from investing in specified companies.

46. Body: The Treasury.

47. Parliamentary scrutiny: negative regulation procedure.

Reasons for the power and procedure

48. This power is being taken to supplement the power set out in new section 142E for the Treasury to create new excluded activities. It permits the Treasury to impose the prohibitions listed in subsection (1). In each case, it is envisaged that action by the ring-fenced body of the type described in paragraphs (a) to (c) of subsection (1) may increase the exposure of the body concerned to global financial markets, and make it more difficult for that body to be wound down in an orderly fashion without disrupting the continuous provision of any core services it may provide. However, such action is arguably not an “activity” carried on by the ring-fenced body, so that the Treasury could not impose such prohibitions by using its powers under new section 142D. Any prohibition imposed under these powers is also likely to be accompanied by a number of exemptions setting out the circumstances in which the ring-fenced body is to be permitted to act in a way otherwise prohibited, and the safeguards which it must observe to do so. For example, the ICB recommended that ring-fenced banks should be prohibited from providing services to other financial institutions (apart from payment services where the regulator considers this to be appropriate), to reduce their exposure to failure elsewhere in the financial system. A prohibition on all transactions with other financial institutions would achieve this, but may be disproportionate, restricting the business of ring-fenced banks more than is necessary to achieve the objective.

49. The Government therefore proposes to permit transactions with other financial institutions where such transactions are undertaken for particular purposes (such as the management of a ring-fenced bank’s liquidity, or for risk-management purposes), subject to specified safeguards. As with excluded activities, both the extent of the permitted exceptions to a prohibition, and the safeguards required, are likely to need to be adjusted over time. It is also likely to be necessary to impose additional prohibitions on ring-fenced banks as financial markets develop further, and new forms of exposure become possible. It is therefore necessary to have powers to make the necessary provisions in secondary legislation, so that amendments can be made over time without the need to bring forward new primary legislation.

50. The conditions which must be satisfied before the Treasury are able to exercise the power are the same, mutatis mutandis, as the conditions applying to the power in new section 142D(4) for the Treasury to provide for a new excluded activity. The Treasury must have regard to the risks to which a ring-fenced bank would be exposed if it was permitted to act in the way the Treasury propose to prohibit, and whether permitting a ring-fenced bank to act in such a way would make it more likely that a subsequent failure of the ring-fenced bank would harm the continuity of provision in the UK of the core services. The Treasury must also be satisfied that making the order prohibiting the specified action is necessary or expedient to protect the continued provision of the core services in the United Kingdom.

51. Just as with the power for the Treasury to create new excluded activities under new section 142D(4), it is envisaged that the provision made in orders made under section 142E will primarily be of a technical nature. For this reason the Treasury considers that the negative resolution procedure is appropriate.

New section 142F

52. Power: supplementary powers to confer powers on the Treasury, or on a regulator; to authorise or require the regulator to make rules for the purposes of any provision in an order made under new sections 142A, 142B, 142D or 142E; or to authorise other instruments to be made for the such purposes.

53. Body: the Treasury;

54. Parliamentary scrutiny: determined by principal instrument

Reason for power and procedure

55. These powers are supplementary to the powers contained in new sections 142A, 142B, 142D and 142E, and may only be used on combination with those powers. It is envisaged that it may be appropriate to give the regulator power to make technical provision related to the core activities and excluded activities, in areas which are generally treated as the preserve of the regulator. For example, provision for new excluded activities will also provide for the circumstances in which ring-fenced bodies are to be permitted to undertake such activities. It will be necessary to provide for safeguards, and it may be more appropriate for detailed provision about the safeguards which must be observed to be made in rules by the regulator. Accordingly, it would be necessary for the Treasury to be able to confer powers on the regulator to do this (the Treasury would also have power, if necessary, to require the regulator to make any rules needed). The power to impose conditions on the exercise of any such power, consultation requirements and, where appropriate to require the consent of the Treasury to the regulator’s exercise of such a power, will enable the Treasury to provide the framework for the way in which the power is exercised, to assist the regulator, and provide for greater certainty to the market.

56. As these powers are supplementary to the powers in the sections listed, they will be exercised in the same instrument, and will be subject to the parliamentary procedure applicable to the primary powers.

New section 142G(3).

