Draft Bank of England Act 1998 (Macro-prudential Measures) Order 2013 and 2 associated instruments - Secondary Legislation Scrutiny Committee Contents


Instruments Drawn to the Special Attention of the House

A.  Draft Bank of England Act 1998 (Macro-prudential Measures) Order 2013

Draft Financial Services and Markets Act 2000 (Financial Services Compensation Scheme) Order 2013

  Draft Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013

Date laid: 24 January 2013

Parliamentary Procedure: affirmative

SUMMARY: THE DRAFT ORDERS SERVE TO SPECIFY IMPORTANT DETAILS OF THE NEW FRAMEWORK FOR FINANCIAL REGULATION UNDER THE FINANCIAL SERVICES ACT 2012, INCLUDING ASPECTS OF THE RELATIONSHIP BETWEEN THE FINANCIAL POLICY COMMITTEE, THE PRUDENTIAL REGULATION AUTHORITY, AND THE FINANCIAL CONDUCT AUTHORITY, ALL OF WHICH ARE ESTABLISHED UNDER THAT ACT.

We draw these instruments to the special attention of the House on the ground that they give rise to issues of public policy likely to be of interest to the House.

1.  HM Treasury (HMT) has laid these draft Orders, to come into force substantively in April 2013. It has also provided accompanying Explanatory Memorandums (EM) and Impact Assessments (IA).

NEW FRAMEWORK FOR FINANCIAL REGULATION

2.  The Financial Services Act 2012 provided a new framework for financial regulation in the United Kingdom, and established three new bodies: the Financial Policy Committee (FPC); the Prudential Regulation Authority (PRA); and the Financial Conduct Authority (FCA). The FPC, as a committee of the Bank of England, will have responsibility for overseeing the financial system as a whole, identifying potential risks to its stability and taking concerted action to address them (macro-prudential regulation). The PRA, an operationally independent subsidiary of the Bank, will regulate all deposit-takers, all insurers and investment firms which may pose a risk to the stability of the UK financial system (micro-prudential regulation). The FCA, as the successor to the Financial Services Authority, will be responsible for conduct of business regulation of all regulated financial firms, and the prudential regulation of those not covered by the PRA. These three instruments serve to specify important details of the new framework, including aspects of the relationship between these newly established bodies.

THE DRAFT ORDERS

3.  The draft Bank of England Act 1998 (Macro-prudential Measures) Order 2013 sets out the measures which the FPC may direct the PRA or the FCA to implement. In its EM, HMT states that the FPC will have the power to give directions to the regulators, but that the scope of the direction-making power is confined to those measures specified by HMT. The Order provides that the FPC may direct the PRA to require UK banks or UK investment firms to maintain additional capital requirements by reference to their exposure to residential property, commercial property or other entities in the financial sector. This would allow the FPC to target risks that emerge in particular sectors. For example, if the FPC believed that systemic risks were arising from the growth of residential mortgage exposures, it could use this power to require institutions to hold capital above normal micro-prudential requirements for exposures to that sector.

4.  The Government intend that the FPC will also have a power to set the level of the Countercyclical Capital Buffer (CCB), a mechanism which should help to increase the resilience of the financial system by requiring banks, building societies and larger investment firms to build up capital during periods of "over-exuberance". However, HMT states that the CCB mechanism is part of the Basel III agreement,[1] to be implemented in Europe by a proposed new EU Capital Requirements Directive ("CRR/D4"); and that, since that Directive is still under negotiation, this Order does not include CCB requirements in the scope of the direction-making power.

5.  The draft Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 divides responsibility for prudential regulation between the PRA and the FCA. Deposit-taking, effecting and carrying on contracts of insurance and certain activities in relation to the Lloyd's market are to be prudentially regulated by the PRA. In addition, dealing in investments as principal is to be prudentially regulated by the PRA when carried on by a person who is designated under this Order by that Authority.

