Draft Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024
Draft Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024
Draft Short Selling Regulations 2024
(2 days, 20 hours ago)
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The Economic Secretary to the Treasury (Tulip Siddiq)
I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024.
The Chair
With this it will be convenient to take the draft Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024 and the draft Short Selling Regulations 2024.
Tulip Siddiq
It is a pleasure to serve under you, Mr Vickers, during this quiet week in politics. The regulations that we are introducing today will ensure effective, proportionate regulation for the financial services sector, first, by reforming the ringfencing regime to be more flexible while upholding financial stability safeguards; secondly, by creating a new framework for the regulation of short selling; and thirdly, by enabling better supervision and enforcement of designated activities under the Financial Services and Markets Act 2023.
I will turn first to the reforms to the ringfencing regime for banks. As the Committee will know, ringfencing was introduced following the global financial crisis on the recommendation of the Independent Commission on Banking, and it came into full force in 2019. It requires large, complex banks to separate the services that they provide to households and small and medium enterprises from investment banking activity.
In 2022, an independent statutory review of the regime recommended updates to ensure that it operates as intended and is proportionate. This statutory instrument improves the regime and implements changes from the review. The reforms that it contains will improve competition in the banking sector, reduce costs and support economic growth. They have been developed with the Prudential Regulation Authority, which is content that they also maintain appropriate financial stability protections.
I will outline the most material updates to the regime. The reforms will ensure that in future only the largest, most complex banks are subject to the regime, with two key changes. The first is an increase in the primary deposit threshold—the amount of core deposits a bank can hold before it is required to ringfence—from £25 billion to £35 billion. This accounts for growth in the deposit base and other relevant economic indicators since ringfencing was introduced and it supports competition. The second change is the introduction of a new secondary threshold, which exempts retail-focused banking groups from the regime, where investment banking activity accounts for less than 10% of common equity tier 1 capital.
This SI also makes changes to the way that banks within the regime can operate. It introduces measures to encourage more investment by ringfenced banks in UK small and medium enterprises and to reduce the compliance burden associated with the regime. It also creates significant new flexibilities to allow ringfenced banks to operate globally, subject to PRA rules, as well as to provide a wider range of goods and services to their customers.
I turn to the draft Short Selling Regulations. Short selling is the practice of selling a security that is borrowed or not owned by the seller with the intention of buying it back later at a lower price to make a profit. Short selling plays a healthy role in the proper functioning of financial markets. It provides essential liquidity to markets, which drives investment in British companies; it helps to drive economic growth; and it helps to ensure that investors pay the right price when investing in shares.
The draft regulations introduce a more streamlined UK short selling regime, which focuses on equities, rather than both equities and sovereign debt. The new regime also introduces a reformed public disclosure regime for short selling, ensuring that there is transparency over short selling activity, without the issues identified with the current regime through the 2022 call for evidence.
However, as I am sure the Opposition spokesperson will identify, there can be risks associated with short selling. As such, it is important for the Financial Conduct Authority to have the tools to effectively monitor short selling activity and intervene if necessary. This statutory instrument provides the FCA with broad rule-making powers in relation to short selling. This will allow the FCA to effectively oversee short selling in UK markets. It will also mean that the UK’s short selling rules can be adapted and updated by the FCA in a more agile way in future—for example, to better adapt to new global standards or to take account of market innovation and new business models. The instrument retains the FCA’s powers to intervene in relation to short selling activity in UK markets in exceptional circumstances, which is an important feature of the current regime.
Turning to the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024, to give the FCA the broad rule-making powers for short selling that I just mentioned, the new short selling regime operates under the designated activities regime—known as DAR. The DAR was introduced into the Financial Services and Markets Act 2000 by the Financial Services and Markets Act 2023, which the Opposition spokesperson will know very well, since we sat across from each other, debating it for days. It allows the Treasury to designate certain activities to be regulated by the FCA. However, persons carrying on those activities under the DAR do not need to become full authorised persons like banks or insurers. This enables proportionate regulation for activities where it would be disproportionate to have met all requirements for authorisation.
The Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024 enable the FCA to supervise and enforce the rules it makes under the DAR. They do this by enabling the FCA to exercise existing supervision and enforcement powers under FSMA 2000 on persons carrying out designated activities, whether or not they are authorised. In the first instance, these powers will be extended to the activities covered by the Consumer Composite Investments (Designated Activities) Regulations 2024 and the Short Selling Regulations 2024. Tha will enable effective supervision of these regimes.
I thank the Committee for putting up with these quite technical amendments. The statutory instruments ensure that our financial services industry is subject to a rulebook that is fit for purpose, more proportionate and tailored to UK markets. I hope the Committee will join me in supporting these regulations.
Gareth Davies (Grantham and Bourne) (Con)
It is always a pleasure to see you presiding over us, Mr Vickers. The Minister has covered the instruments pretty well, so I will make a few remarks, and then I have a couple of pretty straightforward questions. Let me first speak to the statutory instrument on ringfencing. As the Minister set out, the regime came into force in January 2019, requiring the largest UK banks to separate core banking services from their investment and international banking activities. The intention with the ringfencing regime was to protect British banks from shocks, whether originating from elsewhere in the group or in global financial markets.
The regime currently applies to banks with more than £25 billion in retail and small and medium-sized enterprise deposits. The original legislation contained a statutory review clause requiring His Majesty’s Treasury to commission an independent review within two years of the regime coming into effect. The review was commissioned in 2021, chaired by the excellent Sir Keith Skeoch, and the review panel reported in March 2022. The SI that we are debating seeks to implement recommendations from the Skeoch review that were aimed at improving the operation of the regime. It amends previous FSMA-related SIs from 2014 to adjust the regulatory regime applying to ringfenced bodies.
