My Lords, I beg to move that the Committee considers the draft Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015, the draft Financial Services and Markets Act 2000 (Misconduct and Appropriate Regulator) Order 2015, and the draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 3) Order 2015. For the sake of brevity, I shall refer to these as the relevant authorised persons order, the misconduct and appropriate regulator order and the regulated activities amendment order.
The first two orders under consideration today are related, and it may be helpful if I start by outlining the background to this legislation. In December 2013, Parliament passed the Financial Services (Banking Reform) Act 2013, which, for convenience, I shall refer to as the banking reform Act. Among other things, this Act provided the legislative framework for implementing the recommendations of the Parliamentary Commission on Banking Standards, on which several Members of your Lordships’ House served with distinction. This included making provision for introducing the senior managers and certification regime for the banking sector—banks, building societies, credit unions and certain systemically important investment firms. The Government have now included provision in the Bank of England and Financial Services Bill to extend this regime to all other types of financial services firms, but these two orders are part of the original work programme to apply this new regime to banking.
When the parliamentary commission reported in June 2013, it made a number of recommendations for reforming the way in which individuals who work in banks are regulated. These formed the basis for what is now the senior managers and certification regime and include: a tougher regulatory approval regime for a smaller number of the most senior individuals in a bank; annual certification by banks themselves that other key individuals are “fit and proper”; and rules of conduct covering a wider range of bank employees, not just those subject to regulatory pre-approval.
The relevant authorised persons order will extend the scope of the senior managers and certification regime to include UK branches of foreign banks. It was initially decided to confine the senior managers and certification regime to UK institutions: that is, businesses incorporated in the UK. This includes those global financial institutions that operate here through a UK subsidiary company. The subsidiary company is incorporated here and so counts as a UK institution in its own right.
However, it does not include global banks which operate here through a branch in the UK. A branch is not a separate legal entity from its parent and so is not incorporated here. Nevertheless, a branch can have senior managers and staff who could be subject to annual certification or required to comply with rules of conduct. But, of course, the fact that a branch is not separate from its parent was bound to raise a number of issues which could not be fully considered at the time.
A power was therefore included in the Banking Reform Act enabling the Treasury to bring branches of foreign banks into the senior managers and certification regime after appropriate consultation. The consultation document was published last November and the Government announced in March this year that they would make the necessary order. Subject to your Lordships’ approval, all parts of the senior managers and certification regime will from 7 March 2016 apply to foreign banks that operate in the UK through branches here: that is, the same date as that on which the senior managers and certification regime comes into force for UK banks.
There are two points that it might be helpful to be clear about at this stage. First, the Banking Reform Act also included a new criminal offence relating to decisions which cause a bank to fail—sometimes called the “reckless mismanagement” offence. This offence was also recommended by the parliamentary commission and was included in the Banking Reform Act at the same time as the senior managers and certification regime provisions. However, it can be committed only by persons who are senior managers in banks, building societies and systemic investment banks.
This criminal offence is not part of this regime. I want to make it clear that the order does not extend the new offence to UK branches of foreign banks. There is no power in the Banking Reform Act to do that, nor would it be appropriate. The offence is concerned with decisions that cause a bank to fail. As a branch is not a separate legal entity from its parent, it can fail only if the parent fails. The failure of a branch, and any action arising from that, could be taken only by the authorities in the parent’s home state.
Secondly, I want to assure the Committee that the UK regulators have the powers to ensure that the regime can be applied flexibly and appropriately to different types of branch. They can also differentiate where appropriate between “passporting” branches from other EEA states, non-passporting branches from countries outside the EEA, subsidiaries and UK-owned banks.
The misconduct and appropriate regulator order makes some technical changes to the legislation that are needed before the senior managers and certification regime comes into operation in the banking sector next March. The first of these simply ensures that the revised provisions relating to enforcement action by the FCA will cover cases where an approved person has been knowingly concerned in a breach of regulatory requirements imposed by the Alternative Investment Fund Managers Regulations 2013. Those regulations implement the EU alternative investment fund managers directive in the UK.
The second group of technical amendments makes some consequential changes to Section 204A of the Financial Services and Markets Act 2000. Section 204A sets out which of the FCA and PRA is responsible for enforcing certain requirements in that Act. The misconduct and appropriate regulator order makes changes to Section 204A to ensure that the PRA can enforce new requirements where it is the lead regulator for the senior managers and certification regime. If this order were not made, the FCA would have to enforce obligations that should, in effect, be owed to the PRA.
I move now to the draft regulated activities amendment order. In March, Parliament approved the Mortgage Credit Directive Order, which ensures that the UK implements the EU mortgage credit directive, or MCD, on time and with a limited impact on the UK mortgage market. The Mortgage Credit Directive Order 2015 was due to come into effect in March 2016. Since this point, the Government have been actively monitoring the progress of the mortgage industry towards implementation to ensure a smooth transition so that consumers do not see any disruption.
During the course of this routine monitoring, it came to light that, due to the complexity of superimposing a new wave of legislation on top of existing legislation, there were some areas where the Mortgage Credit Directive Order did not achieve what it was intended to. The Government therefore decided to act by making a small number of amendments to the scope of the regulation to ensure that the regulatory framework continued to operate as intended.
The draft regulated activities amendment order under consideration makes a number of changes, all of which aim to ensure that the existing legislation delivers on previously agreed policy. The most significant of these is to ensure that mortgages dating from before 31 October 2004 that are currently regulated as credit agreements will move across to be regulated as mortgages from 31 March 2016. This is part of the Government’s widely supported aim to consolidate the regulation of mortgages within a single framework, reducing the burden on firms and ensuring that customers get a consistent experience.
Taken together, the changes made by the statutory instruments under consideration are another important step to ensure that the UK’s financial system is resilient and works for the good of the nation. I hope that noble Lords will therefore support the Motion to consider these instruments. I beg to move.