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Financial Services (Banking Reform) Act 2013

Summary and Background


4.This Act implements the final recommendations of the Independent Ccommission on Banking (“ICB”), established in June 2010, and recommendations made by the Parliamentary Commission on Banking Standards (“PCBS”), appointed by Parliament to consider how culture and standards in the banking sector could be improved as a consequence of the LIBOR scandal. It also makes available to the Bank of England a new stabilisation option (the “bail-in option”) under Part 1 of the Banking Act 2009.

5.The ICB published its final report on 12 September 2011. It recommended structural reform of the banking industry, together with measures designed to increase the capacity of banks to absorb losses. Its proposals for structural reform centred on the principle that it should be made easier and less costly to resolve banks which get into financial difficulties, or in other words to determine which activities of a failing bank are to be continued, and how they should be continued in an orderly process. In particular, the ICB recommended that retail banking should be separated from wholesale or investment banking, and that this should be achieved by ring-fencing, or separating, retail banking within a banking group in order to isolate banking activities where continuous provision of service is vital to the economy and to the customers of a bank. They also recommended that measures should be taken to ensure the economic independence of the retail bank from the wider banking group, and its independent governance.

6.The ICB recommended that large UK banking groups (and ring-fenced banks on their own behalf, irrespective of the requirements placed on the rest of their group) should be required to hold equity and other regulatory capital, and long-term unsecured debt (referred to as the “primary loss-absorbing capacity” by the ICB), sufficient to cover (for the largest groups) at least 17 percent of the group’s risk-weighted exposures.(1) The regulatory capital and debt forming part of this primary loss-absorbing capacity would be available to bear losses in the event that the bank failed. The ICB further recommended that deposits eligible for protection under the Financial Services Compensation Scheme should be made preferential debts in the event of insolvency.

7.The Government published its initial response accepting the ICB’s recommendations and setting out its plans for implementation on 19 December 2011 in Cm 8252 Government response to the Independent Commission on Banking. The Government developed its proposals further and set them out in a White Paper, Cm 8356 Banking reform: delivering stability and supporting a sustainable economy. This set out more detail on the policy design and was followed by a further period of consultation. The government’s proposals were intended to deliver a robust ring-fence, separating investment banking and its related activities from retail banking, in order to reduce the structural complexity of banks (making them easier to resolve in a crisis) and ensuring their independence from other parts of the group. Copies of the relevant documents, including these consultation documents, are available on the Treasury’s website ( and the website of the ICB (

8.A draft Bill was published on the 10 October 2012 in Cm 8453 Sound Banking:Delivering Reform. This was to enable pre-legislative scrutiny of the draft Bill by the PCBS. On 21 December 2012 the PCBS published its first report (HL98-HC848) making recommendations on the draft Bill. The Government published a response to the first report of the PCBS and this is available at On 11 March 2013 the PCBS published its second report (HL 126-HC 1012) which discussed the Government’s response to its first report and made further recommendations about the draft Bill. On the 19 June 2013 it published its final report on banking reform Changing Banking for Good (HL 27-I- HC 175-I).(2) This report made a substantial number of recommendations, many of which were for the Bank of England, the Prudential Regulation Authority or the Financial Conduct Authority. Those intended for and accepted by the Government, and requiring legislative effect, have been implemented in this Act.

9.In addition, the Act confers on the Bank of England the power to deploy a new stabilisation option called the “bail-in option” in relation to banks, building societies, investment firms and banking group companies. This will enhance the resolution toolkit, consistent with the range of tools that Member States will be required to make available to their resolution authorities under the European Commission’s proposals for a Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “Recovery and Resolution Directive”). It also provides for a special administration regime for financial market instructure companies.


10.Part 1 of the Act makes provision for the separation of the banking activities on which households and small businesses depend (in the Act “core activities”) from wholesale or investment banking activities which may involve a greater degree of risk and expose an entity undertaking them to financial problems arising elsewhere in the global financial system. This separation is referred to in these notes as “ring-fencing”. Certain banks carrying on core activities will be required to be ring-fenced: that is, they will have to comply with restrictions on the other activities they can undertake, and with rules made by the regulator intended to ensure that they are capable of carrying on the business of providing the core services related to the acceptance of deposits independently of other members in their group. They will, for example, be prohibited from carrying on activities (excluded activities) which make them vulnerable to problems arising in the financial system or which may make it more difficult for the banks to be wound down in an orderly fashion (avoiding damage to the wider provision of banking services) if they fail. In certain circumstances the PRA and the FCA will be able to require companies within the same group as a ring-fenced body to divest themselves of a ring-fenced body, or of non-ring-fenced bodies; or to require ring-fenced bodies to divest themselves of specified property or rights. The general objective of the PRA is amended to require it to discharge its general functions in relation to ring-fencing and ring-fenced bodies to protect the continuity of the provision in the United Kingdom of the core services related to core activities. Further, provision is made to ensure that, in the event that the FCA ever becomes responsible for regulating a core activity, it would have an additional objective to protect the continuity of core services associated with that activity.

