The Government has introduced the Financial Services (Banking Reform) Bill (the Banking Reform Bill) into the Parliamentary legislative process. The Banking Reform Bill completed its pre-legislative scrutiny at the end of 2012 and had its first reading in the Commons on 4 February. The Banking Reform Bill will:
- introduce a ring-fence that will require UK banks to separate key everyday banking activities from investment bank activities;
- give preference to depositors who are protected under the FSCS if a bank goes into insolvency;
- allow the Government to ensure banks can better absorb loss during a crisis;
- require the Prudential Regulation Authority (PRA) to ensure banks are held to account for the strength of their ring-fence and giving it the power to enforce full separation; and
- ensure the industry will pay for the cost of the Government's involvement in the international regulatory architecture.
For a further description of the key proposals, see Treasury Publishes Banking Reform Bill.
Following the recommendations of the Parliamentary Commission on Banking Standards, the Government has made some changes to the original draft Bill. In response to certain of the Commission's specific comments, the Government:
- has agreed to publish drafts of statutory instruments it plans to make under the Banking Reform Bill before the Commons Committee stage. The key instruments will include those setting out details of the scope of the ring-fence, the de-minimis exemption from ring-fencing, the specific prohibitions on ring-fenced banks and the precise conditions for exemptions. The Government noted the Commission's concern that the short timetable envisaged for the Parliamentary process did not allow proper examination of key details. However, it will not hold up the progress of the legislation as it intends to deliver on its commitment to implement the recommendations of the Independent Commission on Banking by the end of the current Parliament;
- has noted the concern that the framework must not be susceptible to erosion over time, and will require PRA to have as part of its general objective the duty to protect core services. It will also require the Financial Conduct Authority (FCA) to have an equivalent continuity objective should it become responsible for the regulation of core activities;
- has enhanced the level of Parliamentary scrutiny required for the main building blocks of the ring-fencing framework;
- will consider policy amendments to ensure any exemptions for activities that would otherwise be excluded or prohibited activities must be tough;
- now specifies in the legislation areas in which banks must establish operational and economic independence;
- has allowed for greater use of the affirmative resolution procedure in Parliament for many orders to be made under the primary legislation;
- has catered for "electrification" of the ring-fence by giving regulators a reserve power to require an individual banking group to move to full separation of retail and wholesale activities;
- will require a director of a ring-fenced body always to be an approved person under the Financial Services and Markets Act 2000 (FSMA);
- will ensure secondary legislation that permits ring-fenced banks to sell certain simple derivatives to their customers takes into account the Commission's recommendations for safeguards; and
- will address in secondary legislation the conditions under which high net worth private banking customers and larger organisations should be permitted to invest outside the ring-fence if they choose.
The Government will keep under consideration whether to introduce any further separation, such as the Volcker rule, but notes significant concerns over the distinction between proprietary trading and market-making and whether a ban on proprietary trading could be detrimental to the ring-fence.