57. Power: To specify those cases where a person who has suffered loss as a result of a contravention may bring an action for breach of statutory duty in relation to that contravention

58. Body: the Treasury

59. Parliamentary procedure: negative resolution procedure

Reason for power and procedure

60. The power is essentially the same as that is sections 20(3) and 202(2) of the Financial Services and Markets Act 2000 (FSMA), which provide that contraventions related to breaches of the general prohibition on carrying on regulated activities without being authorised or exempt from authorisation, or breaches of requirements imposed by the Financial Services Authority under the Act are actionable by those who suffer loss “in prescribed cases” (that is, cases prescribed by the Treasury in regulations). A ring-fenced body which carried on an excluded activity, or acts in a way which has been prohibited by an order under section 142E, will be treated as having contravened a requirement under FSMA, and it is important that that remedies should be available to those who have suffered loss in consequence of the contravention in the same circumstances as provided for in the equivalent cases under FSMA in the Financial Services and Markets 2000 (Rights of Action) Regulations 2001 (2001/2256).

61. Orders made under this power will be subject to the negative resolution procedure, which is the procedure applicable to regulations made under section 20(2) and 202(2) of FSMA.

New section 142H

62. Power: a requirement for the regulators to make rules governing specified aspects of the relationship between the ring-fenced body and other companies within the same group.

63. Body: the Prudential Regulation Authority (for those ring-fenced bodies which are not authorised by the PRA, the appropriate regulator is the Financial Conduct Authority, but initially, all ring-fenced bodies are expected to be PRA-authorised persons).

64. Parliamentary scrutiny: none (see paragraph 67 for the procedure applicable to rules made by the regulator)

Reasons for power and procedure

65. New section 142H makes provision as to the way in which the appropriate regulator (which, as noted above, is expected to be the PRA) is to exercise its power to make general rules in relation to ring-fenced bodies. The powers to make these rules are set in section 137A (for the FCA), and section 137E (for the PRA). The powers are expressed as being with respect to the carrying on of activities (both regulated and un-regulated). Subsection (3) lists the areas in which the regulator is to be required to make rules. In that sense, it is not a new power.

66. The primary purpose of new section 142H is to ensure that the regulator makes rules for ring-fenced bodies in relation to each of the areas which are identified in subsection (3), which cover different aspects of the relationship between a ring-fenced bank and other members of the same corporate group as the ring-fenced bank (such as the terms on which a ring-fenced bank may transfer funds to other members of the group), and what subsidiaries the ring-fenced bank may own. The Government considers that rules in these areas are necessary to ensure that ring-fenced banks which are members of groups are able to operate their businesses independently of the other entities of the group. This should help to ensure that a failure of another member of the group does not pose a significant threat to the continued existence of the ring-fenced bank.

67. Rules made by the PRA to comply with the requirements of this section will be subject to the safeguards applying to all PRA general rules under section 138J of FSMA (unless it is necessary or expedient to make rules quickly): the PRA must consult the FCA about any proposed rules, and thereafter publish draft rules accompanied by a cost benefit analysis and an explanation of the purpose of the rules for consultation. Final rules may only be made after the PRA has considered any representations made.

68. The rules will cover matters of operational detail and the Treasury considers that it appropriate for such rules to be made by the regulators subject to the safeguards described above.

New section 142J (Power in relation to loss absorbency requirements)

69. Power: to regulate the way in which the regulator imposes debt requirements on relevant bodies (banks, including ring-fenced banks and building societies, and members of the same group as a bank), by requiring the regulator to require a relevant body to issue debt—or to hold debt of a particular class; or by limiting the requirements the regulator may impose;

70. Body: the Treasury;

71. Parliamentary procedure: negative resolution procedure.

Reason for power and procedure

72. The Government believes that UK banks should have sufficient capacity to absorb losses to ensure that they are both resilient to shocks and that they can be resolved without recourse to taxpayers’ funds. Such loss absorbing capacity may be made up of capital or debt issued by the bank (debt becomes capable of absorbing loss when it may be written down or converted into equity). The rules determining what capital a bank must hold are set out in EU legislation.5 This power is intended to permit the Treasury to provide a framework determining how the regulators may use their powers to require a relevant body to have in issue sufficient debt, and debt of an appropriate class, to ensure that it has sufficient loss absorbing capacity. The Treasury will also be able to give itself power to give directions to the regulator, for example requiring the regulator to make rules imposing specified requirements on UK banks.

73. It will be necessary to strike a balance between ensuring that those UK banks which are considered to be of systemic importance (in that their failure may have implications for the stability of the UK or, in some cases, the global financial system) are required to have sufficient loss absorbing capacity but that they are not subjected to disproportionate requirements which may harm their capacity to contribute to economic growth in the UK. It will also be necessary for the provisions made in relation to loss absorbing capacity to change over time in response to conditions in the global markets. They are therefore more suited to secondary legislation rather than primary legislation.

74. Given the technical nature of the provisions which are likely to be made under this power, the Treasury consider that the negative resolution procedure is appropriate.

