On 12 October, Treasury published the draft Banking Reform Bill to start the formal legislative process for implementing the recommendations of the Independent Commission on Banking (ICB, or the Vickers Report). The draft Bill follows Treasury’s White Paper (see UK Treasury Publishes Banking Structure Reform Plans ), and is the forerunner to the formal Bill, which the Government plans to introduce to Parliament in early 2013.
What does the Bill do?
The Bill is a framework piece of legislation, which sets new objectives for the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and provides enabling powers for much of the detail of the reform to be achieved by secondary legislation. Its key provisions amend the Financial Services and Markets Act 2000 (FSMA) (as it will be amended by the Financial Services Bill).
Ring-fencing and core activities and services
There will be a new part of FSMA (Part 9B) setting out several new defined terms. A “ring-fenced” body is a UK institution which has an FSMA permission relating to one or more “core activities” except (as discussed in the White Paper) building societies and other exempted institutions. The legislation does not set out the monetary or other factors that may exempt an institution, leaving this to Treasury to decide. The only “core activity” specified in the draft Bill is accepting deposits. Treasury has the power to add more core activities, and to set out circumstances in which deposit-taking will not be a core activity. FSMA will also define “core services” as:
- facilities for accepting deposits or other payments into an account provided in the course of carrying on the core activity of accepting deposits;
- facilities for withdrawing money or making payments from such an account; and
- overdraft facilities in connection with such an account.
Treasury may make Orders stating that additional services provided in the course of carrying on this core activity should also be core services.
“Excluded activities” are those which a ring-fenced body may not perform, unless Treasury permits it in certain circumstances. In the draft Bill, the only excluded activity is dealing in investments as principal, but Treasury may extend the definition to further activities, which need not be regulated activities and need not be carried on in the UK. Also, Treasury may make Orders (Prohibition Orders) prohibiting ring-fenced bodies from:
- entering into transactions of a specified kind or with a specified class of person;
- establishing a branch in a specific territory; or
- holding shares or voting power in specified companies in certain circumstances.
There are safeguards on all Treasury’s powers, which require it to have regard to certain factors when making Orders. Further safeguards require that certain Orders must be approved by both Houses of Parliament before they can take effect (the affirmative resolution procedure).
Treasury may also require other regulators to make rules relating to the Orders.
Prohibition on excluded activities
The draft Bill provides that a ring-fenced body which carries on an excluded activity or breaches any prohibition order will be taken to have contravened a requirement placed on it under FSMA. It will not be a criminal offence, but may be actionable by a person who has suffered loss because of it.
Powers and duties of PRA and FCA
The draft Bill gives both PRA and FCA a “continuity” objective. This puts a duty on the regulators to protect the uninterrupted provision of vital banking services in the UK. FCA in particular must seek to ensure:
- the business of ring-fenced bodies is carried on in a way that avoids any adverse effect on the continuity of provision in the UK of core services;
- the business of ring-fenced bodies is protected from risks that could adversely affect provision in the UK of core services; and
- the risks that a failure of a ring-fenced body could adversely affect provision in the UK of core services are minimised.
The draft Bill requires the “appropriate regulator” to make ring-fencing rules that will ensure the carrying on of core activities by a ring-fenced body is not adversely affected by the acts or omissions of other persons, and that, where that body is a member of a group, it is able to act independently. The rules must:
- restrict the extent of shares or voting power a ring-fenced body may hold in another company;
- require the body to make arrangements to ensure effective provision to it of services and facilities it needs in relation to its carrying on of core activities;
- restrict the power of the body to enter into contracts with other group members otherwise than at arm’s length;
- restrict the payments the ring-fenced body may make to other group members;
- require regulatory disclosure of group transactions; and
- make provision about the corporate governance of the body, to secure its ability to act independently.
The regulator (which is likely to be PRA in most cases) must review its rules at least every five years.
The draft Bill also introduces:
- power for Treasury in relation to loss-absorbency requirements, to enable Treasury to require ring-fenced bodies, other deposit-takers or members of deposit-taking groups to issue any debt instrument or ensure any part of its debt consists of debt instruments;
- amendment to the banking business transfer scheme rules to cater for transfers made to avoid ring-fencing contraventions;
- power for Treasury to make regulations introducing ring-fencing arrangements for building societies;
- a new category of preferential debt under insolvency legislation so that all deposits that are eligible for compensation under the Financial Services Compensation Scheme (FSCS) are preferential debts; and
- power for Treasury to direct PRA, FCA and the Bank of England to require relevant persons to pay fees to meet the expenses of Treasury in participating in international organisations aimed at protecting financial stability and financial services.
What happens next?
The Parliamentary Commission on Banking Standards, chaired by Andrew Tyrie, will scrutinise the draft Bill before its formal introduction into Parliament.
The Government intends to have all legislation in place by the end of the current Parliament and to require banks to comply with ICB’s recommendations from 2019.
Separately, the Government is progressing plans for:
- the inclusion of a bail-in tool (through the European Commission’s proposed Recovery and Resolution Directive);
- an additional equity ring-fence buffer of 3 per cent of risk weighted assets above Basel III requirements (through powers under the fourth Capital Requirements Directive (CRD 4) and the Capital Requirements Regulation);
- a resolution buffer for systemically important banks (again, using powers under CRD 4);
- FSCS governance reform; and Payments Council reform.