Draft Financial Services and Markets act 2000 (Ring-fenced Bodies, core activities, excluded activities and prohibitions) (Amendment) Order 2016

Jonathan Reynolds Excerpts

Monday 24th October 2016 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Sir Roger. I thank the Minister for his opening comments.

As we have heard, the draft order will make several changes to the ring-fence regime that is due to come into force in January 2019. As a result of the structural changes that the banks have begun to implement ahead of the regime’s introduction, the Treasury has suggested that a number of technical issues have become apparent that, if not rectified, could undermine the regime’s effectiveness. Any moves to fix legislative error and confusion are of course welcome. In fact, it is clear to the Opposition that there is an urgent need for consolidated legislation in this regulatory area.

Even commercial providers will not provide a complete, up-to-date version of the Financial Services and Markets Act 2000 and its successor legislation and statutory instruments. As such, it is very difficult indeed for practitioners to know exactly what the law currently is. Leaving it all in such a piecemeal mess—there has been legislation in 2012, 2013, 2014 and 2015 to make detailed amendments to already detailed provisions—is unacceptable and causes confusion for everyone involved. Will the Minister confirm whether the Government have plans to rectify the situation?

I notice that there is no regulatory impact assessment for the draft order, although the explanatory memorandum states that the Treasury will prepare a “validation impact assessment” for at least one of the changes: specifically, the removal of the qualifying declaration process. As my Front-Bench colleague in the other place has pointed out, surely it would have been wise to produce an assessment before the policy was introduced, or at least before the order was laid. The Government have until January 2019 to get this matter right, so why is it being rushed through and the correct assessment procedure not being followed? When will the validation impact assessment be published?

I have several questions for the Minister on the specifics of the regulation, in order to clarify the intent and purpose of some of the changes outlined. In particular, the Opposition are today seeking categorical assurances from the Government that the draft order does not contain any measures that could potentially allow different types of activity to slip past or weaken the protection of the ring fence. There is potentially a problem in that the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 sets out exceptions to the prohibition on excluded activities that cannot be conducted by retail banks. Can the Minister confirm that no provision in the draft order could potentially provide a way around the general principle that there must be separation between different types of entity?

As hon. Members will be aware, the Financial Services and Markets Act 2000 works by providing general principles, for example the section 19 prohibition on conducting financial services without authorisation from the Financial Conduct Authority, and then having secondary legislation, for example the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, lay out the exceptions from that general rule. I therefore seek clarification that this regulation does not excuse the banks and others from being bound by the general principles in the statute.

I have specific concerns about the measures in article 2 to amend the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 to make new provision regarding the identification of qualifying organisations. Instead of a relevant organisation being required to give a “qualifying organisation declaration” to a UK deposit taker before it may be considered a qualifying organisation, it is proposed, as the Minister outlined, that a UK deposit taker may determine that an organisation is a qualifying organisation without that organisation having to give any such declaration. However, other regulations—for example, the prospectus regulations in securities law—make plain the sorts of information, or at the very least the categories of information, that must be established.

In comparison, these provisions seem worryingly loose and quite unclear. If the test of a good rule is whether we can know when it has been broken, how will we know when a bank has breached that proposed new rule? Why should a bank be making a decision about the status of an entity where that entity is not yet prepared to provide a balance sheet? Does this apply only to new companies—for example, a new subsidiary, in which case the parent should know the capital being assigned to it—or to companies that are unknown to the bank? If the latter is the case, why is it dealing with them for this purpose? Whether or not an organisation was part of the same group as a qualifying organisation would surely be a matter of fact. In what circumstances will banks be dealing with any entity where that is not clear?

More fundamentally, Labour is concerned about whether any ring fence will actually be able to protect the system, consumers and other financial institutions against the failure of an entity that cannot then find the money to pay back or transfer back whatever is owed to a protected entity. There are genuine, legitimate and serious questions about whether a ring fence, which allows transactions between group companies, is really any protection at all. The retail bank could still be funding the speculations by the investment bank even if the contracts purport to create a right to be repaid for the retail bank. As soon as a crisis strikes, debts will simply not be repaid, and there will be no money in the system to make repayment in full because investment banks will not hoard cash; instead, they will spend it and use it as leverage to borrow more money to speculate with.

As we continue to discover, there is much confusion about what falls on either side of the ring fence. That lack of clarity makes regulation very difficult. However, Labour Members are very clear that never again should we hand the dice back to the gamblers. We know that people and society want and need banks in which they can safely deposit their money and savings and that lend responsibly and provide credit to finance investment growth across the country. People deserve a much more holistic approach than the piecemeal approach that we have seen so far to legislation. What is required is an unswerving commitment to transform the sector and ensure responsible financing.

We will always support financial services where they deliver a clear benefit to the whole community, but we should all recognise that the level of anger that still exists following the financial crisis must be responded to. Getting the ring fence right is a key part of addressing that anger. I would be grateful to the Minister for his response today to the points I have raised.