6.  In the EM, HMT states that the scope of firms that require expert micro-prudential regulation by the PRA may change over time. The FPC will be responsible for monitoring the perimeter of prudential regulation and will be able to make recommendations to HMT about changes to the scope of regulation by the PRA or the FCA. In order to provide the flexibility to respond to such future changes, the scope of activities regulated by the PRA is to be set out in secondary legislation.

7.  The draft Financial Services and Markets Act 2000 (Financial Services Compensation Scheme) Order 2013 divides the allocation of rule-making responsibility for the Financial Services Compensation Scheme (FSCS) between the PRA and the FCA. In the EM, HMT states that the FSCS is the UK's compensation fund of last resort for customers of authorised financial services firms. The Department comments that, because the provision of compensation is essential to both supporting consumer confidence and promoting stability, the role of the FSCS will interact with both the FCA and the PRA in the new regulatory system. The Government are implementing a model where the FCA and PRA will have joint oversight of the FSCS, but split rule-making responsibilities that reflect the general division of regulatory responsibilities. The PRA may (or may not) make compensation rules for deposit-takers and insurers; the FCA may (or may not) make compensation rules for all other types of financial activity.

B.  Draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013

Date laid: 24 January 2013

Parliamentary Procedure: affirmative

SUMMARY: THE DRAFT ORDER AMENDS PROVISIONS RELATING TO COLLECTIVE REDUNDANCIES IN THE TRADE UNION AND LABOUR RELATIONS (CONSOLIDATION) ACT 1992. IN CASES OF "LARGE-SCALE COLLECTIVE REDUNDANCY", WHERE AN EMPLOYER PROPOSES TO DISMISS 100 OR MORE EMPLOYEES AS REDUNDANT WITHIN A PERIOD OF 90 DAYS OR LESS, THE DRAFT ORDER REDUCES THE MINIMUM PERIOD OF TIME WHICH MUST ELAPSE BEFORE THE FIRST DISMISSAL CAN TAKE EFFECT FROM 90 TO 45 DAYS. THE CHANGES PROPOSED WILL PROVIDE GREATER FLEXIBILITY TO EMPLOYERS AND REDUCE BURDENS ON BUSINESS. HOWEVER, IN SPECIFYING THE OBJECTIVES BEHIND THE ORDER, THE GOVERNMENT HAVE ALSO IDENTIFIED BENEFITS TO EMPLOYEES AND THE OVERALL PROCESS OF CONSULTATION. IT IS FAR FROM CLEAR FROM THE EVIDENCE PROVIDED THAT THESE OTHER OBJECTIVES WILL BE ACHIEVED.

We draw this instrument to the special attention of the House on the ground that it may imperfectly achieve some of its policy objectives.

8.  The Department for Business, Innovation and Skills (BIS) has laid this draft Order, to come into force on 6 April 2013. It has also provided an accompanying Explanatory Memorandum (EM) and Impact Assessment (IA).

REVIEW OF RULES ON COLLECTIVE REDUNDANCIES

9.  In the EM, BIS states that, in 2010, the Government undertook to review the rules on collective redundancies, which have been largely unchanged since 1975, as part of a wider review of employment law. The review is intended to ensure there are no unnecessary barriers to business success by providing that the rules are fit for the UK's modern and flexible labour market. The Department explains that, while for large-scale collective redundancies EU legislation[2] requires a minimum of 30 days before the first dismissal can take effect, the rules in this country require a minimum of 90 days. BIS states that it has found that, in practice, there is a high degree of confusion about the current rules and overall poor quality consultation.

10.  The EM confirms that the Government have decided to reduce the minimum period before the first dismissal can take effect from 90 to 45 days in cases involving 100 or more redundancies, but not to go as far as reducing this to 30 days, in view of the importance of allowing sufficient time to local government organisations to respond to potential job losses. The Government have also decided to exclude the termination of fixed term contracts from the rules on collective redundancies where this is taking place at the agreed end of the contract.[3] BIS states that these changes will not affect the individual notice periods required to be given by employers, and that the qualifying period for employees to claim protective awards will not be changed.

