Banking StandardsWritten evidence from the Delegated Powers and Regulatory Reform Committee, House of Lords

Introduction

1. The Commission was requested by the Parliamentary Commission for Banking Standards to consider the provisions in the draft Financial Services (Banking Reform) Bill that delegate legislative power. HM Treasury has provided a memorandum on the powers in the draft Bill. These powers include powers to amend or modify Acts of Parliament at Clauses 4 (new section 142K), 6 and 12. They also include powers at Clauses 4 (new section 142H) for existing regulations to make rules, but, as the memorandum explains, this is largely the nature of a duty on the regulator to exercise its powers to make rules in a particular way.

2. Overall, our consideration picked up two consistent themes: a lack of appropriate Parliamentary control; and a lack of explanation for some significant powers contained in the draft Bill. We had particular concerns about delegated powers in clauses 4 and 9 that the Commission may wish to consider, with the rules relating to clause 4 the most significant.

Clause 4—New Sections 142A and 142B FSMA: Ring-fenced bodies and core activities

3. New section 142G of the Financial Services and Markets Act 2000 (“FSMA”) prevents a “ring-fenced body” from carrying out an “excluded activity”. Under new section 142A(1) a ring-fenced body is a UK institution which has a Part 4A permission relating to a “core activity”. “Core activity” is explained in section 142B.

4. There are three powers relevant to whether or not an institution is caught by the provisions relating to ring-fenced bodies:

(a)section 142A(2)(b) enables an order by the Treasury to exempt classes of institutions;

(b)section 142B(2) enables an order by the Treasury to specify circumstances in which accepting deposits is not a core activity; and

(c)section 142B(5) enables an order by the Treasury to specify activities (in addition to accepting deposits) that are core activities.

5. So the policy discernable from the Bill is that institutions (other than building societies) that accept deposits will, unless the Treasury makes an order to the contrary, be caught; and that institutions (other than building societies) carrying on any other regulated activity will be caught if the Treasury makes an order to that effect. Before making an order, the Treasury must form a particular opinion stated in the Bill (sections 142A(3) and 142B(3),(4) and (6)), though it was unclear to us what opinion had to be formed before making an order reversing the effect of an earlier order. This seems hardly the most robust of frameworks, but may not be surprising in the context of FSMA. For instance, whether an activity is a regulated activity at all under FSMA is determined largely by orders made by the Treasury (section 22). So the powers do not seem inherently inappropriate. But there are questions about Parliamentary control.

6. Since the exercise of any of these powers is central to the scope of section 142G, the Committee would have expected the affirmative procedure in all three cases—between them the powers operate as a switch by means of which the Treasury may bring institutions within, or exclude them from, the ring-fencing regime. However, only the negative procedure applies, except in the case of section 142A(2)(b), where the first order, and any other subsequent orders which restrict or remove an exemption, are subject to affirmative procedure.

7. In relation to section 142A(2)(b), paragraph 11 of the memorandum explains that the power will determine the scope of the ring-fencing regime and rightly draws the analogy with section 38 of FSMA, which is subject to similar provisions for Parliamentary control. We accept that the choice of procedure for section 142A(2)(b) is founded in precedent in FSMA itself. However, the procedure chosen is based on the assumption that removing control needs a lower level of Parliamentary scrutiny than imposing it and we do not consider that the assumption may be so easily made here where important issues of public policy may be at stake.

8. As for the other two powers, we were not persuaded by paragraphs 12 to 24 of the memorandum that the negative procedure is appropriate. Certainly, the possible need for urgency (paragraph 24 of the memorandum) cannot be accepted as a justification, since FSMA itself deals with urgency in other affirmative cases by means of the 28-day “made affirmative” procedure (ie in force immediately but lapses if not approved within 28 days.)

9. Similar considerations apply to the power at sections 142D(2) and (4) (excluded activities) and 142E(1) (prohibitions). These ought all in our view to be subject to affirmative procedure.

Clause 4—New Section 142F: Supplementary Powers

10. New section 142F expands the powers in each of sections 142A, 142B, 142D and 142E so that they may be used to do things which otherwise would not necessarily be covered. This is explained at paragraphs 52 to 56 of the memorandum.

11. Clause 142F is extremely significant. Among other things, it enables an order:

to confer powers on the Treasury or on a regulator;

to require the regulator to make rules;

to authorise the making (by anybody) of other instruments for purposes connected with any provision of the order;

if it authorises the regulator to make rules, to enable the Treasury to control the content of the rules (section 142F(2)).

12. So, for example, an order could authorise the Treasury to make regulations or give directions for the purposes of the order, without a need for Parliamentary procedure, thus relegating parts of the material covered by the order to an instrument free of any Parliamentary control. We were not convinced that this is appropriate.

Clause 4, New Section 142J FSMA

13. New section 142J, explained at paragraphs 69 to 74 of the memorandum, enables the Treasury, by order subject to negative procedure, to dictate how a regulator is to use its power in one specific area (debt instruments). This seems appropriate, as one would expect a degree of Parliamentary control over back-seat driving of this sort by the government. But the order may (new section 142J(4)(e)) confer power on the Treasury to give directions, not subject to any Parliamentary control, to the regulators. This is mentioned, but not justified, at paragraph 72 of the memorandum. We normally require a full and convincing justification for power which may be used to circumvent Parliamentary control and we were not convinced on this occasion.

Clause 4, New Section 142K FSMA

14. Paragraphs 75 to 79 of the memorandum explain this Henry VIII power, subject to affirmative procedure, to amend legislation relating to groups of companies, etc. Paragraph 79 acknowledges that this is a wide power, but paragraph 78 does little more than explain that this wide power would be “helpful”. We acknowledge that there may be specific areas of law, such as VAT, which may need to be modified, but we considered it more appropriate for those to be identified more clearly in the Bill itself, leaving it to the delegated legislation to make the detailed modifications needed for the purpose stated in the draft Bill.

Clause 9—Fees

15. Clause 9 inserts two new sections into FSMA, enabling the Treasury by regulations subject to affirmative procedure to give itself power to levy fees via the regulators (but payable by authorised persons, i.e. the industry). The fees are to cover the Treasury’s expenses in connection with their participation in the activities of international organisations (to be prescribed by regulations subject to negative procedure.)

16. The power is explained at paragraphs 90 to 100 of the memorandum. The significant feature is that Parliament will have no control over the amount of the fees or over who from among those specified in new section 410A(8) will have to pay them. This is done by a combination of directions by the Treasury and the regulators’ rules, neither of which are subject to any form of Parliamentary procedure, though the directions must be laid before Parliament. This may be one way of doing things. But we would see no convincing reason why the content of the proposed regulations under sections 410A(1), which would give the Treasury themselves the power to require payment of fees, could not be in the Bill itself. Whilst we would not say it was necessarily inappropriate, the four tier structure—Act; affirmative regulations; directions; rules—did call perhaps for a fuller explanation.

1 November 2012

Prepared 2nd January 2013