11.Part 1 of the Act also gives the Treasury power to make regulations in connection with the pension liabilities of ring-fenced bodies, and gives the Treasury power to make regulations governing the way in which the PRA may use its powers under FSMA to impose debt requirements on specified classes of institutions.

12.Part 2 of the Act amends the Insolvency Act 1986 and related Scottish legislation to provide that deposits which are eligible for protection under the Financial Services Compensation Scheme are to be preferential debts. This will ensure that such deposits rank ahead of other unsecured claims in insolvency. Part 2 also makes provision as to the way in which the scheme manager of the financial services compensation scheme must exercise its functions; gives the Treasury power to require the scheme manager to provide accounting information to the Treasury, and requires the appointment of an accounting officer to the scheme.

13.Part 3 of the Act (section 17 and Schedule 2) makes provision for a “bail-in stabilisation option” by amending Part 1 of the Banking Act 2009 and modifying the Investment Bank Special Administration Regulations 2011. Currently, Part 1 of the Banking Act 2009 Act includes three stabilisation options: (i) transfer to a private sector purchaser (section 11 of the Act), (ii) transfer to a bridge bank (section 12 of the Act) and (iii) transfer to temporary public ownership (section 13 of the Act, see also section 82 in relation to the power to transfer into public ownership the parent undertaking of a failing bank). The private sector purchaser and the bridge bank stabilisation options can be deployed by the Bank of England. The temporary public ownership option, as a last resort option, can be deployed by the Treasury.

14.The bail-in option enables the Bank of England to take a range of actions for the purposes of stabilising a failing bank. Following an application of the bail-in option the Treasury are required to make provision in relation to compensation.

15.Part 4 of the Act (sections 18 to 38 and Schedule 3) amends Part 5 of FSMA (performance of regulated activities) to provide for the introduction of a new regime for senior managers and banking standards. The amendments implement the recommendations of the PCBS in this area. It also provides for a new criminal offence in relation to decisions which have caused a bank to fail.

16.Part 5 of the Act (sections 39 to 110 and Schedules 4 and 5) establishes a new regulatory regime for payment systems in the United Kingdom, providing for the establishment of a new body, the Payment Systems Regulator, which is given various regulatory and competition functions in relation to payment systems.

17.Part 6 of the Act (sections 111 to 128 and Schedules 6 and 7) establishes a new special administration regime known as “FMI administration”. This applies to “infrastructure companies”, as defined in section 112, that become insolvent. Part 6 also restricts powers of persons other than the Bank of England in the event of the insolvency of an infrastructure company.

18.Part 7 of the Act (sections 129 to 141 and Schedules 8 to 10) makes provision about the duties of the PRA and the FCA in relation to competitition, the power of the regulators to make rules applying to parent undertakings which are not themselves authorised persons under FSMA, and the duty of the regulators to meet the auditors of certain banks and investment firms. It also gives the Treasury power to require the PRA, the FCA and the Bank of England to impose fees on members of the financial services industry in order to cover certain expenses incurred by the Treasury in connection with UK membership of, or Treasury participation in, specified international organisations, such as the Financial Stability Board, and enables the Bank of England by direction to exclude the application of requirements of the Companies Act 2006 relating to the preparation of company accounts to certain of its subsidiaries.

19.Part 7 of the Act also makes provision relating to building societies, claims managements services and makes a number of minor and technical changes to the Financial Services Act 2012, and related legislation.


Exposures are assigned risk weights in accordance with international practice, to determine how much regulatory capital should be held by the bank.


The PCBS has also published two other reports: Proprietary Trading (HL 138-HC 1034), 15 March 2013 and ‘An Accident Waiting to Happen: The Failure of HBOS’ (HL 144-HC 705), 5 April 2013.

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