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

Baroness Kramer Excerpts

Wednesday 18th July 2018 Grand Committee

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, in just under five months, the ring-fencing regime will be fully in force. It requires structural separation of core retail banking from investment banking for UK banks with retail deposits of more than £25 billion.

Ring-fencing is one of the key parts of the post-financial crisis reforms and will be important in preserving financial stability in the United Kingdom. It 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 activities, whose continuous provision is essential to the economy—that is, retail and small business deposits and payments services. It will protect them from shocks originating elsewhere in the global financial system.

The continuous provision of core services—namely, retail and small business deposits and payments services—is essential to the economy. Ring-fencing 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. 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, which prohibit the movement of any funds that the said account holders own, hold or control.

There is a clear conflict between the two regimes. This means that, at present, some banking groups are unable to move accounts held under sanction, which in turn means that they are not compliant with the ring-fencing legislation. The order resolves the otherwise conflicting requirements between the ring-fencing regime and financial sanctions regime by amending the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014. The order amends the definition of “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 last six months are no longer included in the definition. This means that banking groups will not be required to move retail accounts whose holders are subject to financial sanctions into ring-fenced banks. They will be outside the scope of the ring-fencing regime. Banking groups will have six months from the removal of sanctions to move retail accounts of those account holders previously subject to sanctions inside the ring-fence. This ensures that the regime remains consistent once the sanctions have been lifted.

The order will ensure that banking groups that cannot otherwise comply fully with the ring-fencing regime due 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 or the timetable for ring-fencing: banks in scope must be ring-fenced by 1 January 2019 and, together with the Prudential Regulation Authority and the Financial Conduct Authority, we are monitoring their progress closely. I commend the order to the Committee.

[Baroness Kramer (LD)]

My Lords, as a member of the Parliamentary Commission on Banking Standards, I am a very strong advocate of ring-fencing. I am pleased that the process is now well under way. Obviously, I remain vigilant for any opportunity for any person to try to find a way either under or over the ring-fence. Therefore, I would look very carefully at any change or exemption. In this case, the order seems entirely logical and a suitable way in which to deal with the conflict between two good pieces of legislation, finding the simplest path to reconciling them.

I have two simple questions for the Minister. Can he give us some sense of the scale that we are talking about? To be honest, I have little idea of how many accounts are sanctioned at any typical time. I do not know if we are talking about six accounts or 6,000. The reason why I ask is that it makes a difference in monitoring—that is, whether it is a relatively small number or a challenging number. I just have no idea. I do not know if the Minister will be able to throw light on that.

There has also always been a concern, in particular from the sanctions perspective, that people who do bad things—and, typically, if you are going to be sanctioned, you will have been doing something that we think is a bad thing—will look at the opportunity to use aliases, false names and so on to front their various accounts. There is always the possibility that, if those accounts are not recognised as being linked to the individual who is to be sanctioned, they can end up being moved over into the ring-fenced bank. With accounts in two locations, it may become much harder to recognise that they are the accounts of the same individual and ought to be treated in the same way. I am fairly sure that those who are sanctioned will look for any mechanism possible to escape it, but I have no idea if there is a mechanism within all this that provides us with some comfort that we are alert to the use of this particular change as a mechanism that might make life a little easier for those who wish to avoid the sanction that they are due.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing this order and the noble Baroness, Lady Kramer, for asking at least one of the questions that I had in mind, particularly on scale. I do not have quite the exalted background of the noble Baroness as being a member of the banking commission but, because I failed to duck, I have been involved with this legislation since 2010. I saw it through and feel a certain loyalty to it. When this conflict arises, like the noble Baroness, I want to see that conflict resolved. However, I did think, “Why are they going to spoil this beautiful banking legislation, which I have sought to understand over the past several years? Why can we not change the sanctions legislation?” I decided to try to understand the sanctions legislation to see if there was a way in which it could provide the flexibility rather than the banking legislation. I dived into Section 143(4) of the Policing and Crime Act 2017, but I have to say that, at that point, I hit a brick wall. For the life of me, I could not understand from that how the sanctions regime functions. I hope that the Minister can shed light on how the regime works—or perhaps he will write to me at some point.

To what extent has the alternative way of solving the problem been considered—creating flexibility in the sanctions regime to allow movements across the ring-fence that are required for other legal purposes and hence keep the accounts hosted on the right side of the ring-fence?