As the Minister set out, the changes will raise the threshold for inclusion in the ringfenced regime from £25 billion to £35 billion, and add a new exemption for retail-focused products that undertake minimal investment banking activity. Regulatory reporting requirements by ringfenced banks are also being reduced, while restrictions on the geographical operations are being relaxed. The products and services that ringfenced banks can offer are also being relaxed, as in the case of trade finance agreements. Finally, when banks become the subject of the regime because of an acquisition by a ringfenced bank, a four-year transition period is being introduced.
This is a long way of saying that I very much welcome the action that is being taken by this Government as relates to this statutory instrument. However, there are two points that I would like some clarification on, given that the financial landscape is continually changing and has changed a lot in the past two years alone. Regulation must adapt to changing conditions, so let me ask two questions. First, will the £35 billion threshold be reviewed again in the future? Secondly, what will be the process for adjusting the threshold in response to future market developments and inflationary pressures?
Turning to designated activities, under the 2023 Act His Majesty’s Treasury makes regulations to designate activities related to financial markets, including financial market exchanges, instruments, products or investments. The Act also gave the FCA powers to make rules and give directions relating to those designated activities. The designated activity rules framework includes provisions that allow the Treasury to designate certain activities to be regulated by the FCA, without the requirement for those carrying on the activities to become authorised persons. The SI in front of us today rightly aims to provide the FCA with the supervisory and enforcement powers to enforce the rules it makes within that framework.
We support the measures set out in this SI. However, I again have a couple of points to raise, particularly points that were raised in the other place and points that I understand were raised by the Minister, as reported in the Financial Times on 4 December 2024, regarding the naming and shaming of firms by the FCA. I completely appreciate that the FCA has reopened its consultation, but I should be grateful if she would provide clarity on two points. First, at what point exactly in the enforcement process would the naming and shaming take place? Secondly, how will the Government hold the FCA accountable for its new approach, as the Minister herself said was needed in the interview?
Finally and briefly, we turn to the Short Selling Regulations 2024. The SI establishes a new legislative framework for the regulation of short selling by creating a designated activity of short selling, thus giving the FCA powers to make and enforce rules for this practice. Short selling does play a vital role in financial markets, such as providing liquidity. However, it is important that the FCA has the tools it requires to monitor short selling activity and intervene when necessary to mitigate risks. This SI introduces a requirement for the FCA to publish anonymised aggregate net short positions based on all individual position notifications that it receives. It also removes restrictions on uncovered short selling of sovereign debt and sovereign credit default swaps, as the Minister said, as well as sovereign debt notification requirements.
The Opposition support the measures set out in this SI. I have no further questions.
Tulip Siddiq
I thank the Opposition spokesperson for his questions. I am grateful that he is supporting us. He agrees that the SIs represent an important step in ensuring that our approach for the regulation of financial services is effective and proportionate. We feel that these are sensible, technical reforms. The Treasury undertook detailed work with the PRA after the independent review, which the hon. Gentleman mentioned, released its final report in 2022, consulting on a draft package of measures in 2023 and refined those proposals in line with feedback.
It is recognised that the ringfencing regime was originally designed so that the threshold would need to be adjusted over time to reflect the evolution of banking practices and growth in the deposit base. The Treasury considered several metrics as well as financial stability and competition considerations in proposing the £10 billion increase. Increasing the deposit threshold will provide smaller banks with more headroom to grow before being subject to the requirements and costs of ringfencing. We feel that will support domestic competition in retail banking markets. A competitive and dynamic market will improve outcomes for depositors. The reform may encourage inward investment in the UK as new entrants to the UK banking market will have more room to develop economies of scale before being subject to the regime.
While the independent review, which the hon. Gentleman mentioned, did not suggest that uprating was necessary to maintain the policy aims of the current ringfence, the Government have recognised that the threshold acts as a barrier to the growth of smaller players in the market, dampening competition for retail customers. His points are valid, and we will be looking at them, but there are no plans at this point to change the threshold in the way he mentioned.
On the hon. Gentleman’s points about name-and-shame proposals, I am very pleased to hear that he has been reading my interviews in detail. I have raised those proposals several times with the FCA and welcome the fact that it has listened to industry feedback on them. It has taken some steps to address some of the concerns raised by industry, which he will know about. I have been clear with the FCA that effective, proportionate regulation is key to our aims, and that it needs to deliver the Government’s mission to drive inclusive growth.
As the hon. Gentleman knows, the FCA is operationally independent but accountable to Government and Parliament. I am engaging closely with the FCA on name-and-shame proposals and will make sure that any potential impacts on international competitiveness and growth are properly considered. That is not to dismiss the concerns about those proposals from industry, which I have heard first hand. The subject comes up repeatedly in my meetings with the FCA. I hope that reassures the hon. Gentleman a little bit.
I think I have covered most of the hon. Gentleman’s questions, but am happy to write to him on any others. Generally, we feel that this SI is important overall to our mission of growing the economy. I know that when the hon. Gentleman was in government, he had sight of a similar SI and was in agreement with it. I thank the Committee for agreeing to pass this legislation.
Question put and agreed to.
DRAFT FINANCIAL SERVICES AND MARKETS ACT 2000 (DESIGNATED ACTIVITIES) (SUPERVISION AND ENFORCEMENT) REGULATIONS 2024
Resolved,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024.—(Tulip Siddiq.)
DRAFT SHORT SELLING REGULATIONS 2024
Resolved,
That the Committee has considered the draft Short Selling Regulations 2024.—(Tulip Siddiq.)