Draft Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) (Amendment) Order 2018

John Glen Excerpts

Monday 16th July 2018 General Committees

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) (Amendment) Order 2018.

It is a pleasure to serve under your chairmanship, Mr Davies.

From 1 January 2019, the ring-fencing regime will require the structural separation of core retail banking from investment banking for UK banks with retail deposits of more than £25 billion. Ring-fencing was the central recommendation of the Independent Commission on Banking, chaired by Sir John Vickers, which the Government accepted and legislated for via the Financial Services (Banking Reform) Act 2013. It will support financial stability by insulating retail ring-fenced banks’ core services, whose continuous provision is essential to the economy—retail and small business deposits and payment services—from shocks originating elsewhere in the global financial system. It means that banks that provide those essential services become simpler and more resolvable, so core services can keep running even if a ring-fenced bank or its group fails.

As well as ensuring that UK taxpayers are not on the hook for bank failures, ring-fencing should mean fewer and less severe financial crises in future, which will benefit the whole economy. Details of the regime are set out in secondary legislation passed in 2014. As part of restructuring to comply with the ring-fencing regime, banking groups may be required to move some accounts from one legal entity to another—for example, they may need to move a retail depositor’s account into a new ring-fenced bank. However, some of the holders of those bank accounts are subject to financial sanctions that prohibit the movement of any funds that said account holders own, hold or control. The conflict with financial sanctions regimes means that at present some banking groups are unable to comply fully with the ring-fencing legislation.

The order resolves the otherwise conflicting requirements between a ring-fencing regime and financial sanction regimes by amending the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014. It amends the definition of a “core deposit” so that accounts whose account holders are or have been subject to financial sanctions, as defined in section 143(4) of the Policing and Crime Act 2017, at any time in the past six months, are no longer included in the definition. That means that banking groups will not be required to move retail accounts whose holders are subject to financial sanctions into ring-fenced banks. Banking groups will have six months from the removal of sanctions to remove retail accounts of those account holders previously subject to sanctions inside the ring fence.

The order will ensure that banking groups that cannot otherwise comply fully with the ring-fencing regime owing to sanctions legislation are not deemed non-compliant under the ring-fencing legislation. The amendment does not alter the location and height of the ring fence and nor does it alter the timetable for ring-fencing: banks in scope must be ring-fenced by 1 January 2019. Together with the Prudential Regulation Authority and the Financial Conduct Authority, we are monitoring their progress closely.

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[John Glen]

I am grateful for the opportunity to discuss the order, and for the points made by the hon. Members for Stalybridge and Hyde and for Glasgow Central. We have engaged with the Prudential Regulation Authority and the Financial Conduct Authority on the wording and the extent of the order, which proposes to amend the ring-fencing legislation, and feedback has been positive.

The six-month timeframe was chosen to ensure that banks have enough time to make the necessary transfer; it was the result of a practical conversation with the regulators. The hon. Member for Glasgow Central asked why we are waiting until 2021 to review the instrument. That leaves enough time for the PRA and the Treasury to identify potential issues and consult on any changes.

Some wider points were raised when we were in Committee in this room previously. I acknowledge that there are ongoing concerns about various aspects of the sanctions and anti-money-laundering regime. They are without the scope of this conversation, but I am happy to address any specific concerns by letter; that would be more appropriate than to try to answer them conclusively now. I hope I have satisfied Opposition Members, and I commend the order to the Committee.

Question put and agreed to.