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Financial Services (Banking Reform) Act 2013-14
Bill is now an Act
Type of Bill:
The Bill was announced in the Queen's Speech of 9 May 2012, and a white paper entitled 'Banking reform: delivering stability and supporting a sustainable economy' was published on 14 June 2012. The Chancellor has said that he expects the legislation to be passed by early 2014 - the Bill will almost certainly be carried over from this session of Parliament to the 2013-14 session. Ministers have said they are committed to completing all primary and secondary legislation before the end of this Parliament in May 2015.
The Bill aims to implement the Vickers report's recommendation that banks' retail and investment divisions should be broken up, to ensure the safety of UK financial services.
The effect of the Bill's measures will be to protect individual savings by shielding them from the risks of investment banking. It is also designed to end the government's obligation to guarantee the banking sector by creating a clear divide between individuals' savings and investment banks that risk the huge losses that led to the financial crisis that began in 2007.
The government has committed, by Commons committee stage, to publish drafts of the principal statutory instruments, including those establishing 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 will also undertake further consultation this year on introducing a regulatory model for payment systems. Banks have until the start of 2019 to ensure they have met the requirement to have their ring-fence in place.
The Bill will allow for:
- HM Treasury to require that essential, retail banking services are only provided in a ring-fenced bank, and define the services that a ring-fenced bank may not provide
- the Prudential Regulation Authority to ensure that a ring-fenced bank in a group is independent of other entities in the group, namely investment banks
- depositors to be treated as preferred creditors, to be paid before unsecured creditors on insolvency
Sir John Vickers' Independent Commission on Banking published its final report in September 2011, and business secretary Vince Cable announced that the report's recommendations would be accepted in full.
Following the recommendation by the Independent Commission on Banking (ICB) in 2011, the Parliamentary Commission on Banking Standards (PCBS) was appointed by both Houses of Parliament in summer 2012. The Commission, chaired by Andrew Tyrie MP, has taken evidence from a wide range of people and organisations. The inital report was published in December 2013, however certain aspects of the Commission's work are ongoing, including:
- The case for prohibiting groups containing a ring-fenced bank from engaging in proprietary trading, and in particular the contribution that this could make to the changes needed to banking culture and standards;
- How the structural changes will affect standards and culture in the long run;
- How to assess bank suggestions that setting the necessary standards for banking in UK might lead to a flight abroad;
- Whether the sale of derivatives inside the ring-fence has a bearing on measures to prevent future mis-selling of such products;
- The wider issues of competition and transparency raised by the ICB;
- How banks compete;
- How banks run themselves; and
- How banks are supervised and regulated; and
- How the law, including criminal and civil sanctions, applies to banks and bankers.
Labour have said that the Chancellor was "refusing to legislate for a backstop power to allow for across the board separation of the banks", adding that they would be challenging George Osborne to "go further". The Opposition would back amendments to "fully implement the recommendations of the Parliamentary Commission of Banking Standards."
The British Chambers of Commerce welcomed the notion of ring-fencing in the banking system, but is concerned that the proposals do not include the creation of a British business bank to address the finance gap facing many companies. The British Bankers' Association expressed concern that the transition between regulatory authorities should be implemented "efficiently and effectively".
The Financial Services (Banking Reform) Bill was debated by peers during its second reading on 24 July 2013. Issues raised concerned the need to separate retail and investment banking and improving the ring-fence, the importance of retail competition and enabling challenge banks as well as leverage ratios. Many peers called on the government to bring forward further government amendments on ring-fencing as soon as possible to enable full scrutiny during the committee stage.
During its committee stage in the House of Commons, the Financial Services (Banking Reform) Bill, no opposition clauses were accepted as part of the scrutiny process, with measures around competition and bank account portability not agreed by government. Financial secretary Greg Clark indicated that further details on government amendments to respond to the banking commission report will be put forward at the Lords committee stage.
On the first day of the report stage, a government amendment was passed on a minor point in connection to the obligation on the appropriate regulator to make certain rules requiring that a ring-fenced bank be independent of other members of its group. Government amendments that would give the Treasury the power to ensure ring-fenced banks did not become liable for the pension liabilities of any non-ring-fenced entity were also agreed. Lord Turnbull (CB) however failed to secure government support for amendment 23 which sought to provide a reserve power to regulators to enforce full separation should they believe banks were not complying after five years of the Act being commenced.
Peers held the second day of committee scrutiny of the Financial Services (Banking Reform) Bill on 15 October 2013. An amendment calling for a full review of competition in banking was turned down by the government, who cited the ongoing work by the Office of Fair Trading in this regard. Lord Sharkey's (Lib Dem) proposal to apply the principles of regionality to state owned banks was also rejected.
The government's amendment to provide the Bank of England with a new stabilisation option was agreed. Peers also strongly urged the government to think again about the definition of "banks" in relation to amendment 55, as the current provisions excluded the regime for senior manager from those banks which did not take deposits. Government amendment 58 pertaining to a new criminal offence for reckless misconduct that caused bank failures was also agreed.
A number of technical government amendments were agreed to during the third day of committee for the Financial Services (Banking Reform) Bill. These amendments sought to confer order making powers to the Treasury in relation to making consequential amendments to the Bill.
The Financial Services (Banking Reform) Bill received its first day of report stage debate in the Lords on 26 November 2013. A range of opposition amendments concerning issues around ring-fencing were discussed but withdrawn. However, an opposition amendment concerning the general requirement of full separation provoked a division, and was narrowly defeated. A further opposition amendment on professional standards and licensing was voted through by a similarly slim margin.
Moves to commission a review to provide an opportunity to evaluate the effectiveness of the regulators and expand the scope of the senior managers regime were both withdrawn after government responses. During the debate on pay day loans, the government also confirmed they did not intend to wait until the Competition Commission had finished its work and have committed to implementing the cap on the high cost of credit in January 2015.
In the second day of report stage on 27 November 2013, the government committed to review the structure of the Regulatory Decisions Committee and agreed to bring forward an amendment on third reading to ensure regulators regularly met with auditors.An opposition amendment seeking to impose a duty of care on ring-fenced banks was defeated after a vote.
The House accepted the government's assurances there were safeguards in place to deal with proprietary trading, which could be reviewed if the PRA felt it necessary.
The third reading took place on 9 December 2013. Peers agreed a review of ring-fencing would be complete within two years and also agreed that the Prudential Regulatory Authority (PRA) would review proprietary trading by UK banks. Government amendments implementing the commission's recommendations for a licensing regime were also agreed as well provisions about regulator's duty to meet with auditors.
The Bill was passed and returned to the Commons with amendments. At the Commons ping-pong stage, the Labour party's amendment 41 on professional standards, agreed in the Lords, was disagreed after division by MPs, as were their amendments calling for a quicker timetable for the Financial Conduct Authority to impose a cap on high cost credit.
Amendments on the regulation of payment systems were agreed. The Bill returned to the Lords on 16 December 2013. The Lords considered the Commons' disagreement and reason to the Bill. Motion A was agreed to. Motion A1 was withdrawn.
The Bill received royal assent to become the Financial Services (Banking Reform) Act 2013.