My Lords, Amendments 6 and 81 insert two new sections into the Financial Services and Markets Act 2000 and make a consequential amendment to new Section 142J. The first new section, new Section 192JA, gives the PRA a power to make rules over the parent companies of ring-fenced entities. Ring-fencing will require banking groups to make large structural changes to ensure the independence of the ring-fenced bank from other entities in its group. The PRA may need to make rules to ensure that the groups in which ring-fenced banks sit are structured and governed appropriately. Rules over parent companies may be needed to ensure that this is the case.
It is important that the regulator has the ability and flexibility to tackle parent companies. They can influence subsidiaries in a number of important ways—through their attitude to risk management throughout the group, for example. This obviously has implications for the incentives faced by a ring-fenced bank. This amendment, therefore, further enables the regulator to strengthen the ring-fence.
I also expect the PRA to use this power to require groups containing ring-fenced banks to adopt a so-called “sibling structure”. This means that a non-ring-fenced bank cannot own a ring-fenced bank and vice versa. Both the ring-fenced and the non-ring-fenced bank will sit directly underneath the holding company. In this way, the PRA will be able to supervise banking groups more effectively, by having a clear divide between the ring-fenced and non-ring-fenced parts of a group. As development of the ring-fencing policy has progressed, the PRA has identified additional supervision benefits to a “sibling” arrangement such as this. I also understand that the Bank of England is encouraging banking groups to issue loss-absorbing debt from the holding company level, which is likely to lower the marginal cost to banking groups from adopting the sibling structure.
New Section 192JB will give the PRA and the FCA, as appropriate depending on the nature of the firm, the power to impose rules on qualifying parent undertakings to require them to make arrangements which would facilitate the exercise of resolution powers in relation to the parent or any of its subsidiaries.