CONSULTATION

11.  BIS carried out consultation between 21 June and 19 September 2012. The Government response (published in December 2012) explains that there were 160 responses to the consultation, including 32 from large businesses and 17 from business representative organisations; 25 from trades unions; 18 from representatives of the legal profession; and 30 from individuals.[4]

12.  In the EM the Department states that 100 respondents answered a question relating to the minimum period before first dismissal. Of these, 52% favoured a reduction to 30 days; 19% supported 45 days; 22% favoured retaining the existing 90-day period; and 9% of respondents were not sure. Employers and independent legal bodies generally supported a reduction to 30 days, while trades unions argued against reducing the current minimum period, and most did not support either of the proposed options.

OBJECTIVES

13.  BIS has set out the policy objectives and intended effects of the changes on page 1 of the accompanying IA: "The aim of the proposed policy is to create a simple, understandable process that promotes quality consultation and will: allow the parties to engage in consultation that is best suited to their circumstances; improve business flexibility to restructure effectively; and reduce business burdens. [It will] balance the needs of employees made redundant with those that remain." There is a fuller exposition of the policy objective at paragraphs 31 to 35 of the IA, which repeats the aims already quoted, and also states that the new regime will "increase the likelihood of agreement between employers and employees' representatives" and "increase employee buy-in to the decision-making process".

14.  It is not obvious from the evidence presented by BIS that the changes are likely either to promote agreement between employers and employees' representatives, or to gain greater employee support for the process. As noted above, the trade union respondents to the consultation process consistently argued against reducing the current minimum period. In the IA, in the "Description and scale of key monetised costs by main affected groups", BIS sets out that, for employees, the changes proposed will mean a reduction in the amount of time paid by their current employer, and therefore in the pay received: "We expect this reduction in pay to total £252m per annum across all affected employees." We would not expect such factors to pre-dispose employees, or their representatives, to view the new regime favourably.

15.  We note as well that the IA (paragraphs 12 to 15) contains information taken from a Workplace Employment Relations Survey conducted in 2004. BIS states that the survey included a question on whether consultation led to changes in managers' original proposals: "In 78 per cent of cases the answer was 'no'". As previously noted, BIS acknowledges that, at present, consultation in relation to large-scale collective redundancies is overall of poor quality. BIS states that it has agreed with the Advisory Conciliation and Arbitration Service (ACAS) that it will produce non-statutory guidance on collective redundancies, which "will in particular address the principles and behaviours behind a good quality consultation and when employers need to consult".

16.  The Government response to the consultation acknowledges that a significant number of respondents felt that guidance, such as a Code of Practice, would need to have a statutory footing in order to help bring about the required culture change (paragraph 8.17). It quotes (at paragraph 8.30) comments made by some respondents that "it would be confusing to have a Code of Practice that had no statutory basis as this is what most people would expect of a formal Code." Without offering a specific response to these concerns, BIS re-affirms the Government's view that a statutory Code is inappropriate: "It is not possible to prescribe in legislation a number of the issues that need to be covered (e.g. establishment). A statutory Code would also encourage a 'tick-box' approach and reduce...flexibility".

CONCLUSION

17.  It seems clear that the changes proposed will provide greater flexibility to employers in planning for large-scale collective redundancies, and will reduce burdens on business. However, in specifying the objectives of the policy behind this draft Order, the Government have identified benefits both to employees and to the overall process of consultation, as well as benefits to employers. The evidence provided by BIS does little to inspire confidence that these other objectives will be achieved.


1   "Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. Back

2   Council Directive 1998/59/EC on the approximation of the laws of the Member States relating to collective redundancies ("the Directive") Back

3   BIS states that this exclusion is expressly permitted by article 2(a) of the Directive. Back

4   See Government response:

https://www.gov.uk/government/consultations/collective-redundancies-consultation-on-changes-to-the-rules  Back


 
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