Clause 142K

75. Power: to amend any legislation which might impose liability on one company in a group as a result of something done—or not done—by another company in the group, if this is considered necessary or expedient to ensure that the carrying on of core activities by a ring-fenced body is not harmed by actions or omissions of another company in its group;

76. Body: the Treasury;

77. Parliamentary procedure: Draft affirmative resolution procedure.

Reason for power and procedure

78. The ICB report identified circumstances in which a ring-fenced bank might be required to bear costs incurred elsewhere in the group. One of the examples given was the VAT liability which may arise where a ring-fenced body is a member of a VAT group. The ring-fenced body would become jointly and severally liable to pay the VAT. In extreme cases, such liability could threaten the survival of the bank. This may not be the only case in which such liabilities may be imposed on a ring-fenced body in consequence of the acts or omissions of other members of its group, and the Treasury consider that it would be helpful to have the power to make any amendments necessary.

79. Due to the width of the power taken and in particular the fact it enables the Treasury to amend primary legislation, the Treasury consider that it is appropriate for it to be subject to the affirmative resolution procedure.

Clause 6—Building Societies (power to make provision about ring-fencing)

80. Power—to make provision for ring-fencing legislation to apply to building societies and to apply the continuity objective to the exercise of any powers by the FCA or the PRA in relation to functions conferred to it through applying ring-fencing legislation to building societies;

81. Body—Treasury;

82. Parliamentary Scrutiny- draft affirmative.

Reason for power and procedure

83. Under Clause 6 the Treasury may, by statutory instrument, apply any provision of Part 9B (except s142) and any provision made under this part to building societies. In applying these provisions, the Treasury may amend the Building Societies Act 1986, authorise the making of rules or other instruments by the FCA and the PRA as appropriate, confer functions on the FCA and the PRA and make any other consequential amendment, including amendments of other primary legislation as required.

84. As set out in the white paper, HM Treasury’s intention is that building societies will be subject to the same restrictions as the ring fence imposes on institutions that fall within its scope. This power is intended to assist the Treasury in applying the ring fence to building societies. It is intended to supplement existing provisions and powers in the Building Societies Act 1986 to circumscribe the activities of building societies. The Building Societies Act 1986 contains a number of restrictions on the activities of building societies, in particular in sections 6 through 9B of that Act. A number of these sections also include power to amend the section through secondary legislation.

85. It is anticipated by the Treasury that many of the existing restrictions in the Building Societies Act 1986 will mirror restrictions that are imposed through the ring fence or will be capable of being amended through the existing powers in that Act to mirror the ring fence. To include building societies within Clauses 1–5 of this draft Bill would therefore risk double legislation of building societies and the upsetting of an established and familiar legislative structure.

86. As set out above, the exact scope of the ring fence will be determined in secondary legislation. It is consequently not yet clear that all matters to be covered in the ring fence will be within the scope of the existing powers in the Building Societies Act 1986. Clause 6 of the draft Bill therefore provides a general power to amend the Building Societies Act 1986 to enable the Treasury to apply the ring fence where the Building Societies Act 1986 would not permit it to do so.

87. The power includes a power both to apply the continuity function to the building societies ring fence and to confer the ability to make rules on the FCA or PRA. The FCA or PRA will be responsible for the supervision of the ring fence as applicable to building societies and thus will need to be able to make rules and issue guidance to fulfil this function. This accords with the power in Clause 4, inserting section 142F into FSMA. A separate power is required for building societies for these matters because as outlined above, it is anticipated that a number of the changes required to apply the ring fence to building societies will be carried out through existing legislation and thus different rules and guidance will be required for building societies as opposed to other ring-fenced entities.

88. Clause 6 also includes power to make consequential amendments to other legislation where necessary. In applying the ring fence to building societies, the Treasury anticipates that there may be conflicting provisions in other pieces of primary legislation applicable to building societies which will require amendment to ensure compatibility with the ring fence. This power will enable the Treasury to make these amendments.

89. The Treasury consider that it is appropriate that a statutory instrument made under Clause 6 should generally be subject to the draft affirmative procedure. This is appropriate given that the statutory instrument is likely to be amending primary legislation.

Clause 9, New section 410A (fees to meet certain expenses of the Treasury

90. Power:

(a)to make regulations giving the Treasury power to require the FCA, the PRA or the Bank of England to require certain persons to pay fees to meet relevant expenses incurred by the Treasury in its work in relation to international organisations which relate to the organisation’s work on financial stability or financial services;

(b)to list the international organisations concerned.

91. Body: The Treasury;

92. Parliamentary Procedure:

(a)for regulations which only prescribe the international organisations which are relevant for this purpose, the negative resolution procedure;

(b)for all other regulations, draft affirmative resolution procedure.

Reasons for procedure and power

93. This power is being taken to enable the Treasury to recover from the financial services industry the costs the Treasury incur in relation to work with international organisations in connection with financial stability or financial services. The power would, for example, enable the Treasury to recover the costs associated with membership of international organisations like the Financial Stability Board (the FSB). International organisations are growing in importance as a means of setting international standards which affect the operation of the financial services industry in London. It is also becoming increasingly clear that in many cases action to address risks to financial stability can only be taken effectively at the international level.

94. The Treasury consider that it is appropriate that the financial services industry (in particular, authorised persons, recognised clearing houses and recognised investment exchanges) should bear these costs. Such firms benefit significantly from these activities by the Treasury. Participation by the regulator (the PRA, the FCA or the Bank of England) in such forums can be recovered from the financial services industry under existing legislation6.

95. The Treasury consider it appropriate that both the regulators and the financial services industry have clarity as to what expenses are to be recovered in this way, what international organisations are at issue and the considerations the Treasury will take into account when recovering their costs in this way. The Treasury therefore consider that legislation should set out these matters. However, as these matters may change over time, it is not possible to set them out in primary legislation.

96. For example, the nature of the expenses that the Treasury incur in connection with UK membership of such international organisations or in representing the UK in such forums have generally included the obligation to pay membership fees. However other forms of expense such as the provision of non-financial resources (such as staff) have also been increasingly envisaged. Consideration has also been given to funding the Financial Stability Board via an endowment rather than a membership fee for example. Depending on the nature of the expense, the Treasury may not consider that it is appropriate to be able to recover it from the industry. It is therefore not possible to set out comprehensively what expenses are to be recoverable from the financial services industry.

97. The Treasury also consider that it is not possible to set out a comprehensive list of the international organisations at issue in the draft Bill itself. New institutions may be established at any time. The names of existing organisations may also change over time. For example, the Financial Stability Board itself has only existed since 2009 as the successor organisation to the Financial Stability Forum. Thus the Treasury consider it appropriate to take a power to set out the international organisations which are relevant for this purpose in secondary legislation.

98. As the key details of the Treasury power to direct the regulators to impose a fee are to be set out in secondary legislation, it is considered more appropriate for the power to give a direction also to be set out in secondary legislation. This will mean that the legislation in this area is set out in a comprehensive manner in one piece of legislation.

99. Any directions given under regulations made under section 410A must comply with the procedural safeguards set out in section 410B including the obligation on the Treasury to lay a copy of any direction before Parliament.

100. As section 410A confers a power to direct the regulators to impose a fee and so is of the nature of a power to impose a tax, the draft affirmative procedure is considered appropriate to the power to require the payment of fees. However, changes to the list of international organisations in relation to which expenses may be claimed are more technical in nature, and may (as in the case of the Financial Stability Board) be required simply to reflect a change in an organisation’s name. Accordingly, the Treasury consider that where regulations made under section 410A only prescribe the international organisations which are relevant for this purpose, the regulations should be subject to negative resolution procedure.

Clause 12 (transitional provisions and savings)

101. Power: to make transitional, transitory or saving provision by order

102. Body: Treasury

103. Parliamentary scrutiny: negative procedure

Reasons for power and procedure

104. This clause enables the Treasury by order to make such provision as they consider necessary or expedient for transitory, transitional or saving purposes in connection with the commencement of any provision made by or under the draft Bill. The power is needed to facilitate the transition between the current arrangements and the new regulatory regime introduced by the draft Bill. Any modifications or exclusions made in relation to any enactment will be of a temporary nature.

105. The Treasury does not consider it necessary that transitional and savings provision should require the approval of each House in draft; it is appropriate that orders under this provision should be subject to the negative procedure.

12 October 2012

1 Both the Memorandum prepared by the Treasury in relation to the Financial Services Bill and the Report of the Delegated Powers and Regulatory Reform Committee in relation to that Bill can be found on the website of that Committee - http://www.parliament.uk/business/committees/committees-a-z/lords-select/delegated-powers-and-regulatory-reform-committee/bills-considered.

2 The Bill proceeds on the basis that the amendments to FSMA to be made by the Financial Services Bill have come into force.

3 Paragraph 3.39 of the Final Report of the Independent Commission on Banking.

4 SI 2001/544.

5 The Capital Requirements Regulation and Capital Requirements Directive IV, which will replace EU directives 2006/28/EC and 2006/49/EC (the banking consolidation directive) are currently under negotiation.

6 See paragraph 20 of Schedule 1ZA to FSMA for the FCA; paragraph 28 of Schedule 1ZB to FSMA for the PRA; and paragraph 32 of Schedule 17A to FSMA for the Bank of England.

Prepared 2nd January 2013